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Board of Directors´ Report

Board of Directors´ Report for the Financial Period 15 April-31 December 2016

The new Act on Metsähallitus entered into force on 15 April 2016. As a result, the former enterprise was terminated on 14 April 2016 and the new Metsähallitus enterprise, in compliance with the new Act, began operating on 15 April 2016. Due to the structural change resulting from the reform, the financial statements do not include comparative information on the previous year.

The financial period of Forestry Ltd, established in the process, was the same as that of the enterprise. All other subsidiaries provide financial statements for the period 1 January-31 December. These subsidiaries are included in the consolidated financial statements for the period 15 April-31 December 2016.

The key changes resulting from the new Act

Based on the new Act on Metsähallitus, Metsähallitus’ enterprise manages state-owned land and water property, which comprises about one third of Finland's total surface area. The Ministry of Agriculture and Forestry is responsible for the related ownership steering. In matters related to public duties, Metsähallitus is also steered by the Ministry of the Environment.

The enterprise engages in market-based business operations through its subsidiaries. Metsähallitus Group comprises the enterprise and subsidiaries. Property development, public administrative duties and Group operations are organised as part of the enterprise. Group operations and shared service units also form part of the enterprise. Public administrative duties form a separate unit within the enterprise.

The business was incorporated in order to ensure its competitive neutrality. The Forestry business was incorporated into Metsähallitus Forestry Ltd. This company does not own forests, but it has the right to engage in forestry in state-owned commercial and multiple-use forests, for an access right fee. Laatumaa, the property business unit within Metsähallitus, remains part of the enterprise. Laatumaa is responsible for property leasing, development, sales and purchases.

The state-owned land and water areas managed by Metsähallitus form an entity which is best managed within a single organisation. Metsähallitus' public administrative duties are also related to managing state-owned land and water assets. In the organisational reform, national parks, wilderness areas and other protected areas remained the responsibility of the unit in charge of public administrative duties. Game and fisheries management and the Director, Game and Fisheries, now play a stronger role in terms of their public administrative duties.

The organisational reform strengthened the Board of Directors' role in the management of the enterprise. The Board of Directors’ duties include steering and supervising Metsähallitus’ operations, and the strategic management, administration and appropriate organisation of Metsähallitus’ operations. In addition, in accordance with the new Act on Metsähallitus, natural resources plans are subject to approval by the Board. The coordination of land use objectives now plays a more prominent role in the work of the Board.

It has become increasingly important to manage Metsähallitus as a group and coordination is emphasised in the operational steering of all units. Activities supporting core activities, including systems, are implemented at Group level in order to improve the efficiency and quality of operations.

The opening balance sheet of the new enterprise was confirmed by the Finnish Parliament. Equity in the enterprise's balance sheet consists of basic capital and other equity.

The business is practised on the basis of the assets included in the basic equity, EUR 2,601.5 million in total.

Other equity is divided into two parts. For the management of its public administrative duties, Metsähallitus administers state-owned protected areas and wilderness areas, other areas assigned or acquired for conservation purposes, as well as other property necessary to executing its public administrative duties. This property is worth a total of EUR 977.0 million and is included in Metsähallitus’ other equity. In addition, other equity includes land and water areas which are not protected or exploited economically. They are recorded in the enterprise’s other equity, at a value of EUR 224.8 million. This part of other equity includes public water areas, among others.

The property was revalued in the opening balance sheet. The land and water property used by the business, i.e. basic equity, was valued at fair value. This raised the value of the land and water areas by EUR 90.1 million. The Government sets a yield requirement on basic equity used for business purposes. The annual dividend payment target is determined on the basis of this yield requirement. The dividend is paid from the operating profit.

Property included in other equity, used for the purposes of executing public administrative duties, was transferred to the new enterprise at book value.

The working capital of forestry operations, EUR 78.3 million in total, was transferred to the new Forestry company as a capital contribution. Related items were valued at book value. During the set up phase, the new company's equity ratio was 50 per cent.