Vapo's Annual Report 2010

Annual Report 2010 Vapo is the leading supplier and developer of bioenergy in Finland and in the Baltic Sea region. Vapo is a modern, expert organisation that uses peat, wood fuels and agri biomass to produce energy responsibly, supplies timber and offers environmental business solutions. Vapo is an important part of the local energy infrastructure. The parent company Vapo Oy is owned by the Finnish state (50.1%) and Suomen Energiavarat Oy (49.9%).

Content

Vapo’s year 2010 ...... 1 Business areas ...... 8 Corporate responsibility . . . 22 Vapo Local Fuels ...... 9 Economic responsibility . . . . . 23 Operating environment . . . 2 Vapo Pellets ...... 11 Social responsibility ...... 25 Vapo’s strategy ...... 4 Vapo Heat and Power ...... 13 Environmental responsibility . . . 26 Managing Director’s review . 6 Vapo Garden and Environment . . 15 Vapo Timber ...... 17 Corporate Governance . . . 30 Production and Logistics . . . . . 19 Board of Directors and Research and development . . . . 21 management ...... 34

Risk management ...... 36

Financial statements . . . . 38 Board of Directors’ report . . . . 38 Consolidated profit and loss statement ...... 45 Consolidated balance sheet . . . . 46 Consolidated cash flow statement . 47 Consolidated statement of changes in shareholders’ equity . . 48 Group key figures 2006–2010 Vapo’s year 2010

2010, the year of growth

The demand for local fuels (peat and wood) remained at a good level throughout the year. Peat production in summer 2010 was in line with the long term average, but adequate harvesting areas will be required in coming years to rebuild inventory levels.

Vapo strengthened its wood energy business.

Pellet overproduction continued on the European market, which led to restrictions on production. The energy tax reform will improve the competitive position for pellets in coming years.

The Heat and Power business area grew as planned.

The growth of consumer and landscaping activities was limited by cutbacks in the construction industry. The new Home and Garden product range increased sales in Finland and Sweden, which improved the results of the Garden and Environment business area. Demand was up in the Professional Growing business line, although low inventory levels of raw material had an impact on deliveries.

Vapo Timber’s operating result turned positive as a result of increased timber prices and delivery volumes despite growing roundwood prices and restrictions on production towards the end of the year. Key figures 2010 EUR million 2010 2009 2008 2007 2006

Turnover 719.5 573.7 631.8 660.6 600.9 growth, % 25.4 –9.2 –4.4 9.9 14.7 Operating profit 39.1 38.0 21.1 55.5 53.8 % of turnover 5.4 6.6 3.3 8.4 9 Equity ratio, % 38.3 39.5 42.2 43.5 47.3 Gross investments 80.9 80.9 83.8 111.6 69.1 Average amount of personnel 1,333 1,451 1,780 1,828 1,891

Turnover, EUR million Operating profit, EUR Personel by business area million 720 56 661 632 601 574 Local fuels 384 38 38 39 21 % Pellets 226 31 % Heat and Power 152 21 Garden and Environment 342 24 % Timber 219 14 % Total 1,333 11 % 06 07 08 09 10 06 07 08 09 10

Vapo’s Annual Report 2010 1 Operating environment

operating environment

EU one step closer to cleaner energy production

Peat production has a great significance for regional policy in Finland. Challenging targets for additional use of wood cannot be met without peat. Subsidy and tax policies should ensure that peat is prioritised above imported fossil fuels in all situations.

The implementation of the EU’s RES directive on renewable energy proceeded in 2010. The directive obliges member states to reduce their carbon dioxide emissions and increase the share of renewable energy of the total end use of energy. Targets are specific to every country. Finland’s share of renewable energy use is 38%. The increase is 9.5 percentage points from 2005 levels. The share of renewable energy in liquid fuels for transportation is 10%. Finland has set its own target of 20%. Targets have been jointly set in EU but each country can independently choose the way to meet them. National plans were presented to the Commission in 2010. Wood is Finland’s primary solution to the EU’s require- ment to increase the use of renewable energy, and the plan is to triple the use of forest energy from the current level in 2020. Forest chips are to replace 25 TWh of coal, peat and other fuels. A total of 7 TWh will be used for producing liquid fuels for transportation. In Finland, there are plans to build three to four new wood-operated biofuel plants in order to meet the targets. Possible investment grants will have a great effect on getting building permits. The majority of the forest chip material required is to come from small wood i.e. first thinning of young forest. Finland is planning to increase the share of wind power in its energy production to 6 TWh in 2020. Heat pump energy should also rise to 8 TWh. The share of pellet is 2 TWh. The use of biofuels for transportation will be 6 TWh in 2020.

National support for use of renewable energy Increase in the use of renewable energy sources is not possible without national support measures. A small wood energy subsidy that will be used for energy will be introduced in order to increase the supply of small wood. It will be paid for energy wood harvested at young forest management and first thinning sites. The use of forest chips is encouraged by subsidising the production of forest chip electricity. Small CHP plants have a feed-in tariff which ensures the use of biofuels instead of fossil fuels. In future, KEMERA supported subsidies will be granted in order to enhance wood production and protect biodiversity in forests.

2 Vapo’s Annual Report 2010 Finland has a big potential source of renewable energy, where the goal is to maintain peat as a competitive option in pellets, which is nearly unused. Finland has top-quality pellet energy production. production on a European level, but most of the pellet pro- Peat has even quality and high calorific value. The mix- duced is exported. We hope that pellets will have a subsidy ture of peat and wood has better combustion properties than solution which makes it possible to significantly increase their wood alone. Vapo has renewed its organisation to adapt to use. the increased share of wood in fuel production and deliveries. Taxation of fossil fuels, such as coal, oil and natural gas, One of the biggest, if not the biggest, current challenge was increased as a part of a subsidy package for renewable of peat production is to include new production sites into the energy. Peat is not considered a renewable energy under production process. Out of the nearly 10 million hectares of the RES directive even though the EU does not define it as peatland in Finland, only less than 0.7% or 70,000 hectares is fossil either but it is in a class of its own between renewable used for peat production. To replace sites no longer used for and fossil energy. Peat’s emissions factor, however, defines production and to meet the needs of rising demand, 58,000 its impact on climate as comparable with that of coal. As a hectares of additional peatland are needed by 2020. Even result, the tax raise for fossil fuels now applies also to energy if permits were received for all this land and it was used for peat which earlier was tax-free. Taxation of natural gas and production, the share of land in peat production would still peat will gradually rise to the set level by 2016. By increasing remain under 2% of all peatlands. taxation of energy on the basis of emissions, consumption is Peat production is sensitive to weather conditions. This steered towards low-emission fuels. risk can be reduced by having sufficient number of production sites which ensures that even short periods of good Peat is a reliable and local fuel weather provides an adequate outcome. The permit process The emissions factor and taxation decision coming into effect must be clearer and faster. The peatland strategy work group next year weaken peat’s position as a fuel. However, peat is set by the Ministry of Agriculture and Forestry will hopefully still a reliable, local fuel which supplements wood in many improve the situation. The expectation is that the guidelines ways. Peat can ensure the supply of fuel in all situations. The suggested by the work group will help to reach compromises peat industry is a significant employer and therefore has in relation to different uses of peatland, both protection and great regional importance in Finland. The status of peat has production. n been recognised in the national energy and climate strategy

Vapo’s Annual Report 2010 3 Vapo’s strategy

New organisation, new situation

At the beginning of 2011, Vapo will adapt its business and auxiliary operations to corre- spond the changing market situation as the demand for energy peat will go down and the demand for wood fuel will rise. Vapo’s new areas of business are Vapo Biofuels, Vapo Bioheat, Vapo Environment and Vapo Timber. Pellets and environmental peat were transferred to Biofuels. The result of 2010 will be reported in accordance with the old organisational model.

The changes in organisation resulted in the auxiliary opera- The water course load caused by other forms of land use can tion of Production being moved from under a centralised be dozens of times greater than that of peat production. management to be managed by the business areas themselves. This change will allow better management of Permit process of peat production deliveries. Acquisition and coordination of logistics remains In Finland, Vapo openly cooperates with the energy industry, a centralised auxiliary operation which is managed on the decision-makers and local operators (such as The Associa- Group level. tion of Finnish Peat Industries, Finbio, Metsäteollisuus). Vapo emphasises that peatlands are a valuable natural resource Strategic development projects respond to the which must be both protected and used. Vapo aims at creat- changing market ing an open and honest dialogue between interest groups to Rising fuel prises and the increased targets of renewable speed up the permit process of peat production sites. energy use set by the EU will significantly change the energy market in coming years. Taxation of peat, which is rising gradually, together with stricter emissions standards will result in reduced demand of peat and increase the demand for wood fuels.

Key strategic development projects Improving customer relations Vapo is a flexible supplier of different energy sources (wood, Turnover by business area, Investments by business wood chips, energy peat, energy crops). Together with sub- EUR million area, EUR million contractors, Vapo creates an infrastructure for the acquisition of domestic energy for its customers. At the beginning of the year, Local Fuels renewed its organisation in order to 4 % better manage its deliveries. 18 % 16 % We are creating a new area of business: wood energy. 36 % 17 % The aim is to create a forest energy business model which 17 % 60 % offers customers using domestic fuels a competitive channel 14 % 14 % of acquisition at the same time creating added value for 4 % sellers of wood and forest energy.

Water course load of peat production Local Fuels 267.2 Local Fuels 41.8 Peat production causes only a small share (only 1%) of the Pellets 105.6 Pellets 2.5 total water course load in Finland. Vapo uses advanced run- Heat and Power 101.9 Heat and Power 11.7 off water purification methods, and the company strongly Garden and Environment 123.3 Garden and Environment 11.4 invests in further development of methods of purification. Timber 135.4 Timber 2.5

4 Vapo’s Annual Report 2010 Business areas Mission from 1 Janyary, 2011

Vigorous work for domestic energy Vapo Biofuels

Strategy Business operations: A wide range of biofuels (peat, wood, energy crops), ■ Vapo focuses on the bioenergy business in the Baltic Sea region. ensuring efficient production chain able ■ Our bioenergy strategy is based on Vapo’s own peatland to deliver and cost-effective raw material reserves in Finland, Sweden and the Baltic states. acquisition for different business areas. ■ Vapo aims for synergies and cost effciency in its processes. ■ Establishing the competitiveness of Vapo Timber Oy and Countries of operation: Finland, Sweden, Estonia, Latvia, Denmark, Poland and developing the wood procurement chain of Vapo Group. Russia. ■ Full utilisation of the Kekkilä brand. Vision Vapo Bioheat ■ Vapo is a leading operator in bioenergy in the Baltic Sea region. ■ Vapo is the customer’s first choice for a bioenergy partner. ■ Vapo is respected as a reliable local partner, due to our principles, sustainable development and guaranteeing reliable deliveries. Business operations: Local and regional ■ Vapo’s flexibility and resources bring effective and innova- heat and steam produced using local biofuels. tive solutions to its customers, consumers, businesses and communities. Countries of operation: Finland, Sweden, Estonia, Poland. Values ■ We operate profitably. Vapo Environment ■ We value people. ■ We operate in the customer’s best interests. ■ We operate responsibly. Business operations: Kekkilä products for ■ We constantly strive to improve. professional growers and hobby gardeners, local environmental business. Purchase and coordination of logistics and coordination Purchase Countries of operation: Finland, Sweden, Denmark, Norway, Estonia, Latvia. Operating profit by business Vapo Group, geographical area, EUR million distribution of turnover, EUR million 37.6

20 % Vapo Timber 11.2 57 % 8.3 23 % 4.7 Business operations: One of Europe’s biggest timber companies. –5.8 65% of the production is exported.

Local Fuels 37.6 Finland 411.2 Country of operation: Finland Pellets –5.8 Sweden 165.7 Sawmills in Hankasalmi, Lieksa Heat and Power 8.3 Other countries 142.6 Kevätniemi, Nurmes and Inari Garden and Environment 11.2 Peuravuono Timber 4.7

Vapo’s Annual Report 2010 5 Managing director’s review

managing director’s review

Vapo’s future remains highly dependent on energy policy development

Vapo’s position as a versatile operator in the field of bioenergy was strengthened in 2010. Finland has set some very challenging targets for bioenergy use for the near future, and the use of peat, wood and energy crops must maximised in order for these targets to be met. The ratio of peat-to-wood usage, will remain at the current level. After a long consultation phase, a national consensus was reached on the use of mires and peatlands, which secures Vapo reasonable operating conditions despite limitations related to strategy.

The EU’s energy policy reaches implementation stage The objective set for the EU’s energy policy in 2010 was to produce national action plans and to formulate practical measures to reach the targets set on the use of renewable forms of energy. This appears to have failed, as most of the national action plans are very generic and outline no specific measures, which is what meeting the targets requires. Finland’s national action plan is by far one of the most practical across the whole of the EU. Finland’s proposal of measures to increase the use of renewable forms of energy is also one of few that could be implemented speedily enough to actually make a difference on the climatic effects of energy consumption in the future. The EU’s targets are set high, which is why Finland also needs to employ several energy policy instruments at the same time. Only limited evaluations have been carried out on the effects of the different measures, in addition to which a tax reform proposed by the Finnish Ministry of Finance in the summer of 2010 has moved the goalposts in the energy sector, making it all the more difficult to assess the overall impact of the action. Another weakness in the solution is uncertainty about future taxes and subsidies, which may jeopardise investments in domestic fuels in the coming years. In addition to changes in taxation and subsidies, new rules for Vapo’s operating environment are also being formulated by a committee set up to oversee Finland’s National Strategy for Mires and Peatlands, which was to publish its final report by the end of January 2011. The Finnish Association for Nature Conservation (FANC) has taken a public stance on the issue and lobbied for the committee to impose a total ban on the use of peat for energy production. The FANC’s objective appears to be to protect all mires from commercial use. The peat industry is hoping that the committee will come up with clear rules that will guarantee that Finnish homes can be heated with local fuels in the future as well. The targets set on the use of wood-based fuels are so ambitious that to meet them, both peat and wood need to be used together. Instead of competing, wood and peat complement each other in energy production.

Vapo is actively developing new solutions for mitigating the climatic effects of peat production One of the arguments for banning the use of peat is that peat production has negative effects on the status of waters. It is true that mistakes were made in the early days of the current rise of the peat industry in the 1970s and the 1980s which resulted in local problems. With modern production methods, however, turning mires into peat production sites actually reduces the harmful effects caused to the waters below. The water management obligations imposed on peat producers are considerably tougher than those associated with any other form of land use today. Vapo also invests heavily in minimising damage to waters in mires in particular. In the last decade, Vapo spent more than EUR 110 million on nature conservation and environmental investments and halved nutrient runoff from peat production compared to the 1990s.

6 Vapo’s Annual Report 2010 Vapo takes the critics made against its production sites seri- ously and strives to ensure that peat production causes as little environmental damage as possible, both now and in the future. Vapo also endeavours to build constructive dialogue and cooperation with all of its stakeholders in order to bring about further improvements. Peat will continue to play an important role in Vapo’s future. The work of the Committee on Finland’s National Strategy for Mires and Peatlands proves that the importance of peat to Finland’s national energy supply is widely recognised. A lot has already been done to reduce the effects that peat production has on waters, and the findings of this new extensive study need to be published in order to improve the tarnished public image of the peat industry.

Our future lies more and more firmly in wood-based fuels Wood-based fuels in their many different forms are beginning to feature more and more prominently in Vapo’s product selection. Vapo’s clear objective is to maintain its position as the leading supplier of wood-based fuels in the Baltic Sea region. This is why Vapo also needs to prioritise the development of fuelwood production and the associated processing chain in the future. From a financial perspective, the year 2010 was a disap- pointment. The Local Fuels business area performed especially badly and failed to meet its targets. The profitability of wood-based fuels fell short of expectations. On the other hand, Vapo Timber improved its financial position considerably, which shows that we were able to take full advantage of the changed market conditions. The Heat and Power business area developed favourably, and its finances improved significantly compared to the previous year. The performance of the Garden and Environment business area varied between different business lines, but the overall targets were met. I would like to thank all of Vapo’s customers for their loyalty and to give my special thanks to Vapo’s contractors. Both our production and transport contractors are a valuable resource that Vapo can trust in the future as well. I would also like to thank my colleagues at Vapo for their hard work and team spirit. Success is about having determination and the right attitude, and that is what you all have.

Matti Hilli

Vapo’s Annual Report 2010 7 Vapo Local Fuels

BUSINESS AREAS Weather and fluctuation in electricity prices affected results

The demand for local fuels improved but the future is uncertain.

In 2010, the sale of local fuels increased compared to the two Improved delivery reliability for energy wood previous years. Total sales of peat recovered to the levels seen At the beginning of the year, wood stocks were sizable. The throughout the previous decade. The sales of wood and peat low commercial timber volumes of the previous year were felt mixture rose clearly. with a time lag in the energy wood market. The percentage The coldness at the beginning of the year and a colder of logging residue went down while the percentage of than average November and December as well as the residue from forest management and first thinning sites improved utilisation rate in different industries increased the increased. demand for fuel. The delivery reliability of Vapo’s wood energy improved The electricity market was very diverse during the year. and all customers were provided with better solutions. Due to At the beginning of the year, electricity prices on the Nordic the high cost of small timber logging and falling subsidy per market reached an historically high level only to plummet unit, there is increasing pressure to develop cost-effectiveness very low in the spring and summer. From the autumn in the value chain of energy wood. Vapo hopes to gain onwards, prices have been rising and November saw some synergy benefits from cooperating with internal and external extremely high price levels. Market price fluctuations have partners. One major factor affecting the wood energy sector clearly affected Vapo’s fuel deliveries as electricity prices are during the year was a change in relevant legislation. When directly reflected in the different fuel needs of electricity planning national targets for the use of renewable energy, a production. great share of this energy is expected to come from wood- As a result of severe technical problems in electricity based energy. production equipment faced by exceptional numbers of customers, autumn sales were slightly lower than New production sites circumstances would have allowed. New peat land was actively acquired for peat production by In Sweden and the Baltic countries, the weather and buying and renting land. An Environmental Impact Assess- electricity market affected the level of demand in a similar ment was completed for around 2,000 hectares and the way to Finland. In Sweden, peat sales grew and the sale of assessment process continues for 8,000 hectares. There is energy wood increased significantly in the latter half of the now 1,751 hectares of new approved land which replaces the year. In the Baltic countries, sales grew as demand for local land that is no longer used. After production the land is used power and heat plants increased. for forestry and agriculture. Due to the current electricity market situation and the early onset of winter, demand for Vapo’s products was good Future prospects in all main market areas. The latter part of 2011 proved to be challenging especially in Finland due to the combined effect Organisation of peat taxation and government support for renewable fuels. From the beginning of 2011, Vapo Local Fuels and Pellet business areas were combined into Vapo Biofuels business area. As planned, the production of Pellet and the Environ- mental peat business were also transferred there. Transport

8 Vapo’s Annual Report 2010 management will be decentralised early in the year and will be managed by the business areas. By combining different business sector functions (sale, production-delivery and raw material acquisition) we can ensure competitive customer service in a changing market situation. Our customer service provides the customer with extensive biofuel selection, efficient production-delivery chain and assurance of cost-effective raw material acquisition for different business areas. To guarantee increasing energy wood acquisition, Vapo acquired a third of the wood procurement company Harves- tia Oy, which will in future be largely responsible for acquiring energy wood for Vapo as well as supplying raw timber for Myllykoski Oyj and Powerflute Oyj. The different raw wood material needs of Harvestia’s shareholders enable wide and comprehensive use of stands and integrated logging.

Markets The government renewable energy promotion measures and fuel taxes affect the fuel market, so that demand for peat decreases and demand for wood fuel increases. The competitive strength of different pellet types will also be improved by incentives and tax solutions. Within the sector, the sale and delivery of energy peat will decrease compared to last year while those of environmental peat and wood fuel will increase. The demand for pellet is steadily increasing. There is an oversupply situation in European pellet markets. Vapo PaikallisetLocal Fuels polttoaineet 2010 2009 Production LiikevaihtoTurnover (EUR (EUR million) million) 000,0267.2 204,3204.3 The target for peat production is in line with those of previ- LiikevaihdonAnnual change muutos, in turnover, % % 30.8–0,0 –1,3–1.3 ous years. The areas are used to their fullest in all Vapo’s peat LiikevoittoOperating (EURprofit million) (EUR million) 00,037.6 40,640.6 production countries. Pellet production capacity will not be fully used due to over-production. n InvestoinnitInvestments (EUR(EUR million)million) 00,041.8 41,541.5 HenkilöstöNumber or employees 000346 384 BiopolttoaineenBiofuel deliveries, toimitukset, total (TWh) yht. (TWh) 00,024.3 21,021.0 Key figures Key

Vapo’s Annual Report 2010 9 Vapo Pellets

Vapo developes its pellet business

Vapo aims at significantly increasing the use of peat in all of its sectors. Pellet is a renewable energy form full of potential and it makes reaching EU emission targets possible.

Over-production in the pellet market customers increased. Vapo restricted its production because Pellet has a significant role in replacing fossil fuels both in the of the competitive situation tightened. Under-utilisation of consumer market (heating of individual houses) and as the production capacity increased expenses. This led to a fuel for large heat and electricity production plants. Especially weakened result for pellet. in the medium-sized business segment, pellet is the biggest In Poland, regulations related to renewable electricity use competitor to light fuel oil. created a major market for pellet. The entire production of Britain, Belgium, the Netherlands and Poland have all the Vapo plant in Slubice was reorganised to produce indus- created systems where coal has been replaced by pellets mainly trial pellets for the local market. This change improved the in power plants (mixed fuel use) by introducing regulations profitability of the pellet business in Poland. related to renewable electricity production. In Austria and Germany, investments in pellet equipment are significantly Pellet production fell short of targets subsidised, and in Scandinavia the use of renewable energy The challenging market situation lead to pellet production is promoted by increasing taxation of fossil fuels. falling short by one fifth of the original targets in Finland in The pellet market has grown but there has also been 2010. Targets were reduced during the year in order to better an increase in new production capacity especially outside reflect the market situation. Europe where raw wood material is inexpensive. In 2010, The pellet factories in Kaskinen, Ylistaro, Kärsämäki and New Zealand was the furthest source of pellets. There was Vilppula worked normally. Due the pellet market situation, also significant new production in Australia, South Africa the production in Turenki, Ilomantsi and Haukineva factories and the United States. At the moment, our aim is to operate was reduced. The pellet factory in Haapavesi were closed mainly in the European market. There is over-production in throughout the year. the pellet market as European countries are only starting to invest in the use of renewable fuels. For major users of pellet, New business concept for pellet the market price came down during 2010 while European The best result will be reached in local pellet markets in the pellet producers faced rising raw material costs. future. The emphasis in developing the pellet business is on In Vapo’s main regions in Denmark, Sweden and Finland, efforts to create new markets in the medium-sized customer the pellet market grew in the consumer and medium-sized segment in Finland and Sweden. This means heating in segments. Meanwhile, there was new competition in the individual houses and blocks of flats, commercial properties, market which resulted in a smaller total share of the market the public sector and also production of process energy for for Vapo. Vapo is the biggest operator in the field in Finland industries. Building the concept for this service, attracting and Sweden and the second biggest in Denmark. As a result partners and setting up a sales organisation has been carried of this position, there was considerable pressure on Vapo to out in 2010. The launch of a sales concept will fully start at adjust its pricing as imports from low-cost countries to major the beginning of 2011. n

10 Vapo’s Annual Report 2010 Pellet fireplaces are available in many different designs and colors

Vapo Pellets 2010 2009

Turnover (EUR million) 105.6 84.2 Annual change in turnover, % 25,4 –10.4 Operating profit (EUR million) –5.8 –4.0 Investments (EUR million) 2.5 5.1 Number or employees 154 226 Pellet deliveries, total (tonnes) 620,000 563,000 Key figures Key

Vapo’s Annual Report 2010 11 Vapo Heat and Power

Customer benefits from Vapo’s operating model which relies on networking

Vapo’s Heat and Power business area is a strong local operator which serves its customers using local biofuels.

Vapo Heat and Power produces a total of 2,000 GWh of heat In February, Vapo acquired the district heating business in Finland, Sweden, Estonia and Poland and 170 GWh of from the municipality of Rääkkylä, and in April Vapo signed electricity in Finland. Vapo concentrates primarily on small- a district heating contract with the municipality of Sysmä. In scale solid fuel heating plants where the share of local fuels November, Vapo became the heat supplier for the Kestilä was 90% of the total annual fuel requirements. area in the municipality of Siikalatva. In 2010, Vapo outsourced its maintenance and operation tasks to ISS Palvelut Oy and Maintpartner Oy. This operating Wood chip heating plant in Sysmä service network enables the production of heat for custom- Total investments in heat production throughout the year ers’ needs in a more competitive way which again benefits were EUR 11.7 million. Vapo invested in a new solid fuel the customers in the form of affordable district heating prices. boiler plant in Hammaslahti in Joensuu and built 1.5 km of Vapo has created a new model for pellet heat which is based new district heating network. A new wood chip heating plant on a network of the Vapo’s equipment supplier, finance pro- was built in Sysmä as a result of a new heat production con- vider and maintenance service company. tract. Heat production for the plant will start at the beginning of 2011. Vapo is also a shareholder in Jyväskylän Voima Oy Bright future for pellet heat launched in autumn 2010. At 73 sites in Finland, Vapo produces a total of 225 GWh of In addition, there were many smaller investments. In pellet heat, which corresponds to the annual heat demand Lieksa and Sotkamo, the control of combustion air was over 10,000 of one house. Four new pellet heating plants altered, which increased the efficiency of the plants. The were installed during the year. From the beginning of 2011, automation of a power plant in Forssa was modernised, and the competitive strength of pellet heat will improve in Fin- the gear box in three plants was replaced at the Kuivaniemi land as the taxation of fossil fuels rises. wind farm. The Group has also looked into new applications The 8 pellet heating plants in Sweden produced 13.9 GWh for the use of ash. Safety standards were raised. The risk ass- of heat. In order to strengthen its competitive strength in esments updated in all Vapo heat and power plants. Sweden, Vapo remodelled its pellet heat operations. Now it can offer competitive pellet heat to its customers and, at Energy efficiency through development projects the same time, tax-deductions for oil used by industry are The energy efficiency of energy services was developed by abolished from the beginning of 2011. carrying out energy efficiency surveys of our own heat and In Poland, Vapo has signed a pellet heat contract with power plants. Energy integration and energy-saving surveys nine customers who will receive a total of 15 GWh of heat. In were conducted with pellet heat customers. Estonia Vapo produced about 30 GWh of heat. In Forssa, a successful demonstration project was carried out where an oil-fired boiler was transformed into a wood Vapo has over 2,000 district heating customers and peat pellet-fired boiler. The target group for this new In Finland, Vapo has 24 heating plants and 6 power plants. boiler model is our steam and heat customers. In 2010, the number of district heating customers exceeded Together with Savonia Power, Vapo launched a pilot 2,000 as new contracts were signed with 57 customers, and steam turbine based on high velocity technology at the the number of wholesale customers of pellet and heating Sotkamo power plant. plants exceeded 100 at the beginning of the year.

12 Vapo’s Annual Report 2010 Vapo introduced an online electricity shop Vapo24 Online in June. This service is the first automated consumer sales application on the market.

Towards 2011 From the beginning of 2011, the Heat and Power business area will be renamed Vapo Bioheat. The aim is to increasingly focus on local heat and steam produced using bioenergy. There are high expectations for the smaller-scale (less than 0.5 MW) pellet heat sites which are managed under a separate model based heavily on networks. In the future, Vapo will give up its entire consumer sales of electricity. n n

Vapo Heat and Power 2010 2009 Turnover (EUR million) 101.9 87.5 Annual change in turnover, % 16.5 –7.3 Operating profit (EUR million) 8.3 3.2 Investments (EUR million) 11.7 14.8 Number or employees 129 152 Heat deliveries, total (GWh) 1,837 1,703 Finland 1,255 1,185 Sweden 539 494 Estonia 28 24 Poland 15 Electricity sales (Finland, GWh) 317 309 Key figures Key

Vapo’s Annual Report 2010 13 Vapo Garden and Environment

Good results despite weakened economic situation

Vapo’s Garden and Environment business area is divided into four business lines: Professional Growing, Home and Park, Environmental Peat and Environmental Management. The weak economic situation did not affect gardening as much as many other areas. The Garden and Environment business area exceeded set targets, and the increase in sales was 6.8%.

Sales in the Professional Growing business product group which supplements the existing selection by line grew introducing products for growing on terraces and balconies. In 2010, sales in the Professional Growing business line increased moderately. Vapo, with its Kekkilä brand, is one of Recession and shortage of raw material weakened Europe’s leading garden substrates suppliers. The paucity of the sales of landscaping products raw material for horticultural peat limited sales during the Kekkilä’s Park business line offers substrates and turf for peak season. landscaping under a Kekkilä brand in Finland and under a Eurojoki horticultural peat plant was destroyed in a fire Hasselfors Garden brand in Sweden. In 2010, the market of in April 2010 and deliveries were ensured by transferring the Park business line decreased significantly as the number production to other company plants. A new plant will be of completed building projects fell. Also, the results did not completed in spring 2011. reach set targets, which was partly due to a decrease in Despite challenging conditions, customer satisfaction the total volume. Competitive strength has been improved increased to a record level. At the same time, the profitabil- through the new business model which enables the focus to ity of operations improved. be shifted to sales and marketing. Expectations for the Professional Growing business line More housing construction projects will be completed in are cautiously optimistic for 2011. The quality and image 2011and the market for landscaping products are expected benefits brought by the new plant at Eurajoki will be to grow as a result. capitalised through active promotion and customer events. The peat product market remained stable New products for gardening Products in the Environmental Peat business line include peat In 2010, Kekkilä’s consumer business line introduced the for organic substrates, agricultural bedding and peat new Home and Garden product group which aims to make products for industrial absorption and composting. Poor gardening easy. The product group formed over three quar- production conditions throughout the Baltic Sea region in ters of the sales growth in 2010. Two products in this group, 2009 and 2010 slowed down the growth of sales. As a result, Vihervaja in Finland and Viljelylaatikko in Sweden, were voted stocks fell short of targets and sales were restricted both in gardening product of the year. the Finnish market and the export market. Despite competition growing fiercer, prospects are The horticultural peat market volume in Europe remained good because the total market is predicted to grow. In the stable. Despite the shortage of horticultural peat, Vapo kept Nordic countries, the goal is to reinforce market leadership its position as the market leader. The market is expected to and develop the home gardening market by expanding the grow steadily in the coming season. Regardless of profit- range of products and services. During 2011, Kekkilä Oy ability problems in agriculture, the total available market for will launch, among others, an extended Home & Garden horticultural bedding in the Nordic countries remained at the

14 Vapo’s Annual Report 2010 level of the previous year and the sales of bedding peat were at a good level.

Increased efficiency for Environmental Management The Environmental Management business line offers organic material management services in Finland and Sweden as well as regional waste management services in central Finland. Customers are primarily municipal waste management companies, sewage treatment plant and industrial operators. In 2010, the market for the Environmental Manage- ment business remained stable, and the focus for operations was on making better use of existing capacity. Some plants temporarily had bigger volumes of waste which increased sales, and also the sales of compost were at a higher level than planned due to isolated but significant sales. Also the sales of regional waste management were clearly at a higher level than planned. Business results exceeded their targets. In 2010, cooperation between the Environmental Management and landscaping business lines was strengthened by merging their production organisations. As a result of this arrangement, we are better able to meet customers’ requirements for sustainable development.

Cautious optimism for 2011 The total available market is expected to develop moder- Vapo Garden and Environment 2010 2009 ately during 2011. Vapo’s ability to produce good results is improved by a variety of measures and these are believed Turnover (EUR million) 123.3 115.4 to have a positive effect on next year’s results already. Annual change in turnover, % 6.8 –5.5 Vapo’s market position will be strengthened by developing Operating profit (EUR million) 11.2 15.4 both sales resources and strongly investing in marketing Investments (EUR million) 11.4 15.0 and the selection of products and services. Number of employees 267 342 This reorganisation enables more intense focus on figures Key developing Kekkilä’s core businesses. n n

Vapo’s Annual Report 2010 15 Vapo Timber

Balancing with the fluctuating market

The profitability of Vapo Timber clearly improved compared to the previous year but rises in roundwood prices and decreased sales prices caused by over-production changed the positive trend for the second half of the year.

Vapo Timber Oy is a subsidiary of Vapo Oy and has sawmills The average price for roundwood increased 8 percent from in Hankasalmi, in Lieksa Kevätniemi, Nurmes and in Inari the previous year. Russia’s decision to retain its export tariffs Peuravuono. Vapo Timber is a well-known pine and white- enabled the continuation of roundwood imports to the com- wood timber supplier to its main markets in Finland, Western pany’s sawmills. and Southern Europe and in Northern Africa. The market share of the company in Finland is 6 percent and 0.5 percent Profitability weakened in the second half of the year in Europe. Even the biggest multinational producer has Vapo Timber’s turnover in 2010 increased as deliveries and only about a 5 percent share of the European market which sales prices climbed at a higher level than in the previous reflects the fragmented situation in the industry. year. The positive results of the early part of the year calmed down during the second half of the year as the increase in Demand for sawn timber remained weak raw material expenses and later the decrease of sales prices Consumption of sawn timber in the company’s main market cut profitability. However, the company’s business results for areas, excluding Finland, remained low. Improved profitabil- the year improved by over EUR 9 million compared to the ity, caused by decrease in supply, speeded up production in previous year. the industry faster than demand. This resulted in over-production and a decrease in sales prices at the end of the year. In 2010, operations were almost at a normal level However, average sales prices rose 16 percent from the previ- Despite the cold weather at the beginning of the year, the ous year. The competitive advantage gained by the Swedish strike in autumn and limitations to production at the end of sawmilling industry during the downturn in the common the year, the production volume of Vapo Timber grew by a export markets was narrowed down by the strengthening third from the previous year. At the same time, the growth krona and increased roundwood prices. rate in the industry in Finland was around 20 percent. The number of sawn timber deliveries started to grow after a two- Raw wood sales recovered towards the end of year decline. summer In order to improve efficiency, the management of Wood sales volumes in the first half of the year were inad- sales, production and auxiliary operations were centralised equate but, assisted by the destructive storms in July and to company level in December. At the same time, efforts to August, they rose to nearly normal levels after two extremely strengthen the sales organisation were initiated. At the begin- quiet years. The stumpage price of roundwood, which was ning of 2011, the Vapo Timber’s wood acquisition operation on the rise at the beginning of the year, calmed down and and its staff were transferred to Harvestia Oy of which Vapo started to decline slightly in November and December. The Oy acquired 30 percent at that time. price of purchased wood resources remained at too high a Only a few minor replacement investments were carried level considering the timber market prospects in early 2011. out in 2010. However, the company decided on a nearly

16 Vapo’s Annual Report 2010 Timber preparesto facelimitationstoproductiondue The sensitivemarketsituation willcontinuein2011 2011 and,inadditiontoproblems withdemand,Vapo volumes areexpectedtoremain lowatthebeginningof also predictedweakprofitability inthefirsthalfof2011. announced cutstotheirproduction.Thereducedprice the Hankasalmisawmillduringsummer2011,whichwill tory attheendofyear.tory Astaxreliefsend,woodsales EUR sawn timber, isexpectedtostartin2011.However, politi- gap betweensawntimberandrawmaterialroundwood of 2010whenseveralmajorcompaniesintheindustry raw materialshortages. n cal turmoilinthestrategicallyimportantNorthAfrican grow in2010,whileothermainmarketsanincrease increase, andsalespricesbegantodeclineattheend persists. market areamaydisturbthesituationifunrest housing construction,andasaresultinthedemandfor be significantinthefuture. In Finland,theconsumptionofsawntimberstartedto The forestindustry’s raw timberstockwassatisfac- In FinlandandSweden,sawntimberstockbeganto 10 millioninvestmentinrenewingaproductionlineat Vapo Timber focusesontheproduction from forest tomarket Cooperation takestimber Our extensiveexperienceinworking Hankasalmi sawmill. Production ManageratVapo Timber’s Roinanen. Hankasalmi andKevätniemisawmills. network isresponsibleforotheropera- transportation services ofVapotransportation services Timber’s tions suchastransportationtoandfrom and saleoftimber. Anextensivepartner uable additiontooureffortsimprove us findthemostefficientsolutions,” partnership withothercompanieshelps considerably,” statesJukkaToiviainen, our operations.Safetyhasalsoimproved sawmills. Thisguaranteestheclientan explains contractormanagerAnita efficient andprofessionalservice. “The viewoftheentrepreneurisaval- “Fin-Terpuu Oyisresponsibleforthe Vapo Timber Turnover (EURmillion) Annual changeinturnover, % Business result(EURmillion) Investments (EURmillion) Number ofemployees Sawn timberdeliveries(m³) Vapo’s Annual Report2010 541,000 2010 135.4 47.3 235 4.7 2.5 426,000 –25.3 2009 91.9 –4.3 219 0.1 17 Key figures Production and Logistics

New organisational model will also enhance the production and logistics operations

Production matrix organisation was extended to different business areas from 1 January 2011. Centralised organisation made it possible to take advantage of the synergy benefits of joint operations and to create joint operational models. Logistics will remain as a joint operation for the entire Group.

Successful peat production despite challenging A similar examination of possible outsourcing began early conditions in the autumn 2010 at the Neova Ab pellet and heat plants Finnish peat production rates were satisfactory: around 83% in Sweden. of the target set for milled peat and around 90% of the target The construction of two new heat plants and two new set for sod peat was met. A total of 19.4 million cubic metres pellet heat plants were completed. of peat was produced. Targets were met or exceeded in The partly refurbished Eurajoki peat plant was destroyed eastern and south-eastern Finland and in the south-western in a fire in April 2010. Substitutive production started imme- region. Targets were not met in northern Finland. However, diately at plants in Haukineva, Parkano and Niibi. We have demand was met. Peat production is Sweden was 2.0 million been able to meet the demand in a satisfactory manner. cubic metres which is about 80% of the country’s target. Peat A new plant will be build to replace the one destroyed production in Estonia and Latvia was around 2.1 million cubic in the fire and this plant will start operating in March 2011. metres which is under 80% of their annual target. Process equipment supplies are mainly carried out by Premier Conditions for environmental peat production were harsh Tech and construction by RTP-rakennus Oy. in summer 2010, which creates challenges for quality as well as quantity for the next season. The growing material Certified Group production at the Seda plant especially suffered from the cold The entire Group was granted the ISO 14001 and ISO 9001 winter. certifications in May 2010. The company’s Finnish operations are now covered by a quality and environmental manage- Oversupply of pellets ment system certifications. Vapo Timber, Vapo Local Fuels In Finland, pellet production fell behind by one fifth of its and Vapo Garden and Environment had already received target. The target was reduced twice to respond to the these certifications earlier. Now certification was grated to market situation. Plants using dry raw materials found it Vapo Heat and Power and Vapo Pellets. easier than expected to obtain that raw material whereas The ISO 14001 certified environmental management plants in Turenki and Haukineva using wet raw materials had system is a demonstration of responsible operations and to adapt their production to the market situation. it guides the organisation in developing its environmental policies. By following the requirements set by the standard, Outsourcing in operational tasks and maintenance negative impact on the environment can be minimised. The operational tasks and maintenance in pellet and heat Certifications are not set in stone but they are only valid plants and maintenance in power plants in Finland were if their requirements are met. Vapo’s business operations are outsourced to Maintpartner Oy and ISS Palvelut Oy in three conducted in compliance with the joint quality and environ- stages during 2010. This should improve the utilisation rate, mental management system. The organisation must maintain flexibility and provide savings for acquisition. The contract is and develop its quality and environmental management for five years. Outsourcing meant that 100 employees trans- systems and ensure that processes, work performance and ferred to work under these partners. The first steps to develop services are in compliance with the certified system. operations have been taken by successfully combining Vapo’s and its partners’ areas of expertise.

18 Vapo’s Annual Report 2010 Harmonising acquisitions Vapo is involved in several development projects which The Acquisitions department strengthened Vapo’s image aim at lowering costs and developing logistics in a more as a client in the eyes of suppliers as the company carried environmentally friendly direction. In cooperation with out its acquisitions in a centralised manner. Key acquisition operators in the field, Vapo is developing container solutions principles and procedures were compiled into an acquisition for bioenergy transportation. A functional container solution guide which instructs everyone in the Group who is involved could be used for railway and road transportation. Vapo’s in making acquisitions. goal is to increase the volume of its railway transportation from the current 200,000–300,000 tonnes to significantly Fewer incidents more within the next five years. The most challenging part of The central occupational safety project was “Improving safety this is to transform the current Finnish railway system into a in Vapo”. The project dealed with safety management, poli- flexible and cost-effective system. The lack of railway capac- cies of our shared workplace and the use of personal protec- ity suitable for bioenergy transportation prevents transport tive equipment. of significant volumes even if Vapo has the willingness to The insurance company Tapiola contributed to the project increase the volume of railway transportation. In the winter of by sending its Risk Manager to our team meetings. 2010–2011, small-scale railway transportation to Jyväskylän Occupational safety policies, quantifiers and procedures Energia in Southern Ostrobothnia was trialled. In Sweden, for dealing with safety matters were all established for suc- Vapo’s subsidiary Neova has used container transport by rail cessful safety management. Guidelines were put in place to for several years now. recognise and assess work-related risks. Vapo has introduced a pilot project to monitor the con- A code of conduct for shared workplaces was established. sumption of fuel and driving in our transportation equipment. This code describes the ways in which legal requirements are The monitoring system has been installed to one of our full communicated to contractors. Based on the code, a Safety trailer combination trucks, and the decision whether to con- Guide was created for every company location and is used tinue with monitoring will be taken in 2011. n when signing up new contractors. The guide includes an assessment form which is filled in at a new location. Signs are used to communicate with contractors, such as drivers, visit- ing the site. The personal protective equipment policy was har- Vapo Production 2010 2009 monised for the entire Group. The code guides the use of protective equipment by personnel, contractors and visitors. Peat, million m3 23.9 25.6 There are guidelines for location-specific requirements con- Pellets and briquettes, 1,000 t 576 596 cerning the use of personal protective equipment. Heat and Power, GWh 2,170 1,832 Improved treatment of incidents and near misses. These are now recorded in the Deviations database. Significant risks Vapo Logistics that have appeared, their risk analysis and responses to them 2010 2009 are recorded on a separate Risk Deviations database. Road transports, million tonne-km 1,094 986 The annual target is to reduce the number and frequency Rail transports, million tonne-km 85 60 of incidents by 15%. The Nurmes sawmill continues its “Zero Sea transports, million tonne-km 673 644 incidents” campaign introduced the previous year. Key figures In the area of investment projects, Vapo strengthened its partner network. ISS Proko Oy is building three Vapo pellet heat plants. By operating locally, we can use the regional ISS Proko Oy sites for operational and financial gain.

Logistics is made more efficient and environmentally friendly Vapo’s transport volumes in Finland grew by 1.7 million tonnes compared to 2009. Recovery of the timber industry and the satisfactory success of peat production in summer 2010 had their effect on the volume increase. Vapo cooperates with nearly 300 businesses in different business areas. Peat transportation employs approximately 500 people. Vapo’s lorry transportation costs rose 4% mainly due to the rise of fuel costs and drivers’ salaries. The rise in Vapo’s average cost level was below this, which is partly due to the more efficient transportation operations. Shipping volumes remained at the same level as in 2009. Export volumes of the timber industry grew considerably and energy peat was imported to Finland from the Baltic countries. The rise in the price of shipping fuels increased the general shipping cost level by 8%. Vapo’s international transportation costs increased by 4.5% on average.

Vapo’s Annual Report 2010 19 Research and development

Research producing more responsible production methods

National and global pressure to target environmental effects of peat production. Vapo is actively developing and researching new possibilities in responsible peat production.

The business development department supports business sink. In 10–15 years, the area is harvested and used for energy operations by participating in extensive, long-term and production and then allowed to become forested again. potentially risky technology and business development projects and by producing expert services.The development Water management methods under active department employs 12 people and a joint project of Vapo development and Metsäliitto, on biofuels for transportation, employs 9 Water protection issues attracted wide public debate in 2010. people. Peat production has been the object of intense attention in In research and development projects, one of the main the debate on emissions of nutrients and suspended solids. areas is development of environmentally friendly peat Vapo is actively developing new water management production methods. For example, the drying of peat on methods for peatland. The aim is to purify the water drained a tarmac field has been developed into a well-functioning from the production areas so that it is at least as clean as it method but it is still financially too expensive. In addition to was before peat production. The purification process uses tarmac fields, peat extracted from peatland can be dried on either peatland vegetation or a chemical treatment. normal peat fields where special attention has been paid to Controlling emission in water still happens with a delay as the field’s water management. Throughout 2011, tests are to the monitoring work is based on analysing samples. However, be carried out to find more financially effective ways to dry Vapo is developing control methods that could provide real- peat on tarmac fields. time information on the state of the water. Independent studies show that the nitrogen, phosphorus New methods for reuse of peatlands and suspended solids emissions of peat production areas are Another significant area of research is the climate- and water no more than a few percent. Agriculture, forestry, urban and system-friendly use of cut-away areas. There will be 2,500 dispersed settlement areas cause a greater load on drainage hectares of cut-away areas released from peat production in basins than peat production. the near future in Finland and different possible ways of reus- In 2010, Vapo also took part in an international project ing these areas are being developed. on peatland strategy organised by the International Peat There have been some promising results in experiments Society (IPS). The project aims at creating a global peat where the cut-away area has been quickly paludificated and production certificate system which defines the principles reused for peat moss cultivation. When the water system of of sustainable peat production. European Peat and Growing a cut-away area is restored to the state it was before peat Media Association (EPAGMA) has put this all into practice by production, the area resumes its original natural state in creating its own Code of Practice. few years. At best, moss dry-matter production exceeds the growth of wood. The effects of peat production on climate can be Another promising alternative is the intensive cultivation reduced of wood biomass. Cut-over peatland is fertilised with ash and Research on the effects of peat production on climate using allowed to become forested naturally. Wood biomass yield life cycle analysis was continued. In public debate, peat and is 10 cubic metres/year for every hectare already in the first its effects on climate are often described as being even worse ten years. At the same time, the area becomes a large carbon than coal. However, studies show that the effect of peat on

20 Vapo’s Annual Report 2010 Vapo’s research and development expenses, EUR million

5.1 4.5 4.3 4.4 4.0

0.8 0.8 0.7 0.7 0.6

06 07 08 09 10

Percentage of turnover

climate is no greater than that of coal and that the effect can be further reduced by selecting the right peatlands and developing production methods. Nearly always, CHP and heating plants use a combination of peat and wood as fuel. This combination has a lesser impact on climate than coal. Measurements in Finland and in Sweden have proved that the ditched peatlands are sources of greenhouse gases. When peat is extracted from these areas it is to replace coal, and after production the peatland is used for forestry, agriculture or paludification so the area becomes a carbon sink. This reduces peat-related effects on climate.

Studies on timber harvesting and biocoal production go ahead as planned Vapo is developing new technologies for the timber harvesting of forested peatlands as a large number of such areas will be ready for felling in the coming years. Vapo also continues researching possible ways to produce biocoal. The method heats wood in an oxygen-free environment after which it is ground and made into pellets. The calorific value of the end product is better than pellets and its operating characteristics are very similar to coal. Studies on technological solutions were concluded and the next possible project is building a demonstration plant. Vapo has been an active participant in the EU Renew- able Heating and Cooling Platform and it provides an excellent vantage point for the future of renewable energy sources. The purpose of the Platform is to create a vision, goals and a strategic research agenda from 2020 to 2050 for heating the EU region with renewable energy. Vapo is part of CLEEN Oy, a hub for strategic expertise in the energy and environmental business founded in 2008. Currently, a bioenergy research programme is being planned. n

Vapo’s Annual Report 2010 21 Corporate responsibility

corporate responsibility

Vapo is committed to sustainable development of its business operations

As a producer of local fuels and user of natural resources, a central part of Vapo’s business operation is acknowledging the company’s environmental impact and minimising detrimental effects. The company is obliged to do this on the basis of the environmental policies set by the company owners as well as requirements from society.

All Vapo’s operations comply with local legislation in its Social Responsibility Committee headed by the Managing operating countries and the company is committed to the Director, and its members include the business area directors, principles of its corporate social responsibility which defines the Business Development Director, Environment Develop- the guidelines regarding personnel, interested parties and ment Director and Communications Director. The group met the operating environment. Approved practices and values eight times in 2010. and the Group’s commitment to laws, norms and internal regulations are described in the Vapo Group’s ethical direc- Certification of the management system tives. Vapo also has an environmental policy approved by An important tool for realising responsible practices and the Board of Directors in 2010 which is supplemented by a monitoring results is the management system introduced Climate Programme and principles for the remediation of in 2009. In spring 2010, Det Norske Veritas granted the contaminated soil. The quality of work and the realisation of system a quality certification compliant with the ISO 9001 goals are monitored by the management system. standard and an environmental certification compliant with Vapo’s Board of Directors and Management Team are the ISO 14001 standard. This certified management system responsible for outlining the strategy for corporate social covers Vapo’s all business areas, production and logistics and responsibility. The practical work is guided by the Corporate auxiliary and service activities in Finland. Vapo Timber has previously been granted Chain of Custody of Wood-based Raw Materials and Occupational Health and Safety Manage- ment System certifications. With these certificates, Vapo wishes to indicate to customers and interested parties that it is committed to continuous and determined improvement of the quality of products and operation.

Correct information about peat Peat production and use were topics in public debate in 2010. The effects of peat production and use of peat in energy production were widely discussed in the media and in different meetings and events. Vapo was an active party in these discussions. There was an information campaign called “2 percent” on television, the major newspapers, in social media and on the Vapo website. Together with the Association of the Finnish Peat Industries and other peat producers, we organised several Open Day events at peat production locations throughout the summer. The central message in the information campaign was the fact that peat produced for energy is significant both for increasing the usage of wood fuels and securing Finnish energy production. People were also reminded of the fact that currently only less than one percent of Finland’s peatlands are used for peat production and, even in the future, this figure seems to remain below two percent. In addition to its annual report, Vapo reports on matters of corporate social responsibility in line with the Global Reporting Initiative recommendations in Finnish and English on its website at www.vapo.fi > Environment and Society. n

22 Vapo’s Annual Report 2010 economic responsibility

Sustainable financial operation provides additional value to interested parties

The financial responsibility of Vapo is based on profitable operations and developing competitiveness in the long term. Sustainable financial operations also provides added value for interested parties. Due to the nature of Vapo’s operations, financial effects are primarily local.

Vapo and its partners operate, employ and pay taxes in in all its operating countries. The majority of the company’s around 120 Finnish municipalities and in around 100 purchases and services are obtained from local sources. The municipalities in other countries in the Baltic Sea region. The employment effect of the operations is felt both in towns and local nature of Vapo’s operations is reflected in its external in sparsely populated areas. Especially in the sparsely popu- purchases and services as well as salaries relative to turnover lated areas, Vapo is often a very significant local employer.

Direct effect Vapo 2010 (2009) Indirect effect

Customers Customers Sales 719.5 (573.7) – We are respected as a reliable local partner, due to our MEUR principles, sustainable development and guaranteeing Vapo supplies local biofuels, heat and reliable deliveries. electricity, other peat products and Share of domestic – Vapo uses domestic renewable energy sources for heat timber. fuels in Finland and electricity production. 40 (33) % – Vapo’s flexibility and resources allow it to offer efficient and innovative solutions. Personnel Personnel Salaries and fees The Group has approximately 50.2 (51.2) – Vapo is always training and developing its personnel. 1,333 employees. MEUR

Subcontractor Subcontractor (contractors and drivers) (contractors and drivers) Purchases and Vapo acquires forest energy, contract- external – Vapo aims at building with its subcontractors a business ing services to provide peat, forest services relationship which benefits both parties and which results chips and transport services. Vapo pro- 572.2 (427.5) in new jobs and business opportunities. vides work for local operators and their MEUR – Vapo provides added value for contractors by developing employers (350 contractors, almost production machinery and methods. 300 transport providers).

Public sector Public sector

Taxes and – Vapo takes responsibility for its finances and contributes statutory to the well-being of local communities through social social costs security contributions and taxes as well as creating new Vapo pays taxes and statutory jobs both within Vapo and for subcontractors. social costs. 24.3 (22.8) MEUR – Vapo supports schools, colleges and universities. Some examples of this are the donation made to University of Jyväskylä and the pellet professorship in Lappeenranta.

Dividends Shareholders 15.0 (12.0) MEUR

Dividends from fiscal year 2010 are paid 28 March 2011 500 euros per each share.

Vapo’s Annual Report 2010 23 corporate responsibility

Focus on professional improvement and bioenergy know-how

Vapo’s 2010 personnel management theme was responsibility. Some central topics were managing people and deepening and widening expertise in bioenergy within the whole organisation.

In 2010, these topics were reflected in training and offering complement the existing emergency guidelines. As a respon- opportunities for improving expertise to both personnel as sible employer, Vapo wants to ensure the safety and recovery well as entrepreneurs and suppliers within the Vapo partner of its employees in the event of an emergency or risk of an network. emergency. We created a path for professional improvement to sup- Our occupational health service decided to select dia- port supervisors, and launched the Responsible Supervisor I betes prevention as the main target in their bid to reduce training scheme, which focuses on improving basic profes- risk to working ability. In Finland, we introduced the “Fit for sional and managerial skills. This will be followed by the Life” campaign to encourage and assist personnel in making Responsible Supervisor II training scheme, which focuses on changes in their lifestyles and taking care of themselves. managing people. Personnel were asked to provide feedback on management on two occasions through management Consideration for interest groups surveys. The Even Better training programme was launched Vapo emphasised developing trusting relationships and in cooperation with Aalto University to improve middle cooperation with its interest groups. Special attention was management’s business skills. The training is in English, the given to local peat businesses. Some of the outcomes of this Group’s official language. were the cooperation events between Vapo and peat entre- In addition, an online learning environment was launched preneurs organised in 11 locations before and after the peat to support learning and developing expertise. In the future, production season. The content of these events was planned this will provide us with better opportunities to record and in accordance with production targets. Personal well-being improve our expertise in bioenergy, which again will assist and being a successful supervisor were also topics discussed Vapo in its central task. We also established a policy concern- at these events. In addition to the cooperation events, Vapo ing independent studying to encourage personnel to partici- provided considerably more training for its partner busi- pate in professional studies independently. nesses (peat producers and transporters) than in the previous year. Training focused on environmental responsibilities and Appealing jobs improving the competitive strength of the business. Vapo would like to be a company where everyone works Vapo improved the process of informing municipal deci- towards common targets and feels positive. The company’s sion makers in order to create a better and more interactive employer image is based on responsible operations, provid- relationship with municipalities. During the course of the year, ing opportunities for professional development and being Vapo representatives met with around 2,500 municipal deci- market-oriented. The Future Resource project launched in sion makers or influential residents through workshops, open 2010 ensures that Vapo will also have the best bioenergy days, site visits, negotiations and trade fairs. expertise in the field within its own organisation and network As in previous years, Vapo cooperated with organisa- in the future. tions related to its lines of business, and paid especially close attention to international developments in the energy and Well-being and safety through practical measures environmental sector. Interest group work was supplemented Last year saw many improvements in the area of occupa- by sponsoring schools, donating scholarship funds and invit- tional safety at Vapo. A Group occupational safety policy ing schools and other groups to visit different Vapo locations, was established as a part of the occupational safety project as well as other forms of sponsorship. launched in 2009. To implement this policy, our occupational Vapo’s sponsorship contributes to the implementation of safety organisation arranged training for the whole organisa- the Group strategy, and social responsibility and supporting tion and our contractors. A guide to occupational safety sustainable development are essential factors when selecting called “Shared Workplace” was published, and a system was partners for different cooperative projects. Vapo is primarily created for recording health and safety risks and close calls at involved in cooperative projects where locality, flexibility and the workplace. being close to nature are central elements. In cooperation with our occupational health service, we introduced additional emergency instructions on what to do in a situation that threatens an employee’s well-being to

24 Vapo’s Annual Report 2010 social responsibility

Employees by areas Open days provide information on peat production 2006–2010 In summer 2010, Vapo offered everyone the opportunity to learn more about peat production. Eight different peat 977 967 production sites around Finland organised an open day 948 event. The basic principles of peat production, the use of 877 peat for energy, growing and environmental management 833 and the impact of peat production on the environment were 914 861 explained to visitors. Visitors were also given the chance to 832 574 see peat production in action and learn about water manage- 500 ment systems. n 06 07 08 09 10

Finland Other countries Vapo invests in Nordic combined

Vapo continued its cooperation with the Finnish elite and youth sport. In August Vapo made a two-year cooperation agreement with Age distribution of Finnjumping ry. The agreement covers cooperation with the Finnish employees in Finland Nordic combined team’s A-team and work with children and young < 20 0.2%

people. As a result, the junior WC team was named Vapo Team. 21–30 10.1% For Vapo, this sponsorship agreement is a significant investment through which it wishes to demonstrate its corporate social responsibil- 31–40 15.4% ity, improve public relations and its corporate image. The agreement 41–50 24.8% provides the Nordic combined association with a chance for more long 51–60 38.9% term activities. “This is one of the most significant agreements signed with the > 60 10.6% Nordic combined association. This sponsorship considerably improves the training conditions for both young athletes and the athletes in the national team,” affirms Kimmo Savolainen, Head Coach of the Finnish Nordic combined team.

Vapo’s Annual Report 2010 25 corporate responsibility

Making business and caring for the environment

Responsible management of environmental issues is part of Vapo’s business activities. Responsibility includes acknowledging its own environmental impacts and minimising adverse effects on the environment.

The staff at Vapo committed to environmentally-friendly 2050.These guidelines were intended to be ready by 2010 activities and continuous improvement in managing envi- but the work group was given an extension until the end of ronmental issues. Vapo also acknowledges its responsibility January 2011. regarding the environmental impacts of its production chains, The work group makes recommendations regarding the and ensures that peat industry entrepreneurs and employees, rules by which and the extent to which peat production can as well as other subcontractors, have a good grasp on the be carried out on peatlands in future. The aim is to integrate environmental impacts of their work. all the benefits of peatland eco system services. Some of the benefits are the use of peat and wood from the peatlands, Environmental policy assessed in 2010 principles for sustainable use and conservation of peatland The environmental policy approved by Vapo’s Board of nature. The essential issue for peat production is the catego- Directors set the guidelines for managing the environmen- risation of peatlands acquired into areas in their natural state, tal aspects of Vapo’s activity responsibly. The validity of this areas with weakened natural state and areas that have lost policy was reviewed in 2010. More extensive environmental their natural state. The work group has also discussed surface policy reform is planned to take place in 2011. The environ- area needs, protection of nature and the water system and mental policy is to be followed throughout the entire Group, reviewing the environmental permit procedure. and it requires the environment and the needs of the cus- Negotiations were initiated with the Ministry of the tomer and society to be taken into account in all production Environment regarding the protection of peatlands with and service chains. The origin of raw materials, efficiency of high environmental value that are currently held by peat use and minimising adverse environmental impacts must be producers. noted when using natural resources. The environmental policy is supplemented by Vapo’s Debate on protection of the water system in peat own climate programme and soil policy. Vapo’s soil policy conservation requires all Vapo employees to ensure that operations do According to the official VAHTI register from the Finnish envi- not contaminate the soil or cause long term damage that ronmental authorities, the water course load caused by peat may be detected later and difficult to repair. The different production is 1% for nitrogen and 0.7% for phosphorus, out business areas are responsible for taking care of the everyday of the total nutrient washout that has an effect on eutrophi- aspects of the environmental policy locally, and this work is cation. Public debate may have created an impression that is guided by the principles, targets, programmes and monitor- completely opposite to this. ing recorded in Vapo’s management system. Vapo’s climate News reports related to the environmental impacts of programme can be consulted on their website. peat production are often emotional and not based on facts. To promote facts, Vapo has increased the number of EU directives and regulations affect environmental independent waterway-specific expert surveys and tested a work new cyanobacterium survey to trace the origin of nutrient Several EU directives and regulations affect the environmental washouts. work done by Vapo. In 2010, their effects were seen mostly in plans for using renewable energy, climate issues, emissions Vapo is committed to responsible use of peatlands. trading, issues related to energy efficiency and biodiversity, Peat production and its impact on the water system and drafting of water management measures as required by the climate had a key role in Vapo’s environmental responsibil- Water Framework Directive and responsible use of environ- ity work. Vapo is committed to complying with the Code mentally valuable areas. of Practice for responsible use of peatlands. The Code of Practice was introduced in 2010, and it was compiled by the Extension for the peatland strategy work group European Peat and Growing Media Association (EPAGMA). In Finland, the peatland strategy work group set up by the Vapo is one of the founding members of the association. Ministry of Agriculture and Forestry continued its work in The code defines the principles of responsible peatland 2010. The purpose of the work group is to establish national usage at different points of the production chain, from select- guidelines for the use of Finnish peatlands up until 2020 and ing the production field and preparation to peat production

26 Vapo’s Annual Report 2010 environmental responsibility

and re-use of production sites. There is also a commitment In fact, the effect of peat production can only be seen in the not to use environmentally valuable peatlands. This code will head waters and brooks of water routes. The effects of peat be integrated as a part of Vapo’s management system. production are more difficult to recognise in larger bodies of water due to the strong impact of other sources. More information about humus and suspended More information on humus and suspended solids can be solids found on the Vapo website at www.vapo.fi > Environment In peat production, drainage water is extensively measured and Society. for dissolved organic matter, consumption of oxygen, colour and suspended solids (particles). The data from these tests Acidic subsoil potential risk for drainage water are published in control reports at www.nablabs.fi. Sus- There are acidic geological layers in Finnish soil that may pended solids refer to peat and soil particles carried by water. cause changes in the drainage water of cut-away areas. This Their migration is analysed at all control points, and the creates a risk related to agriculture, forestry and any other water treatment process at peat sites focuses especially on kind of activity involving digging. If one of these layers is recovering suspended solids. Suspended solids can silt up the exposed and comes in contact with oxygen, the pH of the bottom of a body of water and this is why it is so important water may drop unfavourably low. to recover it. In August, this risk became a reality at Jukojärvi Lake in As a part of the peatland strategy work, the amount of Ilomantsi, which receives the drainage water from Linnunsuo suspended solids that are washed out from Finnish peatlands peatland. After rain and restoration work, the pH value of was measured. According to tests, the amount of suspended the water was exceptionally low. At the same time, dead fish solids washout generated by peat production is 4,580 ton/ were found in the water body below. year, while forestry on peatland causes 71,000 tons and farm- This demonstrated that the water treatment process ing on peatland 12,750 tons of suspended solids washout in peatland production sites in sulphide risk areas needs per year. This means that approximately 5% of suspended improved methods and more efficient water treatment in solids from peatlands is caused by peat production. One third future. As a result, this matter is one of the research areas of of Finland’s land area is peatland and two thirds is mineral our development department. soil. Farming and forestry also takes place on mineral soil but there is no information available on washout. Programme for more efficient water protection In public debate in 2010, the terms humus and sus- methods pended solids were often confused, and all organic matter in The programme to improve water protection methods in water was sometimes thought to be from peat production. peat production launched in 2009 continued. In 2010, Vapo

Water course load of Vapo’s peat production 2006–2010 in Finland

Suspended solids, tonnes/ Nitrogen, tonnes/year Phosphor, tonnes/year year

33,388 388 606 21.6 577 563 19.6 19.5 22,609 609 22,693 693 22,437 437 450 410 14.2 22,033 034 13.2

06 07 08 09 10 06 07 08 09 10 06 07 08 09 10

Sources of nutrient washout that increase eutrophication in Finland

Nitrogen emission sources, % Sources of phosphorus emissions, %

Agriculture 53.4% Agriculture 67.1% Deposit 16.9% Scattered settlement 8.6% Communitys 15.0% Forestry 5.6% Forestry 4.4% Deposit 5.5% Scattered settlement 3.4% Communitys 4.8% Pulp and paper industry 3.2% Pulp and paper industry 3.9% Other industry 1.2% Fish processing industry 2.0% Peat production 1.0% Fur farming 1.1% Fish processing industry 0.9% Other industry 0.7% Fur farming 0.6% Peat production 0.7%

Source: VAHTI register from the environmental authorities

Vapo’s Annual Report 2010 27 corporate responsibility

made a EUR 9.1 million investment in environmental protec- of 2010 in 20 (15) of Vapo’s locations in Finland, Sweden, tion for peat production. Half of this sum was used for renew- Estonia, Latvia and Spain. Throughout the year, these devices ing and improving the water protection structures of the were used for about 1,540 hours, which has reduced costs so-called old production sites. An extensive and systematic and emissions. The use of public transport instead of private site-specific monitoring procedure was also introduced in vehicles has increased. Diesel and low emission vehicles will order to improve site management. Environmental inspec- be preferred in future acquisitions. tions related to this procedure were carried out throughout Vapo participated in a global Earth Hour organised by the the year in over 200 peat production sites. The aim is to carry WWF. During Earth Hour on 27th March, individual people out an inspection at every site once a year. and communities all around the world switched off their lights between 8:30 pm and 9:30 pm. Three million euros for the Saarijärvi Route The impacts of peat production related to the famous Saari- Soil inspections at Pursiala completed järvi Route were discussed in the TASO project work group, The soil inspections at the old Pursiala sawmill required by the launched by the Ministry of the Environment and other spon- Southern Savo Centre for Economic Development, Transport sors. Alongside interest groups, this project is meant to survey and the Environment were completed in November 2010. the effects of agriculture and peat production on the state of There were extensive ground water tests, drilling, a variety the route and develop new methods to manage water course of geophysical and geotechnical tests and a hydrogeological load. model of the area was drafted to map the water flow direc- Vapo is committed to investing EUR 3 million to protect tions in the area. The purpose of all this was to analyse the the Saarijärvi route. Some of this investment will be used to need for rehabilitation due to the ground water source nearby. improve existing water protection measures and some will be used to develop new research methods. Vapo has already Number of environmental permits remained high started the project by improving the route’s water protection Environmental permits have a significant impact on Vapo’s measures, reviewing the state of its own sites and analys- environmental protection work and the protection methods ing the cyanobacterium situation, which indicates nutrient applied. In 2010, legally valid permits were not obtained as washout in selected lakes. Next year, around ten new surface quickly as expected, which makes opening new peat produc- overland flow fields or wetlands will be built in the area. A tion sites more difficult. total of EUR 600,000 has been set aside for this. In 2010, Vapo Group applied for 100 (91) environmental permits, most of which were peat production permits. 87 Improved energy efficiency (60) were initiated in Finland, 13 (3) in Sweden and 0 (28) Vapo’s power and heating plants mainly use local fuels. In in Estonia. Environmental permits were granted for 52 (84) every country they are sourced from locations where fuels are locations. Of these, the 44 (25) obtained in Finland, 8 (18) in produced in compliance with permit conditions and other Sweden and 22 (41) in Estonia were peat production permits. environmental obligations. The use of local fuels reduces the In Finland 30 (7.3)% of applications were rejected. The need to import energy and thereby the amount of emissions number of environmental impact assessments launched was resulting from transportation. Self-sufficiency in energy pro- 3 (5) in Finland, 13 (3) in Sweden and 8(1) in Estonia. A total duction is improved as a result. of 14 (26) of these were completed. Improving the energy efficiency of Vapo’s own plants has been a target for continuous development. One tool for Continued increase in environmental costs this work is the voluntary energy efficiency contract between Vapo uses a significant share of its turnover for environmental businesses and the state, which includes all of Vapo’s power investments and developing production methods. In 2010, and heating plants that have their own district heating environmental protection costs amounted to EUR 15.9 (13.6) networks: Forssa, Haapavesi, Ilomantsi, Lieksa, Muurame, million, excluding work conducted by company employees. Mynämäki, Rääkkylä, Sotkamo, Vuokatti, Tohmajärvi and Salo, Of these costs, EUR 14.1 (12.0) million occurred in Finland, which was included in 2010. These plants have goals up to EUR 1.7 (1.5) in Sweden and EUR 0.2 (0.03) million in 2016 and practical measures to reach these goals have begun. other countries. In addition, a large portion of research and In 2010, an independent reviewer conducted an energy development costs were targeted towards projects related to analysis at the Salo and Sotkamo plants. This review acted as environmental responsibility. The in house staff investment in a basis for measures to improve energy efficiency. The goal environmental issues totalled 48 (56) manpower years. is to reduce the use of fuel or to produce more energy with Environmental protection costs arose from emission the same amount of fuel, reduce waste and the plant’s use of control measures at power and heating plants and other electricity. Similar analysis was previously conducted in the facilities, water protection measures and load monitoring at Forssa and Lieksa power plants. peat production sites, soil protection and rehabilitation, dust and noise control, ecological surveys, Environmental Impact Target to get smaller carbon footprint Assessments and environmental permits, fire protection and Less travel numerous environment-related investigations. Measures aimed at diminishing Vapo’s carbon footprint have been successful. Travel costs in the entire Group continued Vapo products benefit the environment to fall slightly, and video conferences have become a normal Although Vapo’s operations place a burden on the environ- routine. There were video conference devices at the end ment, the company’s products can also help to improve

28 Vapo’s Annual Report 2010 environmental responsibility

it. Peat is a necessity in fulfilling the renewable energy use Relating to environmental issues, interest groups targets set by the EU. Peat-wood mixture replaces imported expect to be informed about: energy, especially coal, and pellet replaces oil. Pellet also 1. Energy self-sufficiency improves self-sufficiency and reduces emissions. 2. Environmental effects of our activity Reed canary grass, cultivated on sites no longer used for 3. Vapo climate programme peat production, produces a big biomass crop and stores a 4. Source of raw material great amount of carbon dioxide from the air. According to 5. Impact on immediate environment (dust, noise, etc.) research, the use of reed canary grass for fuel causes 40% less 6. Emissions into air (nitrogen, sulphur, particles) carbon dioxide emissions/MWh than coal. In addition, reed 7. Measures to ensure biodiversity canary grass acts as a wetland and retains nutrients and soil 8. Research and development work on managing environ- on fields near shores and ditches. mental effects The compost and gardening topsoil products make use 9. The scale of peat production, surface area and use of waste raw materials and the waste management business 10. Carrying out assessments on environmental effects area improves the state of the environment and promotes the recycling of products and materials. Sawmill wood products, on the other hand, are natural building materials that store carbon dioxide for long periods of time. Bedding and composting peat products reduce the environmental pressure on waterways from agriculture and cattle breeding. The volume of nutrients stored by environmental peat in Finland exceeds the total nutrient burden generated by the entire peat production industry.

Evaluation of the environmental impact of pellet as benefit for climate Vapo was one of 24 wood pellet producers and developers competing for the Climate award from the Finnish energy industries (ET). The strengths of wood pellet are its renew- ability, versatility and locality. Pellet can be used in variety of different boilers and it replaces fuel oil and other fossil fuels. In Finland, the current use of pellets corresponds with around 75 million litres of heavy or light fuel oil. When wood pellet is used, we are not creating emissions through this imported form of energy.

New data In spring 2010, Vapo used an interest group analysis to survey the expectations of interest groups regarding reporting on environmental issues from the point of view of GRI reporting (Global Reporting Initiatives). The interest group analysis consisted of three stages: 1) Recognising key interest groups and defining content, 2) carrying out the survey online and in paper form (posted to landowners) and 3) analysing the answers and results. The aim was to define points for development in annual reporting and especially for reporting on environmental matters. A similar survey will be carried out in few years’ time. In March, the survey was sent to 3,000 people in Finland and Sweden, and 21.2% of recipients took part in the survey.

Key interest groups related to corporate social responsibility are: 1. Vapo employees 2. Customers 3. Neighbours 4. Owners 5. Decision-makers, ministries 6. Authorities 7. Contractors 8. Peatland lessors, land and forest owners 9. Trade unions 10. Science, research Vapo’s Annual Report 2010 29 Governance

governance

Corporate governance

Vapo Oy is a Finnish joint-stock company The issues discussed in the Annual Meeting include the which complies with the Finnish Compa- following: – The adoption of the financial statements and the consoli- nies Act, the Articles of Association, and dated financial statements Shareholders’ Agreement in its decision- – The managing of distributable assets making and management. In addition, – Determining the number of members in the Supervisory Board and the Board of Directors and electing them Vapo Oy complies with the recommenda- – Granting discharge from liability to the members of the tion of the Finnish Ownership Steering Supervising Board and Board of Directors and the Manag- Department in Corporate Governance ing Director – Choosing the Auditors matters in publicly owned and affili- – Deciding on the remuneration payable to the members of ated companies and, where applicable, the Supervisory Board and the Board of Directors the Finnish Corporate Governance In 2010 Code 2010 by the Securities Market The Annual General Meeting was held on 25 March 2010 Association. in Helsinki. In addition to owners’ representatives, the Chairman of Vapo’s Board of Directors and Managing Director of Vapo were present at the General Meeting.

Supervisory Board Vapo Oy has a Supervisory Board consisting of a minimum of 8 and a maximum of 10 members elected by the Annual General Meeting for a term of one year, and three employee Vapo Group’s administrative bodies are the Annual General representatives elected by the personnel for a term of two Meeting of shareholders, the Supervisory Board, the Board of years. Directors, the Managing Director, and the Boards of Directors The tasks of the Supervisory Board are: and Managing Directors of subsidiaries. The Vapo Oy Board – To supervise the administration of the company conducted of Directors appoints the members of the Boards of Directors by the Board of Directors and the Managing Director of the subsidiaries and other Group companies. The manage- – To issue a statement to the Annual General Meeting on the ment of the Vapo Group is based on simple and straightfor- Statement of Accounts and Auditors’ Report ward solutions. – To give directions to the Board of Directors of the Com- Operations management of Vapo consists of the Direc- pany in matters which have far-reaching consequences and tors of the Business Areas and the Vapo Group CFO who involve important principal issues. both report to Vapo Oy’s Managing Director. The operations – To issue a statement to the Annual General Meeting in management of Vapo Oy’s subsidiaries Vapo Timber Oy and matters where the Finnish Companies Act requires a state- Kekkilä Oy is the responsibility of the Managing Directors ment from the Supervisory Board of these subsidiaries who report to the Board of Directors of their respective companies. The Managing Director of Vapo In 2010 Oy acts as the Chairman of these Boards of Directors. The Supervisory Board met 4 times in 2010. The average attendance was 82%. At the General Meeting of 2010, General meeting the following people were elected as members of the The highest decision-making body in the Vapo Group is Vapo Supervisory Board: Oy’s General Meeting. In accordance with the Articles of – Marjo Matikainen-Kallström, Member of Parliament Association, the General Meeting is convened by registered In addition to this, the following people continued to letter to the shareholders at the address in the share register serve as members of the Supervisory Board: no later than eight days before the meeting. The Annual – Hannu Hoskonen, Member of Parliament General Meeting shall be held annually either in Jyväskylä or – Juha Korkeaoja, Member of Parliament Helsinki by the end of May, on the date determined by the – Eero Kubin, Customer Manager Board of Directors. – Esko Kurvinen, Managing Director

30 Vapo’s Annual Report 2010 corporate governance

– Heikki Miilumäki, Doctor of Technology (h.c.) – Marja-Leena Rinkineva, (b.1964), Master of Laws, – Mats Nylund, Member of Parliament Member – Raimo Piirainen, Member of Parliament – Katariina Simola, (b.1957), M.Sc. (Tech.), MBA, – Kauko Rauhansalo, Municipal Counsellor (hon.) Member – Simo Salmelin, Provincial Counsellor (hon.) All members of the Board of Directors are independent of the company. Compensation of the Supervisory Board In accordance with the decision of the General Meeting in Remuneration of the Board of Directors 2010, members of the Supervisory Board will receive monthly In accordance with the decision of the General Meeting and attendance allowances. The Chairman will receive 1,000 in 2010, members of the Board of Directors will receive a euros, the Deputy Chairman 600 euros and other members monthly and attendance allowance. The Chairman of the 500 euros per month. The attendance allowance is 200 euros Board of Directors will receive 2,750 euros, the Deputy per meeting. Travel costs will be reimbursed on presentation Chairman 1,900 euros and other members 1,550 euros per of a receipt. month. The attendance allowance is 500 euros per meeting and is paid for attendance at meetings of both the Board of Board of Directors Directors and its Committee. Travel costs will be reimbursed The Vapo Oy Board of Directors is responsible for the on presentation of a receipt. management and supervision of the Vapo Group as per the Companies Act, the Company’s Articles of Association, the Committees Standing Orders of the Board of Directors and the Sharehold- The Board of Directors appoints two permanent Commit- ers’ instructions. The Vapo Oy Board of Directors comprises a tees from among its members: the Audit Committee and the minimum of 4 and a maximum of 8 members elected by the Compensation Committee. Annual General Meeting for a term of one year. The Chair- man is elected by the Annual General Meeting. The Audit Committee in 2010 The Board of Directors follows an approved agenda The task of the Audit Committee is to prepare, direct whose main points are: and evaluate financial reporting, accounting, auditing, – Preparation of the matters to be submitted to the Annual internal audits, risk management, judicial risks, and inter- General Meeting and to the Supervisory Board nal auditing systems. Each year, the Board of Directors – Definition and approval of the long-term goals and strate- appoints three members for the Audit Committee from gies of the Group and its Business Areas among its members. In 2010 they were: – Approval of the operational, investment and financial plans – Managing Director Perttu Rinta, Chairman made for the Business Areas for the current financial period, until 22 March 2010 and monitoring the reporting related to the plans – Managing Director Hannu Linna, Chairman – Ensuring that the Group and its companies prepare the from 22 March 2010 statutory external Annual Statements in an appropriate – Managing Director Risto Kantola manner and form – Director Katariina Simola – Creating the necessary organisation structure and appoint- The Audit Committee met four times in 2010 and attend- ing the Managing Director, the Group’s Business Area ance was 100%. Directors and the Directors of the Group Support Units, as well as deciding on their remuneration The Remuneration Committee in 2010 – Approval of the operational policies and monitoring how The task of the Remuneration Committee is to propose they are implemented a management salary and remuneration system to the – Organisation of internal auditing Board of Directors and prepare any significant organisa- – Corporate acquisitions and related practices tion and appointment issues. Each year, the Board of – Decisions on important investments of the Group compa- Directors appoints three members to the Remuneration nies, other long-term expenses, assignments of property Committee from among its members. In 2010 they were: and financing arrangements according to set budgets – Juho Lipsanen, Master of Economic Sciences, Chairman given in euros – Managing Director Hannu Linna until 22 March 2010 – Decisions on significant expansions or restrictions of – Managing Director Perttu Rinta from 22 March 2010 operations – Government Counsellor Marja-Leena Rinkineva The Board of Directors monitors and assesses its working The Compensation Committee met 12 times during the methods with annual internal reports. year, e.g. to discuss the election process of the Managing Director. The average attendance was 97%. In 2010 The Board of Directors met 14 times in 2009. The average Managing Director attendance was 100%. The Managing Director makes decisions both independently The Board of Directors consists of: and supported by the Group Management Team within the – Juho Lipsanen, (b.1961), Master of Economic Sciences, limits of the powers defined by the Board of Directors, and Chairman of the Board of Directors prepares proposals to be submitted to the Vapo Oy Board of – Perttu Rinta, (b. 1954), M.Sc. (Econ.), Deputy Chair- Directors. man of the Board of Directors – Risto Kantola (b.1960), M.Sc. (Tech.), Member – Hannu Linna (b.1955), M.Sc. (Eng.), Member

Vapo’s Annual Report 2010 31 governance

The Management Team of 2010 (excluding the Managing The tasks of the Managing Director include: Director) have received a total of 1,015,489 euros in salaries – The day-to-day management of Vapo Oy and the Group in and other remuneration. accordance wit the Articles of Association, Companies Act In addition to the salary paid in monthly instalments, the and instructions issued by the Board of Directors Managing Director may receive a profit target-based pay- – Reporting to both the Board of Directors and the Supervi- ment, which may not exceed 40% of the annual (monetary) sory Board salary. The main principles used to determine this payment – Responsibility of drawing up and presenting the Group are linked to Vapo Group’s profit and cash flow. In 2010, strategies and business plans to the Board of Directors for Matti Hilli’s monthly salary and bonus paid for the results of approval 2009 were a total of 406,121 euros of which the bonus was – Informing the Board of Directors regularly on the opera- 76,162 euros. In 2010, pension contributions were 387,154 tions and the financial situation of the company euros. – Presenting matters to be decided upon to the Board of In addition to the monthly salary, Tomi Yli-Kyyny, who Directors, unless this is delegated to the Director of the starts as a Managing Director on 1 April 2011, may receive Business Area concerned a profit target-based payment, which may not exceed 40% – Chairing the Committees of the Board of Directors of the annual (monetary) salary. The age of retirement for a Managing Director is 63 years. A Managing Director is also Group Management Team entitled to a collective supplementary pension insurance The Group Management Team supports the Managing Direc- which entitles him/her to retire at the age of 63 at the earli- tor in his/her work and meets as notified by the Managing est. Vapo contributes to this insurance an annual sum cor- Director in the notice of meeting, the composition depend- responding to 20% of the Managing Director’s total annual ing on the current agenda. salary excluding bonuses. The tasks of the Group Management Team are: Directors belonging to the Management Team, including – Deciding on investments and acquisitions within the the Managing Director, are covered by the pension scheme authority limits approved by the Board of Directors provided for by the Employees’ Pensions Act. Members of the – Ensures that the decisions made by the governing bodies Management Team appointed prior to 31 December 2004 are implemented in an appropriate way in the organisation are entitled to an additional pension in accordance with the – Submitting proposals to the Board of Directors concerning terms agreed upon in their employment contract. Those the development of Vapo Group strategies born prior to 31 December 1952 have a contractual right to – Assisting Vapo Oy’s Managing Director to prepare for Vapo retire at the age of 60, whilst those who were born after this Oy’s Board meetings date may only retire, according to the terms agreed in their – Active promotion of cooperation between the Business employment contracts, at 62. At this point, they will mostly Areas and agreeing on shared principles and development receive a pension granted for the earliest retirement pension measures to enhance the management of the Group age after a full working life, as provided for by the law on – Supervising the development of business operations retirement. The company has an agreement with a pension The Group Management Team meeting is called by the Man- insurance company on the said supplementary pension rights. aging Director at least once a month. The company does not have option bonus schemes.

Management in 2010 Remuneration of personnel In 2010, the Vapo Management Team consisted of: An incentive bonus can be paid to a member of staff if they – Matti Hilli, Managing Director exceed the standard targets set for their work and contrib- – Asko Dahlbom, Deputy Managing Director ute to the company’s profitable growth. The purpose of the – Petri Alava, Business Area Director, Vapo Garden and incentive bonus is to be a tool for steering operation and to Environment improve company result. – Juha Hakala, Managing Director, Vapo Timber Oy The incentive bonus for 2010 will be paid following the – Pasi Koivisto, Production Director and Business Area bonus limits defined based on the Vapo Group results. At the Director, Vapo Heat and Power lower limit, the bonus is 0% and, at the upper limit, it is 10% – Esa Koivula, Business Area Director, Vapo Local Fuels (5% for those within the CLA performance pay scheme) of and Vapo Pellets the employee’s annual salary. Personnel incentive bonuses for – Jari Leppänen, Logistics Director 2010 were a total of 967,003 euros. The Management Team met 41 times throughout the year. More information on the changes in the Management Internal audit Team can be found in the Board of Directors’ report on The internal inspection assesses and ensures that the inter- p. 38. nal monitoring system and the operations in general are appropriate and effective; that the financial information and Remuneration of Senior Management reporting is reliable; that the rules, operational principles The salary of the Management Team consists of a monthly and instructions are followed properly; and creates added fixed salary and incentive bonuses which is a maximum of value for the organisation by providing consultation on these 20–40% of the annual salary. The main principles used to matters. determine this payment are linked to Vapo Group’s profit and The internal auditing reports are submitted to the Manag- cash flow. The targets set are determined by the Group Man- ing Director, who reports to the Board of Directors on the aging Director and are approved by the Board of Directors. special audits if necessary. The Internal Auditing Body issues

32 Vapo’s Annual Report 2010 corporate governance

a review on its findings to the Board of Directors once a year that the information given is reliable, and that the regulations and the Audit Committee receives a summary of the findings and the principles of operations of the Group are observed. twice a year, together with an auditing plan for the upcom- The operations are steered and monitored on a monthly ing 6 month period. basis, primarily by the Business Area, and secondarily by Vapo Group has a Director of Internal Auditing, who can the country. The steering and monitoring process contains employ external auditing resources if necessary. The Auditor monthly and tertile reports, a review of the current financial in Charge and the Director of Internal Auditing together period and rolling 12 month forecasts. ensure that the auditing measures that they take are compat- At the Group level, the Chief Financial Officer (CFO) shall ible with each other. be in charge of internal monitoring and monitoring of the Business Areas shall be covered by the management con- Audit cerned. Internal monitoring is implemented by the Control- The Authorised Public Auditors of the parent company, lers appointed for each Business Area. The Group Operating elected by the Annual General Meeting, audit the accounts Manual, Controller’s Manual and Vapo Accounting Standards for the whole Group through their global network. support operations. The instructions are available for everyone on the Group’s intranet pages. The soundness of the Year 2010 system is assessed annually with external and internal audits. Authorised Public Auditors Deloitte & Touche Oy contin- The aim of the risk management measures is to recognise, ued as the auditors for 2010. The auditor with principal measure and control such risks that, if realised, could endan- responsibility was Tapani Vuopala, APA. 2009 was the ger the operations of the Company and prevent it reaching previous year when bids for the audit engagement were the set objectives. On the other hand, such risks can also requested. The chosen auditor is appointed until further open opportunities for the Company. notice. In 2010, the remuneration paid to the audit agen- For more information on risk management see p. 36. cies belonging to the Deloitte chain was 251,000 euro. A more detailed description of Vapo Group’s governance and Risk Management and Internal Monitoring management can be found on Vapo’s website at: The aim of internal monitoring is to ensure that the compa- http://www.vapo.fi/eng/vapo_group/corporate_governance/ nies of the Group operate in an effective and profitable way,

Form of governance

General Meeting Auditing Supervisory Board

Internal Audit Audit Committee Board of Directors Compensation Committee

Managing Director

Vapo’s Annual Report 2010 33 governance

Board of Directors

Chairman of the Board Propel Voima Oy Member of the Board and Juho Lipsanen, born 1961, M.Sc. (Econ. Oulun Seudun sähkö Verkkopalvelut Oy Chair- & Bus. Admin.) man of the Board Valcrea Ag (Switzerland) Partner Member of Vapo’s Board of Directors 2009– Main simultaneous positions of trust: Piab Member of the Audit Committee 2009– AB, Täby, Sweden, Länsi-Suomi Yhtymä Oy, ARC Technologies Chairman of the Board, Hannu Linna, born 1955, M.Sc. (Eng.) Juho Lipsanen Tectia Oyj Chairman of the Board, Raskone Managing Director, Vaasan Sähkö Oy Oy Chairman of the Board, Setera Oy Chair- man of the Board, Coronaria Hoitoketju Oy Main simultaneous positions of trust: Member of the Board PRT-Forest Oy, Chairman of the Board, EPV Energy Ltd, Member of the Board, Oy RAVERA Previous Employment: TeliaSonera Finland Ab, EPV Energy Ltd, Merinova Oy, Member of 2005–2008, Managing Director, Alma Media the Board, Suomen Merituuli Oy, Member of the 2002–2005, Managing Director, ABB Ltd Board, Pohjolan Voima Oy, Deputy Member of Perttu Rinta 1988–2002, CFO of ABB Automation and the Board, the Confederation of Finnish Indus- Managing Director of ABB New Ventures tries EK, Member of Business Delegation

Chairman of the Board of Vapo 2008– Member of Vapo’s Board of Directors 2009– Chairman of the Compensation Committee Chairman of the Audit Committee 2010– 2008– Marja-Leena Rinkineva, born 1964, LL.M. Deputy Chairman of the Board Ministerial Counsellor, Ministry of Trade and Industry, Corporate steering unit Risto Kantola Perttu Rinta, born 1954, M.Sc. (Econ. & Bus. Admin.) Main simultaneous positions of trust: Member Managing Director, Suur-Savon Sähkö Oy of the Board of Hansel Oy, Deputy Member of the Supervisory Board of the State Pension Fund, Main simultaneous positions of trust: Deputy Chairman of the Board of the Trust of Kymppivoima Oy and Järvi-Suomen Voima Invest in Finland Oy, Deputy Chairman of the Board, Suur- Savon Sähkötyö Oy and Punkavoima Oy, Member of Vapo’s Board of Directors 2006– Chairman of the Board, Ilkka-Yhtymä Oyj, Hannu Linna Member of the Compensation Committee 2006– Deputy Chairman of the Supervisory Board Katariina Simola, born 1957, M.Sc. (Eng.), Deputy Chairman of the Board of Vapo 2009– MBA Deputy Chairman of the Compensation Director, Pöyry Management Consulting Oy Committee 2010– Previous employment: Royal Dutch/Shell, Members Senior Business Development Consultant, Fortum Risto Kantola, born 1960, Marja-Leena Rinkineva Group, various tasks. M.Sc. (Eng.) Managing Directing, Oulun Seudun Sähkö Member of Vapo’s Board of Directors 2005– Member of the Audit Committee 2005– Main simultaneous positions of trust: Eltel Networks Pohjoinen Oy, Svartisen Holding The members of the Board of Directors do not AS, Eastern Norge Svartisen AS, Kymp- own shares in Vapo Group. pivoima Hydro Oy, Rapid Power Oy and

Katariina Simola

34 Vapo’s Annual Report 2010 board of directors and management 31 december 2010

Group Management Team

Managing Director Matti Hilli, Chairman, born 1951, M.Sc. (Eng.) With Vapo since 1985.

Petri Alava, born 1965, M.Sc. (Eng.) Business Area Director, Vapo Garden and Environment With Kekkilä since 2005. Matti Hilli Petri Alava Asko Dahlbom, born 1958, M.Sc. (Econ & Bus. Admin.) Deputy Managing Director, CFO With Vapo since 2005.

Juha Hakala, born 1962, M.Sc. (Eng.), eMBA Managing Director, Vapo Timber Oy Asko Dahlbom Juha Hakala With Vapo since 2010.

Pasi Koivisto, born 1966, Engineer Production Director, Vapo Production Business Area Director, Vapo Heat and Power With Vapo since 2008.

Esa Koivula, born 1959, Engineer Business Area Director, Vapo Local Fuels and Vapo Pellets Pasi Koivisto Esa Koivula With Vapo since 2009.

Jari Leppänen, born 1961, M.Sc. (Eng.) Logistics Director With Vapo since 2005.

Jari Leppänen

Vapo’s Annual Report 2010 35 governance

Proactive risk management

At Vapo, risks are divided into strategic business risks, risks noted in the annual operation plan, operating risks and financial risks. The goal is proactive risk management.

Risks are viewed in the context of strategic planning, annual A significant strategic risk for future business is the exceedingly operation planning, investment and project planning and difficult attainment of environmental permits for new peat pro- follow-up. Alternative prevention and recovery plans are drawn duction areas which increases costs and may create significant up for each of the risks identified whenever possible. Risks obstacles for the sales of energy peat in the future. relating to accidents, interruption of operations and credit are One shared risk that has a wide effect on Vapo’s business is managed with insurance. weather. In the winter, the temperature has an impact on fuel purchases by external and internal customers, and the utilisa- Organisation of risk management tion rate of the Group’s own heat production plants. In spring, Risk management is part of business management and is the weather conditions determine the length of the garden trade responsibility of all Vapo’s directors and individuals within their season and thus its sales volumes. In the summer, the weather respective organisations. The Business Area Directors oversee affects the quantity and quality of biofuels, peat and wood. the implementation of the risk management strategy in their On a national level, the summer of 2010 was average but own Business Areas and report to the Managing Director and there was great regional variation in weather conditions for peat the Risk Management Board. Credit risks and the financial production. The summer produced a harvest which will secure situation are actively monitored by the Group’s financial supply for the 2010–2011 season. Due to regional differences, department, which ensures that credit sales and financing are peat must be taken to northern Finland from other parts of the implemented in accordance with the Group’s endorsed credit country. Peat stocks will remain at a low level as in the previous sales and financial policy. year and will reach around 1–2 TWh in May 2011. The target for The risk management process is developed and coordi- the summer of 2011 is to produce an equal amount of energy nated by the Risk Management Board with the help of the Risk peat as in 2010 i.e. 22 TWh. The aim is to have surplus energy Management Director. The Risk Management Board reports peat stock of 50–70% for each heating season. To achieve to Vapo’s Management Team and the Managing Director who this we will make use of all possible peat production sites and again reports to the Audit Committee of the Board of Direc- resources. The risk is that if the energy peat production of tors. The Audit Committee of the Board of Directors assesses summer 2011 is less than 16 TWh, peat stocks will be empty in the relevance and adequacy of the Group’s risk management May 2012. activities. Vapo strives to provide exceedingly better delivery capabil- ity by developing its wood fuel delivery chain and wood fuel Business risks business area. However, wood fuels are sold separately from peat Vapo’s local fuels and the related energy production proc- fuels. esses are always competing with other fuels and power supply The results in the sawmilling business area experienced sources. At the beginning of 2011, new fuel taxes come into positive development from the second half of 2009 onwards effect, including excise tax of 1.90 euros/MWh for peat, which as production limitations in major producer countries enabled affect the competition between different fuel types. The excise sales prices to rise. As availability of roundwood and profitability tax for peat rises to 3.9 euros/MWh in coming years. This improved, the supply of sawn timber grew faster than demand decreases the demand for peat and increases that for wood which caused sales prices to fall at the end of 2010. Restrictions fuel. Vapo strengthens its own wood fuel business by adding on production were implemented at Vapo Timber sawmills from resources and reorganising the acquisition of energy wood and December 2010 to balance the situation but overproduction wood for the company sawmills under one organisation. is predicted to continue until spring 2011. High volumes in In the long term, the competition affecting Vapo’s success raw timber sales in the latter half of 2010 enabled increases in takes place at the design stage of heat and power plants, when sawmill timber stock even though this was at a price which weak- the fuel type to be used at plants is selected. As Vapo holds a ened profitability. As tax reliefs ended, sales of wood decreased dominant market position in the energy peat market, its opera- in early 2011, therefore the high price of roundwood in the first tions in Finland are governed by the requirements of Finnish half of the year as well as its availability in the second created competition law which include a non-discriminatory customer a profitability risk already in the first half-year. Tariffs for timber policy and transparent pricing based on changes in costs. imported from Russia remained the same and enabled continued Pricing of peat is especially challenging due to its inherent imports. Vapo Timber prepares to face limitations to production variations in quality, regional differences in production conditions and deliveries, and dependence on weather conditions.

36 Vapo’s Annual Report 2010 risk management

Vapo risk management procedure: applies to all risk types

Identify risks Reconsider

Describe effect and duration of risks

Monitor Signs Identify the signs that predict an incident Supervise Implementation Evaluate the effect (e) and likelihood of risk and prioritise Report

Discuss at all stages Plan measures to manage the risk. Appoint persons responsible and have a deadline for completion of measures

Implement the measures

due to raw material availability and weakened profitability at Maintpartner has conducted occupational safety and the beginning of 2011. environmental inspections at all of their Vapo sites. Based on The pellet business was dominated by over-production in these inspections and together with Vapo’s production repre- 2010. Due to over-production and losses in the pellet business, sentatives, plans have been drafted to eliminate all deficien- Vapo restricted its pellet production in 2010 by leaving two of cies identified. Maintpartner has started to implement this its plants idle. Global over-production is expected to continue plan and will report to Vapo on its progress. in 2011 and limitations to production are likely to continue. ISS will also carry out a safety and environmental inspec- Around Finland, the over-production situation is made worse tions at its Vapo sites. Together with Vapo representatives, by new plants in Russia (Vyborg) and Norway. These plants they have already agreed on development measures which will increase over-production by about 2 million tonnes. At the will be implemented by the end of 2011. same time, price of raw materials is likely to remain at a high level in Finland and Sweden. Risk insurance Vapo’s Group administration is in charge of the property and Operating risks loss of profits insurance policies. Cover is reassessed each year Vapo’s operating risks include environmental risks, fire, break- to ascertain which damage and liability risks are covered by age, occupational safety risks, interruption of operations as well the insurance policies. as product/delivery-related customer, contract, information Property and loss of profit risks relate mainly to energy security and employee risks. production, composting plants, pellet manufacturing, and The goal of operating risk management is to be proactive the plant, warehouse and factory assets mainly as a fire risk. with possible risk events instead of reacting to them after the In recent years, the fire risk trend at Vapo has been event. Essential to this are preventive risk assessments and increasing for both Vapo and the insurance company mainly so-called managerial reviews whose risk management decisions due to the company compost plants and horticultural peat form the basis of operating risk management. refinery plants. However, it is unlikely that the trend would In 2011, environmental inspections have been carried out continue. This is due to fire safety improvements such as throughout Finland in order to develop the management of sprinklers at the new Eurajoki horticultural peat plant. environmental aspects in peat production. Peat production areas and peat stockpiles are located in separate locations and therefore cannot be lost as the result Improved occupational safety of a single event. The significant risk in peat production is a The Vapo Turva (Vapo Safety) project continued at Vapo Oy’s liability risk related to a fire which may spread beyond the Finnish pellet and horticultural peat factories and compost- peat production area and, as a consequence, would lead to ing, heat and power plants. Access control and fire safety have Vapo’s obligation to pay damages. This risk is minimised with been harmonised, camera surveillance has been intensified and fire prevention directives and actions. occupational safety has been improved. Despite investments in safety, there was an unfortunate accident resulting in death of Financial risks one of Maintpartner’s employees at the Sotkamo power plant The aim of financial risk management is to reduce the in 2010. impact on the result and cash flow of any fluctuations in the In order to improve occupational safety, Vapo has initiated exchange and interest rates relating to operational activities, a new review of safety risks which is to be conducted at all and to secure adequate liquidity. Vapo plants in Finland by the end of 2012. The aim is to iden- The Group Treasury acts as a counterbalance for the sub- tify actual points of improvement and people responsible for sidiaries and is responsible for managing external fundrais- these points and then remedy any shortcomings. ing. It is also responsible for the administration of cash assets Vapo has outsourced the maintenance and operating and for any appropriate hedging measures. The Group’s risk tasks of 8 pellet plants and 11 heating plants to Maintpartner. management tools include currency derivatives, foreign cur- Maintpartner also takes care of local operating and mainte- rency loans, interest rate swaps and commodity derivatives. nance tasks at power plants in Forssa, Lieksa and Sotkamo, of Electricity market risks are covered in full according to Vapo’s which Vapo is in charge, and the heating plants connected electricity trading policy with electricity derivatives. The finan- to them. The maintenance and operating tasks of 10 heating cial risks contained in the financial statements are explained plants and most of the maintenance and operating tasks of in more detail in the Notes to the Consolidated Financial pellet heating plants have been outsourced to ISS Palvelut Oy. Statements which can be accessed on the Group’s website. n

Vapo’s Annual Report 2010 37 Financial Statements

Board of Directors’ report ...... 39 Parent company financial statements 2010, in accordance with Finnish Accounting Standards (FAS) ...... 76 Consolidated Financial Statements 2010, IFRS . . . . .46 Parent company profit and loss statement ...... 76 Consolidated statement of comprehensive income . . . 46 Parent company balance sheet ...... 77 Consolidated balance sheet ...... 47 Parent company cash flow statement ...... 78 Consolidated cash flow statement, IFRS ...... 48 Consolidated statement of changes in Notes to the parent company profit and loss shareholders’ equity ...... 49 statements ...... 79 1 . Accounting policies for the financial statements . . 79. Notes to the consolidated financial statements, IFRS . .50 2 . Turnover ...... 79. Company ...... 50 3 . Other operating income ...... 80 . 1 . Accounting policies for the consolidated financial 4 . Materials and services ...... 80. statements ...... 50 5 . Notes concerning personnel and members of 2 . Segment information ...... 54 administrative bodies ...... 80 . 3 . Company acquisitions ...... 56 6 . Depreciation and impairments ...... 80. 4 . Other operating income ...... 57 7 . Other operating expenses ...... 81 . 5 . Materials and services ...... 57 8 . Financial income and expenses ...... 81. 6 . Other operating expenses ...... 57 9 . Extraordinary items ...... 81. 7 . Personnel expenses ...... 58 10 . Profit-adjusting entries ...... 82 . 8 . Depreciation and impairments ...... 58 11 . Direct taxes ...... 82 . 9 . Financial income and expenses ...... 59 12 . Intangible assets ...... 82 . 10 . Income tax ...... 60 13 . Tangible assets ...... 83 . 11 . Intangible assets ...... 60 14 . Investments ...... 83 . 12 . Tangible fixed assets ...... 62 15 . Inventories ...... 84 . 13 . Shares in affiliate companies ...... 64 16 . Long-term receivables ...... 84 . 14 . Available-for-sale investments ...... 65 17 . Short-term receivables ...... 84 . 15 . Long-term receivables ...... 65 18 . Shareholders’ equity ...... 84 . 16 . Other long-term investments ...... 65 19 . Obligatory reserves ...... 85 . 17 . Deferred tax liabilities and assets ...... 66 20 . Long-term liabilities ...... 85 18 . Inventories ...... 67 21 . Short-term liabilities ...... 85 . 19 . Sales receivables and other receivables ...... 67 22 . Contingent liabilities ...... 86. 20 . Cash assets ...... 68 21 . Notes to shareholders’ equity ...... 68 Group key figures 2006–2010 ...... 87 22 . Interest-bearing debts ...... 68 23 . Long-term interest-free debts ...... 69 Principles for calculating key figures ...... 87 24 . Reserves ...... 69 25 . Accounts payable and other debts ...... 70 Board of Directors’ proposal 26 . Management of financial and product risks . . . . 70 for the allocation of profits ...... 88 27 . Fair values of financial assets and debts ...... 73 28 . Subsidiary shares ...... 73 Signatures ...... 88 29 . Contingent liabilities ...... 74 30 . Related party transactions ...... 75 Auditor’s report ...... 89

38 Vapo’s Annual Report 2010 Tilinpäätös

Board of Directors’ report

Operating environment The Group’s operating profit of EUR 39.1 million includes The demand for local fuels (peat and wood) remained at a the net amount of an insurance pay-out awarded in compen- good level throughout the year. Demand was affected by the sation for a fire at a horticultural peat mill in Eurajoki (EUR 2.0 cold weather, electricity markets and the increased utilisation million), impairment of the goodwill of Seda A/S (EUR –1.4 rate by industries. Demand for environmental peat remained million), and a write-off recorded as a result of the closing good especially due to insufficient raw material and bed- down of a briquette factory of AS Tootsi Turvas (EUR –0.7 ding peat stocks in the Baltic countries. The summer’s peat million). The net effect of the aforementioned events was production volume was in line with the long-term average, EUR –0.1 million. ensuring capacity for the deliveries agreed for the 2010–2011 Efforts to secure an adequate supply of logs for the early heating season. months of 2011 and the oversupply of pellets meant that the Pellet overproduction continued on the European market, amount of capital tied up in stocks was EUR 17 million above which led to restrictions on production. The EU’s energy target at the end of the year. policy is expected to improve the competitiveness of pellets in the coming years. Financing and investments Vapo Timber’s positive profit development continued. The Group’s financial situation remained stable through- Decreasing market supply allowed the company to increase out the year. At the end of the year, the Group’s solvency its sawn goods deliveries and to raise its prices, which ratio was 38.3% (39.5%) and the net debt/equity ratio was improved profitability. Production volumes had to be lowered 119.5% (111.5%). Interest-bearing net liabilities amounted towards the end of the year due to poor demand. to EUR 414.8 million (EUR 364.3 million) on the closing date. Progress relating to the European Union’s Renewable The Group’s net finance revenue amounted to EUR 0.8 mil- Energy Directive (RES) continued in 2010. According to the lion (with finance costs at EUR 9.4 million), which includes a directive, Member States have to reduce their carbon dioxide change of EUR 9.7 million in the market value of financial and emissions and increase their use of renewable forms of energy commodity derivatives (EUR 0.1 million). Net finance revenue relative to overall energy consumption. Member States are accounted for 0.1% of total revenue (1.6%). free to choose the means for meeting the targets set by the Business cash flow was EUR 49.1 million (37.8 million) EU. National action plans were submitted to the Commission and cash flow after investments EUR -21.4 million (–30.8 in 2010. million). Finland’s primary solution for increasing the use of Vapo Group’s gross investments totalled EUR 80.9 million renewable sources of energy is wood. The plan is to triple the (80.9 million). In proportion to depreciation, the investment volume of wood-based energy production by 2020. In addi- rate was 184%. Investments were divided between the dif- tion to introducing a subsidies package for renewable energy, ferent business areas as follows: Local Fuels EUR 41.8 million the Finnish Government has decided to increase the tax on (51.7%), Pellets EUR 2.5 million (3.1%), Heat and Power fossil fuels, including peat-based fuels, which were previously EUR 11.7 million (14.5%), Garden and Environment EUR tax-free. The gradual increase of taxation on peat lowers 11.4 million (14.1%), and Timber EUR 2.5 million (3.1%). demand for peat-based fuels and increases demand for The Group’s other investments amounted to EUR 11 million wood-based fuels. With this in mind, Vapo has strengthened (13.5%). The most significant investments in 2010 included its foothold in the wood-based fuels market by acquiring basic investments and improvements introduced to peat approximately one third of the issued capital of Harvestia Oy. production, the construction of a new horticultural peat mill in Eurajoki, and new heating and pellet heating plants. EUR million 2010 2009 2008 Changes in the organisation Turnover 719.5 573.7 631.8 Vapo’s business activities were reorganised into four busi- - generated in Finland 411.2 328.1 364.0 ness areas as of the beginning of 2011: Vapo Biofuels, Vapo - % of total revenue 57.2 57.2 57.6 Bioheat, Vapo Environment and Vapo Timber. The production Operating profit 39.1 38.0 21.1 of each of the four business segments is directly controlled - % of revenue 5.4 6.6 3.3 by the sector in question. The Group’s logistics operations Profit before tax 40.2 28.6 –1.4 remain centralised. The business managers in charge of the different business Taxes 10.1 7.2 3.8 areas are Esa Koivula (Vapo Biofuels), Pasi Koivisto (Vapo Bio- Non-controlling interests 1.1 0.8 0.9 heat), Petri Alava (Vapo Environment), and Juha Hakala (Vapo Profit for the period 30.1 21.5 2.4 Timber). The Group Management Team comprises these four Return on investment (%) 9.5 7.0 3.6 business managers as well as Jari Leppänen, Logistics Director, Return on equity (%) 8.9 6.7 0.7 Asko Dahlbom, Deputy Managing Director and CFO, and Balance sheet total 922.7 847.8 761.4 Matti Hilli, Managing Director.

Vapo’s Annual Report 2010 39 Tomi Yli-Kyyny, MSc (Technology), has been appointed Changes in Group structure as Vapo’s new Managing Director as of 1 April 2011. The Vapo acquired around one third of Harvestia Oy’s shares. In current Managing Director, Matti Hilli, will retire on 14 June future, Harvestia Oy will supply Vapo with pine and white- 2011. wood roundwood and a growing share of Vapo’s energy wood. Vapo Timber’s wood sourcing was also incorporated Internal business arrangements into Harvestia at this time. The new organisation began oper- As part of the Group’s organisational restructuring, Vapo Oy ating at its full capacity as of the beginning of 2011. sold its compost and green area construction business to the Inline with Group strategy, Vapo has sold its electric- Group’s subsidiary, Kekkilä Oy, in its entirety on 1 January ity transfer business to Forssan Energia Oy, which is a joint 2011. venture of Valkeakosken Energia Oy and Sallila Energia Oy. The Swedish subsidiary, Neova AB, also sold its compost Forssan Energia Oy will take over the business as of 1 April and green area construction business to Hasselfors Garden 2011. AB. As a result of the reshuffle, Neova AB will now focus on Vapo has also sold its 44.4% share of Enas Oy to VTT biofuels and bioheat production, while Hasselfors Garden AB Service Oy. Enas Oy provides analysis and laboratory services will focus on environmental business. especially for the bioenergy sector. Vapo Timber Oy has sold its one-third holding in Anaika Components Ltd Oy to a Finnish sawmill company, Anaika Wood Ltd Oy.

Development by business segment

Turnover by segment

EUR million 10–12/2010 10–12/2009 Change % 1–12/2010 1–12/2009 Change % Local Fuels 82.9 65.2 27.2 267.2 204.3 30.8 Pellets 38.0 25.6 48.5 105.6 84.2 25.4 Heat and Power 33.8 27.8 21.6 101.9 87.5 16.5 Garden and Environment 23.8 22.6 5.3 123.3 115.4 6.8 Timber 34.3 29.0 18.3 135.4 91.9 47.3 Other operations 0.6 0.4 50.0 2.9 3.1 -6.5 Inter-segment turnover –6.2 –4.1 –51.2 –16.8 –12.7 –32.3 Group total 207.2 166.5 24.4 719.5 573.7 25.4

Operating result (EBIT) by segment EUR million 10–12/2010 10–12/2009 Change % 1–12/2010 1/–12/2009 Change % Local Fuels 9.9 12.1 –18.2 37.6 40.6 –7.3 Pellets –0.7 –0.5 –40.0 –5.8 –4.0 – 45.0 Heat and Power 5.0 2.8 78.6 8.3 3.2 159.4 Garden and Environment 0.7 3.6 –80.6 11.2 15.4 –27.3 Timber –0.1 2.1 –104.8 4.7 –4.3 209.3 Other operations –3.7 –3.7 0.0 –16.9 –12.9 –31.0 Eliminations 0.7 0.1 0.0 0.0 Group total 11.8 16.5 –28.5 39.1 38.0 2.9

40 Vapo’s Annual Report 2010 Normal seasonal variation Investments amounted to EUR 41.8 million (EUR 41.5 mil- Demand for local fuels, pellets, and heat and power is heavily lion) and comprised the acquisition of new peatlands as well dependent on seasonal temperature variations, which result as the associated drainage work and machinery purchases. in seasonal fluctuations in sales volumes. With the exception of early autumn, temperatures in 2010 were favourable to Pellets local fuels and heating energy sales, and demand for Vapo’s The Pellets division turnover totalled EUR 105.6 million products was strong. (EUR 84.2 million). The segment made a loss of EUR 5.8 mil- The production of peat-based fuels and environmental lion (EUR –4.0 million). The operating loss includes a write-off products succeeds best when there is little rainfall. Peat of EUR 0.7 million resulting from the closure of one of production in summer 2010 was in line with the long-term AS Tootsi Turvas’s briquette facturies. average, but there was great regional variation. The 2010 The overproduction of pellet in the European market growth season did not improve the stock levels established in which started in 2009 continued. Stocks grew and sale prices previous seasons. Buffer stocks can only be built with several remained low. The outlook for long-term growth of the pellet successful growth seasons of average weather conditions and business in Europe is nevertheless good, thanks to the EU’s adequate growth area. renewable energy policy and the increased price of fossil fuels. The season’s peat production did little to alleviate the This decrease in prices could not be fully transferred into situation with environmental products, where low stock levels raw material prices which led to continued production restric- hampered sales. tions at several plants. The underutilised capacity increased production costs in Finland, which made exporting unprof- Local Fuels itable. Vapo’s aim is to sell the pellets produced in Finland Local Fuels’ turnover was EUR 267.2 million (204.3 million) domestically, either as fuel or as heating energy. The energy and operating profit EUR 37.6 million (40.6 million). tax solutions and subsidies introduced in 2010 support this Deliveries of peat-based fuels amounted to 18.9 TWh aim. (14.1 TWh) in Finland. The cold winter months and the cool In the Swedish market, where taxation favours bioheat, spring and early summer boosted demand for heating fuels, we maintained our market leader position in the domestic and thanks to the market situation in the electricity sector, segment despite tightening competition. Also the Polish the use of peat to generate electricity increased. Increased market developed in a positive way. In Finland, the growth demand for energy in the industrial sector also increased peat of demand in the consumer segment was restricted by low sales. In Sweden, energy peat deliveries totalled 1.6 TWh taxation on competing fuels – light fuel oil and electricity. (1.4 TWh). The reform of energy taxation, which took effect as of the Sales volumes could be increased during the first half of beginning of 2011, is likely to improve the competitiveness of the year thanks to the previous summer’s favourable growth pellets in Finland. conditions. The adequate supply of good-quality peat and Vapo’s total pellet production was 576,000 tonnes of pel- streamlined delivery distances boosted profitability during lets (563,000 tonnes). the first months of 2010. The weather conditions of May and Investments in pellet factories amounted to EUR 2.5 mil- June and heavy rainfall towards the end of the growth season lion (EUR 5.1 million). compromised production and complicated direct deliveries, which resulted in higher production and logistics costs as Heat and Power delivery distances increased. There were also notable regional The Heat and Power business area’s turnover totalled differences in peat production during the summer of 2010: EUR 101.9 million (87.5 million). Operating profit was Southern and Eastern Finland enjoyed favourable conditions, EUR 8.3 million (3.2 million). but the growth season of Northern Finland in particular was Heat and steam deliveries to customers totalled 1,837 GWh hampered by heavy rainfall, as a result of which the agreed (1,703 GWh). Electricity sales amounted to 317 GWh production targets could not be met. Production volumes in (305 GWh). The increase in the sales of energy products was Sweden and the Baltic States also fell short of target. attributable to favourable conditions in the winter months, Vapo lowered the price of its peat-based fuels by approxi- increased demand among industrial customers, and the high mately 10% in 2010 as a result of the successful growth market prices of electricity. Vapo’s own energy generation and season of 2009. The price reduction was possible thanks to deliveries to customers proceeded as normal during the year. improved cost-effectiveness and more favourable weather The profit generated by electricity sales was hampered conditions. by higher-than-forecasted electricity prices, which increased Wood-based fuel deliveries amounted to 1.9 TWh costs. Profitability was boosted by hedging measures carried (1.8 TWh) in Finland and to 1.4 TWh (1.0 TWh) in Sweden. out inline with Vapo’s hedging policy as well as increases in The profitability of wood-based fuels was hampered by sale prices. increased supply chain costs and higher log prices, which Investments throughout the year totalled EUR 11.7 million could not be offset by higher sale prices. (14.8 million). At the end of the year, Vapo was in the process Delivery volumes of energy crops amounted to 115 GWh of building one heating plant and two pellet heating plants in (119 GWh). Finland, three heating plants in Sweden, and three pellet heat- Peat has maintained its position in the energy mar- ing plants in Poland. kets and interest in the local fuels produced by Vapo has increased. At the beginning of the year, Local Fuels renewed Garden and Environment its organisation in order to better manage its deliveries. The The revenue generated from garden and environment prod- wood energy business strengthened. ucts amounted to EUR 123.3 million (EUR 115.4 million).The operating profit was EUR 11.2 million (EUR 15.4 million).The

Vapo’s Annual Report 2010 41 operating profit includes an extraordinary item of EUR 0.6 Personnel million net, resulting from the net amount of an insurance Vapo Group’s personnel in 2010 pay-out awarded in compensation for a fire at a horticultural peat mill in Eurajoki (EUR 2.0 million) as well as impairment 2010 2009 of the goodwill of Seda A/S (EUR –1.4 million). Finland 833 877 The snowy winter of 2010 delayed the advance deliver- Other countries 500 574 ies of home gardening products within the Home and Park Group total 1,333 1,451 business line during the first months of the year, but demand Vapo Oy 457 517 picked up once the intensive gardening season got under way. In addition to the snowy winter, profitability was compromised by decreased demand for green area construction, The number of employees was most significantly affected by which resulted from a drop in construction industry vol- the outsourcing of maintenance and operating tasks of the umes. The new Home & Garden product range, which was Finnish pellet and heating plants and sections of power plant launched at the beginning of the year, has increased sales in maintenance to Maintpartner Oy and ISS Palvelut Oy. The both Finland and Sweden. transfer affected a total of 100 employees. There was demand for environmental peat but insufficient Vapo Academy focused on strengthening strategic know- raw material and bedding peat stocks in the Baltic countries how with the help of training programmes, including a Group limited sales. The poor growth conditions of the summer of management course and stakeholder training events focusing 2010 did not improve the situation. on communications. The number of training events focusing The market situation of the Professional Growing business on the production and logistics network also increased. area improved which could be seen in the increased demand. Another significant development was the introduction of an The low stocks of horticultural peat also had a negative electronic online learning environment and the organisation’s impact on the sales volumes of growing media. first-ever online training course. The organisation continued to The operating profit of the Environmental Management promote consistent leadership by providing training courses business line improved thanks to higher waste treatment focusing on the responsibility of managers. In total, Vapo volumes and increased demand for composting and regional Academy provided approximately 1,207 days (725 days) of waste handling services. training in 2010, of which 477 (410) were targeted at Vapo’s A horticultural peat mill was destroyed in a fire in Eurajoki own employees and 730 (315) at contractors. in April 2010, which increased costs during the first half of Personnel co-determination and administrative representa- the year. Deliveries to customers were made from other Kek- tion were implemented through daily contact and personnel kilä mills. The Eurajoki mill produces growth media for profes- representation on the Supervisory Board (3 members), Vapo sional growers. The construction of a new plant in Eurajoki is Oy’s production management group (3 members), Vapo scheduled for completion in the spring of 2011. Timber sawmills’ management groups (6 members in total) Investments in the business area totalled EUR 11.4 mil- and Kekkilä Oy’s management team (2 members). Group- lion (15.0 million). level cooperation in Finland was put in practice in the Group’s co-determination advisory committee, which has 11 repre- Timber sentatives from different personnel groups and 4 management Timber’s turnover amounted to EUR 135.4 million (91.9 mil- representatives. The committee met four times during the year. lion) and operating profit to EUR 4.7 million (–4.3 million). Co-determination negotiations were carried out regarding The positive trend that began in the spring of 2009 with reorganisation of Vapo Group’s Finnish operations and regard to the price of sawn goods and increased deliv- adjustment measures taken in order to have the personnel and ery volumes as well as the decrease in costs that resulted the volume of the operation better meet the requirements of from higher production volumes boosted revenue and the the changing market situation. There is a need to reduce the operating profit during the first half of 2010. During the number of employees by 48 in 2011–2012 and this will be second half of the year, profitability was hampered by the achieved through retirement, ending fixed-term employment increasing prices of logs and a decrease in sale prices, which contracts and making some redundancies. resulted from oversupply. Timber deliveries totalled 541,000 m³ (426,000 m³). However, average product sales price rose Research and development 16% from the previous year. The Group’s research and development spending in 2010 Despite a cold spell at the beginning of 2010, the totalled EUR 4.4 million (4.0 million), which is 0.61% of port strike in the autumn and lowered production vol- turnover (0.69%). The business development department umes towards the end of the year, sawn goods production employed, on average, 12 people. The separate biodiesel increased by a third compared to the previous year. As a project employed a further 9 people. result of increased demand and low supply at the beginning The most significant research initiatives during the year of the year, the price of logs increased by 8% compared to included the development of environmentally friendly peat the previous year. The volume of sawn goods sales in Finland production methods, drainage systems for peatlands, and new doubled in 2010 compared to the previous year, thanks to methods for peatland after-care. New technologies were also the higher prices of logs, summer storms and a period of developed for the production and the harvesting of trees from temporary tax relief, which ended at the end of the year. The forested peatlands. nationwide stumpage price was approximately 17% higher Vapo also continues researching possible ways to produce than one year previously. biocoal. Technological studies have now been completed, and Maintenance investments in sawmills amounted to a total the next step in the project is to build a demonstration plant. of EUR 2.5 million (EUR 0.1 million) in 2010.

42 Vapo’s Annual Report 2010 Research on the effects of peat production on climate A total of 2,541 hectares of peatland (on 53 different using life cycle analysis was continued. The climatic effects mires) became ready for production in 2010. Abandoned of peat can be reduced considerably by a more strategic production sites amounted to 1,650 hectares. A total of selection of peatlands and by developing better production 1,954 hectares were designated for other land use purposes, methods. and approximately 1,000 hectares of these were returned to Vapo has been an active participant in the international landowners. A total of 160 hectares were forested, 173 hec- cooperation of the energy industry through various bioen- tares were designated for growing energy crops, 37 hectares ergy organisations and projects with the goal of strengthen- were designated for agricultural purposes, and 13 hectares ing the status of peat and other bioenergy. were turned into wetlands. A total of 455 hectares were Vapo was also central to the launch of the large bioen- designated as support areas for peat production. ergy research and development programme under Cleen Oy, The Group’s environmental protection costs, excluding a hub for energy and environmental expertise. In addition, costs of own personnel, for 2010 totalled EUR 15.9 million Vapo participated actively in the work of the European Tech- (13.6 million) and environmental investments EUR 9 million nology Platform on Renewable Heating and Cooling, which (9.8 million). The management of the Group’s environmen- aims to define a strategic research agenda and a common tal issues required 48 (56) manpower years of work. vision for increasing the use of renewable energy technolo- The Group’s social responsibility issues are addressed in gies for heating and cooling in Europe between 2020 and more detail on the Group website and in the 2010 annual 2030. report section.

Environmental issues Major risks and uncertainty factors The EU’s directives and regulations direct practical environ- One shared risk that has an effect on Vapo’s business is mental work in Vapo. In 2010, their effects were seen in weather. In the winter, the temperature has an impact on renewable energy plans, climate initiatives, emissions trading, fuel purchases by external and internal customers, and the issues relating to energy efficiency and biodiversity, and utilisation rate of the Group’s own heat production plants. in the drafting of plans for water management as per the In spring, weather conditions determine the length of the Water Framework Directive and the principles governing the garden trade season and its sales volumes. In the summer, responsible use of high nature value areas. the weather affects the quantity and quality of biofuels. A committee appointed by the Finnish Ministry of Agri- Peat production in summer 2010 was in line with the culture and Forestry to oversee Finland’s National Strategy for long-term average, but there was great regional variation. Mires and Peatlands continued its work in 2010. Its role is to The 2010 growth season did not improve the stock levels formulate a national strategy for the use of Finnish mires and established in previous seasons. Buffer stocks can only be peatlands between 2020 and 2050. The committee proposes built with several successful growth seasons of average rules according to which mires and peatlands can be used weather conditions and adequate growth area. The slow for commercial purposes in the future. Vapo’s environmental permit procedure associated with mires complicates the responsibilities are governed by an environmental policy acquisition of new production sites considerably, which is ratified by the Group’s Board of Directors. The policy, which becoming an increasing risk factor for Vapo. was revised in 2010, applies to the entire Group. The policy In spring 2009, peat stock levels were not sufficient to ensures that both environmental considerations and the meet the demand for peat in full because of the weather requirements of customers and society are factored into all risks that materialised in 2007 and 2008. This means that product and service chains. The environmental policy is sup- some of the customers faced a peat fuel shortage, and Vapo plemented by Vapo’s own climate programme and soil policy. took care of such situations in cooperation with customers. Vapo has also committed to applying the Code of Practice for One significant customer initiated arbitration proceedings Responsible Peatland Management formulated by the Euro- due to an alleged breach of contract related to the shortage. pean Peat and Growing Media Association (EPAGMA). The parties have now resolved the conflict, and the financial The programme to improve water protection in peat repercussions have been factored into the 2010 Financial production launched in 2009 continued. During 2010, the Statements. organisation adopted a new, comprehensive and systematic The rising costs of fossil fuels and the increasingly approach to site-specific environmental management Vapo demanding targets set by the EU on the use of renewable also replaced and improved some of the water management forms of energy are expected to change the energy market structures found in the so-called old production sites. in the coming years. The gradually increasing taxation on Improving the energy efficiency of Vapo’s own power and peat, together with increasingly strict emission standards, heating plants and lowering the use of oil remain important may lower demand for peat and increase demand for wood- development priorities. All of Vapo’s power and heating based fuels. With this in mind, Vapo strengthened its foot- plants that have their own district network follow voluntary hold in the wood-based fuels market in 2010 by acquiring energy efficiency conventions. approximately one third of the issued capital of Harvestia Oy. A total of 87 (60) new environmental permit applica- Some of the Group’s power plants fall within the scope tions were lodged in Finland, 13 (3) in Sweden, and 22 (28) of the EU’s emission trading system. The Group aims to fulfil in Estonia. All of the applications related to peat production its emission obligations during Phase II of the Kyoto Protocol projects. A total of 24 (9) environmental impact assessments (2008–2012) by using its free emissions allowances as well focusing on peat production were launched in 2010, and 14 as by buying more allowances from the open market and (26) EIAs were completed. by making use of the emission reductions available thanks to the TGF investment. The Group has also prepared for Phase III of the Kyoto Protocol (2013–2020), in relation to

Vapo’s Annual Report 2010 43 which the Board of Directors decided in November 2010 to The Board of Directors met 14 times. Attendance in the invest EUR 10 million in Nefco Carbon Facility (NeCF). The Board meetings was 100%. The Board has conducted a self- fund procures certified emission reductions (CER) which can assessment procedure. The Board of Directors has elected the be used to cover the Group’s emission obligations within the Compensation Committee and the Audit Committee from EU’s emissions trading scheme as of 2013. among its members. In 2010, the Compensation Committee The pellet sector suffered from oversupply in 2010, and comprised Juho Lipsanen, MSc (Economics & Business production volumes had to be reined in at several factories. Administration) as the chairman and Hannu Linna, Managing Global oversupply is also expected to continue in 2011. Director (until 22 March 2010), Marja-Leena Rinkineva, In addition, the prices of the raw material are expected Government Counsellor, and Perttu Rinta, Managing Director to remain high in Finland and Sweden. In the long term, (as of 22 March 2010) as members. The Compensation securing profitability development requires the full utilisa- Committee convened 12 times in total, in connection with tion of invested capacity otherwise the value of the capacity appointing the new Managing Director, for example. The would need to be re-evaluated and impaired. Growth can be attendance was 97%. The Audit Committee comprised Perttu expected from the increasing demand for peat pellets and Rinta, Managing Director, as the chairman until 22 March pellet heating in the industrial sector. 2010 and Hannu Linna, Managing Director, as the chairman as Timber operates in the highly cyclical sawmill industry of 22 March 2010, as well as Risto Kantola, Managing Director, where the supply of sawn goods began to grow faster than and Katariina Simola, Director, as members. The Audit demand after the favourable beginning of 2010, resulting in Committee met four times and the attendance was 100%. yet another decrease in sale prices. Oversupply is expected to continue until the spring of 2011. The limited availability and Supervisory Board as at 31 December 2010 high prices of logs also pose risks to profitability. Due to over- Chairman supply, the limited availability of logs, and weakening profit- Juha Korkeaoja, Member of Parliament ability, Vapo Timber has prepared itself for lower production Deputy Chairman volumes in the early months of 2011. Heikki Miilumäki, DSc (Technology) h.c. A project launched in 2009 with the aim of improving Members safety within the organisation was completed in 2010. The Hannu Hoskonen, Member of Parliament project involved making the access control systems and fire Tero Kallio, Managing Director (until 25 March 2010) safety arrangements of Vapo’s pellet factories and horticul- Mats Nylund, Member of Parliament tural peat mills as well as compost, heating, and power plants Raimo Piirainen, Member of Parliament in Finland more consistent, increasing the efficiency of CCTV Eero Kubin, Customer Manager monitoring, and improving occupational health and safety. Esko Kurvinen, Managing Director Despite the efforts, an accident that took place at a power Kauko Rauhansalo, Municipal Counsellor (hon.) plant in Sotkamo in February 2010 claimed the life of one Simo Salmelin, Provincial Counsellor (hon.) Maintpartner employee, and a horticultural peat mill in Eura- Marjo Matikainen-Kallström, Member of Parliament, (as of 25 joki was destroyed in a fire in April 2010. March 2010) Other risks are not estimated to have significant effects. For more information on risks and risk management, see Personnel representatives and their deputies the notes to the financial statements, the annual report and on the Supervisory Board until 30 June 2010 Vapo’s website. Timo Pennanen, peat workers (Timo Talasoja) Pekka Häkkinen, forest and sawmill workers (Erkki Rova) Group administration in 2010 Hannu Laukkanen, clerical employees/forestry experts (Juha The Vapo Group’s administrative bodies are the Annual Kinnunen) General Meeting of shareholders, the Supervisory Board, the Board of Directors, the Managing Director, and the Boards of Personnel representatives and their deputies Directors and Managing Directors of subsidiaries. Vapo Oy’s on the Supervisory Board as of 1 July 2010 Board of Directors appoints the Audit Committee and Com- Heikki Salorinne, forest and sawmill workers (Erkki Rova) pensation Committee from among its members as stipulated Ilpo Viinamäki, peat industry workers (Seppo Ala-Aho) in the shareholders’ agreement. Terho Turunen, forestry experts (Heikki Miettinen) The operative management of Vapo Oy’s business is arranged into business areas. The Group administration also The Supervisory Board met four times in 2008. The attend- includes a Group Management Team, appointed by Vapo ance percentage was 82%. Oy’s Board of Directors, which serves to support the Manag- ing Director. Auditors Authorised Public Accountants Deloitte & Touche Oy, with Board of Directors, 31 December 2010 Tapani Vuopala, APA, as auditor with principal responsibility. Chairman Juho Lipsanen, M.Sc (Econ. & Bus. Adm.) Group Management Team Deputy Chairman Matti Hilli, Managing Director Perttu Rinta, Managing Director Asko Dahlbom, Deputy Managing Director, CFO Members Petri Alava, Business Area Director, Garden and Environment Risto Kantola, Managing Director Juha Hakala, Managing Director, Vapo Timber Oy Hannu Linna, Managing Director Esa Koivula, Business Area Director, Local Fuels and Pellets Marja-Leena Rinkineva, Government Counsellor Katariina Simola, Director 44 Vapo’s Annual Report 2010 Pasi Koivisto, Production Director and Business Area Director, capital of Vapo Oy amounted to EUR 50,456,000 at the end Heat and Power of 2010. Jari Leppänen, Logistics Director Vapo Oy is a joint venture of the Finnish State and Suomen Energiavarat Oy. The Finnish State holds 50.1% The extended Group Management Team of the shares (15,030 shares) and Suomen Energiavarat Oy also includes the following members: 49.9% (14,970 shares). Matti Puuronen, Director, Baltic Operations Juhani Ylä-Sahra, Director, Scandinavian Operations Short-term prospects Kari Mutka, Director, Business Development Vapo reorganised its business to match the changing market Kari Poikolainen, Chief Legal Counsel conditions at the beginning of 2011, as demand for peat- Reijo Vatanen, Director, Communications based fuels is expected to decrease and demand for wood- based fuels to grow. Vapo’s new business areas are Vapo Remuneration Biofuels, Vapo Bioheat, Vapo Environment and Vapo Timber. According to the decisions made at the 2010 General Meet- Pellets and environmental peat were transferred to Vapo ing, the members of the Supervisory Board and the Board of Biofuels. Directors were entitled to a monthly compensation as well as In the Vapo Biofuels business area, the demand for local an allowance per meeting, in addition to which their travel fuels is predicted to remain at a good level until the end of expenses were remunerated. The Chairman of the Supervi- the present heating season. The excise tax on peat is likely sory Board was entitled to EUR 1,000, the Deputy Chairman to lower demand for energy peat in 2011 and to increase to EUR 600 and other members to EUR 500 per month. The demand for wood-based fuels. The somewhat uncertain attendance allowance was EUR 200 per meeting. The Chair- future of the industrial sector may affect demand for electric- man of the Board of Directors will receive 2,750 euros, the ity in particular as well as the amount of fuel required by Deputy Chairman 1,900 euros and other members 1,550 power plants. The new tax on peat, which is to be intro- euros per month. The attendance allowance was EUR 500 per duced in accordance with a proposal made by the Finnish meeting, and it was payable for attendance at the meetings Ministry of Finance, combined with Finland’s renewable of both the Board of Directors and its committees. The total energy obligations and increasing taxation on imported fuels amount of compensation and travel expenses paid to the is excepted to lead to consumers favouring domestic fuels, members of the Board of Directors and the Supervisory Board including both wood and peat. was EUR 273,200 in 2010. The most significant factors affecting operations and In 2010, Matti Hilli’s monthly salary and bonus paid for profits in 2011 include the taxation on peat and other fuels the results of 2009 were a total of 406,121 euros of which and the effects of the weather on peat production volumes, the bonus was 76,162 euros. The pension contributions pay- demand for fuels, and transport conditions. able on the basis of the employment contract of the current There is still overproduction on the European pellet Managing Director amounted to a total of EUR 387,154 in market and as a result production may have to be restricted 2010. According to his contract, Mr Hilli is to retire at age at certain production plants. Demand in Vapo’s primary 60. The monthly salary payable to Tomi Yli-Kyyny, who will market areas is expected to improve from 2010. The EU’s take over as Vapo’s Managing Director as of 1 April 2011, energy policy is believed to boost demand in the longer term. amounts to a total of EUR 24,000. His contract also includes The Vapo Bioheat business area will focus more and a performance-based bonus, which can amount to no more more on local heat and steam produced using bioenergy. than 40% of his overall salary. In addition, Mr Yli-Kyyny is The Group has great expectations especially of small pellet entitled to supplementary pension insurance, of which Vapo heating plants of 0.2–2.0 MW about to be launched, where contributes an amount equivalent to 20% of the Managing Vapo offers a local bioenergy supply solution together with its Director’s annual salary before bonuses every year. The age of partners. retirement for a Managing Director is 63 years. The overall market for the Garden and Environment busi- The salary of the Management Team consists of a monthly ness area is expected to develop favourably and Vapo’s well- fixed salary and incentive bonuses which is a maximum of known brands – Kekkilä and Hasselfors Garden – to increase 20–40% of the annual salary. The total amount of salaries and their market shares profitably in this growing market. bonuses paid to the members of the Group Management Housing construction volumes, and as a result the Team in 2010 (excluding the Managing Director) was EUR consumption of timber, is expected to rise in Europe in 1,015,489. the coming years. Timber has made a strategic decision Bonuses under the personnel’s incentive scheme were to invest in modernising the entire machinery of a sawmill defined by the operating profit achieved by Vapo Group in in Hankasalmi in the summer of 2011, which will ensure 2010. The total amount of bonuses paid to personnel and competitiveness in the coming years when demand improves. allocated in the 2010 financial statement was EUR 967,003. Timber is forecasting low sales volumes for sawn goods at the beginning of 2011, as the recent period of temporary Issued capital and shareholders of Vapo Oy tax relief comes to an end. In addition to coping with poor Vapo Oy has one class of shares. The total number of shares demand, Timber also expects to have to rein in production is 30,000, and the book value of each share is EUR 1,681.879. volumes due to log shortages. Each share entitles its holder to one vote at the General It is estimated that the annual turnover of the Vapo Meeting, and all shares carry the same dividends. The issued Group will increase from the level of the previous year and the relative profitability will improve.

Vapo’s Annual Report 2010 45 Consolidated Financial Statements, IFRS

1 Jan.– 1 Jan.– EUR 1,000 Note 31 Dec. 2010 31 Dec. 2009

TURNOVER 2 719,515 573,710

Change in stock levels of finished and unfinished products –8,859 40,085 Production for own use 7,456 7,762 Other operating income 4 14,105 14,417 Materials and services 5 –361,463 –311,301 Expenses arising from staff benefits 7 –64,350 –66,869 Depreciation 8 –43,950 –41,418 Impairments 8 -4,871 –115 Impairment of goodwill 8 –1,395 Other operating expenses 6 –217,064 –178,259 Operating profit 39,124 38,011

Financial income and expenses 9 802 –9,393 Share of affiliate companies’ results 281 -6 Profit before tax 40,207 28,613

Income tax 10 –10,124 –7,152 PROFIT FOR THE PERIOD 30,083 21,460

OTHER COMPREHENSIVE INCOME ITEMS: Conversion differences from foreign units 2,625 1,491 Available-for-sale investments 1,223 1,528 Taxes due on other comprehensive income items –318 –397 Other comprehensive income items for the period after taxes 3,530 2,621 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 33,613 24,082

Attribution of profit for the period: To parent company shareholders 28,993 20,658 To non-controlling shareholders 1,090 802 30,083 21,460

Attribution of comprehensive income for the period: To parent company shareholders 32,505 23,281 To non-controlling shareholders 1,108 800 33,613 24,082

Earnings per share, calculated from profits attributable to parent company shareholders Earnings per share 966 689 Average number of shares: 30,000 30,000

46 Vapo’s Annual Report 2010 Consolidated balance sheet, IFRS

EUR 1,000 Note 31 Dec. 2010 31 Dec. 2009

ASSETS Long-term assets Intangible assets 11 11,563 8,948 Goodwill 11 18,290 19,186 Tangible assets 12 527,097 489,862 Shares in affiliate companies 13 1,329 1,676 Available-for-sale investments 14 19,043 18,042 Long-term sales and other receivables 15 5,065 5,521 Other long-term investments 16 1,138 1,325 Deferred tax assets 17 1,176 831 Long-term assets total 584,700 545,391

Short-term assets Inventories 18 186,052 180,152 Sales receivables and other receivables 19 145,091 118,123 Income tax receivables 2,316 2,675 Cash on hand and in bank 20 3,839 1,498 Short-term assets total 337,298 302,448

Long-term assets available-for-sale 11 711

ASSETS TOTAL 922,710 847,838

SHAREHOLDERS’ EQUITY AND DEBTS Shareholders’ equity Share capital 50,456 50,456 Fair value fund and other funds 35,853 35,053 Conversion differences –791 –3,397 Accrued profits 257,299 240,082 Parent company shareholders’ share of shareholders’ equity 342,818 322,194 Non-controlling shareholders 4,135 4,362 Shareholders’ equity total 21 346,953 326,556

Long-term debts Deferred tax liabilities 17 38,320 33,461 Long-term interest-bearing debts 22 285,036 235,079 Other long-term debts 23 10,178 10,716 Reserves 24 12,091 10,757 Long-term debts total 345,624 290,013

Short-term debts Short-term interest-bearing debts 22 137,148 134,882 Accounts payable and other debts 25 91,755 95,204 Income tax debts 870 1,008 Reserves 24 359 175 Short-term debts total 230,133 231,269

SHAREHOLDERS’ EQUITY AND DEBTS TOTAL 922,710 847,838

Vapo’s Annual Report 2010 47 Consolidated cash flow statement, IFRS

EUR 1,000 31 Dec. 2010 31 Dec. 2009

Business cash flow Profit for the period 30,083 21,460 Adjustments to the result for the period Depreciation and impairments 50,215 41,534 Share of affiliate companies’ results –281 6 Financial income and expenses –802 9,393 Income tax 10,124 7,152 Other adjustments –2,439 1,541 Total adjustments to the result for the period 56,817 59,626

Change in working capital Increase / decrease in inventories –1,847 –48,056 Increase / decrease in sales receivables and other receivables –16,235 –1,125 Increase / decrease in accounts payable and other debts –3,315 18,502 Change in reserves 1,016 603 Change in working capital total –20,381 –30,076

Interest paid –9,740 –11,787 Interest received 371 876 Other financial items –1,218 –225 Taxes paid –6,840 –2,101 Business cash flow 49,092 37,773

Investment cash flow Investments in tangible and intangible assets –80,233 –78,102 Income from assignment of tangible and intangible assets 6,268 9,677 Subsidiary shares bought –1,661 Income from assignment of other investments 2,562 108 Loans granted –697 –207 Repayments of loans receivable 483 477 Dividends received 1,090 1,067 Investment cash flow –70,527 –68,641

Financing cash flow Increase/decrease in short-term loans 23,826 23,841 Withdrawal of funds from long-term loans 101,874 91,297 Repayment of long-term loans –82,633 –62,965 Repayment of finance lease debts –82 –5,534 Dividends paid –13,335 –15,300 Financing cash flow 29,650 31,339

Change in cash assets 8,215 471

Cash assets at the beginning of the accounting period 1,498 3,021 Change in cash assets 8,215 471 Effect of changes in exchange rates –5,874 –1,994 Cash assets at the end of the accounting period 3,839 1,498

48 Vapo’s Annual Report 2010 Consolidated statement of changes in shareholders’ equity, IFRS

Non- Con- controlling Share Fair value Other version Retained share- EUR 1,000 capital fund funds differences earning Total holders Total

SHAREHOLDERS’ EQUITY 1 Dec. 2010 50,456 5,087 29,966 –3,397 240,082 322,194 4,362 326,556 Changes in shareholders’ equity Dividend distribution –12,000 –12,000 –1,335 –13,335 Joint ventures 0 0 Transfers between items 0 0 Total comprehensive income 905 2,607 28,993 32,505 1,108 33,613 Other changes Imputed taxes 16 154 171 171 Other changes –121 69 –52 –52 SHAREHOLDERS’ EQUITY 31 Dec. 2010 50,456 5,992 29,861 –791 257,299 342,818 4,135 346,953

Non- Con- controlling Share Fair value Other version Retained share- EUR 1,000 capital fund funds differences earning Total holders Total

SHAREHOLDERS’ EQUITY 1 Jan. 2009 50,456 3,956 30,039 –4,889 233,854 313,415 4,271 317,686 Changes in shareholders’ equity Dividend distribution –14,310 –14,310 –990 –15,300 Joint ventures 0 280 280 Transfers between items 0 0 Total comprehensive income 1,131 1,492 20,658 23,281 800 24,082 Other changes Imputed taxes 13 –755 –743 –743 Other changes –85 636 550 550 SHAREHOLDERS’ EQUITY 31 Dec. 2009 50,456 5,087 29,966 –3,397 240,082 322,194 4,362 326,556

Vapo’s Annual Report 2010 49 Notes to the consolidated financial statements, IFRS

Company 1. Accounting policies for the consolidated financial The Vapo Group is a supplier of local and renewable fuels, bio- statements electricity and bioheat, and environmental business solutions in the Baltic Sea region. 1.1 General The Vapo Group consists of five business areas: Local Vapo Oy’s consolidated financial statements have been com- Fuels, Pellets, Heat and Power, Garden and Environment piled in accordance with the International Financial Reporting and Timber. The Group has subsidiaries in Finland and other Standards (IFRS), which have been approved for use in the countries. EU, and in accordance with the IAS and IFRS standards in The parent company, Vapo Oy, is a Finnish company force on 31 December 2010, as well as the SIC and IFRIC established in compliance with Finnish laws, domiciled in standing interpretations. The Vapo Group adopted the Jyväskylä at the registered address Vapo Oy, Yrjönkatu 42, IFRS accounting standards in its financial reporting in 2006. P.O.Box 22, 40101 Jyväskylä, Finland. The company website Previously, the Group complied with the Finnish Accounting is available at www.vapo.fi. Standards (FAS). All comparison data for 2005 have been The Board of Directors of Vapo Oy approved these finan- adjusted to conform to IFRS standards. As permitted by the cial statements for publication at its meeting on 17 February IFRS 1 transition standard, company mergers implemented 2011. prior to the IFRS transition date are presented according to According to the Finnish Companies Act, shareholders are the Finnish Accounting Standards. entitled to either approve or dismiss the financial statements The notes to the consolidated financial statements also at the General Shareholders’ Meeting following their publica- comply with the requirements of the Finnish accounting and tion. The Shareholders’ Meeting is also entitled to vote on a company acts which complement the IFRS regulations. The revision of the financial statements. profit and loss statement data are presented in thousands of A copy of the consolidated financial statements is avail- euros and are based on the original acquisition costs, unless able at www.vapo.fi or from the head office of the parent stated otherwise in the accounting policies. For presentation company. purposes, individual figures and totals have been rounded up to the nearest thousand, resulting in rounding differences in the totals. All data presented in the consolidated financial statements are based on continuous operations.

1.2. Consolidation principles The consolidated financial statements cover the parent company, Vapo Oy, and all subsidiaries in which the parent company owns over 50% of share votes, or which are otherwise controlled by the parent company. Piipsan Turve Oy, in which Vapo’s holding is 48%, has been consolidated as a subsidiary in the consolidated profit and loss statements. Affiliate companies in which Vapo controls 20–50% of the share votes, and in which Vapo has considerable influence but no absolute control, have been consolidated using the capital share method. The consolidated financial statements do not include Biokraft Oy, which has been consolidated in the Metsäliitto Cooperative’s profit and loss statements. Acquired subsidiaries have been consolidated in the consolidated financial statements from the date on which the Group acquired control. Group companies’ mutual share ownerships have been eliminated using the acquisition cost method. The acquisition cost has been allocated to the acquired company’s assets and debts at their fair value at the time of the acquisition, where a reliable figure could be determined. For these allocations, imputed taxes have been estimated at the current tax rate and the remainder has been entered in the balance sheet as goodwill. The Group’s internal business transactions, receivables, debts, unrealised margins and internal distribution of profit are not included in the consolidated financial statements. The profit for the period is distributed between the parent company’s owners and minority shareholders. The share of non-controlling shareholders is also presented as a separate item as part of shareholders’ equity.

50 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

1.3. Summary of key accounting principles local tax legislation, along with any tax adjustments for previous periods and any changes to imputed taxes. The tax Application of new IFRS standards impact on items posted directly in shareholders’ equity is also and IFRIC interpretations posted in shareholders’ equity. Standards that came to force in 2010 were not applied in For any provisional difference between accounting and Vapo Group. taxation, deferred tax assets and liabilities are entered at tax rates applicable on the closing date. The most significant pro- Use of estimates in financial statements visional differences are caused by profit adjusting entries, the Compiling the financial statements in accordance with IFRS valuation of the net assets of acquired companies at fair value, requires Group management to use estimates and assump- the valuation of available-for-sale financial assets at fair value tions. These estimates and assumptions affect the value of and by internal margins. A deferred tax asset is entered up to balance sheet items on the closing date, the reporting of the amount which can probably be utilised against taxable conditional assets and debts, and the amount of income and income generated in the future. expenses recorded for the reporting period. The estimates are based on the management’s best assessment on the closing Goodwill and other intangible assets date but the final figures may differ from the estimates. Esti- Goodwill arising from the acquisition of a company is the mates are used in the financial statements for the amounts of difference between the acquisition cost and the acquired, reserves, impairment testing and fair values. individualised net assets valued at fair values. Goodwill is assigned to cash flow-generating units and is tested annually Income recognition principles for any impairment. In the case of affiliate companies, good- Service sales are entered as income once the significant risks will is incorporated into the value of the affiliate company and benefits associated with the ownership of the products investment. sold have passed to the buyer and Vapo Group has no actual Other intangible assets include patents, copyright and authority over the goods sold. software licences. They are valued at the original acquisition Income from services is recorded once these services have cost and depreciated using straight-line depreciation over been performed. When turnover is calculated, indirect taxes their estimated economic life, which can vary from five to ten and reductions are deducted from sales revenue. years.

Foreign currency-denominated transactions Tangible assets Transactions denominated in foreign currency are converted to euros using the exchange rate on the transaction date. Fixed assets Currency-denominated receivables and debts are converted Tangible fixed assets acquired by Group companies are at the exchange rate on the closing date. The exchange rate valued at the original acquisition cost. The tangible fixed differences arising from the conversion are entered in their assets of acquired subsidiaries are valued at the fair value at entirety under financial income and expenses. the time of acquisition. Tangible fixed assets are presented The profit and loss statements of foreign subsidiaries in the balance sheet at the acquisition cost less accrued are converted to euros using the average exchange rate for depreciation and impairment losses. If a fixed asset consists of the period and the balance sheets are converted using the a number of parts with differing economic lives, the parts are exchange rate on the closing date. The average exchange treated as separate assets. rate difference arising from the different exchange rates used Depreciation is based on the following expected eco- for the profit and loss statement and the balance sheet has nomic lives: been entered under conversion items for retained earnings. The conversion difference for the shareholders’ equity result- Buildings and structures 15–40 years ing from changes in the exchange rates has been entered Machinery and equipment 3–25 years as a separate item under the conversion differences for the Other tangible assets 5–30 years Group shareholders’ equity. No depreciation is made on land areas; peat assets are Research and development expenditure depreciated by substance depreciation over their estimated Research expenses are entered as expenditure for the economic life. Ordinary repair and maintenance expenses accounting period when they are incurred. Development are entered as expenditure during the accounting period expenses arising from the design of new products are capi- when they are incurred. Expenses for significant renewal talised in the balance sheet as intangible assets provided that and improvement projects are entered in the balance sheet the product is technically viable, can be exploited commer- if it is plausible that they will increase the economic benefit cially and is expected to provide equivalent economic gain. accrued by the company. Profits and losses arising from the The consolidated balance sheet for the closing date does not alienation and decommissioning of tangible fixed assets are include capitalised development expenses. calculated as the difference between the net income received and carrying amounts. Sales profits and losses are included in Income tax the profit and loss statement under operating profit. Taxes due for company profits for the period are entered under consolidated taxes on the basis of each company’s

Vapo’s Annual Report 2010 51 Notes to the consolidated financial statements

Peat assets Cash assets The peat assets relating to Vapo’s peat division are included Cash assets consist of cash funds, short-term bank deposits under tangible assets in the balance sheet. Depreciation of and other short-term highly liquid money market investments peat assets is applied according to use. With regards to the which have a maximum maturity of three months. acquisition of new production areas, a portion of the total purchase price that corresponds to the estimated volume of Financial instruments the peat assets is entered as an increase in peat assets. Financial assets are classified in the following groups on the Costs arising from preparing peat production areas for basis of IAS 39: assets at fair value through profit or loss, production are treated as an addition to the acquisition cost available-for-sale financial assets, and loans and receivables. of peat assets. The volume (m3) of peat assets in the Group Available-for-sale financial assets as well as financial assets production areas is monitored by measurements. Measure- and debts at fair value through profit or loss are valued at fair ment results do not lead to changes in the carrying amounts, value using quoted market prices and rates. Unquoted shares but the depreciation plan, which is based on volumes of whose fair value cannot be determined reliably are entered at planned use and remaining peat, is, if necessary, revised. the acquisition cost less impairment write-downs. Changes in the fair value of available-for-sale financial assets are entered Impairments directly under shareholders’ equity. When an asset of this Carrying amounts of assets are assessed at the end of each kind is sold, the accrued changes in fair value are carried over reporting period in order to determine any impairment. Key from shareholders’ equity to the result. Purchases and sales of financial figures, official decisions, energy market changes available-for-sale financial assets are entered on the transac- and regulations as well as the actions of competitors are tion date. monitored as factors which may suggest a need to adjust the Loans and other receivables as well as all financial debts, value of assets. The impairment is examined at the level of apart from derivatives, are entered on the liquidation date cash flow generating units, i.e. at the lowest unit level, since and are presented in the balance sheet at acquisition cost. this is largely independent of other units and the cash flows The amount of uncertain receivables is assessed on the basis can be separated from other cash flows. The impairment is of the risk attached to individual items. Credit losses are calculated by comparing the carrying amount of the item entered as expenditure in the profit and loss statement. with the recoverable value of the corresponding assets. As a All derivatives are valued and entered at fair value on the rule, the recoverable value is based on the future discounted transaction and closing date. The determination of the fair net cash flow obtainable with the aid of the corresponding value is based on quoted market prices and rates. The Group asset. does not apply hedge accounting. Realised and unrealised In order to determine a possible impairment of peat profits and losses from derivatives are entered in the profit production areas, Vapo Group monitors factors affecting the and loss statement under financial items. income-generating capacity of these areas. These include the In addition, the applicable tax adjustments are made to volume of peat and its thermal content, the logistical location all changes in fair value entered under shareholders’ equity. of the peatland, its geographical conditions, the environmental permit process, the acquisition price, the preparation cost Subsidies received and the stage of the life cycle. Subsidies received from states or other organisations are entered as income in the profit and loss statement. Entries Inventories should be made systematically, which means that subsi- Inventories have been valued at the acquisition cost or the dies should be entered under the expenses which they are lower net realisation value. The net realisation value is the intended to cover. Subsidies granted for the acquisition estimated selling price obtainable in ordinary business activi- of fixed assets are entered as income in the course of the ties less estimated expenses arising from the preparation and economic life of the assets. In the balance sheet, these invest- implementation of the transaction. The value of inventories ment subsidies are deducted from the value of the relevant has been determined using the FIFO method and it includes fixed assets. all expenses arising from the acquisition as well as other indirect allocable expenses. The acquisition cost of manufactured Emission rights inventories includes not only the cost of purchasing materials, The calculation principles for emission rights are based on direct labour and other direct costs, but also the share of the current IFRS standards. Emission rights are intangible general costs corresponding to the normal production level, rights valued at acquisition cost. Emission rights which are excluding the costs of general administration, sales and received free of charge are valued at their nominal value, financing. Peat production inventories include the sales stock i.e. their value is zero. If the free emission rights are not suf- of peat, i.e. the volume of peat extracted in the summer. The ficient to cover the actual emissions, a reserve for meeting value of inventories has been depreciated with respect to the emission rights obligation is entered in the balance sheet. non-marketable assets. Thus the possible effect on the result is caused by the difference between the actual emissions and the emission rights received.

52 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Reserves A reserve is entered in the balance sheet when the Group has a legal or actual obligation resulting from a previous transaction, it is probable that the fulfilment of the said obligation will require a financial payment or cause an economic loss, and the amount of the obligation can be reliably estimated. Reserves can relate to business reorganisations, loss-making agreements and environmental obligations. The commencement of peat production in a peatland requires an environmental permit. The permit defines, for example, the treatment measures for the area once peat production has ended. In order to prepare for said treatment measures, Vapo Group accrues a post-production reserve, the amount of which alters depending on the annual production volume. The post-production reserve is entered as an expense in the profit and loss statement and at the same time the reserve amount is accrued on the balance sheet. Part of the reserve is spent annually to cover the costs incurred during post-production treatment. The amount of the reserve and any changes to post-production obligations are examined on each closing date and the reserve is revised to ensure that it corresponds to the best estimate at the time.

Rental agreements Rental agreements for tangible assets, by which a substantial part of the risks and benefits specific to ownership are passed to the Group, are classified as finance lease agreements. Finance leases are entered in the balance sheet under assets at the start of the rental period, either at the fair value of the object or at the present value of minimum lease payments, depending on which is lower. Assets leased by a finance lease agreement are depreciated either over their economic life or within the shorter lease term. Lease payments are allocated between the finance charge and the reduction of the outstanding liability. Rental obligations are included in short and long-term debts under interest-bearing liabilities. Rental agreements for fixed assets, in which a substantial part of the risks and benefits specific to ownership remain with the party leasing the asset, are classified as other rental agreements. Rents determined according to other rental agreements are entered in the profit and loss statement as expenses.

Vapo’s Annual Report 2010 53 Notes to the consolidated financial statements

2. Segment information Pellets: The segment’s income consisted of the sale and The Group’s segment reporting is based primarily on business production of wood and peat pellets in Finland, Sweden, segments. Business segments reflect Vapo’s business organi- Denmark, Poland and Estonia. sation and financial reporting procedures. Inter-segment Garden and Environment: The segment’s income transactions are based on market prices, or when such prices consisted of the sale, development and production of garden do not exist, on fair values. All inter-segment sales and other substrates, plant nutrients, environmental peat products and transactions are eliminated in the Group consolidation. The environmental services. Environmental peat products can be segments report their operating result as Earnings Before used, for example, as bedding for animals, for soil improve- Interest and Taxes (EBIT). Segment assets include all units and ment in farming, for absorption and composting at waste assets belonging to the segment, exclusive of assets relating treatment plants and for environmental construction and to financing and taxes. Goodwill arising from the acquisition earthworks. Environmental services consist of the treatment of subsidiary companies has been assigned to business seg- of biowaste and sludges, composting plant deliveries and ments. A segment’s debts include all current liabilities related regional waste treatment. In addition to Finland, operations to its business operations, exclusive of finance and tax-related took place in Sweden, Latvia, Norway, Denmark and Estonia. debts. Operations outside the main segments are reported Timber: The segment’s income consisted of the sale under ‘Other operations’. and production of sawn timber and processed products. All Local Fuels: The segment’s income consisted of the sale, production took place in Finland. procurement and production of local biofuels. The principal products were energy peat, a variety of wood fuels and energy crops. Operations took place in Finland, Sweden, Others Estonia, Latvia and Russia. Unallocated items in the profit and loss statement include the Heat and Power: The segment’s income consisted of Group’s undivided costs. Assets not allocated to the segments the sale, procurement and production of heat and power mainly comprise Group-related items, tax receivables, loan either alone or in collaboration with a partner. The majority receivables, shares and stocks. Unallocated liabilities comprise of energy was produced from local and renewable biofu- Group-related items, long-term and short-term loans and els. Operations took place in Finland, Sweden, Estonia and tax-related items. Poland.

Business segments Garden and Heat and Environ Other Elimi 2010, EUR 1,000 Local Fuels Pellets Power ment Timber operations nations Group total External turnover 264,853 105,610 96,368 123,033 128,686 965 0 719,515 Internal turnover 2,349 5,519 250 6,669 1,966 –16,753 0 Turnover 267,202 105,610 101,887 123,283 135,355 2,931 –16,753 719,515 Operating profit/loss by segment 37,634 –5,823 8,343 11,176 4,690 –16,870 –25 39,124 Financial income and expenses 802 Share of affiliate companies’ results 1 70 42 169 281 Income tax -10,124 Profit for the period 37,634 –5,823 8,413 11,218 4,690 –16,701 –25 30,084

Segment assets 314,541 129,185 189,136 119,455 67,179 52,944 –4,911 872,440 Shares in affiliate companies 84 574 670 1,329 Unallocated assets 48,941 Assets total 922,710

Segment debts 42,151 7,499 12,629 27,898 11,297 12,909 –2,111 112,272 Unallocated debts 463,485 Debts total 575,757

Investments 41,899 2,474 11,698 11,444 2,459 10,955 80,929 Depreciation 14,777 5,473 12,032 6,469 3,243 1,956 43,950 Impairments 1,102 849 2,921 4,871

54 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Garden and Heat and Environ Other Elimi 2009, EUR 1,000 Local Fuels Pellets Power ment Timber operations nations Group total External turnover 202,489 84,185 83,238 114,685 87,641 1,646 -174 573,710 Internal turnover 1,794 5 4,235 749 4,265 1,457 –12,505 0 Turnover 204,283 84,190 87,473 115,434 91,906 3,103 –12,679 573,710 Operating profit/loss by segment 40,584 –3,959 3,322 15,412 –4,346 –13,007 5 38,011 Financial income and expenses –9,393 Share of affiliate companies’ results –7 –163 42 122 –6 Income tax –7,152 Profit for the period 40,577 –3,959 3,159 15,454 –4,346 –12,885 5 21,460

Segment assets 307,457 119,624 187,042 127,210 47,848 21,901 –3,451 807,631 Shares in affiliate companies 92 510 628 446 1,676 Unallocated assets 38,531 Assets total 307,549 119,624 187,552 127,838 47,848 22,347 –3,451 847,838

Segment debts 45,700 12,325 24,960 16,947 2,225 8,193 –2,177 108,173 Unallocated debts 413,109 Debts total 45,700 12,325 24,960 16,947 2,225 8,193 –2,177 521,282

Investments 41,493 5,088 14,840 14,975 66 4,454 80,916 Depreciation 15,461 4,883 9,844 5,820 3,494 1,590 326 41,418 Impairments 115 115

Geographical segments

EUR 1,000 2010 2009 Turnover Turnover Finland 411,186 328,097 Turnover Sweden 165,686 134,340 Turnover other countries 142,644 111,273 Total 719,515 573,710

Long-term assets* Finland 400,228 374,781 Sweden 105,965 91,870 Other countries 50,758 51,344 Shares in affiliate companies 1,329 1,676 Total 558,279 519,672

Investments Finland 64,786 61,543 Sweden 11,077 10,415 Other countries 5,065 8,958 Total 80,929 80,916

The geographical allocation of the segment turnover is determined on the basis of the location of the customers and the value of the segments’ assets on the basis of the location of the assets. * The Group’s other long-term assets, excluding financial instruments and deferred tax assets.

Vapo’s Annual Report 2010 55 Notes to the consolidated financial statements

3. Company acquisitions

In 2010, the Group did not carry out any company acquisitions.

Impact of acquisitions on the Group assets and debts Fair values Book values Fair values Book values entered at before entered at before EUR 1,000 merger merger merger merger

Impact on assets (+) 2010 2010 2009 2009 Tangible assets 2,548 1,176 Intangible assets 13 13 Available-for-sale investments Inventories 1,290 1,290 Sales and other receivables 381 381 Cash on hand and in bank 33 33 Impact on assets 0 0 4,265 2,893

Impact on minority share –279

Impact on debts (-) Deferred tax liabilities –394 –10 Reserves –27 –27 Long-term interest-bearing debts –1,288 –1,288 Short-term interest-bearing debts –406 –406 Accounts payable and other debts –462 –462 Impact on debts 0 0 –2,576 –2,192

Impact on net assets 0 0 1,410 701

Goodwill accrued from acquisition 580 Acquisition price 1,692 Cash assets of acquired subsidiary 31 Cash flow effect 0 1,661

Itemisation of acquisition price Proportion paid as cash assets 1,692

56 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

4. Other operating income

EUR 1,000 2010 2009 Rental income 1,288 1,352 Subsidies and public funding 1,753 2,490 Other operating income 1,728 2,034 Fire insurance compensations 6,300 5,791 Profit on sales of fixed assets 3,036 2,750 Other operating income 14,105 14,417

Vapo’s subsidiary Suo Oy received EUR 1.0 million in public funding for energy crop production.

5. Materials and services

EUR 1,000 2010 2009 Purchases during the period –243,157 –206,314 Increase or decrease in stocks 5,366 7,322 External services –123,672 –112,310 Materials and services –361,463 –311,301

6. Other operating expenses

EUR 1,000 2010 2009 Rent –13,635 –12,053 Sales freights –81,358 –65,481 Losses from the alienation of fixed assets –597 –4,291

Audit expenses, actual audit –251 –285 Audit expenses, other expert services –648 –553 Audit expenses, tax consulting –48 –247 Audit expenses –947 –1,085

External services –21,679 –13,612 Other expenses –98,848 –81,736 Other operating expenses total –217,064 –178,259

Research and development expenses in 2010 totalled EUR 4.0 million (4.3 million). Expenses include a EUR 250,000 donation to the basic capital of the University of Jyväskylä.

Vapo’s Annual Report 2010 57 Notes to the consolidated financial statements

7. Personnel expenses

EUR 1,000 2010 2009 Salaries and fees –50,186 –51,174

Pension expenses (payment-based arrangements) –7,317 –7,095 Pension expenses (voluntary) –611 –800 Pension expenses, total –7,927 –7,896

Other indirect employee costs –6,236 –7,800 Expenses arising from staff benefits total –64,350 –66,869

Management salaries and fees Managing Director and Deputy Managing Director 1,395 1,393 Members of the Board of Directors 205 192 Members of the Supervisory Board 74 66 Management salaries, fees and perquisites total 1,674 1,651

For more information on remuneration for the Board of Directors, Supervisory Board, Managing Director, management and personnel on page 43–44 of the Board of Directors report.

Average number of personnel 2010 2009 Local Fuels 346 384 Pellets 154 226 Heat and Power 129 152 Garden and Environment 267 342 Timber 235 219 Other operations 202 128 Total 1,333 1,451

8. Depreciation and impairments

EUR 1,000 2010 2009 Planned depreciation Intangible rights –2,181 –1,480 Buildings and structures –6,095 –5,490 Machinery and equipment –23,384 –21,713 Other tangible assets –12,289 –12,735 Total –43,950 –41,418

Impairments Goodwill –1,395 Land property –18 –24 Buildings –780 Machinery and equipment –2,754 Exceptional impairment of current assets –1,320 –92 Total –6,266 –115 Depreciation and impairments total –50,215 –41,534

58 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

9. Financial income and expenses

EUR 1,000 2010 2009 Dividend yield from available-for-sale investments 1,042 961 Profit from sale of available-for-sale investments 3 Change in value of financial assets at fair value through profit or loss - interest rate derivatives, non-hedge accounting 3,237 - currency derivatives, non-hedge accounting 336 - electricity derivatives, non-hedge accounting 6,582 1,600 - commodity derivatives, non-hedge accounting 207 Interest revenue 366 767 Exchange rate gain from financial loans at allocated acquisition cost 148 1,046 Other exchange rate gains 18,590 4,760 Other financial income 201 89 Financial income total 30,504 9,429

Interest expenses –9,403 –11,021 Impairments from investments in fixed assets –815 –187 Change in value of financial assets at fair value through profit or loss - interest rate derivatives, non-hedge accounting –1,061 - currency derivatives, non-hedge accounting –631 - commodity derivatives, non-hedge accounting –442 Exchange rate loss from financial loans at allocated acquisition cost –987 –46 Other exchange rate losses –17,512 –5,499 Other financial expenses –541 –377 Financial expenses total –29,701 –18,822 Financial income and expenses total 802 –9,393

Vapo’s Annual Report 2010 59 Notes to the consolidated financial statements

10. Income tax

EUR 1,000 2010 2009 Income tax on regular operations –7,067 –4,950 Taxes from previous accounting periods –93 –67 Other direct taxes –3 –10 Deferred tax liabilities and assets –2,961 –2,125 Total –10,124 –7,152

Tax balancing calculation

EUR 1,000 2010 2009 Book result before taxes 40,207 28,613

Deferred tax at parent company’s 26% tax rate –10,454 –7,439 Effects of foreign subsidiaries’ differing tax rates 298 191 Effect of tax-free items at unit tax rate 825 412 Effect of non-deductible items at unit tax rate –637 –247 Tax from previous accounting periods –93 –67 Unrecorded tax on losses for the period –63 –2 Tax expense in profit and loss statement –10,124 –7,152

Deferred tax assets not entered in the balance sheet Business loss 63 2

11. Intangible assets

Intangible Advance EUR 1,000 Goodwill rights payments Total Acquisition cost 1 Jan. 2010 26,145 13,023 1,007 40,175 Conversion differences (+/–) 499 3 501 Increases 1,199 4,552 5,751 Decreases –519 –136 –655 Transfers between items 4,011 –4,011 0 Transfer to long-term assets available-for-sale –777 –134 –911 Acquisition cost 31 Dec. 2010 26,125 17,322 1,414 44,861

Accrued depreciation 1 Jan. 2010 –6,959 –5,081 –12,041 Conversion differences (+/–) 0 –1 –1 Accrued depreciation on deductions and transfers 519 –110 409 Transfer to long-term assets available-for-sale 200 200 3,518 Depreciation for the period –2,181 –2,181 Impairments –1,395 –1,395 Accrued depreciation 31 Dec. 2010 –7,836 –7,173 0 –15,009

Book value 31 Dec. 2010 18,289 10,149 1,414 29,853

60 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Intangible Advance EUR 1,000 Goodwill rights payments Total Acquisition cost 1 Jan. 2009 27,092 8,809 1,709 37,610 Conversion differences (+/–) 299 1 300 Acquisitions of subsidiaries 580 16 596 Increases 477 1,765 3,492 5,734 Decreases –2,302 –1,774 –28 –4,104 Transfers between items 4,205 –4,166 39 Acquisition cost 31 Dec. 2009 26,145 13,023 1,007 40,175

Accrued depreciation 1 Jan. 2009 –9,265 –4,814 –14,078 Conversion differences (+/–) 3 0 3 Accrued deprecation of acquisitions –3 –3 Accrued depreciation on deductions and transfers 2,302 1,216 3,518 Depreciation for the period –1,480 –1,480 Accrued depreciation 31 Dec. 2009 –6,959 –5,081 0 –12,041 Book value 31 Dec. 2009 19,186 7,941 1,007 28,134

Intangible rights related to electricity sales were classified as available-for-sale in 2010.

Impairment testing of cash flow generating The main assumptions in utility value calculations are as units containing goodwill follows: For the purposes of impairment testing, goodwill has Tootsi Turvas, Seda and Neova been allocated to the smallest Group units which generate - new clients will increase sales if market share is maintained independent cash flows and are monitored in management - selling prices are estimated to increase as the prices of reporting. The smallest cash flow generating unit is a busi- competing fuels rise ness area or a separate monitoring target. Cash generating - production levels have increased units were the same as in the previous year. Neova AB (Heat and Power), Garden and Environment The recoverable amount of money has been defined on business area and the Pellet business the basis of utility value calculations. The calculations are - calculations are based on 2011 annual operating plans and based on management approved predictions, budgets and five-year strategy plans strategy calculations covering a period of 1–5 years. Predic- Vapo Oy (Heat and Power) tions exceeding the five-year period have been made with - calculations are based on 2011 annual operating plan and, caution either without a growth factor or with a marginal after 2010, two percent price and cost increases. effect. In all cash flow generating units, calculations have been The calculation period corresponds to the average lifetime made on the basis of the existing production capacity, main- of fixed assets. If the asset tested consists mainly of peat tained with replacement investments. assets, the lifetime is based on the volume of peat. As a result of impairment testing, Seda’s goodwill Predicted cash flows have been discounted to the present. EUR 1.4 million was impaired. There was no need for other The discount rate is the Group’s weighted average capital impairments. The management feels that reasonable changes cost (wacc), 7.0% (7.0% in 2009), for all units accumulating in the main assumptions used in the calculations will not cash flow. cause the book value of assets to exceed the amount of funds recoverable from them.

Vapo’s Annual Report 2010 61 Notes to the consolidated financial statements

Allocation of goodwill to cash flow generating units

EUR 1,000 2010 2009 AS Tootsi Turvas 1,219 1,219 AS Seda 0 1,393 Neova AB (excluding Heat and Power unit) 804 2,266 Neova AB (Heat and Power) 1,920 262 Vapo Oy, Heat and Power 4,359 4,359 Pellet business area 3,991 3,991 Garden and Environment business area 5,997 5,695 Total 18,290 19,186

Allocation of goodwill to segments

EUR 1,000 2010 2009 Local Fuels 569 573 Pellets 4,793 6,257 Heat and Power 6,276 4,621 Garden and Environment 6,653 7,734 Total 18,290 19,186

12. Tangible fixed assets Advance payments Machinery Other and Land and Buildings and and tangible unfinished EUR 1,000 water areas structures equipment assets acquisitions Total Acquisition cost 1 Jan. 2010 38,968 141,940 383,715 292,042 16,332 872,998 Conversion differences 410 3,163 13,755 3,710 344 21,381 Increases 4,073 554 4,961 7,659 57,931 75,177 Decreases –316 –6,674 –16,399 –1,881 –1,897 –27,167 Transfers between items –385 18,997 6,268 –24,880 0 Acquisition cost 31 Dec. 2010 43,135 138,598 405,028 307,799 47,830 942,389

Accrued depreciation 1 Jan. 2010 –81 –55,245 –197,712 –130,098 –383,137 Conversion differences (+/–) –821 –6,181 –1,916 –8,918 Accrued depreciation on deductions and transfers 47 5,156 15,085 1,795 22,083 Depreciation for the period –6,095 –23,384 –12,289 –41,769 Impairments* –18 –780 –2,754 –3,551 Accrued depreciation 31 Dec. 2010 –52 –57,786 –214,946 –142,509 –415,292

Book value 31 Dec. 2010 43,083 80,813 190,082 165,290 47,830 527,097

* Possible land and water area depreciation are included in Impairments.

62 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Advance payments Machinery Other and Land and Buildings and and tangible unfinished EUR 1,000 water areas structures equipment assets acquisitions Total Acquisition cost 1 Jan. 2009 35,555 134,926 368,386 260,511 27,374 826,751 Conversion differences 159 1,187 5,254 1,304 76 7,981 Acquisitions of subsidiaries 747 2,067 1,172 3,986 Increases 3,334 1,134 32,153 2,819 32,602 72,041 Decreases –251 –4,017 –29,399 –2,893 –13 –36,573 Transfers between items 170 7,964 5,255 29,130 –43,707 –1,188 Acquisition cost 31 Dec. 2009 38,968 141,940 383,715 292,042 16,332 872,998

Accrued depreciation 1 Jan. 2009 –58 –51,798 –195,308 –118,321 –365,485 Conversion differences (+/–) –278 –2,339 –709 –3,326 Accrued depreciation of acquisitions –448 –864 –126 –1,438 Accrued depreciation on deductions and transfers 2,769 22,512 1,793 27,074 Depreciation for the period –5,490 –21,713 –12,735 –39,938 Impairments* –24 –24 Accrued depreciation 31 Dec. 2009 –81 –55,245 –197,712 –130,098 –383,137 Book value 31 Dec. 2009 38,887 86,695 186,003 161,944 16,332 489,861

* Possible land and water area depreciation are included in Impairments.

The acquisition cost of tangible fixed assets includes assets leased on finance lease agreements as follows:

Machinery Buildings and and 2010, EUR 1,000 structures equipment Total Acquisition cost 968 148 1,115 Accrued depreciation –150 –126 –275 Book value 818 22 840

Machinery Buildings and and 2009, EUR 1,000 structures equipment Total Acquisition cost 968 396 1,364 Accrued depreciation –122 –348 –470 Book value 846 48 894

Vapo’s Annual Report 2010 63 Notes to the consolidated financial statements

13. Shares in affiliate companies

EUR 1,000 2010 2009 Acquisition cost 1 Jan. 1,248 1,248 Decreases –142 Acquisition cost 31 Dec. 1,106 1,248

Capital share adjustments 1 Jan. 428 541 Share of affiliate companies’ results 281 –6 Dividend received during accounting period –49 Decreases –437 –107 Capital share adjustments 31 Dec. 223 428

Book value 31 Dec. 1,329 1,676

Undepreciated goodwill in affiliate companies 0 6

Financial summary of affiliate companies (100%):

2010, EUR 1,000 Domicile Assets Liabilities Turnover Result Holding Mäntän Energia Oy Finland 9,244 7,924 12,009 40 45.0% Keski-Pohjanmaan Komposti Oy Finland 1,374 33 103 38 50.0% Tammelan Aluelämpö Oy Finland 442 295 401 –2 50.0% Simon Turvejaloste Oy Finland 232 47 135 19 33.3% UAB Bioenergija LT Lithuania 269 171 335 –19 49.0%

2009, EUR 1,000 Domicile Assets Liabilities Turnover Result Holding Mäntän Energia Oy Finland 5,071 3,985 10,660 0 45.0% Anaika Components Oy Finland 36.5% Keski-Pohjanmaan Komposti Oy Finland 1,319 17 84 38 50.0% Tammelan Aluelämpö Oy Finland 436 273 309 13 50.0% Enas Oy Finland 1,255 250 1,566 275 44.4% Simon Turvejaloste Oy Finland 191 100 134 20 33.3% UAB Bioenergija LT Lithuania 229 115 339 –3 49.0%

64 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

14. Available-for-sale investments Available-for-sale investments include both quoted and non-quoted shares. Quoted shares have been valued at fair value. Non-quoted shares are presented at acquisition price because their fair values cannot be reliably estimated.

EUR 1,000 2010 2009 Acquisition cost 1 Jan. 18,233 16,749 Conversion difference 11 –9 Decreases –222 –35 Revaluation (net) 1,223 1,528 Acquisition cost 31 Dec. 19,245 18,233

Accrued impairments 1 Jan. –191 Conversion difference –11 Impairments for the period –191 Accrued impairments 31 Dec. –202 –191

Book value 31 Dec. 19,043 18,042

15. Long-term receivables

EUR 1,000 2010 2009 Long-term interest-bearing receivables Loan receivables from affiliate companies 365 Loan receivables from others 3,183 3,183 Total 3,183 3,548

Long-term interest-free receivables From others 1,882 1,973

Long-term sales and other receivables total 5,065 5,521

16. Other long-term investments

EUR 1,000 2010 2009 Acquisition cost 1 Jan. 1,325 1,342 Decreases –187 –14 Impairments –3 Acquisition cost 31 Dec. 1,138 1,325

Other long-term investments consist of shares in real estate companies.

Vapo’s Annual Report 2010 65 Notes to the consolidated financial statements

Entered in 17. Deferred tax liabilities and assets other Entered Entered in compre- under profit and hensive share- Acquired/ Conversion loss income holders’ divested 31 Dec. EUR 1,000 1 Jan. 2010 difference statement items equity companies 2010 Itemisation of deferred tax assets Due to losses 801 16 203 154 1,175 Other allocation differences 2,911 3 –698 2,216 Due to consolidation measures 43 –11 32 Fair value fund 0 0 1 Total 3,755 19 –506 154 0 3,424

Itemisation of deferred tax liabilities Depreciation differences and voluntary reserves 22,715 167 1,220 24,103 Other allocation differences 1,665 273 2,371 –16 4,293 Allocation of fair value from acquisitions 10,081 989 –1,141 9,929 Fair value fund 1,788 318 2,106 Entered in other IFRS funds 137 137 Total 36,385 1,430 2,450 318 –16 0 40,567

Deferred taxes in balance sheet Deferred tax assets 1,176 Deferred tax liabilities 38,320 Net tax liabilities 37,144

Entered in other Entered Entered in compre- under profit and hensive share- Acquired/ Con-version loss income holders’ divested 31 Dec. EUR 1,000 1 Jan. 2009 difference statement items equity companies 2010 Itemisation of deferred tax assets Due to losses 869 3 –71 801 Other allocation differences 2,789 3 44 75 2,911 Due to consolidation measures 57 –14 43 Fair value fund 1 0 0 Total 3,715 6 –40 0 75 3,755

Itemisation of deferred tax liabilities Depreciation differences and voluntary reserves 20,489 87 2,240 –101 22,715 Other allocation differences 113 25 674 843 10 1,665 Allocation of fair value from acquisitions 10,103 423 -830 384 10,081 Fair value fund 1,391 397 1,788 Entered in other IFRS funds 137 137 Total 32,232 535 2,085 397 743 394 36,385

Deferred taxes in balance sheet Deferred tax assets 831 Deferred tax liabilities 33,461 Net tax liabilities 32,630

Deferred tax liabilities and assets are offset if there is a legally enforceable right to set off current tax liabilities against current tax assets and when they relate to income taxes levied by the same taxation authority. Deferred taxes have been determined using the tax rate in each country. A deferred tax asset has not been entered for all losses because it has been estimated that all losses cannot be utilised in the near future.

Deferred tax assets not entered in the balance sheet 2010 2009 Due to business loss 63 2

66 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

18. Inventories

EUR 1,000 2010 2009 Materials and supplies 47,153 40,587 Unfinished products 990 1,834 Finished products 130,192 133,425 Goods 120 46 Other inventories 130 158 Advance payments for inventories 7,466 4,102 Inventories total 186,052 180,152

The book value of inventories does not involve significant items entered at their net realisable value.

19. Sales receivables and other receivables

EUR 1,000 2010 2009 Sales receivables Sales receivables (from others) 123,400 97,330 Sales receivables from affiliate companies 684 794 124,084 98,124

Other short-term receivables and receivables carried forward Loan receivables (from others) 399 185 Short-term loan receivables from affiliate companies 450 Other short-term receivables 5,692 9,810 Receivables carried forward (from others) 8,632 9,348 14,723 19,792 Assets at fair value through profit or loss Derivative contracts – non-hedge accounting 6,284 207 Sales and other receivables total 145,091 118,123

Short-term sales receivables by currency: EUR 1,000 2010 2009 Euro 71,530 62,295 USD 1,943 1,715 GBP 1,153 650 SEK 40,785 27,639 Other currencies 8,673 5,825 Total 124,084 98,124

Maturity of sales receivables and items recorded as credit loss EUR 1,000 2010 2009 Not matured 114,073 89,192 Matured less than 30 days ago 7,159 6,784 Matured 31–60 days ago 711 884 Matured 61–90 days ago 171 330 Matured more than 90 days ago 1,970 934 Total 124,084 98,124

Credit losses 415 503

Vapo’s Annual Report 2010 67 Notes to the consolidated financial statements

20. Cash assets

EUR 1,000 2010 2009 Cash in hand and bank accounts 3,839 1,498

21. Notes to shareholders’ equity

Descriptions of the shareholders’ equity funds:

Fair value fund consists of the fair value and write-up of available-for-sale quoted shares less deferred tax liability. Contingency fund consists of the non-restricted contingency fund founded during the inauguration of Vapo Oy as per the Act on the Establishment of Vapo Oy (1015/1983). Conversion differences consist of the currency-denominated differences in shareholders’ equity in the foreign subsidiaries at the time of acquisition and in subsequent retained earnings.

22. Interest-bearing debts

EUR 1,000 2010 2009 Long-term financial debts at allocated acquisition cost Loans from financial institutions 281,173 229,450 Pension loans 2,990 4,720 Finance lease debts 874 909 Total 285,036 235,079

Current financial debts at allocated acquisition cost Loans from financial institutions 23,821 45,554 Pension loans 1,730 1,730 Commercial papers 111,043 85,676 Finance lease debts 35 82 Other debts 520 1,840 Total 137,148 134,882

Repayment scheme for long-term debts EUR 1,000 2011 2012 2013 2014 2015 2016 Total Bank and pension loans 25,552 62,513 71,648 56,080 90,394 3,528 309,714 Finance lease debts 35 25 25 25 25 773 908

Interest-bearing long-term debts by currency:

EUR 1,000 2010 2009 EUR 240,974 215,056 SEK 68,616 65,710 Other currencies 1,033 1,679 Total 310,623 282,445

The interest-bearing debts presented in the financial statements have been valued at nominal values because they are equivalent to fair values.

68 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Finance lease debts EUR 1,000 2010 2009

Contractual rental payments Within 1 year 60 110 Within 1 to 5 years 194 211 After 5 years 1,044 1,086 Contractual rental payments total 1,298 1,408

Contractual rental payments, fair value Within 1 year 35 79 Within 1 to 5 years 100 113 After 5 years 773 799 Contractual rental payments, fair value, total 908 991

23. Long-term interest-free debts

EUR 1,000 2 010 2009 Joining fee debts 6,924 6,918 Advances received 3,214 3,732 Other debts 40 66 Total 10,178 10,716

24. Reserves Environmental cost allowance Pension Other EUR 1,000 reserves reserves Total Reserves 1 Jan. 2010 9,146 1,768 18 10,932 Conversion difference 491 1 492 Increases in reserves 1,815 331 176 2,322 Spent reserves –896 –369 –1,265 Cancellations of unused reserves –30 –30 Effect of change in discount rate 0 Acquisitions/divestments of subsidiaries 0 Reserves 31 Dec. 2010 10,555 1,701 194 12,450

Long-term 10,555 1,515 22 12,091 Short-term 187 173 359

Vapo’s Annual Report 2010 69 Notes to the consolidated financial statements

25. Accounts payable and other debts

EUR 1,000 2010 2009 Current financial debts at allocated acquisition cost Advances received 12,569 18,045 Accounts payable 40,706 40,978 Accounts payable to affiliate companies 66 53,275 59,089

Other debts 12,957 5,487 Interest debts and other financial debts 1,286 1,599 Salary and social cost allocations 10,276 11,574 Other accruals and deferred income 12,635 12,495

Short-term financial assets at fair value through profit or loss Derivative contracts – non-hedge accounting 1,325 4,960 Total 91,755 95,204

Short-term accounts payable by currency EUR 1,000 2010 2009 Euro 31,408 27,391 USD 72 22 GBP 61 28 SEK 7,638 12,031 Other currencies 1,528 1,572 Total 40,706 41,044

26. Management of financial and product risks

The Group is exposed to many financial risks as part of its Currency risk business operations. The main aim of the Group’s financial Due to its international operations, the Group is exposed to risk management is to minimise the impact on the result and the currency risks arising from exports and imports, internal cash flow of any fluctuations in the exchange and interest trading, internal foreign currency financing (transaction risk) rates relating to operational activities, and to secure adequate and net investments made in foreign currency in foreign liquidity. The main financial risks are interest and exchange subsidiaries (conversion risk). risks. The Group’s centralised group treasury is in charge of Most of the turnover is generated in the euro zone. After identifying and managing financial risks in accordance with the euro, the most significant export invoicing currencies are the financial policy approved by the Board of Directors. pound sterling, the Swedish krona and the US dollar. When The Group Treasury acts as a counterbalance for the sub- these currencies strengthen, the impact on Group result is sidiaries and is responsible for managing external fundrais- positive, and when they weaken, it is negative. The most ing. It is also responsible for the administration of cash assets significant internal funding currencies of the Group are the and flows and for any appropriate hedging measures. The Swedish krona, the Danish krone, the Polish zloty and the Group’s risk management tools include forward exchange Latvian lats. contracts and currency options, currency swaps, foreign The hedging policy attempts to cover significant currency currency loans, interest rate swaps and different commodity positions in full arising from foreign currency receivables, derivatives. liabilities and outstanding orders. Hedging is also applied to protect internal financing items denominated in SEK, NOK and PLN. Hedging operations are conducted in line with the Group financing policy but hedge accounting is not applied to these items. The Group treasury agrees on currency derivative contracts mainly through subsidiaries. Foreign currency loans are always conducted through the parent company.

70 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

Vapo’s transaction risk at the end of 2008 in euros, converted at the closing date exchange rates:

2010 2009 Position Hedging Net Hedging % Position Hedging Net Hedging% DKK 2.8 0.0 2.8 0% 3.5 0.0 3.5 0% GBP 2.2 –2.2 0.0 100% 1.8 –1.8 0.0 100% PLN 5.7 –5.7 0.0 101% 4.1 –4.1 0.0 100% LVL 1.1 0.0 1.1 0% 1.6 0.0 1.6 0% NOK 1.4 –1.3 0.1 93% 0.3 –0.3 0.0 93% RUB 1.8 0.0 1.8 0% 1.5 0.0 1.5 0% SEK 119.0 –119.1 –0.1 100% 106.1 –101.2 4.8 95% USD 1.4 –1.4 0.0 100% 2.6 –2.5 0.1 98% Total 135.3 –129.7 5.6 96% 122.0 –109.9 12.0 90%

The Group has foreign net investments and thus it is exposed in use on the closing date. However, the EUR 50 million to risks created when investments made in foreign currency standby credit was completely unused. are converted into the parent company’s operating currency The Group actively monitors the amount of financing (conversion risk). Net investments made in the subsidiaries in required, so that the Group will have adequate liquidity foreign currency are not covered by hedging. The most to finance operations and to take care of other financial significant conversion risks exist with the Swedish krona, obligations. Liquidity is managed by balancing the relative Danish krone and Latvia lats. proportion of short- and long-term loans and the payment schedules for long-term loans. The risk associated with the Group net investments on the closing date: availability and price of financing is managed by spreading fundraising between different banks. EUR million 2010 2009 In 2010, Vapo met the covenants and other terms con- DKK 14.7 14.7 tained in its financing contracts. EEK 43.1 43.1 The cash flows for the instalments, financing costs and LVL 13.4 13.4 derivative contracts associated with Vapo’s interest-bearing NOK 4.0 4.0 debts are as follows: PLN 5.7 5.7 RUB 0.3 0.3 EUR million < 1 yr 1–5 yrs > 5 yrs SEK 27.0 21.5 Long-term debts Total 108.2 102.7 Instalments 25.6 280.7 4.3 The table below shows changes in the euro’s exchange rates Financing costs 8.3 13.4 0.3 against the Group’s operating currencies. The sensitivity Short-term debts analysis does not include net investments in subsidiaries. The currency risk sensitivity analysis is based on the consolidated Instalments 111.0 - - Group currency position, taking currency hedging into Financing costs 0.5 - - account. The combined effects, including a +/– 10% Derivative debts fluctuation in the value of the euro against the other Expenses 76.6 7.6 0.0 currencies, are as follows: Income 77.9 9.8 0.0 EUR million 2010 2009 Total 299.9 311.5 4.6 Euro strengthens 10% + /– –0.5 –0.7 Euro weakens 10% + /– 0.6 0.9 Interest rate risk The Group’s interest-bearing net debts amounted to EUR 414.8 (364.3) million on the closing date. The Group’s objec- Liquidity and refinancing risk tive is to hedge against any significant impacts resulting from The situation in the financial markets settled down compared interest rate fluctuations concerning the interest-bearing to 2009 and Group financing requirements were met without debts and receivables on the balance sheet. Interest rate problems in 2010. The Group’s liquidity remained good. The swaps form the primary hedging instrument. Interest rate risk most significant measure to improve liquidity was the EUR 50 is measured by the average duration of the debt portfo- million agreement signed in 2010 for a three-year standby lio (gap). On 31.12.10, the duration of the debt portfolio, credit. For short-term financing, the Group employed a EUR derivatives included, was 16 months (10 months in 2008). 100 million commercial paper scheme which was entirely The weighted average interest rate of long-term loans, interest hedging included, was 2.60% (2.85%).

Vapo’s Annual Report 2010 71 Notes to the consolidated financial statements

The interest rate risk sensitivity analysis is based on the electricity trading, the regional price risk is hedged to a consolidated Group-level interest rate risk, which consists of minimum of 50% of the amount of system-priced derivatives interest-bearing debts and derivatives, such as interest rate purchased. swaps, which hedge against the risk. If other factors were to The electricity price risk sensitivity analysis includes the remain constant, an increase or decrease of 1% in the interest derivative contracts concluded, but not expected consump- rate for the contracts within the next 12 months would have tion. A 10% increase or fall in electricity market prices, an impact of EUR +/–1.9 million on the interest costs associ- compared with the prices at the end of 2008, would have an ated with the interest-bearing debts and receivables (tax impact of EUR +/–1.8 million on the result. impact excluded). Interest rate derivatives are valued at their full market Price risk concerning emission rights value and the effect of any changes is entered in the profit Some of the Group’s power plants fall within the scope of the and loss statement. EU’s emission trading system. In 2010, the Group received free emission rights. In addition to this, the Group purchased Market risk from investments additional emission rights on the market in order to fulfil its The Group is exposed to the price risk caused by to the obligations for 2010 and used the emission reduction units fluctuation in publicly quoted market prices of shares. No (ERU) gained from TGF fund. changes in investments in quoted shares have occurred In the emission trading period 2008–2012, the Group during the financial period. Changes in the value of available- does not receive enough emission rights from the national for-sale financial assets affect shareholders’ equity via other allocations to meet its demand. The Group has made provi- comprehensive income items. sions to obtain additional emission rights by participating in the Baltic Sea area coal fund (Testing Ground Facility, TGF). Counterparty and credit risk Emission rights are also obtained on the market in accord- The counterparty risks associated with depositing cash funds ance with the Group’s emission trading policy. This policy and concluding financial and commodity derivative contracts outlines the strategy for reducing the quantity and price are managed by only concluding contracts and transactions risks related to the acquisition of emission rights. At the end with parties that are creditworthy and active on the market. of each quarter, a minimum of 80% of the next 12 months’ The business segments are responsible for managing the emission rights requirements are quantity- and price-hedged. credit risks associated with commercial receivables. The credit The emission rights requirements are calculated based on the risk associated with business operations is reduced using operating plans and fuel consumption of the power plants. credit insurance and customer-specific credit limits. The Group has prepared for the next emission trade The Group has no significant counterparty risk period (2013–2020). The Board of Directors decided in concentration. November 2010 to invest EUR 10 million in Nefco Carbon Facility (NeCF). The fund produces certified emission reduc- Electricity price risk tions (CER) which can be used to cover the Group’s emission The Vapo Group sells electricity in Finland. The Power and obligations within the EU emission trading system from 2013. Heat division is hedged against the risks associated with the sale of electricity in accordance with its electricity trading risk Capital management management policy. Electricity from Vapo’s own production The aim of the Group’s capital management is to enable is sold on the market for market price. the growth of business operations in line with the strategy Price hedges protect electricity physically sold on the and to simultaneously optimise the total cost of the capital. market. They are employed to stabilise the price of electricity The capital structure objective is to maintain the Group’s sold into the market and to reduce the uncertainty of the solvency at 40% or more. This objective was not reached in financial results from these operations. The principle hedge 2010 financial period. In 2010, the solvency ratio was 38.3% instruments used are electricity futures and forward agree- (39.5%) and the net debt/equity ratio was 119.5% (111.5%). ments as well as fixed-price physical electricity supply agree- Vapo Oy annually distributes approximately 50% of the ments. Price hedges are based on expected and confirmed profit noted in the consolidated financial statement for the electricity sales. At the end of each calendar year, a minimum accounting period as dividend. of 80% of the total purchases on the electricity market purchases in the next calendar year are price-hedged. In Vapo’s Net debt/equity ratios were as follows:

EUR 1,000 2010 2009 Interest-bearing debts 422,184 369,961 Interest-bearing receivables –3,582 –4,183 Cash assets –3,839 –1,498 Net debts 414,763 364,280

Shareholders’ equity total 346,953 326,556

Net debt/equity ratio (gearing) 119.5% 111.6%

72 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

27. Fair values of financial assets and debts

EUR 1,000 31 Dec. 2010 31 Dec. 2009

Positive Negative Net Positive Negative Net Contract Fair value Fair value Fair value Fair value Fair value Fair value Interest rate derivatives, non-hedge accounting 814 –1,648 –834 0 –4,071 –4,071 Currency derivatives, non-hedge accounting 18 –301 –283 8 –599 –591 Oil derivatives, non-hedge accounting 6 –51 –45 207 0 207 Electricity derivatives, non-hedge accounting 7,300 –1,015 6,284 1,038 –1,336 –297 Emission right derivatives, non-hedge accounting 22 –212 –190 0 0 0 Short-term derivative contracts 8,187 –3,227 4,932 1,253 –6,006 –4,753

Electricity derivatives, GWh 382 397

Nominal value of derivative contracts 31 Dec. 31 Dec. EUR 1,000 2010 2009 Nominal value of interest rate derivatives 226,169 202,470 Nominal value of currency derivatives 70,339 46,858 Nominal value of oil derivatives 524 603 Nominal value of electricity derivatives 18,289 19,664 Nominal value of emission rights 2,747 0 Short-term 318,070 269,596

28. Subsidiary shares Number of Group Domicile shares Share % Share % Subsidiary shares owned by Vapo Oy: Vapo Timber Oy Finland 5,000 100.00 100.00 Kekkilä Oy Finland 3,012,456 100.00 100.00 Mustankorkea Oy Finland 275 55.00 55.00 Suo Oy Finland 149,990 99.99 99.99 Piipsan Turve Oy Finland 120 48.00 48.00 Neova AB Sweden 121,928 100.00 100.00 Hasselfors Garden AB Sweden 1,000 100.00 100.00 AS Tootsi Turvas Estonia 698,420 100.00 100.00 A/S Seda Latvia 7,800 100.00 100.00 Vapo A/S Denmark 400 100.00 100.00 Karel Vapo Russia 10,178 100.00 100.00 Vapo Sp. Z.o.o. Poland 100 100.00 100.00 Hasselfors Garden AS Norway 300 100.00 100.00 Andöy Torv AS Norway 2,058 60.00 60.00

Subsidiary shares owned by Vapo Timber Oy: Karel Timber Oy Finland 8 100.00 100.00

Subsidiary shares owned by Kekkilä Oy: Kekkilä Iberia S.L. Spain 1 100.00 100.00

Vapo’s Annual Report 2010 73 Notes to the consolidated financial statements

Number of Group Domicile shares Share % Share %

Subsidiary shares owned by AS Tootsi Turvas: Nova Sadam Estonia 1 100.00 100.00

Subsidiary shares owned by A/S Seda: Silgulda Ltd Latvia 52.00 52.00 Palsu Kudra Ltd Latvia 52.00 52.00

Subsidiary shares owned by Karel Vapo: Vyborgtorf Russia 100.00 100.00

Andöy Torv AS:n omistamat tytäryhtiöosakkeet: Andöytorv Transport AS Norway 200 100.00 60.00

29. Contingent liabilities

EUR 1,000 2010 2009 Securities given on own behalf Mortgages given 2,691 2,691 Guarantees 20,769 17,102 Pledges given 7 7 Total 23,468 19,800

Contingent liabilities on behalf of Group companies Guarantees 9,081 8,306 Other contingent liabilities 0 0 Total 9,081 8,306

Other contingent liabilities Pending forest sale agreements 18,450 11,017

Guarantees given on behalf of others Guarantees 3,113 3,200

Other rent liabilities Rent liabilities due within a year 6,607 6,226 Rent liabilities due within 1–5 years 17,616 17,704 Rent liabilities due at a later date 4,339 7,908 Total 28,562 31,838

The Group has leased machinery, equipment, vehicles and IT equipment. Leased production machinery and equipment, with a capital value of EUR 31.8 million on the closing date, account for the most significant share of the agreements. There are no agreements currently at acquisition stage. The duration of the lease agreements is ten years. The agreements include an option, but not an obligation, to continue the agreement after the original end date.

74 Vapo’s Annual Report 2010 Notes to the consolidated financial statements

30. Related party transactions Senior management’s perquisites and loan receivables The senior management consists of the Board of Directors, Business transactions and open balances with affiliate Managing Director and the rest of the Management Team. companies It has been agreed that, in addition to their annual salary paid monthly, an incentive bonus, which may not exceed EUR 1,000 2010 2009 20–40% of their annual salary, can be paid to the Managing Sales 3,664 4,935 Director, members of the Group Management Team and to Purchases –323 –1,000 some segment directors. The main principles used to deter- Dividend income 49 102 mine this payment are linked to Vapo Group’s profit and cash flow. Annual targets for the Managing Director’s incentive Interest revenue –49 payment are determined by the Board of Directors on the Interest expenses –1 –6 basis of the Compensation Committee’s proposal. The targets set for the Management Team are determined by the Board Long-term receivables of Directors on basis of the Managing Director’s proposal. Loan receivables 365 If the Board of Directors dismisses the Managing Direc- tor, the term of notice is 6 months, in addition to which he

is entitled to compensation corresponding to 12 months’ Short-term receivables salary. If the Managing Director resigns, the term of notice is Sales receivables 684 794 6 months. Loan receivables 450 The company does not employ option bonus schemes. Receivables carried forward The Managing Director is entitled to retire at the age of 60. The retirement age of Tomi Yli-Kyyny, the new Manag- ing Director as of 1 April 2011, will be 63 years. In addition, Short-term debts Yli-Kyyny is entitled to a collective supplementary pension Accounts payable 66 insurance. Vapo contributes to this insurance an annual sum Other debts 168 853 corresponding to 20% of the Managing Director’s total annual salary excluding bonuses. Directors belonging to The interest rate on the loans granted to affiliate companies is the Management Team, including the Managing Direc- based on market rates. tor, are covered by the pension scheme provided for by the Employees’ Pensions Act. Members of the Management Team appointed prior to 31 December 2004 are entitled to an additional pension. Within this group, those born prior to 31 December 1952 have a contractual right to retire at the age of 60, whilst those who were born after this date may only retire, according to the conditions of their employment contracts, at 62. At this point they will receive a pension granted for the earliest retirement pension age after a full working life, as provided for by the law on retirement. On 31 December 2010 and 31 December 2009, there were no loan receivables from members of the senior management.

Vapo’s Annual Report 2010 75 Parent company financial statements, FAS

1 Jan.– 1 Jan.– EUR 1,000 Note 31 Dec. 2010 31 Dec. 2009 TURNOVER 2 346,869 286,272

Change in stock levels of finished and unfinished products –7,697 31,363 Production for own use 5,503 5,564 Other operating income 3 5,249 4,357

Materials and services 4 –153,010 –146,761 Personnel expenses 5 –25,537 –31,089 Depreciation and impairments 6 –26,294 –23,435 Other operating expenses 7 –117,478 –98,911 Operating profit 27,605 27,361

Financial income and expenses 8 –4,440 841 Profit before extraordinary items 23,165 28,201

Extraordinary items 9 2,139 Profit after extraordinary items 23,165 30,340

Profit-adjusting entries 10 –5,567 –12,578 Direct taxes 11 –3,698 –3,163 PROFIT FOR THE PERIOD 13,899 14,600

76 Vapo’s Annual Report 2010 Parent company balance sheet, FAS

EUR 1,000 Note 31 Dec. 2010 31 Dec. 2009

ASSETS TOTAL Fixed assets Intangible assets 12 11,996 8,700 Tangible assets 13 322,896 306,001 Investments 14 156,390 151,424 491,282 466,125 Current assets Inventories 15 92,929 95,461 Long-term receivables 16 91,791 61,246 Short-term receivables 17 136,029 146,678 Cash on hand and in bank 1,861 862 322,609 304,248 ASSETS TOTAL 813,891 770,372

LIABILITIES AND SHAREHOLDERS’ EQUITY TOTAL Shareholders’ equity Share capital 50,456 50,456 Other funds 30,096 30,096 Profit from previous accounting periods 156,033 153,434 Profit/loss for the period 13,899 14,600 Shareholders’ equity total 18 250,485 248,586

Accrual of profit-adjusting entries 75,315 69,748 Obligatory reserves 19 3,860 3,660

Liabilities Long-term interest-bearing liabilities 20 283,107 232,997 Long-term interest-free liabilities 20 10,138 10,650 Current interest-bearing liabilities 21 140,866 144,232 Current non-interest-bearing liabilities 21 50,119 60,500 Liabilities total 484,230 448,378 LIABILITIES AND SHAREHOLDERS’ EQUITY TOTAL 813,891 770,372

Vapo’s Annual Report 2010 77 Parent company cash flow statement, FAS

EUR 1,000 12/2010 12/2009 Business cash flow Profit for the period 13,899 14,600 Adjustments to the result for the period Depreciation and impairments 26,294 23,435 Financial income and expenses 4,440 1,556 Income tax 3,698 3,163 Other adjustments 2,865 12,815 Total adjustments to the result for the period 37,297 40,968

Change in working capital Increase/decrease in inventories 2,533 –38,549 Increase/decrease in short-term interest-free receivables –2,712 –5,270 Increase/decrease in short-term interest-free debts –1,592 13,848 Change in reserves 200 486 Change in working capital total –1,571 –29,484

Interest paid on business operations –9,757 –11,747 Interest received from business operations 2,996 3,586 Other financial items from business operations –1,335 –191 Taxes paid on business operations –3,219 –1,584 Profit before extraordinary items 38,310 16,147 Cash flow due to extraordinary items 5,139 Business cash flow 38,310 21,286

Investment cash flow Investments in tangible and intangible assets –49,401 –59,740 Income from assignment of tangible and intangible assets 3,611 1,909 Subsidiary shares bought –5,500 –3,790 Income from assignment of other investments 2,542 108 Dividends received from business operations 2,680 9,348 Investment cash flow –46,069 –52,166

Financing cash flow Increase/decrease in long-term loan receivables –20,763 4,801 Increase/decrease in short-term loan receivables 12,935 –17,900 Increase/decrease in short-term loans 18,155 27,976 Withdrawal of funds from long-term loans 101,874 91,297 Repayment of long-term loans –82,445 –62,473 Dividends paid –12,000 –14,310 Group subventions paid –9,000 Financing cash flow 8,757 29,390

Change in cash assets 998 –1,490

Cash assets at the beginning of the accounting period 862 2,352 Change in cash assets 998 –1,490 Cash assets at the end of the accounting period 1,860 862

78 Vapo’s Annual Report 2010 Notes to the parent company profit and loss statements, FAS

1. Accounting policies for the financial statements Fixed assets and depreciation Vapo Oy’s financial statements have been compiled in com- Carrying amounts of fixed assets are based on the origi- pliance with the Finnish Accounting Act. The Group adopted nal acquisition costs, from which annual depreciation and the International Financial Reporting Standards (IFRS) on 1 impairments are deducted. Fixed assets are written off using January 2006. planned straight-line depreciation based on the asset’s economic life or a depreciation calculated according to use. The Foreign currency-denominated items economic lives of intangible assets are 5–10 years and the and derivative contracts economic lives of tangible assets are 3–40 years. Foreign currency-denominated business operations are entered at the exchange rates on the transaction date, while Emission rights the receivables and debts included in the balance sheet on Emission rights are intangible rights valued at acquisition the closing date are converted at the exchange rate on the cost. Emission rights received free of charge are valued at closing date. Differences in the exchange rates are entered zero. If the free emission rights are not sufficient to cover the under the exchange rate differences. actual emissions, a reserve for meeting the emission rights Derivative contracts concluded in order to hedge against obligation is included. Thus the possible effect on the result currency risks have been valued at the exchange rate on is caused by the difference between the actual emissions and the closing date. The compound amount factor included in the emission rights received. derivatives has been spread over the contract period. The differences in exchange rates for the contract hedging bal- Leasing ance debts or receivables have been recorded as such under Leasing payments have been entered as an annual expense. financial income and expenses. Inventories Turnover and income recognition principles Inventories have been valued at acquisition cost, unless the Income is recognised when the service is rendered. When cal- repurchase cost or alienation price is likely to be lower. The culating turnover, indirect sales taxes, discounts granted and value of the inventories has been determined using the FIFO reclamation expenses are deducted from the sales proceeds. method. Also included in the inventories’ acquisition cost is the Other operating income and expenses corresponding share of the fixed acquisition and production Other operating income includes profits on sales of fixed costs, allocated to products according to the usual operating assets, rental income and any emission rights subsidies level of the production unit. The peat production inventories received. Other operating expenses include losses on sales include the peat resources made ready for sale. Peat resources of fixed assets, actual expenses relating to emission rights, not made ready for sale are included under short-term assets as well as sales delivery expenses, credit losses and any sales as peat substance to be written off according to use. commissions paid. Taxes Research and development expenditure Income tax has been included in accordance with Finnish tax Research and development expenses are recorded as profit or legislation. Deferred tax assets are presented in the notes to loss in the year that they occur. the profit and loss statements.

2. Turnover

EUR 1,000 2010 2009 Turnover by segment Local Fuels 210,361 165,865 Heat and Power 72,499 57,811 Environment 28,551 28,370 Pellets 34,080 31,124 Other operations 1,378 3,103 Total 346,869 286,272

Turnover by geographical market Finland 325,279 266,104 Sweden 10,308 11,431 Other countries 11,281 8,737 Total 346,869 286,272

Vapo’s Annual Report 2010 79 Notes to the parent company profit and loss statements

3. Other operating income

EUR 1,000 2010 2009 Rental income 1,166 1,605 Subsidies and public funding 531 621 Profit on sales of fixed assets 3,059 1,418 Other income 493 713 Total 5,249 4,357

4. Materials and services

EUR 1,000 2010 2009 Purchases during the period –76,777 –74,821 Change in reserves 5,772 5,016 External services –82,004 –76,956 Total –153,010 –146,761

5. Notes concerning personnel and members of administrative bodies

EUR 1,000 2010 2009 Personnel expenses Salaries and fees –20,614 –24,248 Pension costs –4,141 –4,502 Other indirect employee costs –782 –2,340 Total –25,537 –31,089

Management salaries, fees and perquisites Managing Director and Deputy Managing Director 647 513 Members of the Board of Directors 199 186 Members of the Supervisory Board 74 66 Other members of the Management Team 1,013 1,237 Total 1,933 2,002

Number of employees Average for the period 457 517

6. Depreciation and impairments

EUR 1,000 2010 2009 Intangible rights –2,116 –1,353 Buildings and structures –3,019 –2,488 Machinery and equipment –11,913 –9,980 Other tangible assets –9,232 –9,591 Planned depreciation –26,280 –23,411

Impairments of fixed assets –14 –24 Planned depreciation and impairments total –26,294 –23,435

80 Vapo’s Annual Report 2010 Notes to the parent company profit and loss statements

7. Other operating expenses

EUR 1,000 2010 2009 Rent –10,127 –9,006 Sales freights –55,985 –45,988 Losses from the alienation of fixed assets –357 –2,973 Merger losses –2,564

Audit expenses, actual audit –60 –51 Audit expenses, other expert services –258 –206 Audit expenses, tax consulting –48 –247 Audit expenses –366 –505

External services –18,854 –10,357 Other expenses –31,790 –27,517 Other operating expenses total –117,478 –98,911

8. Financial income and expenses

EUR 1,000 2010 2009 Dividend income from Group companies 1,595 8,282 Dividend income from affiliate companies 49 107 Dividend income from others 1,036 959 Income from shares 2,680 9,348

Interest income from Group companies 2,842 2,768 Other financial income from Group companies 28 13 Interest income from others 141 467 Other financial income from others 15,913 4,764 Other interest and financial income 18,924 8,013

Interest paid for Group companies –109 –305 Other financial expenses paid for Group companies –17 –17 Interest paid for debts to affiliate companies –1 –6 Interest expenses paid for debts to others –9,286 –10,689 Other financial expenses paid to others –16,631 –5,502 Other interest and financial expenses –26,044 –16,520

Financial income and expenses total –4,440 841

Exchange rate gains 15,885 3,703 Exchange rate losses –16,282 –5,355 Exchange rate difference total –397 –1,652

9. Extraordinary items

EUR 1,000 2010 2009 Non-recurring income Insurance compensations 5,139 Non-recurring expenses Group subventions paid –3,000

Vapo’s Annual Report 2010 81 Notes to the parent company profit and loss statements

10. Profit-adjusting entries

EUR 1,000 2010 2009 Change in depreciation difference Intangible assets –523 –586 Buildings and structures –60 –3,686 Machinery and equipment –5,207 –8,989 Other tangible assets 222 32 Total –5,567 –13,230

Change in voluntary reserves Addition in repurchase reserve –3,000 Use of repurchase reserve 3,652 Total 0 652

11. Direct taxes

EUR 1,000 2010 2009 Income tax on regular operations –3,613 –3,100 Taxes from previous accounting periods –85 –62 Total –3,698 –3,163

12. Intangible assets

Intangible EUR 1,000 Goodwill rights Advances Total Acquisition cost 1 Jan. 2010 11,909 1,007 12,916 Increases 1,106 4,552 5,658 Decreases –303 –303 Transfers between items 4,011 –4,011 0 Acquisition cost 31 Dec. 2010 0 16,723 1,548 18,271

Accrued depreciation 1 Jan. 2010 –4,216 –4,216 Accrued depreciation on deductions and transfers 57 57 Depreciation for the period –2,116 –2,116 Accrued depreciation 31 Dec. 2010 0 –6,275 0 –6,275

Book value 31.12.10 0 10,448 1,548 11,996

Intangible EUR 1,000 Goodwill rights Advances Total Acquisition cost 1 Jan. 2009 1,806 6,392 1,709 9,907 Increases 1,609 3,492 5,101 Decreases –1,806 –258 –28 –2,092 Transfers between items 4,166 –4,166 0 Acquisition cost 31 Dec. 2009 0 11,909 1,007 12,916

Accrued depreciation 1 Jan. 2009 –1,806 –3,122 –4,929 Accrued depreciation on deductions and transfers 1,806 258 2,065 Depreciation for the period –1,353 –1,353 Accrued depreciation 31 Dec. 2009 0 –4,216 0 –4,216

Book value 31 Dec. 2009 0 7,693 1,007 8,700

82 Vapo’s Annual Report 2010 Notes to the parent company profit and loss statements

13. Tangible assets Machinery Advance payments Land and water Buildings and and Other tangible and unfinished EUR 1,000 areas structures equipment assets acquisi-tions Total Acquisition cost 1 Jan. 2010 33,327 72,859 206,047 225,813 5,225 543,271 Increases 2,973 19 1,439 5,041 34,271 43,743 Decreases –260 –3,683 –3,384 –83 –1,550 –8,960 Transfers between items 384 8,718 4,054 –13,157 0 Acquisition cost 31 Dec. 2010 36,040 69,580 212,819 234,825 24,789 578,054

Accrued depreciation 1 Jan. 2010 –81 –28,041 –106,373 –102,774 0 –237,270 Accrued depreciation on deductions and transfers 47 3,351 2,867 24 0 6,289 Depreciation for the period –3,019 –11,913 –9,232 0 –24,164 Impairments –14 –14 Accrued depreciation 31 Dec. 2010 –48 –27,709 –115,420 –111,982 –255,158 Book value 31.12.2010 35,992 41,872 97,399 122,843 24,789 322,896

Machinery Advance payments Land and water Buildings and and Other tangible and unfinished EUR 1,000 areas structures equipment assets acquisi-tions Total Acquisition cost 1 Jan. 2009 29,815 63,582 166,998 201,328 18,725 480,447 Increases 3,240 1,209 29,749 19,803 54,001 Increases, M&A 510 2,547 16,093 749 34 19,932 Decreases –238 –2,069 –6,794 –2,010 –11,110 Transfers between items 7,590 25,746 –33,337 0 Acquisition cost 31 Dec. 2009 33,327 72,859 206,047 225,813 5,225 543,271

Accrued depreciation 1 Jan. 2009 –58 –25,254 –95,688 –95,018 0 –216,018 Accrued depreciation on deductions and transfers 596 5,074 1,944 0 7,614 Accrued depreciation, M&A –895 –5,779 –109 –6,783 Depreciation for the period –2,488 –9,980 –9,591 0 –22,059 Impairments –24 –24 Accrued depreciation –81 –28,041 –106,373 –102,774 –237,270 31 Dec. 2009

Book value 31.12.2009 33,246 44,818 99,673 123,039 5,225 306,001

14. Investments Shares in Shares in Group affiliate Other stocks EUR 1,000 companies companies and shares Total Acquisition cost 1 Jan. 2010 137,853 1,248 12,323 151,424 Increases 5,500 5,500 Decreases M&A –142 –392 –534 Decreases 0 Book value 31 Dec. 2010 143,353 1,106 11,931 156,390

Shares in Shares in Group affiliate Other stocks EUR 1,000 companies companies and shares Total Acquisition cost 1 Jan. 2009 137,064 1,248 12,371 150,683 Increases 3,790 3,790 Decreases M&A –3,001 –3,001 Decreases –48 –48 Book value 31 Dec. 2009 137,853 1,248 12,323 151,424 Vapo’s Annual Report 2010 83 Notes to the parent company profit and loss statements

15. Inventories

EUR 1,000 2010 2009 Materials and supplies 21,943 16,210 Finished products 68,788 76,445 Advance payments for inventories 2,198 2,806 Inventories total 92,929 95,461

16. Long-term receivables

EUR 1,000 2010 2009 Receivables from Group companies Loan receivables 88,608 58,063 Loan receivables from others 3,183 3,183 Total 91,791 61,246

17. Short-term receivables

EUR 1,000 2,010 2009 Receivables from Group companies Sales receivables 6,309 3,990 Loan receivables 70,063 83,002 Receivables carried forward 246 730 Receivables from affiliate companies Sales receivables 684 454 Receivables from others Sales receivables 52,377 44,897 Loan receivables 199 185 Receivables carried forward 5,957 7,701 Other receivables 193 5,721 Total 136,029 146,678

Receivables carried forward Allocated taxes 1,387 1,866 Other sales receivables carried forward 3,547 5,649 Other expense receivables carried forward 1,023 186 Total 5,957 7,701

18. Shareholders’ equity

EUR 1,000 2010 2009 Retained earnings 1 Jan. 168,033 167,744 Dividend distribution –12,000 –14,310 Profit for the period 13,899 14,600 Retained earnings 31 Dec. 169,933 168,033

Calculation of distributable assets Distributable asset fund 30,096 30,096 Retained earnings 169,933 168,033 Distributable assets 200,029 198,130

84 Vapo’s Annual Report 2010 Notes to the parent company profit and loss statements

19. Obligatory reserves

EUR 1,000 2010 2009 Environmental obligation reserve 3,860 3,660 Total 3,860 3,660

Imputed unrecorded tax receivable for reserves 1,004 952 Imputed unrecorded tax liability for appropriation 19,582 18,134

20. Long-term liabilities

EUR 1,000 2010 2009 Loans from financial institutions 280,117 228,277 Pension loans 2,990 4,720 Joining fees 6,924 6,918 Advances received 3,214 3,732 Total 293,245 243,646

Repayment scheme for long-term interest-bearing debts EUR 1,000 2011 2012 2013 2014 2015 2016– Total Bank and pension loans 25,472 62,423 71,548 55,960 90,254 3,024 308,680

21. Short-term liabilities

EUR 1,000 2010 2009 Loans from financial institutions 23,821 45,342 Pension loans 1,730 1,730 Advances received 12,300 17,746 Accounts payable 21,661 18,080 Debts to Group companies Accounts payable 1,988 2,112 Other debts 3,753 18,643 Accrued expenses and deferred income 24 499 Debts to affiliate companies Accounts payable 66 Other debts 168 853 Other debts 117,060 87,577 Accrued expenses and deferred income 8,480 12,085 Total 190,985 204,732

Significant items included in accrued expenses and deferred income EUR 1,000 2010 2009 Allocated personnel expenses 3,547 5,600 Allocated interest expenses 1,238 1,599 Accrued expenses 3,694 4,885 Deferred income 1 1 Total 8,480 12,085

Vapo’s Annual Report 2010 85 Notes to the parent company profit and loss statements

22. Contingent liabilities

EUR 1,000 2010 2009 Other securities given on own behalf Guarantees 15,350 13,082 Pledges given 3 3 Total 15,353 13,085

Contingent liabilities on behalf of Group companies Guarantees 5,517 4,742 Other contingent liabilities 0 0 Total 5,517 4,742

Other contingent liabilities Derivative contracts 310,051 265,197

Guarantees given on behalf of others Guarantees 3,113 3,200

Other rent liabilities Rent liabilities due within a year 5,297 5,204 Rent liabilities due within 1–5 years 15,847 16,084 Rent liabilities due at a later date 4,339 7,908 Total 25,483 29,196

Other financial liabilities The company is obligated to revise VAT deductions from completed property investments if the taxable use of the property is reduced during the auditing period.

Maximum liability Last EUR 1,000 revision year Investment completed 2006 304 2010 Investment completed 2007 75 2011 Investment completed 2008 1,402 2017 Investment completed 2009 1,614 2018 Investment completed 2010 39 2019 Total 3,434

86 Vapo’s Annual Report 2010 Group key figures 2006–2010, IFRS

IFRS IFRS IFRS IFRS IFRS EUR million 2006 2007 2008 2009 2010 Turnover 600.9 660.6 631.8 573.7 719.5 Growth % 14.7 9.9 –4.4 –9.2 25.4 Operating profit 53.8 55.5 21.1 38.0 39.1 % of turnover 9.0 8.4 3.3 6.6 5.4 Net financing items –5.2 –7.3 –21.7 –9.4 0.8 Profit before tax 49.2 48.4 –1.4 28.6 40.2 % of turnover 8.2 7.3 –0.2 5.0 5.6 Taxes –13.2 –13.8 3.8 –7.1 10.1 Profit for the period 34.6 34.0 2.4 21.5 30.1 Dividend distribution 17.0 17.0 14.3 12.0 15.0 Balance sheet total 699.7 788.4 761.3 847.8 922.7 Interest-bearing debts 235.9 313.7 317.9 370.0 422.2 Return on investment % 10.8 9.9 3.6 7.0 9.5 Return on equity % 11.5 10.4 0.7 6.7 8.9 Liquidity (current ratio) 1.2 1.4 1.3 1.3 1.5 Equity ratio % 47.3 43.5 42.4 39.5 38.3 Net debt/equity ratio % 71.8 90.4 97.8 111.6 119.5 Gross investments 69.1 111.6 83.8 80.9 80.9 % of turnover 11.5 16.9 13.3 14.1 11.2 Average number of personnel 1,891 1,828 1,780 1,451 1,333 Key figures per share Number of shares 30,000 30,000 30,000 30,000 30,000 Earnings/share, EUR 1,153.41 1,133.07 49.79 688.61 966.44 Shareholders’ equity/share, EUR 10,610.44 11,137.97 10,447.16 10,739.81 11,430.89 Dividend/share, EUR 566.66 566.66 477.00 400.00 500.00 Dividend % of profit 49.1 50.0 593.6 55.9 49.9

Principles for calculating key figures

Result before taxes (IFRS) + interest and other financial expenses – exchange rate gain for liabilities Return on investment = x 100 Balance sheet total (average) – interest-free debts (average)

Profit before taxes (IFRS) – taxes Return on equity = x 100 (Shareholders’ equity + non-controlling shareholders) on average

Short-term assets Liquidity = Short-term debts

Shareholders’ equity + non-controlling shareholders Solvency ratio = x 100 Balance sheet total – advances received

Interest-bearing net debts = Interest-bearing debts – interest-bearing receivables – cash funds

Interest-bearing net debts Net debt/equity ratio = x 100 Shareholders’ equity + non-controlling shareholders

Vapo’s Annual Report 2010 87 Board of Directors’ proposal for the allocation of profits

Vapo Oy’s distributable funds are EUR 200,029,108.98, of which the profit for the accounting period is EUR 13,899,330.04.

The Board of Directors proposes to the shareholders’ meeting that the distributable funds be allocated as follows:

– distributed as EUR 500.00 dividend per share, total EUR 15,000,000.00 – remaining as shareholders’ equity EUR 185,029,108.98 EUR 200,029,108.98

Signatures

Vantaa 18 February 2011 Vapo Oy’s Board of Directors

Juho Lipsanen Perttu Rinta Chairman Deputy Chairman

Marja-Leena Rinkineva Katariina Simola

Risto Kantola Hannu Linna

Matti Hilli Managing Director

Auditors’ statement

We have provided a report on a completed audit of the profit and loss statements on this date.

Vantaa 17 February 2011

DELOITTE & TOUCHE OY Authorised Public Accountants

Tapani Vuopala, APA

88 Vapo’s Annual Report 2010 Auditor’s report

To the Annual General Meeting of Vapo Oy assessments, the auditor considers internal control relevant We have audited the accounting records, the financial state- to the entity’s preparation of financial statements and the ments, the report of the Board of Directors, and the adminis- report of the Board of Directors that give a true and fair view tration of Vapo Oy for the financial period 1.1.–31.12.2010. in order to design audit procedures that are appropriate in The financial statements comprise of the consolidated state- the circumstances, but not for the purpose of expressing an ment of comprehensive income, balance sheet, statement opinion on the effectiveness of the company’s internal con- of changes in equity, cash flow statement and notes to the trol. An audit also includes evaluating the appropriateness of consolidated financial statements, as well as the parent com- accounting policies used and the reasonableness of account- pany’s income statement, balance sheet, cash flow statement ing estimates made by management, as well as evaluating and notes to the financial statements. the overall presentation of the financial statements and the report of the Board of Directors. Responsibility of the Supervisory Board, Board We believe that the audit evidence we have obtained is of Directors and the Managing Director sufficient and appropriate to provide a basis for our audit The responsibility of the Supervisory Board is to supervise the opinion. company’s administration by the Board of Directors and the Managing Director. The Board of Directors and the Managing Opinion on the consolidated financial statements Director are responsible for the preparation of consolidated In our opinion, the consolidated financial statements give financial statements that give a true and fair view in accord- a true and fair view of the financial position, financial per- ance with International Financial Reporting Standards (IFRS) formance, and cash flows of the group in accordance with as adopted by the EU, as well as for the preparation of finan- International Financial Reporting Standards (IFRS) as adopted cial statements and the report of the Board of Directors that by the EU. give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements Opinion on the company’s financial statements and the report of the Board of Directors in Finland. The Board and the report of the Board of Directors of Directors is responsible for the appropriate arrangement In our opinion, the financial statements and the report of of the control of the company’s accounts and finances, and the Board of Directors give a true and fair view of both the the Managing Director shall see to it that the accounts of the consolidated and the parent company’s financial perform- company are in compliance with the law and that its financial ance and financial position in accordance with the laws and affairs have been arranged in a reliable manner. regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. Auditor’s Responsibility The information in the report of the Board of Directors is Our responsibility is to express an opinion on the financial consistent with the information in the financial statements. statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. The Other opinions Auditing Act requires that we comply with the requirements We support that the financial statements should be adopted. of professional ethics. We conducted our audit in accordance The proposal by the Board of Directors regarding the treat- with good auditing practice in Finland. Good auditing prac- ment of distributable funds is in compliance with the Limited tice requires that we plan and perform the audit to obtain Liability Companies Act. We support that the Supervisory reasonable assurance about whether the financial statements Board, Board of Directors of the parent company and the the report of the Board of Directors are free from material Managing Director should be discharged from liability for the misstatement, and whether the members of the Supervisory financial period audited by us. Board, Board of Directors of the parent company and the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or Vantaa, 17 February 2011 have violated the Limited Liability Companies Act or the articles of association of the company. Deloitte & Touche Oy An audit involves performing procedures to obtain audit Authorized Public Audit Firm evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. The procedures selected depend on the auditor’s judgment, Tapani Vuopala including the assessment of the risks of material misstate- Authorized Public Accountant ment, whether due to fraud or error. In making those risk

Vapo’s Annual Report 2010 89 Vapo Oy P .O . Box 22, 40101 Jyväskylä Yrjönkatu 42 FI-40100 Jyväskylä Tel: +358 20 790 4000 Fax: +358 20 790 5601 e-mail: firstname .lastname@vapo fi. www .vapo .com