2018ANNUAL REPORT

Positive energy.

Corporate governance

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CORPORATE GOVERNANCE

GOVERNING BODIES

BOARD OF DIRECTORS AND COMMITTEES

MANAGEMENT TEAM

MANAGEMENT

RISK MANAGEMENT

CORPORATE STRUCTURECaruna Networks Oy is the parent company of Caruna Networks Group (”Caruna”). The parent company of Caruna Networks Oy is Suomi Power BV, which has its domicile in the Netherlands. Caruna Networks Oy is the owner of the other two companies in the Group, Caruna Oy and Caruna Espoo Oy.

Until 31 December 2017, Caruna Networks Sähkönsiirto Oy and Caruna Networks Espoo Oy were also part of the Group. Caruna Networks Oy was the owner of Caruna Networks Sähkönsiirto Oy and Caruna Networks Espoo Oy, which in turn owned Caruna Oy and Caruna Espoo Oy.

On 1 January 2018, Caruna Networks Sähkönsiirto Oy and Caruna Networks Espoo Oy were merged into Caruna Networks Oy. The mergers did not impact Caruna’s customers or personnel in any way.

The corporate governance is based on Finnish law, Group companies’ arti-cles of association and the Central Chamber of Commerce’s good governance guidelines for unlisted companies.

The consolidated financial statements and interim reports are prepared in line with the International Financial Reporting Standards (IFRS) approved by the EU. The parent company’s annual report and financial statements have been prepared in line with the Finnish Companies Act, Accounting Act, and Finnish Accounting Board instructions and opinions.

The accounting statement covers both the consolidated financial state-ments and parent company financial statements.

Corporate governance

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The CEO is responsible for executive management. In decision making, the CEO is supported by Caruna’s Management Team. Internal auditors help to ensure that the Group’s operations remain effective and appropriate. They report to the Board and Audit Committee.

GENERAL MEETINGCaruna Networks Oy’s general meeting exercises the highest decision-making powers in the Group.

The Annual General Meeting appoints the members of the Board of Directors for a term of office commencing at the Annual General Meeting and ending at the next Annual General Meeting. Planning the composition of the Board of Directors involves taking into account Caruna’s current and future business needs and seeking to ensure the diversity of the Board in several aspects. Caruna’s Board members must have adequate experience and expertise that complement those of the other members. The members’ individual qualities are also emphasised.

The general meeting’s decisions usually require a simple majority. Such decisions include approving the financial statements, paying dividends, discharging the Board of Directors and the CEO from liability, electing the

Caruna Networks Oy governing bodies

Caruna Networks Oy’s governing bodies are the Annual General Meeting and Board of Directors. The Board of Directors’s three committees, the Audit Committee, the Nomination and Remuneration Committee, and the Health, Safety and Environment Committee, prepare the items debated by the Board and assist the Board in its decision-making.

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Board of Directors and the auditors and making decisions regarding their remuneration.

In accordance with the Limited Liability Companies Act and the articles of association, the general meeting is convened by the Board of Directors.

BOARD OF DIRECTORSCaruna’s Board of Directors is responsible for the Group’s strategic devel-opment and for monitoring and steering the Group’s business operations and governance. In accordance with the Limited Liability Companies Act and the articles of association, the Board of Directors is tasked with representing the Group and ensuring the oversight of accounting and financial manage-ment. The Board of Directors decides on Caruna’s values.

The Board has between one and ten ordinary members and it may have two deputy members. The Annual General Meeting elects the members for a term which ends at the next Annual General Meeting.

The Board convenes according to an agreed schedule to discuss matters assigned to it. The Board has approved the rules of procedure for its activities.

The CEO, the CFO and the Head of Governance and Risk Management, who also acts as the Board’s secretary, regularly attend Board meetings. Other Management Team members and directors of the Group attend the meetings by invitation.

COMMITTEES OF THE BOARD OF DIRECTORSCommittees under the Board are the Audit Committee, the Nomination and Remuneration Committee, and the Health, Safety and Environment Committee. The committees support the work of the Board by preparing and evaluating matters for decision-making by the Board.

Committee members are elected by the Board. Each committee must consist of three members. The members’ term of office ends after the conclusion of the next Annual General Meeting. All Board members have the right to attend committee meetings.

The committee’s chair regularly reports to the Board on the committee activities after each meeting. All Board members can access the committee meeting documents and agendas. The Board of Directors has approved the committees’ written rules of procedure. The rules are regularly reviewed and updated.

AUDIT COMMITTEEThe Audit Committee assists the Board of Directors in tasks related to financial reporting, risks and oversight. The Audit Committee oversees the financial reporting process and monitors the effectiveness of the Group’s internal auditing and risk management systems.

Caruna’s auditor, CEO, CFO and Head of Governance and Risk Management, who acts as the committee secretary, regularly attend the committee meet-ings. Other directors attend the meetings by invitation.

The Audit Committee approves the rules of procedure for the internal audit and the auditing plan. The committee also reviews the plan for the external auditing of the accounts and discusses the auditing plan, the Audit Reports and their effects.

NOMINATION AND REMUNERATION COMMITTEEThe Nomination and Remuneration Committee assists the Board of Directors in tasks related to the nominations and remuneration of the Group’s man-agement. The committee meetings are regularly attended by the CEO and the Head of Governance and Risk Management, who also acts as the committee secretary. The Head of HR attends the meetings by invitation.

HEALTH, SAFETY AND ENVIRONMENT COMMITTEEThe Health, Safety and Environment Committee assists the Board in decision making concerning the safety of operations, environmental issues and corporate responsibility. The committee approves the Group’s corporate responsibility programme and indicators.

The CEO, the Board member responsible for HSE matters, the HSE Manag-er and the Head of Governance and Risk Management, who also acts as the committee secretary, regularly attend the meetings.

Caruna’s Board of Directors is re-sponsible for the Group’s strategic development and for monitoring and steering the Group’s business operations and governance.

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MEMBERS OF THE BOARD OF DIRECTORSUp to the Annual General Meeting on 26 March 2018, the Board members were Juha Laaksonen (Chair) and members Kenton Bradbury, Jouni Grönroos, John Guccione, Gregor Kurth and Niall Mills. Tomas Pedraza and Delphine Voeltzel were deputy members.

The Board members elected at the Annual General Meeting of 26 March 2018 are Juha Laaksonen (Chair), Kenton Bradbury, Jouni Grönroos, John Guccione, Gregor Kurth and Niall Mills. Ellen Richardson and Delphine Voeltzel were elected as deputy members.

Kenton Bradbury announced his resignation from the Board of Directors on 15 November 2018. In an extraordinary general meeting on 15 November, Matt Liddle was elected to replace Kenton Bradbury on the Board for the remainder of the term.

The Board of Directors convened nine times in 2018.

AUDIT COMMITTEEFollowing the Annual General Meeting of 2018, Jouni Grönroos (Chair), Gregor Kurth and Delphine Voeltzel were elected to the Audit Committee.

The Audit Committee convened three times in 2018.

NOMINATION AND REMUNERATION COMMITTEEIn 2018, the Nomination and Remuneration Committee consisted of Juha Laaksonen (Chair), John Guccione and Niall Mills.

The Nomination and Remuneration Committee convened three times in 2018.

HEALTH, SAFETY AND ENVIRONMENT COMMITTEEIn 2018, the Health, Safety and Environment Committee consisted of Niall Mills (Chair), Kenton Bradbury and Gregor Kurth.

The Health, Safety and Environment Committee convened twice in 2018.

Board of Directors and committees in 2018

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Upper row from the left: John Guccione (Member), Ellen Richardson (Deputy Board Member), Juha Laaksonen (Chair) and Jouni Grönroos (Member). Lower row from the left: Niall Mills (Member) and Delphine Voeltzel (Deputy Board Member). Board Members Matt Liddle (from 15 November 2018) and Gregor Kurth are missing from the picture.

GOVERNING BODIESCORPORATE GOVERNANCE MANAGEMENT TEAM MANAGEMENT RISK MANAGEMENT

The Group’s CEO has been Tomi Yli-Kyyny as of 1 May 2017. The Management Team supports the CEO’s work. The Management Team

assists the CEO in achieving strategic and sustainable business objectives in a manner decided by the Board, prepares the Group’s business plans and decides on investment and business arrangements that fall within its remit.

Financial performance and the outcomes of the corporate responsibility programme are monitored by monthly reporting and reviewed monthly by the Management Team. The Group’s operational management includes extended quarterly business monitoring meetings. The extended Management Team in-cludes, in addition to the Management Team members, key persons appointed by the CEO, along with the elected representatives of Caruna’s employees and senior employees.

Each member of the Management Team is responsible for the operative implementation of the day-to-day business activities.

MEMBERS OF THE MANAGEMENT TEAMCaruna made three new Management Team appointments during the first six months of the year. Anne Pirilä started as Head of Communications and Public Affairs on 5 February 2018, and Kosti Rautiainen as Head of Electrical Networks Unit on 18 March 2018. In June, Caruna announced the launch of a new unit for Development and Innovation, to start on 1 September 2018. Elina Lehtomäki is in charge of the new unit. She stepped into her new role as Head of Development and Innovation and member of the Management Team on 15 June 2018. Management Team member, CFO Jyrki Tammivuori was appointed Deputy CEO at the beginning of January.

The Management Team consisted of CEO Tomi Yli-Kyyny, CFO and Deputy CEO Jyrki Tammivuori, Head of Electrical Network Unit Kosti Rautiainen (from 18 March 2018), Head of Customer Relations Katriina Kalavainen, Head of Governance, Compliance and Risks Harri Pynnä, Head of HR Tommi Saikkonen, Head of Communications and Public Affairs Anne Pirilä (from 5 February 2018) and Head of Development and Innovation Elina Lehtomäki (from 15 June 2018).

The role of the CEO is stipulated in the Limited Liability Companies Act. The CEO chairs the Management Team. In accordance with the Limited Liability Companies Act and the instructions and orders given by the Board, the CEO is responsible for the Group’s executive management. Under the Limited Liability Companies Act, the CEO is responsible for ensuring that the company’s accounts are in compliance with the law and its financial affairs have been arranged in a reliable manner.

Management Team

Financial perfor-mance and the outcomes of the corporate respon-sibility programme are monitored by monthly report-ing and reviewed monthly by the Management Team.

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TOMI YLI-KYYNYM.Sc. (Engineering), b. 1962 CEO

Background: besides experience in the energy sector, Yli-Kyyny has 20 years of experience in the insurance and banking sector.

Previous positions and other roles:2015– Member of the Board, Garantia Oy 2014– Member of the Board, Barona Oy 2011–2017 CEO, Vapo 2005–2010 CEO, Pohjola Vakuutus 2005–2006 CEO, Pohjola Group Oyj

KATRIINA KALAVAINENB.Sc. (Economics), b. 1970 Head of Customer Relations

Background: more than 20 years of experience in customer service management. Extensive experience both in the energy and telecom sectors.

Previous positions:2008–2013 Head of customer data management, Fortum Distribution 2008 Team manager, customer services, Fortum Distribution 2006–2008 Customer service manager, private customers and small companies, Elisa Oyj 2004–2005 Customer service manager, private customers and small businesses, Elisa Oyj

JYRKI TAMMIVUORIM.Sc. (Economics), b. 1971 CFO, Deputy CEO

Background: over 20 years’ experi-ence in financial roles.

Previous positions:2013–2014 acting CFO, Stora Enso Oyj 2008–2014 Group Treasurer, Stora Enso Oyj 1999–2008 Several posts at Stora Enso Oyj’s Brussels, London and Helsinki offices 2012–2015 Member of the Board, Tornator Oyj 2010–2012 Deputy member of the Board, Tornator Oyj 2009–2014 Member of the Board, Thiele Kaolin Company, GA USA

KOSTI RAUTIAINENM.Sc. (Tech), b.1977 Head of Electrical Network (as of March 2018)

Background: over 15 years of international experience in mana-gerial and executive positions in the energy sector.

Previous positions: 2017–2018 Executive Vice President, Maintpartner Group 2015–2017 Senior Vice President, Ekokem 2012–2015 Vice President Technology, Fortum India 2008–2012 Production Director, Fortum Heat 2003–2008 Multiple positions, e.g. Vattenfall, Wärtsilä

Management Team

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HARRI PYNNÄLL.M. b. 1956 Head of Governance, Compliance and Risks

Background: 20 years of experience in energy business and 12 years of experience in the banking sector.

Previous positions:1998–2013 General Counsel, Fortum Corporation 1994–1998 Industrial Counsellor, Ministry of Trade and Industry 1982–1994 Legal Counsel and Senior Vice President, Corporate and Invest-ment Banking, Union Bank of Finland

ANNE PIRILÄ M.Soc.Sc., b. 1963 Head of Communications and Public Affairs (as of February 2018)

Background: over 20 years of expe-rience in corporate communications

Previous positions:2011–2018 Communications Director, Finnish Forest Industries Federation 2007–2011 SVP, Corporate Communications and IR, Rautaruukki Corporation 2002–2007 VP, Communications and IR, Ahlstrom Corporation 2000–2002 Communications Manager, CapMan Oyj 1997–2000 Communications Consultant, Pohjoisranta

TOMMI SAIKKONENM.Sc. (Economics), b. 1966 Head of HR

Background: 10 years of experience in the electricity distribution busi-ness, 25 years in HR.

Previous positions:2008–2013 VP Human Resources, Fortum Distribution 2000–2008 HR Manager / HR Director, Nokia Ltd 1997–2000 HR Consultant / HR Manag-er, ICL Data Ltd

ELINA LEHTOMÄKIM.Sc. (Electrical Engineering), b.1974 Head of Development and Innovation (as of June 2018)

Background: almost 20 years of ex-perience in managerial, development and advisory positions in the energy and distribution business.

Previous positions: 2016–2018 Business Development Manager, Caruna 2013–2015 Head of Growth Invest-ments and Maintenance, Caruna 2010–2013 Head of Network Services, Fortum Distribution 1999–2010 Advisor, Electrical Network, Finnish Energy

Management Team

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CARUNA IS MANAGED ACCORDING TO STRATEGY AND VALUESWe have defined Caruna’s strategy and business goals on a Group-wide basis and shared them with the entire organisation.

Our operations are led by the CEO and Management Team, who are in charge of the execution of our long-term strategy. The Management Team sets goals for the business planning period and defines the focal areas and key projects for each year. Our three business units — Customer Relations, Electricity Networks, Development and Innovation — prepare their annual business plans on this basis. The results are monitored in view of the plans and goals on a monthly basis.

Finance, legal matters, strategic planning, regulation and ICT issues have been merged under the Company Services. Administration and risk manage-ment, communications and public relations and HR are led by their own heads of units. All unit heads are members of the Caruna Management Team and report directly to the CEO. The Management Team convenes twice a month.

The Management Team is supported by the Extended Management Team, which primarily acts as the steering group for strategic changes. The Extended Management Team comprises of all Management Team members, two employee representatives and key managers from the business units appointed by the CEO. The Extended Management Team convenes once per month.

GUIDELINES, POLICIES AND STANDARDS PROVIDE MANAGEMENT SUPPORTIn addition to laws and regulations, management is guided by our corporate values, own guidelines and policies (HR, risk management, asset management, finance, communications and health, safety and environment).

Caruna’s Code of Conduct lays the foundation for our way of work. It de-fines how we take care of Caruna’s assets, how we work together and treat each other and how we conduct the electricity distribution business.

The Code of Conduct applies to Caruna employees, managers and Board members. We also require that our contractors, service providers, sub-contractors and other contract partners comply with the Supplier Code of

The Management Team sets goals for the business planning period and defines the focal areas and key projects for each year.

Management

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TYÖNUMERO 10

CEO

ELECTRICAL NETWORK CUSTOMER RELATIONS

ADMINISTRATION AND RISK MANAGEMENT

HUMAN RESOURCES

DEVELOPMENT AND INNOVATION

COMMUNICATIONS AND PUBLIC RELATIONS

COMPANY SERVICES AND STRATEGIC PLANNING

Conduct. The basic premise is that everyone working for Caruna and for our contract partners observes a consistent code of conduct.

We apply the following standardised schemes: - ISO 55001:2014 Asset Management System - ISO 45001:2018 compliant Occupational Health and Safety Management System

- ISO 14001:2015 compliant, certified Environmental Management System

WE REGULARLY ASSESS OUR OPERATIONSOur Management Team, Extended Management Team and units regularly mon-itor our business and attainment of goals and report on them to the Board of Directors.

A set of company- and unit-specific performance indicators have been created for monitoring Caruna’s operations, including a range of targets down to the level of each individual. The operations are examined as a whole, and the indicators have been designed to exclude the possibility of partial op-timisation. Each employee’s performance is compared against the company’s strategic and business goals. The set of indicators also functions as a basis for our reward system. Our reward system applies to the entire personnel.

We evaluate the quality of management through yearly personnel surveys. We promote self-management and encourage employees to actively partici-pate in improving the working environment.

We are continuously improving our management system. In 2019, one of the executive management’s chosen key projects is the successful implementa-tion of the new organisational structure and operating model that came into effect in 2018.

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Risk management

Risk management is part of Caruna’s internal control system. We regularly assess the strategic, operative and financial risks facing the Group. Risk management strives to ensure that any risks affecting the Group’s business operations are identified, managed and monitored. The Group has taken out appropriate insurance policies that provide sufficient cover for its operations.

STRATEGIC RISKSStrategic risks include, among others, regulatory risk, that is, harmful and negative impacts on the regulatory environment, changes in the operating environment, and the availability of financing and competent resources.

Changes in the regulatory environmentIn the long term, operational risks often emerge as a result of changes in regulations but also, in the short term, from differing interpretations of reg-ulations and decisions. The Finnish regulatory environment can be considered stable. The current regulation period commenced at the beginning of 2016 and provides an 8-year, rather than a 4-year, perspective.Read more about Caruna’s regulatory environment.

Challenges in the operating environmentTo improve our operating environment and to meet challenges created by developing smart distribution networks and more, we started revising our strategy in 2017. The strategy revision continued in 2018 with actions such as renewal of our customer-facing web service. We also renewed our organisational management system to ensure the smooth progress of the new strategy and key projects implementing it.

We adopted a new operating model which comprises business development and an innovation unit. In the future, we will also invest in a competence development plan for our employees.

Availability of financingCaruna is improving its electricity network to guarantee reliable distribution. Network investments require financing, and thus the availability of financing for strategy implementation constitutes a risk factor. To ensure financing, we strive to communicate transparently and reliably with financial providers, to continuously monitor our refinancing needs and to maintain our credit rating.

Availability of competent resourcesThe management of HR risks and the identification of key competence areas is dependent on good management and supervision, based on the Group strategy and goals. It requires appropriate processes and tools, good cooperation between the various parties and evaluation that allows us to continuously improve operations.

OPERATIVE RISKSThe most significant risks to operations are related to exceptional weather conditions, supplier risk and safety. For example, exceptional weather condi-tions may affect the reliability of the supply and distribution network. The key method of preventing interruptions is to replace overhead lines with under-ground cables, forests management near overhead lines and development of remote network control.

Exceptional weather conditionsThe most significant operative risks relate to exceptional weather conditions, such as storms, heavy snowfall and exceptionally severe frosts, which can affect the security of supply in the distribution network. The key method of preventing

We ensure the continuity of our operations by actively identifying and managing risks. The strategy

revision continued in 2018 with actions such as renewal of our customer-facing web service.

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Our procurement model will ensure Caruna a favourable and sound position for competition in each of its network areas.

interruptions is to replace overhead lines with underground cables, forest management near overhead lines and development of remote network control.

We are also developing network structures so that, in case of a disturbance, the damaged part can be isolated from the rest of the network and the number of customers affected minimised. Careful prior planning enables adequate preparation, which is essential in case of a disturbance.Read more about reliability of supply and preparedness.

Supplier riskOur suppliers may, due to liquidation or other reasons, become unable to deliver commissioned network projects and services. Our procurement model will ensure Caruna a cost-effective and sound position for competition in each of its network areas.

A systematic management model for contractors and services allows us to become aware of any contractor-specific problems promptly, making it possible to step in and take necessary corrective actions without delay.Read more about supplier management.

Risks related to health, safety and the environmentThe management of health, safety and environmental (HSE) risks is integrat-ed in Caruna’s total risk management and dealt with in accordance with the company’s risk management principles.

Identification and assessment of HSE risks, along with the definition and monitoring of the measures to manage such risks, are part of work carried out by Caruna’s internal HSE working group. A comprehensive HSE risk as-sessment is carried out every year as part of the business planning process. The list of risks is revised monthly, and the changes in risks are reviewed quarterly, including an assessment of the level of risk and the status of measures. In the company-level risk matrix, the level of all identified HSE risks is given as low or moderate.Caruna’s safety risks include incidents such as subcontractor injuries and serious near misses. Subcontractors, who do not have a contractual relationship with Caruna, carry out a significant part of the work on site. The majority of their work is demanding and requires specific expertise.Read more about contractor safety and our HSE network.

The most significant environmental risk has been the risk of oil spills, especially in the class 1 groundwater areas. Caruna’s objective is to com-pletely eliminate this risk by the end of 2019 with the help of the groundwater pole-mounted transformer regeneration programme.Read more about environmental damage and our environmental goals.

FINANCIAL RISKSFinancial risks such as electricity price risk, interest rate, credit, currency, solvency and refinancing risks are presented in Note 18. Financial risk management of the financial statements.

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Caruna caruna.fi/en

Postal addressCaruna, P.O. Box 1,00068 Caruna

Visiting addressUpseerinkatu 2, 02600 Espoo