Annual Report Annual Report M-real is Europe’s leading primary fibre

2009 paperboard producer and a major paper supplier. M-real offers its customers innovative high-performance paperboards and papers for consumer packaging, communications and advertising end-uses. Annual Report Annual Report M-real is Europe’s leading primary fibre

2009 paperboard producer and a major paper supplier. M-real offers its customers innovative high-performance paperboards and papers for consumer packaging, communications and advertising end-uses. KEY FIGURES AND page 2 M-real YEAR 2009 IN BRIEF 4 Year 2009 in brief 6 Key figures 8 CEO’s review

Consumer02 Packaging 12 Office Papers 14 Speciality Papers 16 Market Pulp and Energy 18 page BUSINESS Operating environment 20 Raw materials 22 Managing environmental impacts 24 Energy and climate 26 Personnel 2810 FINANCIAL REPORT 2009 page

32 Report of the Board of Directors 2009 40 Consolidated financial statements 99 Parent company’s fnancial statements

30110 Corporate Governance Statement 118 Board of directors 120 Management team 128 Financial reporting 130 Contact details From forest to end user

Raw materials Production Products

M-real is committed to using wood raw M-real uses the best available techno- M-real’s production processes are based material from sustainably managed forests logy in its production units. The key on the economic use of resources and on in compliance with local legislation. The principles of production include conti- minimising the environmental impact of role of certified quality and environmental nuous improvement of operations and the products throughout their life cycle. systems is in part to control the origin of minimising environmental impacts; all Moreover, M-real’s products are safe wood: M-real can thereby know the exact production units use certified ISO 9001 for people and the environment alike. source of the wood it uses. In 2009, 69 per quality and ISO 14001 environmental The company’s core competence lies cent of wood raw material was certified, systems. M-real also continuously imp- in its profound knowledge of the pro- and M-real aims to further increase the roves its energy efficiency. A certified perties of different wood fibres and the share of certified wood in its products. energy efficiency system verified by a compatibility of pulps with specific end The safety of other raw materials, such third party was implemented in all pro- uses. The combination of continuous as chemicals, is also taken into account duction units by the end of 2009. M-real’s quality assurance with efficient and well- already in the product development phase. self-sufficiency in energy is about 77 per managed production helps to ensure a Moreover, M-real’s products can achieve cent and wood-based fuels account for 59 uniform quality of the products. In ad- the same stiffness and printability fea- per cent. M-real is also self-sufficient in dition, light boards and papers provide tures with less raw material compared pulp. M-real’s greenhouse gas emission savings throughout the value chain by to competing board and paper grades: reporting received significant recognition decreasing both transported amounts lightweight products are an essential when M-real was placed second in its field and waste. In spite of their lightness, the part of M-real’s product range. in the 2009 Nordic Carbon Disclosure performance and printability properties Leadership Index (CDLI). of the products remain excellent. Thanks to a streamlined product offering with clearer purposes of use, M-real is able to deliver products faster than before. The principles of simplicity and ease 2 guide all M-real operations.

FROM FOREST TO END USER Delivery chain Stakeholders The environment

Transportation volumes are high in the M-real provides its customers with added Board and paper are made of renewable forest industry, so an efficient and sustai- value through premium products spe- raw materials and are 100 per cent re- nable delivery chain requires a versatile cifically tailored for the purpose of use. cyclable. Recycled board and paper can and well-designed logistics network. The Lightweight products, for instance, offer be utilised at the end of its life cycle in significance of efficient logistics, good customers savings in transport costs, and energy production or as raw material for partners and functional traffic connec- their properties are of high quality along- products made of recycled fibre. Board is tions to competitiveness is everincrea- side their lightness. The uniform quality also suitable for composting. Recycling sing. M-real aims at fast deliveries that of the products also decreases wastage. board and paper reduces the environ- are as efficient as possible by utilising A simple product offering makes it easier mental impact. Lightweight products various means of transportation and for the customer to select the best pos- reduce the amount of waste further, as selecting the most appropriate means sible product for the use in question. In their manufacture requires less raw ma- of transportation for each occasion. The addition, M-real communicates about its terial. The raw material, i.e. wood, is best environmental impacts of transport are operations in an open and transparent used primarily for further refining instead reduced with efficient route planning, manner; for example, the environmental of as fuel wood, for instance. The carbon minimising transport distances, using impacts of operations can be viewed on footprint of M-real’s lightweight products the capacity of the vehicles as efficient- the Paper Profile product declarations is smaller compared to heavier grades ly as possible, and improving operating on the website as well as customer- and throughout the value chain, from the pro- models and guidelines. A constantly product-specific carbon footprint calcu- duction to the end of its life cycle. changing operating environment sets lations. M-real’s business is based on several international and local develop- responsible profit performance, which ment needs for the delivery chain. The sets the prerequisites for continuous- most important of these are related to ly developing operations in a way that the management of environmental im- benefits the customers, shareholders, pacts and maintaining and improving employees and partners. logistical performance. 3

FROM FOREST TO END USER Year 2009 in brief

JANUARY FEBRUARY MARCH APRIL MAY JUNE

January February March August

Statutory negotiations concerning M-real launched a new profit M-real repurchased from the M-real received EUR 190 million mill operations in Finland were improvement programme with an market its own EUR 400 million cash from an early repayment by begun. The target of the negotiations annual target of EUR 80 million. The senior floating rate notes with a Sappi of the vendor notes. was to prepare production full annual effect will be visible from total par value of approximately EUR temporarily for lower demand. 2011. A separate EUR 60 million 60 million. The loan matures on 15 programme to improve the 2009 December 2010. M-real’s associated company Oy cash flow was also launched. Metsä-Botnia Ab announced its plan to close its pulp mill in Kaskinen, Matti Mörsky was appointed Finland. M-real Corporation’s CFO. Mörsky started in the position in May 2009. Statutory negotiations at the Hallein mill, Austria, were initiated, M-real Zanders launched the new targeting to discontinue paper FSC-certified uncoated fine paper production at the end of April 2009. ZANTO.

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YEAR 2009 IN BRIEF JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

October November December The transaction regarding the new ownership structure of Metsä- M-real’s associated company, Oy M-real was the second best New internal profit improvement Botnia and the divestment of Metsä-Botnia Ab, and its owners, company in the materials sector in measures were announced. The Uruguayan operations was closed. M-real, Metsäliitto Cooperative the Carbon Disclosure Leadership planned actions are a permanent Closing of the transaction reduced and UPM-Kymmene Oyj, signed the Index (CDLI), Nordic Report 2009. closure of the Alizay pulp mill, master agreement regarding the CDLI highlights the companies that M-real’s net debt by about EUR 500 the closures of two speciality new ownership structure of Metsä- provided the most comprehensive million, including a EUR 300 million Botnia and the divestment of Metsä- response to the Carbon Disclosure paper machines in the Reflex mill, cash portion. Botnia’s Uruguayan operations Project (CDP) information request. an investment at Husum mill to The Energy Efficiency System to UPM. improve its energy efficiency and a new EUR 20 million internal profit (EES) was implemented in The profit improvement target for improvement programme covering M-real’s production units during the year 2009 was raised from EUR all M-real’s business areas. the year 2009. The EES provides 80 million to EUR 90 million mainly the foundation for the company’s resulting from a decrease in IT and A new three-year IT services systematic energy efficiency personnel costs. The target for the contract with Tieto Corporation cash flow improvement programme activities. was signed. The new contract will was increased from EUR 60 million M-real announced a partial early to EUR 80 million. become effective on 1 July 2010. The contract is expected to decrease redemption of EUR 250 million of The publisher of German annual IT costs by approximately its 2010 bond. The early redemption Standards chose the brand Zanders EUR 30 million from 2010 onwards. will reduce M-real’s net financing as brand of the century. costs in 2010 by approximately EUR Negotiations on the new 11 million. organisation at M-real Husum were completed. The number of personnel is to decrease to below 800.

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YEAR 2009 IN BRIEF Key figures

2009 2008 Change (%)

Sales, EUR million 2,432 3,236 -25 Operating result excl. non-recurring items, EUR million -150 -35 - % of sales -6.2 -1.1 Operating result, EUR million -267 -61 - % of sales -11.0 -1.9 Result from continuing operations before tax, EUR million -358 -204 - % of sales -14.7 -6.3 Result for the period, EUR million -354 -508

Return on capital employed, % -8.9 -1,3 Return on equity, % -28.6 -10.4 Interest-bearing net liabilities, EUR million 777 1,254 -38 Gearing ratio, % 153 152 Net gearing ratio, % 84 90 Equity ratio, % 29.6 30.8

Sales Operating result Return on capital employed EUR million EUR million %

4,000 50 2

0 0 3,000 -50 -2 -100 2,000 -4 -150 -6 -200 1,000 -250 -8

0 -300 -10 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

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KEY FIGURES 2009 2008 Change (%)

Earnings per share, EUR -1.09 -1.58 Earnings per share, from continuing operations, EUR -1.02 -0.55 Equity per share, EUR 2.79 4.05 -31 Dividend per share, EUR *) 0.00 0.00 Market capitalization 31 Dec., EUR million 517 232 -123

Gross capital expenditure, EUR million 73 128 -43 Gross capital expenditure, from continuing operations EUR million 73 105 -30 Cash flow arising from operating activities, EUR million 81 -97

Personnel 31 Dec. 4,903 6,546 -25 Personnel 31 Dec., from continuing operations 4,903 6,546 -25

*) Board of Directors proposes that no dividend is paid for 2009.

Operating result, excluding M-real cost structure* Sales breakdown non-recurring items, EUR million

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KEY FIGURES CEO’s review

Dear Reader, The starting point for M-real’s re-engineering was difficult. Major acquisitions implemented at the turn of the millennium increased the net debt to intolerable levels. Demand seemed to be satu- rated in many paper grades, and prices were on a declining trend. The acquired asset base was not in line with the best competitors. Moreover, the operating environment was soon after weakened materially by overcapacity, a strengthened euro and record high cost inflation.

People at M-real, however, have done a tremendous job coping with the challenges of the external business environment and creating a healthier and more focused structure for the company. Since 2006, we have improved internal efficiency and saved annual costs by more than EUR 400 million and reduced the operating net working capital by more than EUR 300 million. All development ac- tions have targeted more simplified structures and ways of operating. We have divested assets worth over EUR 2 billion and reduced the net debt to one-third of the 2006 level.

A consistent strategic target has been the concentration on and strengthening of the core business Consumer Packaging, today accounting for about half of the total annual sales. In early 2009 we attained European market leadership, based to a large extent on the new successful business concept LITE4U.

In December 2009, Metsä-Botnia’s divestment of the Uruguayan operations was completed as part of our strategic review. As a result of the divestment of the Graphic Papers business, euca- lyptus pulp was no longer an important raw material for us. In addition, the divestment significantly decreased our net debt and pulp surplus.

The paper industry strategic review continues targeting to take part in the restructuring and consolidation of the European un- coated fine and speciality paper business. Through these con- tinued strategic measures we aim to further reduce our net debt from the current level of about EUR 750 million. After structural improvements in our paper business we will be ready to exploit the Consumer Packaging growth potential in emerging markets, alone or together with selected local partners.

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CEO’S REVIEW The global economic recession that began in late 2008 hit our results severely. Operating rates dropped across the board by 15-20 per cent-units, resulting in major losses in the first half of 2009. In the second half of the year we saw a clear improvement. We have been especially happy to see a normalised demand for Consumer Packaging products and the improvement of their profitability to all-time high levels. Demand and the profitabil- ity of the paper and pulp business have also improved but not yet to the levels seen before the re- cession. In addition to the challenges related to the economic recession our 2009 profitability was weakened by adapting to the divestment of Graphic Papers. In additon, the closure of the Hallein mill and large production portfolio changes in Gohrsmühle weakened profitability.

We will start the year 2010 with clearly improved prospects. Consumer Packaging’s good perform- ance will become more visible in M-real’s figures, thanks to the restructuring that has progressed as planned. The overall demand situation has improved, and prices for pulp and board seem to be increasing. We are implementing another round of significant internal efficiency improvement measures, mainly concentrating on the paper business areas.

People at M-real have done excellent work and showed firm commitment to the company. I want to thank you all for your fine efforts. Special thanks must also go to our owners, customers and partners for good cooperation in 2009. M-real’s largest structural change is already behind us, and we can now place more emphasis on building on our strengths.

Mikko Helander

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CEO’S REVIEW page

BUSINESS 12page Consumer Packaging 12 Office Papers 14 Speciality Papers 16 Market Pulp and Energy 18 Operating environment 20 Raw materials 22 Managing environmental impacts 24 Energy and climate 26 Personnel 28

10 11 Consumer Packaging

During the report year, Consumer Packaging focused particularly on further development of the service concept, reorganisation of sales and completing the centralisation of customer service centres. In early 2009, production was adjusted to match the sharp temporary fall in demand.

The development of the service concept in the main mar- Markets kets continued with added sheeting capacity in Europe. Consumer Packaging is the world’s leading producer of The increase in sheeting in the market shortened prod- folding boxboard, coated white top liners and wallpaper uct delivery times considerably and improved customer base. Its main market is Europe. service. This sheeting capacity addition also increased The demand for all grades was low due to the global the delivery volumes of boards. During the report year recession during the first half of the year. The demand both customers and M-real enjoyed the benefits of the for folding boxboard picked up in the summer, even LITE4U concept launched in the previous year accord- exceeding expectations during the autumn. Folding ing to objectives, as the simplified range of lightweight boxboard price increases were announced during the Consumer Packaging products shortened delivery times, made it easier to latter half of the year, first in the United Kingdom, fol- is the world’s leading select the fit-for-purpose board, boosted production lowed by the rest of Europe. producer of innovative and improved profitability. The demand for white top liners, wallpaper base and premium folding The geographical division of responsibilities was papers for flexible packaging and labelling also picked boxboard, coated white abandoned in the reorganisation of sales operations by up during the latter half of the year, albeit slower than top liners and wallpaper dividing the cartonboards sales organisation by customer the demand for folding boxboard. White top liner prices base. The products type to multinational brand owners and converters and were increased in Europe in the autumn. are excellent for the local customers. The reorganisation aimed at a more The average delivery volumes were favourable dur- packaging of cosmetics, streamlined and simple operating model and increased ing the report year across all product types in spite of food products and resources for meeting the various needs of the customer the soft two quarters at the beginning of the year. confectioneries, for segments. Simultaneously, the sales organisation of Consumer Packaging aims at strengthening its mar- example. The business linerboards and speciality papers were renewed. ket leadership through organic growth in Europe. The area also offers versatile Centralising the customer service centres in five production is based on solid fibre expertise, proprietary packaging services in European cities, namely Maidenhead in the United Kingdom, BCTMP production and self-sufficiency in fibre. As the Asia. Brussels in Belgium, Frankfurt in Germany, Espoo in market leader in its field, Consumer Packaging is tar- Finland and Moscow in Russia, was completed during geting to further improve its profitability. Future growth the year. Centralisation of the customer service centres will not apply at the expense of profitability. improved customer service and strengthened M-real’s ability to operate in a challenging environment. Profitability trends During the first half of the year, production was Consumer Packaging’s operating result for 2009 was curtailed to match the sharp temporary fall in demand. improved by increased prices, the implementation of cost- Production was cut by approximately 20 per cent at all saving measures and the stronger US dollar against the mills during the first half of the year. euro. The most significant factor weakening the result Äänekoski mills reorganised their waste manage- was the general decline in demand as a result of the ment, starting on 1 June 2009. The reorganisation aims severe recession in the general economy. to improve the recovery of energy containing waste and utilising it at the Äänevoima power plant and to reduce Outlook the amount of mixed waste going to landfill as well as The need for price increases continues across all prod-

the CO2 emissions. uct types in 2010, as the previously implemented price increases do not cover the record-high cost inflation in 2006–2008. While the prices of raw materials, energy and transport did decrease slightly during 2009, they still remain at a record-high level.

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CONSUMER PACKAGING The demand for all product types is expected to weight boards is excellent. According to the tests, the Products and services increase in 2010. Demand for primary fibre-based pa- compression strength of M-real’s lightweight boards is Cartonboards perboard packaging made of renewable raw material at least as good as the compression strength of com- Carta Integra that can be recycled fully or used as a source of energy peting heavier products. Carta Elega at the end of its life cycle is expected to grow, particu- The studies also investigated the impact of the Carta Solida Avanta Prima larly compared to packaging made of non-renewable shapes, colours and functionality of the packaging, Simcote raw materials, such as plastic. The entire Consumer such as its easiness to open, its attractiveness and Tako Packaging’s production process involves primary fibre, user-friendliness. The results indicate that packaging Graphic boards so it does not contain any potential contaminants that is an essential part of the product and it should com- Carta Integra might be present in recycled fibre. municate the properties of the brand. Carta Elega Costs, such as the prices of pulp, oil-based raw ma- The research shows that the carbon footprint of Carta Solida terials, transport and wood, are expected to increase boards decreases in proportion to decreased grammage. Coated and uncoated white-top slightly in 2010. Cartons made of M-real’s light boards have been proved liners to have a smaller carbon footprint than heavier boards Kemiart throughout the value chain, from the manufacture of CASE the product to the end of its life cycle. Flexible packaging and Efficiency throughout the value chain labeling Simcastor Consumer Packaging is implementing an extensive Efficient Packaging research programme studying the Wallpaper base impact of high performance lightweight boards on the Cresta efficiency of the entire package chain. Lightweight board Integrated Brand Packaging provides both cost benefits to actors in the package chain services (IBP) and reduces environmental impacts, as the production of lightweight boards uses less raw materials, transport weights are lower and they generate less waste. The studies concentrated on box compression prop- erties, consumer perception of the package and the dis- tinctiveness compared to competing packages, as well as the environmental impacts and carbon footprint of the packaging with boards of different weights. Due to the high box compression strength the stiff- ness and stackability of cartons made of M-real’s light-

Largest Folding Boxboard Key figures Producers in Europe 2009 2008 Change (%) M-real 32% Sales, EUR million 968 1,061 -9 EBITDA, EUR million 140 108 30 Stora Enso 25% EBITDA, excl. non-recurring items, EUR million 146 109 34 Mayr-Meinhof 10% Operating result, EUR million 51 24 Operating result, % 5.3 2.3 Careo 9% Operating result, excl. non-recurring items EUR million 69 29 Operating result, exc. non-recurring items, % 7.1 2.7 International 8% Paper Return on capital employed, % 7.5 3.2 0 200 400 600 800 Return on capital employed, excl. non-recurring items, % 10.2 3.8 Capacity, 1,000 tonnes per annum Deliveries, 1,000 tonnes 1,212 1,345 -10 Source: Pöyry, M-real Production, 1,000 tonnes 1,232 1,336 -8 Personnel, average 1,575 1,664 -5 13

CONSUMER PACKAGING Office Papers

The change in the Alizay paper mill production succeeded according to plan, and the mill will increasingly focus on recycled fibre-based copy papers. The renewal of Husum pulp mill’s recovery boilers brought considerable improvements to energy efficiency.

The recovery of heat at the Husum pulp mill was im- However, the drop in demand for uncoated fine pa- proved and energy production was made more efficient per stabilised, and the decrease in prices levelled off by renewing two and closing down one of the three re- during the second half of 2009. covery boilers of the mill. The overhaul will be completed During the report year, operating rates of the un- during the second quarter of 2010. The renewal of the coated fine paper machines were approximately 90 recovery boiler increases the efficiency of production, per cent. The closing down of the New Thames mill lowers emissions and makes it possible to increase and transfer of production to the Alizay mill improved electricity production. the operating rates. During the report year, an extensive change in the Office Papers produces, production was carried out at the Alizay paper mill, with Profitability trends markets and sells the mill focusing on a strongly growing product segment, Office Papers’ result for 2009 was weakened by a de- premium uncoated fine recycled fibre-based copy papers. At the beginning of crease in average selling prices and softened demand papers to companies 2010, recycled fibre-based papers already accounted for the products as a result of the recession in the in the office supplies for approximately half of the mill’s production. The general economy. The result was improved by lower industry, office machine change in production was implemented according to raw material costs and the implemented cost-saving manufacturers and schedule, and the mill’s production normalised during measures. paper wholesalers. the second half of the year. In future, production of the Office Papers’ products Alizay paper mill will be increasingly focused to recycled Outlook are excellent for printing, fibre-based papers. Prices of uncoated fine paper are expected to increase copying, forms and In December 2009, a plan to permanently shut down gradually. A revival in the demand for uncoated fine envelopes. the Alizay pulp mill was published. The pulp mill has paper is the prerequisite for price increases. Raw ma- been temporarily shut down since March 2009. The terial, energy and transport costs are expected to in- need for chemical pulp in paper production has thus crease only slightly. clearly decreased, because the production of recycled The industry for uncoated fine paper in Europe fibre based office papers has increased since late 2008. continues to be very fragmented. Even though capac- The negotiations with employees on the possible clo- ity has been reduced in the past years, the overcapacity sure of Alizay’s pulp mill will be completed by the end problem still exists. of July 2010 at the latest. The demand for uncoated fine paper follows the revival of the economy. Uncertainty concerning how de- Markets mand will pick up further increases the need to speed Office Papers is the fifth largest producer of uncoated up structural change and close down capacity. fine paper in Europe in terms of capacity, and its main market area is Europe. The demand for office paper continued to wane during the report year as the general economic situation deteriorated approximately 5–10 per cent depending on the product.

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OFFICE PAPERS CASE Products SAVE! – saves paper and the environment Data Copy Office Papers’ new, lighter-than-normal SAVE! office pa- Evolve per, weighting only 65 g/m2, reduces the environmental Logic load and saves on printing costs. The lightness of SAVE! Modo Papers has been achieved by using special pulp as the main SAVE! raw material. As a result, the stiffness and thickness of the paper and the quality of printouts are at least equal to those of normal office paper varieties. SAVE! reduces environmental impacts throughout its life cycle. Less material is used in the paper manufac- turing thanks to the special pulp, and correspondingly, a lighter paper means less waste at the end of the life cycle. The paper can be recycled and used as raw ma- terial for products made from recycled fibres. SAVE! office paper is excellent for black & white and colour printing using both laser and inkjet print- ers. SAVE! is FSC-certified and produced at the Alizay mill in France.

Largest Uncoated Key figures Fine Paper Producers 2009 2008 Change (%) in Europe Sales, EUR million 543 804 -32 Portucel 14% EBITDA, EUR million 1 35 EBITDA, excl. non-recurring items, EUR million 8 37 Stora Enso 14% Operating result, EUR million -104 -53 Mondi 11% Operating result, % -19.1 -6.6 Operating result, excl. non-recurring items EUR million -48 -29 UPM-Kymmene 10% Operating result, exc. non-recurring items, % -8.8 -3.6 Return on capital employed, % -21.2 -7.4 M-real 9% Return on capital employed, excl. non-recurring items, % -9.8 -3.8 0 400 800 1200 1600 Deliveries, 1,000 tonnes 790 1,081 -27 Capacity, 1,000 tonnes per annum Production, 1,000 tonnes 795 905 -12 Source: Pöyry, M-real Personnel, average 1,424 1,561 -9 15

OFFICE PAPERS Speciality Papers

As part of renewing the product strategy, Speciality Papers expanded its product range with uncoated fine papers as well as label and packaging papers. The production of standard coated fine papers in the Gohrsmühle mill was discontinued at the end of April 2009. Furthermore, the Hallein paper mill was closed in April. In December, a plan to close two speciality paper machines in the Reflex mill in 2010 was announced.

In summer 2009, Speciality Papers introduced the most Markets extensive label and packaging paper product range on Speciality Papers is a leading producer of speciality the market. The offering was expanded by the launch papers in Europe. of a double coated label paper, Zanlabel, from the The market situation in label and packaging pa- Gohrsmühle mill. Later in the autumn, the special- pers remained relatively stable during the report year ity paper sales organisations of the Gohrsmühle and while demand decreased only slightly due to the weak Simpele mills were merged, and the sales responsi- macroeconomic situation. Prices of speciality papers in bility for the Simcastor label and flexible packaging general remained stable during the report year. Speciality Papers is grades from Simpele was transferred to the Speciality Demand for uncoated fine paper declined as demand a leading producer of Papers business area. The production of uncoated fine in the printing industry softened due to the weak macr- speciality papers in papers was expanded, and the product range includes oeconomic situation. The prices of uncoated fine paper Europe. Its product the heaviest grammages. decreased by approximately 10 per cent in 2009. range includes cast According to the announcement in December 2009, The demand for carbonless papers fell considerably coated papers and Speciality Papers’ profitability will be further improved in 2009. There was also pressure to decrease prices. boards, label and by the planned closures of paper machines 1 and 5 in Carbonless paper capacity has been reduced in Europe packaging papers, the Reflex mill, accounting for 80,000 tonnes of annual during the report year, but the need for structural reor- carbonless papers, capacity and the streamlining of the organisations in both ganisation and further capacity closures remains. graphic speciality Gohrsmühle and Reflex mills. The production of carbon- papers, digital papers, less papers is to be transferred to the Gohrsmühle mill Profitability bookbinding materials and the finishing and converting will remain in the Reflex Speciality Papers’ result was negatively impacted by and uncoated fine mill. Negotiations to implement the machine closures weakened demand due to the general economic reces- papers. and organisational changes began in January 2010. sion as well as the costs associated with the discontinu- Implementation of the planned measures is planned ation of standard coated fine paper production, which to occur by the end of June 2010. The product range accounted for approximately half of the losses in 2009. remained the same. The result was improved by higher average selling prices The Gohrsmühle mill optimised the operation of the and implemented cost-saving measures. old electrostatic precipitator for boilers 2 and 3 to reduce dust emissions in December 2009. They also installed a Outlook

new oil burner at boiler 4 to reduce NOx emissions. The need for price increases in all product types re- The Reflex mill improved their environment man- mains in 2010. agement systems by implementing a database for all The demand for speciality papers follows the recov- German laws and regulations plus respective environ- ery of the economy, and as the overall economic situa- mental permits, obligations and responsibilities within tion revives, demand is expected to improve. Structural the organisation. change in the industry is likely to continue. The most excess capacity exists in carbonless pa- pers, and demand will continue to decrease gradually in spite of the trends of the general economy. There is also excess market capacity in uncoated fine papers in Europe due to new capacity in the market and de- creased demand due to the weakened macroeconomic situation.

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SPECIALITY PAPERS CASE Products New sales team Packaging and labelling papers M-real Speciality Papers and M-real Simpele Paper CHROMOLUX sales organisations were integrated in October 2009. ZANDERS TREVI The focus of the new Speciality Papers sales team is to Zanlabel become the leading market player in the core market Graphic papers and boards sectors of wet glue labels, flexible packaging, carbon- CHROMOLUX less papers, self adhesive and cast coated graphical ZANDERS Efalin papers and boards in Europe. Customers will benefit ZANDERS Elephanthide from the most extensive speciality paper product range ZANDERS Estralin ZANDERS medley on the market, from cast coated, double coated, single ZANDERS Spectral coated, uncoated label and packaging papers, as well ZANDERS T2000 as special metalised and coloured papers and boards. ZANDERS ZETA ZANTO M-real Speciality Papers can also offer tailor-made solutions to customers adding new value to graphi- Office communications cal, label and packaging applications by using various ZANDERS autocopy coating technologies. ZANDERS Bankpost ZANDERS Classic ZANDERS Gohrsmühle ZANDERS medley ZANDERS Reflex Special ZANDERS ZETA

Digital printing Silver digital Silver image laser ZANDERS REFLEXION

Key figures 2009 2008 Change (%) Sales, EUR million 352 622 -43 EBITDA, EUR million -65 45 EBITDA, excl. non-recurring items, EUR million -31 23 Operating result, EUR million -151 -59 Operating result, % -42.9 -9.5 Operating result, excl. non-recurring items EUR million -51 -15 Operating result, excl. non-recurring items, % -14.4 -2.4 Return on capital employed, % -62.1 -14.3 Return on capital employed, excl. non-recurring items, % -20.3 -3.4 Deliveries, 1,000 tonnes 342 680 -50 Production, 1,000 tonnes 319 705 -55 Personnel, average 1,733 2,016 -14 17

SPECIALITY PAPERS Market Pulp and Energy

The investments made in the Husum and Hallein pulp mills will improve their competitiveness in the gradually reviving pulp market. The new cooperation models adopted along with the structural change benefit M-real, customers and partners.

Market pulp deliveries increased in 2009 as an increasing Profitability trends share of the production of the Hallein pulp mill and the Market Pulp and Energy’s result for 2009 was weakened Kaskinen BCTMP mill was begun to be sold to external by the lower selling price of pulp and the production customers. The business area also coordinates the sales curtailments of pulp mills due to low demand attribut- of the market pulp share of the Husum pulp mill. able to the recession in the general economy. The result The new sheeting and baling line of the Hallein pulp was improved by lower wood costs. mill was completed in October 2009. The condensate tail turbine of the mill uses steam to generate green Outlook electricity that is sold to the market. The wood-based Market Pulp and Energy The pulp price outlook depends particularly on paper electricity sold in 2009 amounted to approximately 35 is responsible for selling demand trends. The increase in the price of pulp that MWh. The renewal of the recovery boiler of the Husum M-real’s market pulp continued until the end of 2009 has mainly been due to pulp mill during the autumn of 2009 considerably im- and energy to external the closing down of capacity and stocking up of invento- proved the mill’s energy efficiency and increased its parties and coordinating ries. It seems likely that the increase in the price of pulp production capacity. measures that aim at will stop and settle at a more stable level in 2010. improving the energy The demand for both short and long fibre pulp is efficiency of all M-real Markets expected to increase compared to 2009. With regard The price of market pulp continued falling until the production plants. to short fibre, the demand will be met by new capacity turn of April-May, after which the price was in a steady The business area entering the market. No new capacity is expected in increase for the rest of the year. Pulp stock levels have coordinates contract terms of long fibre pulp. However, temporarily closed- been very low in general. One of the reasons for the manufacturing issues down capacity might be brought back into operation pulp market becoming tighter was the closing down of between M-real and during 2010. pulp capacity around the world. The strengthening of Sappi and is also the euro weakened the impact of the US dollar-based responsible for the price increase in market pulp on profitability. parties’ cooperation The tax credits paid in North America for burn- related to pulp and ing black liquor impaired the competitiveness of the energy. European industry compared to US and Canadian pulp producers. The subsidy system encouraged to maintain production at an artificially high level, which resulted in a price pressure on pulp. The subsidy was discontinued at the end of 2009, thus some pulp capacity is expected to be closed in North America as a result. The demand for certified fibre has increased, and M-real mills have succeeded in increasing its levels to match the increased demand.

18

MARKET PULP AND ENERGY Products CASE Added value through cooperation Short fibre pulp In connection with the sale of the Graphic Papers Long fibre pulp business area, a subcontract based on a long-term BCTMP agreement unique in the paper industry was created, whereby Sappi will sell the products of the Äänekoski and Husum paper mills owned by M-real through its own sales network. The strategic partnership with Sappi has begun favourably. The arrangement is an example of the new operating models introduced by the structural change of the paper industry. Along with the cooperation, M-real products have obtained a strong and competent sales network. The arrangement provides Sappi with a strong foothold in the Nordic uncoated fine paper market and better connections to the Russian market, for instance. The cooperation with Metsä-Botnia was expanded during 2009. The responsibilities of the business area include more detailed forecasting of Metsä-Botnia’s pulp deliveries and coordination to M-real and Sappi mills. With the cooperation, M-real is able to benefit even more effectively from Metsä-Botnia’s strong market knowledge. M-real’s pulp volumes strengthen Metsä- Botnia’s volumes as the Uruguay pulp mill was trans- ferred to the ownership of UPM-Kymmene. In addition, tighter cooperation with Metsä-Botnia has considerably improved, e.g., the better coordination of maintenance shutdowns between pulp mills.

Key figures 2009 2008 Change (%) Sales, EUR million 508 644 -31 EBITDA, EUR million -21 148 EBITDA, excl. non-recurring items, EUR million -17 73 Operating result, EUR million -91 106 Operating result, % -17.9 16.5 Operating result, excl. non-recurring items, EUR million -54 32 Operating result, excl. non-recurring items, % -10.6 5 Return on capital employed, % -12.8 12.6 Return on capital employed, excl. non-recurring items, % -7.7 3.6 Deliveries, 1,000 tonnes 1,155 1,115 3.6

19

MARKET PULP AND ENERGY Operating environment

Demand decreased for board and paper due to the recession – the demand for board recovered quickly. Board is regarded as the product of the future. The softening of the demand for paper and board prod- M-real’s position as a supplier of folding boxboard has ucts as a result of the general economic recession strengthened during 2009, and the demand for its caused global changes in both production capacity and products returned to pre-recession levels towards the product inventory levels during the report year. These end of the year. changes have been necessary in order to effect a posi- The purpose of packaging is to provide added value tive development in pulp and board pricing. Business to products and their users. This is influenced by vari- efficiency improvements and reformed management of ous social phenomena such as the emphasis on peo- costs and capital have also supported the improvement ple’s need for individuality and improvement in living of the industry’s profitability in the long term. standards, urbanisation, ageing populations, increas- ing requirements for hygiene, strengthening of brand Board loyalty in, e.g., foodstuffs and beauty and well-being Global production of board totals nearly 50 million tonnes products, and increasing competition between product every year. The largest geographical board production brands. Environmental and economic objectives in board area is Asia. The annual consumption of board aver- packaging go naturally hand-in-hand. The increase in ages seven kilos per capita. Globally, board production the demand for fibre packaging is expected to remain decreased only slightly, even though capacity was shut solid also in the future. down both temporarily and permanently in North America and Europe. In Asia, on the other hand, both produc- Paper tion capacity and consumption continued to increase. Almost 150 million tonnes of paper is produced globally After the downturn at the end of 2008 and beginning of every year. Asia is the largest geographical paper pro- 2009, board consumption has gradually begun to grow duction area, and its significance is still growing. The in Europe and North America as well, and the growth annual global consumption of printing and writing paper is expected to continue. and newsprint totals 22 kilos per capita. Globally, the production of M-real’s main product, In Europe, the demand for paper decreased as a folding boxboard for consumer packaging, totals ap- result of the recession, as advertising decreased or proximately six million tonnes. The decrease in the moved to electronic channels. Demand improved to- demand for folding boxboard as a result of the reces- wards the end of the year, but pre-recession levels have sion was smaller than the decrease in paper demand. not been achieved at least by the end of 2009. Cuts in

Production capacities in Europe

Million tonnes/year Europe M-real M-real’s share (%) Folding boxboard 2.4 0.8 32 Uncoated fine paper 11.2 1.0 9

20 Source: M-real, Pöyry

OPERATING ENVIRONMENT paper production capacity and production curtailments have continued in Europe, but there is still excess ca- pacity in the paper market. The production capacity of uncoated fine paper in- creased in Europe in the autumn with a new machine of approximately half a million tonnes which, combined ”Board and paper products are made using with the recession, weakened the market balance and energy-efficient technology, and the final decreased prices. However, it seems that the downward trend in prices has ended, and signs of price increases products can be recycled several times.” possibilities began to emerge at the end of the year. The need to increase prices in order to improve profit- ability is significant. Demand for speciality papers decreased as a re- sult of the economic recession similarly to other pa- per grades. The situation improved towards the end of the year, but it has not yet reached the pre-recession level. The prices of speciality papers mainly remained stable during 2009.

Even though paper products, and to same extent board products, suffered due to the macroeconomically diffi- cult year, they are products of the future. Their main raw material is renewable and from sustainably managed forests. The products are made using energy-efficient technology, and the final products can be recycled se- veral times. At the end of their life cycle, they can also be utilised as a source of energy.

Folding boxboard market price Uncoated fine paper market in Europe, EUR/tonne price in Europe, EUR/tonne

1,000 1,000

900 900

800 800

700 700 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Source: Pöyry Source: FOEX 21

OPERATING ENVIRONMENT Premium products from sustainable raw materials

Due to the unique fibre characteristics, excellent perform- ment systems and an annually updated environmental ance properties are achieved with M-real’s lighter than programme. Wood procurement complies with local average boards and papers. This reduces the amount legislation and regulations issued by the authorities. of raw materials consumed, the environmental impact The same commitment is required from contractual of production and transportation, and the amount of partners. The wood procurement operations are un- waste produced. der continuous development and best practices are M-real is committed to using sustainable raw ma- always applied. terials in its production. The most important raw mate- In wood procurement, valuable plant and animal rial is wood grown in sustainably managed forests and habitats and other sites of importance in terms of forest obtained in a sustainable manner. M-real’s parent com- biodiversity or landscape values are protected. Metsäliitto pany Metsäliitto Cooperative is responsible for M-real’s regularly audits its wood suppliers as well as its own wood supply. The bulk of the wood raw material used by logging sites and the logging sites of its subcontractors M-real in Finland comes from the forests of the owner- to determine whether harvesting has been conducted members of Metsäliitto Cooperative. Other wood sup- in compliance with the licence conditions. At the same ply countries include Austria, Latvia, Lithuania, France, time, attention is paid to the quality of the management Sweden, Germany, Russia and Estonia. During the year of the forest environment and social dimensions such as under review, Metsäliitto delivered some 7.5 million cubic the training and occupational safety of employees. metres of wood to M-real’s mills (including 30 per cent M-real knows the origin of the wood it uses regard- to Metsä-Botnia’s mills until 8 December 2009). less of whether it is from certified forests or not, as ISO M-real is committed to promoting responsible quality and environmental management systems include forest management. All wood purchase agreements a wood origin tracking system. All M-real mills oper- include precise environmental specifications and cri- ate under a certified Chain-of-Custody system which teria. Forest regeneration measures are implemented enables them to verify the share of certified wood in in a habitat-protective manner once timber harvesting their products. M-real strives to launch more forest is completed. certification labelled products on the market in 2010. Wood procurement is governed by environmental Some 69 per cent of the wood used by M-real comes policy regarding wood supply and forestry, as well as from certified forests. the principles of corporate responsibility. Further up in During the year under review, M-real used approxi- the production chain, these policies and principles are mately 1.6 million tonnes of different pulps, of which 1.1 preserved through chain-of-custody certification pro- million tonnes were produced at the company’s own cedures, certified quality and environmental manage- mills. M-real’s share of Metsä-Botnia pulp was 0.9 mil-

Wood supply to M-real mills by procurement area

1 000 m3 2009 2008 Deliveries of certified wood to M-real mills in 2009 * Finland 3,488 5,043 Sweden 2,272 2,639 PEFC (%) FSC (%) Russia 563 1,246 France 133 1,066 Austria 78 0 Austria 524 870 Finland 80 3 Germany 0 460 France 65 0 Latvia 228 425 Sweden 29 19 Estonia 204 230 Lithuania 47 169 * Including 30 per cent of wood delivered to Metsä-Botnia mills until 8 Uruguay 0 118 December 2009. 22 7,459 12,266

RAW MATERIALS lion tonnes. Approximately 0.1 million tonnes of different Consumer Packaging is implementing an extensive pulps were purchased from external suppliers and 0.5 Efficient Packaging research programme studying the million tones were sold to external parties. impact of high performance lightweight boards on the M-real requires that its pulp suppliers operate in efficiency of the entire package chain. Lightweight board strict compliance with the law, and report annually both provides cost benefits to actors in the package chain on the origin of wood, forest certification and environ- and reduces environmental impacts, as the production mental data. of lightweight boards uses less raw material, transport weights are lower and they generate less waste. Product safety An extensive product mix development programme All raw materials used in M-real products are selected was implemented in the speciality paper business dur- based on the end use of the products. For example, in ing the review year. In addition, a new, non-woven type boards used for food packages, only raw materials ap- wallpaper base as well as a wet-strength label paper proved for this end use may be used. In that case, all were developed. In the Office Papers business area, a raw materials must be approved by the German Federal new, lighter-than-normal SAVE! office paper, weighting Institute for Risk Assessment (BfR) and the U.S. Food only 65 g/m2, was developed. It reduces the environ- and Drug Administration (FDA). M-real products have mental load and saves on printing costs. been tested as required by the relevant legislation A new chemical recovery system was successfully and recommendations; for example, the suitability of taken into operation in the Kaskinen bleached chemi- boards as toy materials is tested in accordance with the thermomechanical pulp mill. This development in- European EN 71-3 and EN 71-9 standards. creases M-real’s competitiveness in the field of CTMP A database is maintained on the most important technology. chemicals used in the production process. The database M-real participated actively during the review year contains environmental, health and safety information in research cooperation with Forestcluster Ltd and the and, for example, information on the registrations of the Futupack programme. These long-term programmes substances in compliance with REACH chemical regu- are aimed at creating capabilities for renewing existing lation. Work to implement the new European chemical business activities. regulation REACH (Regulation 1907/2006/EC) continued M-real’s R&D expenses were approximately EUR in 2009. M-real has gathered the required information on 7 million in 2009, representing around 0.3 per cent of the substances it manufactures for registration in 2010. sales. Board and paper are excluded from direct registration under REACH as they are regarded as “articles”. The substances to be registered are typically by-products and intermediate products of the process, such as tall oil formed in the manufacturing of pulp.

Research and development M-real focused its R&D activities on improving efficiency and renewing product portfolios in 2009. Efficiency im- provement projects were implemented mainly as mill projects, the objective of which was to achieve efficiency benefits as well as direct cost savings, particularly in raw materials and energy. During the report year, according to its objectives, both customers and M-real enjoyed the benefits of the LITE4U concept launched in the previous year, as the simplified range of lightweight products shortened de- livery times, made it easier to select the fit-for-purpose board, boosted production and improved profitability. 23

RAW MATERIALS Systematic management of environmental impacts

Minimising environmental impacts, continuous improve- M-real has reduced its emissions to air by intro- ment of operations, efficient use of raw materials and ducing low-sulphur fuels and by replacing fossil fuels open communication form the core of M-real’s environ- with wood-based fuels. These emissions include fuel- mental policy. M-real mills operate certified ISO 9001 derived sulphur and nitrogen oxides which can cause and ISO 14001 quality and environmental management water and soil acidification; carbon dioxide, the main systems that support the systematic improvement and driver of climate change; and particle emissions, which follow-up of operations. Several mills also utilise a cer- have a negative impact on air quality. tified occupational and product safety system. Mill waste levels have also been reduced through Several improvements that reduce environmen- efficient re-use of by-products and co-products. Waste tal load and risks were implemented in M-real’s mills sorting at mills and use as either raw material or for during 2009. The upgrades focused on making the use energy production reduces the need for landfill disposal. of raw materials, water and energy more efficient and For example, primary fibre, high-quality recycled fibre or reducing emissions to air. During 2009, all M-real mills both are used as raw materials for office paper produc- adopted a certified Energy Efficiency System (EES), tion, depending on its type. Packaging plastics, metals, which is a systematic management tool to cut energy paper and board are recycled. Process sludge and wood- consumption and carbon dioxide emissions. based waste are used as fuels if not used otherwise. For M-real reports openly on its environmental impacts example, the fibre sludge generated during the recovered through, e.g., mill-specific EMAS (Eco-Management and fibre deinking process is used in the building products Audit Scheme) reports. The climate impacts of individual industry and for energy production. Ash from the mill products are reported according to customer in carbon power plant is used in earthworks construction as an footprint calculations adopted in 2007. Product-specific alternative to gravel and other soil resources. Wood ash Paper Profile environmental product declarations have can also be used as a fertiliser. been published for all M-real products on the company’s website at www.m-real.com. The emissions and amounts Optimisation of transportation of waste produced by M-real mills are reported on page Transportation volumes and distances within the forest 126 of this Annual Report. industry can be considerable. The environmental im- pacts of logistics are reduced by making logistics more Emissions and waste efficient: products are transported in units as large as Industrial air, water and noise emissions have decreased possible, with the transports loaded as full as possible. continuously through the consistent application of Best During 2009, the utilisation rates of the mills were lower Available Techniques (BAT). Mill water cycles have been than before, which also reflected on the transport route closed, cleaning methods enhanced and incidental choices: it was not always possible to use established and emissions minimised. The amounts of harmful sub- proven routes in all cases. However, M-real’s logistics stances in wastewater from board and paper produc- favours the most efficient operating method possible. tion are reduced by more effective treatment processes, For example, in selecting new warehouses, those with reduced water consumption, personnel training for a rail connection are preferred. Logistics indicators and improved management of process disturbances, and reporting are continuously being improved, and further the reduction of incidental discharges. Highly effec- development of the environmental performance report- tive treatment processes have restricted the impact of ing is a key area. wastewater emissions within a limited area at the im- M-real uses road, rail and sea transport. Wood mediate point of discharge. The water consumption of represents the largest portion of all raw material de- production processes has been reduced continuously. liveries. Other significant product groups transported Work to close mill water systems even further is being include chemicals and fillers used in the manufactur- continued. The majority of mills are located in areas of ing of the products, pigments and finished board and plentiful water supply and therefore do not compete for paper products. Transport and warehouse functions water consumption with other uses, such as irrigation are largely outsourced. Besides cost efficiency, other of fields or drinking water. important criteria in the selection of logistics solutions and partners include quality, safety and environmental 24

MANAGEMENT OF ENVIRONMENTAL IMPACTS aspects. In terms of logistics, companies with a valid M-real follows Metsäliitto Group’s Code of Conduct, environmental certificate and policy (such as ISO 14001) which is designed to ensure Group-wide adherence to are preferred. approved practices and common ethical principles. The The decision of the International Maritime Organisation leading principles of the Code of Conduct include com- IMO to adopt new, lower emission limits for sulphur pliance with the principles of corporate responsibility,

(SO2) and nitrogen (NOx) oxides gradually as from 2010 performing one’s duties in the best possible manner, anti- results in new development challenges, particularly for corruption, open communications, appropriate action in maritime transport in the Baltic region and fuels. The case of conflicting interests, and fair competition. most significant change in the sulphur emission limits would take place in 2015 (lowering the current limit of 1.5 per cent to 0.1 per cent). It has been estimated that the associated cost effect on the forest industry will be extremely significant and also higher in Finland than other competing countries.

Responsible profitability M-real is committed to conducting its business in a responsible manner and promoting sustainable de- velopment through its business activities as well as to continuously improving its operations. The key values of the company – responsible profitability, reliability, co- operation and renewal – lay the foundation for M-real’s operations. M-real measures the financial, social and environmental impacts of operation. The results are reported on a regular basis to the Group’s sharehold- ers in the Annual Report, for instance. M-real has endorsed Metsäliitto Group’s Commitment to Corporate Responsibility, which it implements through its principles of corporate responsibility. The statement is based in part on the UN’s Global Compact initiative on responsible corporate citizenship. Through Metsäliitto Group, M-real is also an active member of the World Business Council for Sustainable Development (WBCSD). Themes of sustainable development central to M-real’s customers and other stakeholders include the legality of the wood raw material, wood origin manage- ment and forest certification, climate-related matters Environmental indicators such as carbon footprint, and matters of social respon- sibility. The management of environmental matters is Tonnes 2009 2008 based on M-real’s environmental policy which, in turn, Emissions to air Greenhouse effect, CO -eqv 952,462 1,199,262 is based on a continuous development of operations. 2 Acidification, SO -eqv 5,002 7,245 The HR policy, on the other hand, is guided by planning, 2 improving the operating environment and competence of Discharges to water personnel, and preventive and purposeful development COD 26,095 35,004 of well-being at work and occupational safety. Eutrophication, P-eqv 150 210 Waste Landfill waste 25,433 76,229 25

MANAGEMENT OF ENVIRONMENTAL IMPACTS A sustained effort to enhance energy efficiency

In 2009, M-real implemented several projects to impro- Energy production and consumption ve energy efficiency, with an annual energy-saving im- Wood is a renewable, recyclable and energy-efficient pact of 100 GWh of heat and 35 GWh of electricity. This raw material that can be utilised efficiently in the pro- corresponds to the energy consumption of a small city. duction process. M-real products are fully recyclable, The energy savings reduced the annual CO2 emissions and fibre-based products can also be used at the end of produced by M-real’s operations by 20,000 tonnes, or their lifecycle to recover the energy contained therein. some 2 per cent of the total emissions. Energy efficien- Most of M-real’s energy procurement, 59 per cent, is cy was impaired and emissions increased temporarily based on renewable wood fuels. Taking into account in 2009 by the low utilisation rates of the mills during the procurement of hydro and nuclear power and use

the first two quarters due to the challenging market of recycled fuels, CO2-neutral energy sources account conditions. for 73 per cent of energy supply. The aim is to increase

An Energy Efficiency System (EES) was imple- the share and production of bio-derived and CO2-neutral mented at all M-real mills during 2009. The system energy further. aims at increasingly systematic, daily development of M-real’s Simpele mill began to utilise recycled fuel energy efficiency throughout the organisation. M-real´s in the existing wood- and peat-fired power plant in greenhouse gas emission reporting was rewarded when 2009. Utilisation of burnable waste reduces the need M-real was ranked second in its field in the 2009 Nordic for landfill disposal and the use of fossil fuels. A new Carbon Disclosure Leadership Index. condensate tail turbine was commissioned at M-real’s M-real joined the WBCSD (World Business Council Hallein mill, making it possible to increase wood-based for Sustainable Development) Manifesto for Energy electricity production by about a third in the mill’s wood- Efficiency in Buildings through the Metsäliitto Group. In fired power plant. In Kaskinen, M-real decreased the accordance with the Manifesto, M-real aims to improve size of Metsä-Botnia’s old bark boiler, enabling M-real the energy efficiency of its office buildings. to continue using it in heat production for the BCTMP mill and the area. In 2009, it was decided to invest EUR

Development of energy usage 2007–2009

Development of energy GWh 2009 2008 2007 usage 2007–2009 Use of wood-based fuels 11,216 14,096 12,884 GWh Use of fossil fuels 3,702 4,701 4,488 15000 Q 2007 Purchased energy 1,841 2,205 2,760 Q 2008 Purchased heat 54 228 470 12000 Q 2009

9000 Sources of total energy

6000 GWh 2009 (%) 2008 (%) 2007 (%) Wood-based 11,619 59 59 54 3000 Natural gas 2,506 13 14 14 Coal 1,792 9 9 11 0 Nuclear power 1,770 9 8 10 Wood- Fossil Pur- Pur- based fuels chased chased Hydro power 856 4 4 6 fuels energy heat Oil 816 4 4 4 26 Peat 225 1 1 2

ENERGY AND CLIMATE 22 million in improving the energy efficiency of the was the EU’s favourable opinion that M-real’s production Husum mill. The investment includes the installation functions are included in the so-called carbon leakage of a new turbine. The planned measures are expected industries, allowing the necessary EU emission rights to to increase the electricity self-sufficiency of the Husum be free of charge also in the future. The basis for this is mill from the current 30 per cent to 50 per cent. The preventing carbon leakage: were no free emission rights increase in electricity production is based on wood are distributed, the EU emission trading would result fuels. The investment is scheduled for completion by in significant competitive disadvantage to mills inside the end of 2010. the EU compared to non-EU competitors.

Energy production from other biofuels and CO2- Due to the low utilisation rates of the mills during neutral waste continued to be developed in several the first half of the year, continuous development of M-real mills in 2009. If the projects proceed favourably, energy efficiency and increased use of renewable fuels, investment decisions may be made on several projects some of the CO2 emission rights granted to M-real during 2010. could be sold during the year under review. In 2009, the EU Commission prepared rules on the amount of free Emissions trading emission rights to be received by each mill during the During 2009, M-real and Metsäliitto Group participated in period 2013-2020. Emission rights will be distributed in the European Commission’s preparatory work related to proportion to CO2 efficiency. Less efficient parties will the practical implementation of the EU emission trading need to buy a larger share of the emission rights they period 2013–2020 through industrial interest groups. It need. The EU aims to make decisions on this during 2010, a matter of importance to M-real.

Emissions to air (t) - Particles 635

- Carbon dioxide CO2 (fossil fuels) 952,462 - Sulphur (as SO2) 1,807 - Nitrogen oxides (as NO2) 4,564

Wood-based raw materials Production - Wood (1,000 m3) 8,550 - Paper 1,364 - Pulp (1,000 t) 114 - Pulp and CTMP 1,983 - Recovered paper (1000 t) 97 - Paperboard 982

Other raw materials (1000 t) - Pigments 512 - Adhesives 105 M-real Energy (GWh) - Fuel purchased outside the Group 5,186 - Electricity (purchased) 1,841 - Heat (purchased) 54

Process water (1,000 m3) 1,201,138

Discharges to water systems (t)

- Biological oxygen demand (BOD7) 1,830 - Chemical oxygen demand (COD) 26,095 - Phosphorus (P) 57 - Nitrogen (N) 419 - Total suspended solids 2,236

Waste (t) - Landfill waste 25,433 - Hazardous waste 993 27

ENERGY AND CLIMATE Systematic competence development

At the end of 2009, the number of M-real personnel ings between the management and representatives of amounted to 4,903 (31 December 2008: 6,546). The the personnel in the offices and mills. In addition, rep- figure for the end of 2009 no longer includes the share resentatives of the management have actively attended of Metsä-Botnia personnel due to the change in the personnel groups’ own meetings. consolidation method (the figure for 2008 included 30 per cent of Metsä-Botnia personnel, or 553 people). Development of work motivation and competence The decrease in the number of personnel was mainly Due to cuts in the workforce, a special challenge fac- due to the adjustment of the organisation to correspond ing HR and management at M-real during the period to the corporate structure following the divestment of under review was to maintain know-how, work motiva- Graphic Papers and the end of the transitional service tion and efficiency of production at the offices and mills. agreements made with Sappi Limited. Attention was paid to the competence and motivation Statutory negotiations on temporary layoffs and per- of the personnel by offering larger and more versatile sonnel cuts were conducted in Finnish and international duties, training and job rotation within M-real as well units in a constructive spirit. Those laid off or in danger as the entire Metsäliitto Group. of being laid off were supported by training and assisted The competence of employees was robustly de- in searching for work and re-employment within M-real veloped based on the new four-level training system. and the entire Metsäliitto Group in accordance with the Vocational supplementary training and degree education change security programme in close cooperation with programmes were offered to M-real’s production per- representatives of the personnel. sonnel. A mid-management development programme Proven practices related to the division of tasks, was designed during the year under review, and it will content of work and operating models established in commence in 2010. In addition, M-real employees par- M-real’s mills in Finland were utilised in the Sharing ticipated in the Challenger management development Best Practices within M-real programme at the Husum, programme. Gohrsmühle, Reflex and Alizay mills among others. The M-real decided to initiate a key personnel pro- programme is intended to be continued in 2010. gramme to cover future business needs. Based on the The personnel organisations of M-real and Oy Metsä- programme, individual development and follow-up Botnia Ab in Finland were merged during the year under plans will be made for key employees. The manage- review, and a compact regional HR organisation was ment barometer survey implemented in the autumn adopted. The merger made it possible to harmonise explored the views of the company’s Management Team HR policy and HR-related operating models and ensure and other management on factors that influence the equal treatment of employees. company’s success. Necessary development measures Cooperation and dialogue between the employer were identified based on the results and included in the and the personnel continued by way of regular meet- 2010 action plans.

Occupational safety and well-being

2009 2008 2007 Sickness absenteeism (%) 4.8 4.7 4.4 Work injury absenteeism (%) 0.3 0.2 0.2 Lost time accident frequency rate (per million worked hours) 14.6 18.8 15.1 Reported near misses (per 100 employees) 16.9 15.8 20.0 28

PERSONNEL Long-term well-being at work At M-real, well-being at work and occupational safety are considered an important part of profitable opera- tion and success. Well-being at work refers to an indi- vidual employee’s possibility to feel successful at work and to the spiritual strength of the employee and the work community as a whole. Employees’ well-being and safety are secured systematically and preventively in accordance with the well-being at work and occupa- tional safety policy. The aim is to extend and develop the employees’ careers, react to problems early and thereby reduce absence due to sickness. Thanks to the follow-up system involving accidents, occupational diseases and absence due to sickness im- plemented in 2008, M-real is better equipped to forecast and identify risks of impaired work ability and direct measures to prevent them. Cooperation takes place with superiors, HR, personnel representatives and in- surance companies among others. M-real will focus particularly on age management and preparation for the retirement of middle-aged personnel groups. The pur- pose is to increase resources that support the individual and the workplace in changes of work and improve the preconditions for maintaining work ability. All of the occupational healthcare services of M-real’s operations in Finland were centralised with two service providers in 2009. The content of occupational healthcare services has been revised and operations steered and developed in accordance with M-real’s objectives.

Personnel by country

Personnel* Personnel at Net employment Average age of 31.12.2009 31.12.2008 change 2009 employees 2009 Finland 1,824 2,258 -434 46.5 Germany 1,228 1,414 -186 46.6 Sweden 980 1,062 -82 47.3 France 396 462 -66 41.0 Austria 203 644 -441 43.2 Other Countries 272 706 -434 38.0 Total 4,903 6,546 -1,643 45.1

* M-real’s number of personnel at the end of 2009 no longer includes the share of Metsä-Botnia’s employees, at the end of 2008 30 per cent of Metsä-Botnia’s employees, or 553 people were included 29

PERSONNEL FINANCIAL page STATEMENTS

32page Report of the Board of Directors 2009 32 Consolidated statement of Comprehensive income 40 Consolidated balance sheet 41 Statement of changes in shareholders’ equity 42 Consolidated cash flow statement 43 Notes to the financial statement 44 Shares and shareholders 94 Calculation of key ratios 98 Parent company accounts – Income statement 99 Parent company accounts – Balance sheet 100 Parent company accounts – Cash flow statement 101 Parent company accounting policies 102 Notes to the parent company financial statement 103 The Board’s proposal for the distribution of profits 108 Auditor’s report 109

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31

Report of the Board of Directors 2009

Market conditions in 2009 Result for the review period The demand for all of M-real’s main products declined clearly at the M-real’s sales in 2009 totalled EUR 2,432 million (2008: 3,236 and 2007: end of 2008 and continued to be weak throughout the first half of 2009. 3,499). Comparable sales were down 21.2 percent. The operating re- Demand picked up at the end of the second quarter. The demand for sult excluding non-recurring items was EUR -150 million (2008: -35 paperboard products in particular recovered rapidly, reaching nor- and 2007: 75), and including non-recurring items EUR -267 million mal levels towards the end of the year. Demand for paper produced (2008: -61 and 2007: -49). The result from continuing operations be- by M-real also developed positively during the second half of the year fore taxes, excluding non-recurring items, totalled EUR -230 million but failed to reach the pre-recession levels before year-end. Total de- (2008: -178 and 2007: -67), and including non-recurring items, EUR liveries of European folding boxboard producers fell by 11 per cent -358 million (2008: -204 and 2007: -191). and total deliveries of uncoated fine paper producers by 12 per cent The operating result was EUR -267 million (2008: -61 and 2007: -49). in 2009 compared with 2008. In the spring of 2009, M-real became The non-recurring items recognised in the operating result amounted the market leader in folding boxboard in Europe. to EUR -117 million net, the most significant being: The price of folding boxboard rose due to implemented price in- creases, while the price of office paper decreased markedly due to • EUR 134 million profit related to the Metsä-Botnia arrangement, of weaker demand and additional production capacity started in the which EUR 18 million is allocated to Market Pulp and Energy and European market. The downward trend in the price of office paper EUR 116 million to Other operations. levelled off in the last quarter of the year. There were no significant • An impairment loss of EUR 113 million according to IAS 36, of which changes in the average prices of speciality papers. The structural EUR 66 million is allocated to Speciality Papers and EUR 47 million to change in the European paper industry and paper capacity closures Office Papers. Of this, EUR 33 million was recognised in goodwill. seem to continue. The pulp market price, which decreased signifi- • EUR 48 million in write-downs and cost provisions in the Market cantly at the beginning of the year, began to rise again in March and Pulp and Energy business area connected to the plan to perma- the rise continued until the end of the year. nently close down the Alizay pulp mill. Production costs decreased slightly in 2009. The most significant • EUR 28 million in cost provisions and write-downs in the Speciality change occurred in wood costs. Papers business area connected to the closure of the Hallein paper The average exchange rate of the euro against the US dollar wea- mill. kened in 2009. Against the British pound and Swedish krona, however, • EUR 22 million in cost provisions and write-downs associated with the euro strengthened compared to the 2008 average level. the closure of the Metsä-Botnia Kaskinen mill. This total consists of EUR 16 million related to the Consumer Packaging business area and EUR 6 million to the Market Pulp and Energy business area.

Sales Operating result Operating result, excluding EUR million EUR million non-recurring items, EUR million

4,000 50 100

0 50 3,000 -50

-100 0 2,000 -150 -50 -200 1,000 -100 -250

0 -300 -150 32 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

REPORT OF THE BOARD OF DIRECTORS 2009 • EUR 12 million cost provision in Other operations associated with • EUR 13 million cost for the Pont Sainte Maxence (PSM) mill divested the terminated IT contract. in June 2006 for a guarantee issued to the mill’s energy supplier and • EUR 11 million cost provision related to profit improvement me- for the write-down of receivables from PSM in Other operations. asures of the Husum mill, comprising EUR 9 million in the Office • EUR 10 million cost provision and write-down for the closure of Papers business area and EUR 2 million in the Market Pulp and New Thames mill’s cut-size operations in Office Papers. Energy business area. • EUR 5 million cost provision associated with the profit improvement Compared to the previous year, the operating result excluding non- programme of the Speciality Papers business area. recurring items was weakened by the reduced delivery volumes caus- • EUR 12 million net in other non-recurring items, comprising EUR 2 ed by weakened demand and lower average selling prices of office million in Consumer Packaging, EUR 1 million in Speciality Papers papers. The result was improved by the implemented price increases, and EUR 9 million in Other operations. especially in board, and the implemented cost savings. The total delivery volume of the paper businesses in 2009 was The non-recurring items recognised in the operating result for 2008 1,132,000 tonnes (2008: 1,761,000 and 2007: 1,911,000). The deliveries amounted to EUR -26 million net, the most significant being: by Consumer Packaging totalled 1,212,000 tonnes (2008: 1,345,000 and 2007: 1,386,000). • EUR 86 million impairment charges under IAS 36, of which EUR 66 Financial income and expenses totalled EUR -75 million (-142). million were allocated to Speciality Papers, EUR 16 million to Office Foreign exchange gains and losses from accounts receivable, accounts Papers and EUR 4 million to Consumer Packaging. Of these, EUR payable, financial income and expenses and the valuation of currency 20 million was recognised in goodwill. hedging were EUR 5 million (13). Net interest and other financial in- • EUR 74 million recognised as realised fair value and capital gains from come and expenses amounted to EUR -80 million (-155). Other financial the sale of Pohjolan Voima shares in Market Pulp and Energy. income and expenses included EUR 10 million of valuation gains on • EUR 23 million positive effect in the Speciality Papers business area interest rate derivatives (valuation gain of 0). Additionally, the finan- related to the sale of the New Thames mill and being freed from cial income included a gain of approximately EUR 31 million related the pension liabilities of industrial operations in the UK, as well as to repurchases of the EUR 400 million bond maturing in December the removal of other responsibilities related to the closure of the 2010 and financial expenses included a loss of EUR 30 million related Sittingbourne mill. to early repayment of the vendor note by Sappi. • EUR 14 million cost provision for streamlining M-real’s structure In the review year, the result from continuing operations before to reflect the divestment of the Graphics Papers business in Other taxes was EUR -358 million (2008: -204 and 2007: -191). The result operations. from continuing operations before taxes, excluding non-recurring items, was EUR -230 million (2008: -178 and 2007: -67). Income taxes,

Return on capital employed Earnings per share Result from continuing % EUR operations before tax, EUR million

2 0.0 0

0 -0.5 -100 -2

-4 -1.0 -200

-6 -1.5 -300 -8

-10 -2.0 -400 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 33

REPORT OF THE BOARD OF DIRECTORS 2009 including the change in deferred tax liabilities, totalled EUR 27 million Both programmes proceeded better than expected, and therefore positive (2008: 34 and 2007: 23). the target of the profit improvement programme was increased to EUR Earnings per share were EUR -1.09 (2008: -1.58 and 2007: -0.59). 90 million and the target of the cash flow improvement programme Earnings per share from continuing operations excluding non-recurring to EUR 80 million in October 2009. items were EUR -0.66 (2008: -0.48 and 2007: -0.17). Return on equity In 2008, M-real announced it was planning the discontinuation of was -28.6 per cent (2008: -10.4 and 2007: -8.5), and -18.3 per cent (2008: standard coated fine paper production at the Hallein and Gohrsmühle -9.0 and 2007: -2.8) excluding non-recurring items. Return on capital mills based on earlier examined strategic options. Both mills had been employed was -8.9 per cent (2008: -1.3 and 2007: -0.8); excluding non- loss-making for a long period of time. At Hallein, paper production recurring items -4.5 per cent (2008: -0.5 and 2007: 2.8). was discontinued at the end of April 2009. At the Gohrsmühle mill, standard coated fine paper production was discontinued in April. At Personnel Gohrsmühle, the production of speciality papers as well as uncoated The number of personnel stood at 4,903 on 31 December 2009 (31 fine paper reels and folio sheets has been expanded. December 2008: 6,546 and 31.12.2007: 7,241), of which 1,824 (2008: M-real’s organisation was revised following the above-mentioned 2,258 and 2007: 2,474) worked in Finland. In 2009, M-real employed discontinued production at the Hallein and Gohrsmühle mills. The an average of 5,913 people (2008: 9,087 and 2007: 12,675). The figu- Other Papers business area was renamed Speciality Papers. The new re for the end of 2009 no longer includes the share of Metsä-Botnia structure took effect on 17 June 2009. personnel due to the change in the consolidation method. The figures In October 2009, M-real’s associated company Oy Metsä-Botnia Ab for 2008 and 2007 included 30 per cent of Metsä-Botnia personnel and its owners, M-real Corporation, Metsäliitto Cooperative and UPM- (2008: 553 and 2007: 521). In 2009 salaries and wages totalled EUR Kymmene Oyj, signed an agreement on the divestment of the pulp mill 254 (2008: 293 and 2007: 368). Metsä-Botnia’s wages are included and forests located in Uruguay, to UPM. The transaction was closed until 8.12.2009. in December 2009, and as a result Metsä-Botnia became Metsäliitto Cooperative’s subsidiary. M-real changed the consolidation method Investments of Metsä-Botnia in its consolidated financial accounts and processes Gross investments in 2009 totalled EUR 73 million (2008: 128 and 2007: its ownership in Metsä-Botnia as an associated company according to 259), including a EUR 16 million share of Metsä-Botnia’s investments IAS 28 instead of as a joint venture (IAS 31). Previously, Metsä-Botnia (2008: 29 and 2007: 122). Metsä-Botnia’s investment share is based on had been consolidated line by line based on the ownership. Starting M-real’s 30 per cent share of ownership and the consolidation method from 8 December 2009, M-real will disclose its share of the profits of of Metsä-Botnia until 8 December 2009 (2008: 30% and 2007: 30%). Metsä-Botnia on the line Share of net results in associated companies above operating result, and on the line Investments in associated com- Structural change panies on the balance sheet. As a result of the transaction, M-real’s In February 2009, M-real launched a new profit improvement pro- net debt decreased by approximately EUR 500 million compared to gramme with an annual target of EUR 80 million. The improvement the end of the third quarter of 2009 when taking into account the cash actions concerned the business areas and streamlining the support consideration of EUR 300 million, the market priced receivable of EUR functions to reflect the changed company structure. The full annual 50 million from Metsäliitto and the change in the consolidation met- effect of the programme will be visible from 2011. hod of Metsä-Botnia for M-real’s consolidated financial statements. A separate EUR 60 million programme to improve the 2009 cash M-real will use the funds to pay off its debts. As a further result of the flow was also launched in February. The actions included, e.g., the transaction and the consolidation change M-real’s annual sales will reduction of net working capital and cuts in investments. decrease by approximately EUR 250 million. Due to the transaction and the change in the consolidation method, M-real’s shareholders’ equity increased by approximately EUR 58 million in the review year. In December 2009, M-real announced that it will start a new profit Assets and capital employed EUR million improvement programme for 2010, with the most significant actions being plans to permanently shut down the Alizay pulp mill in France 8000 and two speciality paper machines at Reflex, Germany, the plan to stre- amline the organisation and management model in M-real Zanders, 6000 a EUR 22 million investment at the Husum mill to improve its energy efficiency and a new EUR 20 million internal profit improvement pro- gramme covering all of M-real’s business areas. Once implemented, 4000 the planned measures are expected to improve M-real’s annual ope- Q Non-current rating result by EUR 80 million with full effect from 2011 onwards. The assets result improvement of the new planned measures in 2010 is expected 2000 Q Inventories to be EUR 40 million. The combined profit impact of the new planned Q Other current assets measures and the previous years’ profit improvement programmes is 0 Average expected to be approximately EUR 100 million positive in 2010. 34 2005 2006 2007 2008 2009

M-real’s structural change from a paper company to become mo- 2009, M-real implemented several projects to improve energy effi- re clearly a packaging material producer has proceeded according to ciency, with an annual energy-saving impact of 100 GWh of heat and plan. The strategic review of the paper business continues. 35 GWh of electricity. This corresponds to the energy consumption

of a small town. The energy savings reduced the annual CO2 emis- Research and development sions produced by M-real’s operations by 20.000 tonnes, or some 2 M-real focused its R&D activities on improving efficiency and renewing per cent of the total emissions. Energy efficiency was impaired and product portfolios in 2009. The product mix was completely renewed emissions increased temporarily in 2009 by the low utilisation rates of in the Gohrsmühle mill. Consumer Packaging is implementing an ex- the mills during the first two quarters due to the challenging market tensive Efficient Packaging research programme studying the impact conditions. Robust efforts to improve energy efficiency were rewar- of high performance lightweight boards on the efficiency of the entire ded when M-real ranked second in its field in the 2009 Nordic Carbon package chain. During the report year both customers and M-real en- Disclosure Leadership Index. joyed the benefits of the LITE4U concept launched the previous year Industrial air, water and noise emissions have decreased conti- according to objectives. A new, non-woven type wallpaper base as well nuously through the consistent application of Best Available Techniques as a wet-strength label paper were developed during the review year. (BAT). Mill water cycles have been closed, cleaning methods enhanced In the Office Papers business area a new, lighter-than-normal SAVE! and incidental emissions minimised. Amounts of harmful substances office paper (65 g/m2) was developed. It reduces the environmental in wastewater from board and paper production are reduced by more load and saves on printing costs. effective treatment processes, reduced water consumption, person- M-real’s research and development expenses were EUR 7 million nel training for improved management of process disturbances, and in 2009, approximately 0.3 per cent of sales (2008: 10 and 0.3 per cent, reduction of incidental discharges. Highly effective treatment processes 2007: 14 and 0.4 per cent). have restricted the impact of wastewater emissions to within a limited area at the immediate point of discharge. The water consumption of Environment production processes has been reduced continuously. Work to close Minimising environmental impacts, continuous improvement of ope- mill water systems even further is being continued. The majority of rations, efficient use of raw materials and open communication form mills are located in areas of plentiful water supply and therefore do the core of M-real’s environmental policy. M-real mills operate certi- not compete for water consumption with other uses, such as irriga- fied ISO 9001 and ISO 14001 quality and environmental management tion of fields or drinking water. systems that support the systematic improvement and follow-up of M-real has reduced its emissions to air by introducing low-sulphur operations. Several mills also utilise a certified occupational and pro- fuels and by replacing fossil fuels with wood-based fuels. These duct safety system. emissions include fuel-derived sulphur and nitrogen oxides which Several improvements that reduce environmental load and risks can cause water and soil acidification; carbon dioxide, the main dri- were implemented in M-real’s mills during 2009. The upgrades fo- ver of climate change; and particle emissions, which have a negative cused on making the use of raw materials, water and energy more impact on air quality. efficient and reducing emissions to air. Mill waste levels have also been reduced through efficient re-use An Energy Efficiency System (EES) was implemented at all M-real of by-products and co-products. Waste sorting at mills and use as eit- mills during 2009. The system aims at increasingly systematic, dai- her raw material or for energy production reduces the need for landfill ly development of energy efficiency throughout the organisation. In disposal. For example, primary fibre, high-quality recycled fibre or

Equity ratio Gearing ratio Net gearing ratio % % % 40 160 120

100 30 120 80

20 80 60

40 10 40 20

0 0 0 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 35

both are used as raw materials for office paper production, depending During the year under review, approximately 69 per cent of the on the paper type. Packaging plastics, metals, paper and board are wood procured by Metsäliitto for M-real’s mills came from certified recycled. Process sludge and wood-based waste are used as fuels if forests. M-real strives to increase the share of certified wood in its not used otherwise. For example, the fibre sludge generated during products and to launch more forest certification labelled products on the recovered fibre deinking process is used in the building products the market. The certified quality and environmental management industry and for energy production. Ash from the mill power plant is systems used by Metsäliitto Wood Supply include a wood origin ma- used in earthworks construction as an alternative to gravel and other nagement system. The system enables M-real to know the origin of its soil resources. Wood ash can also be used as a fertiliser. wood even if the wood is not derived from a certified forest. All M-real M-real reports openly on its environmental impacts through, e.g., mills employ a certified Chain of Custody system which enables them mill-specific EMAS (Eco-Management and Audit Scheme) reports. to verify the share of certified wood in their products. The climate impacts of individual products are reported according to customer in carbon footprint calculations adopted in 2007. Product- Financing specific Paper Profile environmental product descriptions have At the end of 2009, M-real’s equity ratio was 29.6 per cent (31 December been published for all M-real products on the company’s website at 2008: 30.8 and 31 December 2007: 34.4) and the gearing ratio 153 per www.m-real.com. cent (2008: 152 and 2007: 124). The net gearing ratio was 84 (2008: The number of old environmental liabilities has decreased due to 90 and 2007: 99). Some of M-real’s loan agreements set a 120 per rehabilitation measures for contaminated land areas carried out in cent limit on the company’s net gearing ratio and a 30 per cent limit recent years. During the year under review, the Niemen Saha landfill on the equity ratio. Calculated as defined in the loan agreements, the in Tampere was restored. At the present time, known old environ- net gearing ratio at the end of 2009 was approximately 63 per cent mental obligations concern only the closed Wifsta mill area and the (74) and the equity ratio some 35 per cent (36). landfill site of the Silverdalen mill, decommissioned by M-real, both The change in the fair value of investments available for sale was in Sweden. Provisions made for meeting environmental obligations approximately EUR -97 million in 2009 based mainly on the decrease were approximately EUR 1 million at the end of the year. M-real’s en- in the value of the Pohjolan Voima shares. vironmental expenses in 2009 were EUR 38 million (57). At the end of the year, net interest-bearing liabilities totalled EUR 777 million (31 December 2008: 1,254 and 31 December 2007: 1,867). Wood Supply Foreign-currency-denominated loans accounted for 8 per cent; 84 per M-real’s parent company Metsäliitto Cooperative is responsible for cent were floating-rate and the rest were fixed-rate. At the end of 2009, M-real’s wood supply. Metsäliitto and M-real are committed to using the average interest rate on loans was 6.0 per cent and the average wood that is sourced responsibly and in compliance with local laws. maturity of long-term loans 2.4 years. The interest rate maturity of The bulk of M-real’s domestic wood raw material comes from loans was 6.4 months at the end of the year. During the period, the the forests of Metsäliitto Cooperative’s owner-members. Metsäliitto interest rate maturity has varied between 2 and 7 months. also procures wood from Austria, Latvia, Lithuania, France, Sweden, Cash flow from operations amounted to EUR 110 million in 2009 Germany, Russia and Estonia. During the year under review, Metsäliitto (2008: 118). Working capital was down by EUR 140 million (down 7). delivered some 7.5 million cubic metres of wood to M-real’s mills (in- At year-end, an average of 4.9 months of the net foreign currency cluding 30 per cent to Metsä-Botnia’s mills until 8 December 2009). exposure was hedged. The degree of hedging varied between 3 and 5 M-real knows the origin of the wood it procures and ensures the le- months during the period. Approximately 99 per cent of the non-euro- gality of the loggings. denominated equity was hedged at the end of the review period.

Repayment of non-current loans Investments, continuing EUR million operations, % sales 600 12

500 10

400 8

300 6

200 4

100 2

0 0 36 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009

Liquidity continues at a good level. At the end of the year, liquidity Competitive environment was EUR 776 million, of which EUR 279 million consisted of committed The balance between supply and demand has a significant impact on credit facilities and EUR 497 million of liquid assets and investments. the prices of paper and paperboard products. The market balance has The amount of committed credit facilities decreased after the EUR improved recently thanks to capacity cuts, but the global economic 500 million syndicated revolving credit facility ended due to being recession has simultaneously caused falling demand. Any possible cancelled by the company in October 2009. The revolving credit fa- decrease in demand or increase in supply in the future may have unfa- cility would have been due in December 2009. In addition, the Group vourable effects on the market balance. Business cycles unfavourable had other interest-bearing receivables totalling EUR 136 million. To to M-real or capacity increases by competitors may decrease the prices meet its short-term financing needs, the Group also had at its disposal of M-real’s products. On the other hand, potential capacity closures in uncommitted domestic and foreign commercial paper programmes the industry or consolidation of the industry structure may lead to an and credit facilities amounting to about EUR 529 million. In connection increase in prices. The increasing strengthening of the euro versus with the restructuring of Metsä-Botnia’s ownership and the divest- the US dollar in particular may result in increased imports to Europe, ment of the operations in Uruguay, M-real received a cash payment which would further weaken the market balance in Europe. of EUR 300 million in December. In addition, M-real sold a three per cent share of Metsä-Botnia to Metsäliitto. Metsäliitto paid its share Credit and other counterparty risks purchase with a market priced vendor note of EUR 50 million, having Management of the credit risks involved in commercial activities is the a maturity of 3 years. responsibility of M-real’s business areas and centralised credit control. In connection with the divestment of Graphic Papers in December The credit control function together with the business areas defines 2008, M-real received EUR 220 million in interest-bearing vendor notes the internal credit limits and terms of payment for different customers. from Sappi. In August, M-real agreed with Sappi that Sappi will repay Some of the credit risks are transferred further to credit insurance the vendor notes at the price of 86.5 per cent of their nominal value. companies by means of credit insurance contracts. The global finan- The cash payment of EUR 190 million received by M-real from Sappi cing crisis has also affected the financial standing of the largest credit in August strengthened the Group’s liquidity. This early repayment insurance companies and their risk tolerance. This has had a direct resulted in an approximately EUR 30 million loss that was booked in impact on the availability of M-real’s customer credit insurance and M-real’s financial expenses in the third quarter of 2009. overdraft facilities. M-real’s customer credit risk has therefore been In the second quarter, M-real raised a EUR 60 million pension pre- higher than normal in 2009. Measures have been taken to reduce the mium (TyEL) loan. After this drawdown, M-real still has a total of about risk by intensifying internal credit control and its processes. EUR 279 million of undrawn pension premium (TyEL) loans. The main principles for the company’s credit control are defined In the first quarter, M-real repurchased its own bonds (EUR 400 in the credit policy approved by the company’s Board of Directors. million bond due in December 2010) with a nominal value of EUR 59.95 Counterparty-specific, approved maximum amounts are also applied million. A gain of approximately EUR 31 million from the purchases was to money market investments, derivatives and borrowings in order to recorded in the first quarter result. In December, M-real announced ensure creditworthiness and to reduce risk concentrations. that it will exercise its right to partial early redemption of the above- mentioned floating rate notes. The total par value of redemption was Changes in consumer habits EUR 250 million. The early redemption took place on 25 January 2010 In the future, changes in new electronic communications technology, and the redemption price was 100 per cent of the par value according marketing channels and other consumer habits may change the de- to the terms of the notes. After the redemption, the par value of all mand for M-real’s paper and paperboard products. outstanding notes is approximately EUR 90 million. Price risks of production input costs Significant risks and uncertainties A radical and unforeseen rise in the price of production inputs im- M-real estimates its strategic, operative, financial and insurable risks portant for M-real’s operations, such as wood, energy or chemicals, twice a year. The risk assessments carried out during 2009 identified or problems with their availability may reduce profitability and threa- the following risks and uncertainties with a possible impact on M-real’s ten the continuity of operations. M-real endeavours to hedge against financial performance and ability to operate. this risk by entering into long-term delivery agreements and related derivative contracts. The EU and its member states have decided on Uncertainty of the global economy development the rules for emissions trading for the 2008–2012 period. The final In the main markets, paper and board demand mainly follows the decisions on the application rules for the emissions trade directive general economic development. The demand decreased conside- of the subsequent 2013–2020 period, such as the possible distributi- rably at the end of 2008 due to the global recession. The state of the on of free emission rights to paper industry companies, have not yet world economy began to pick up towards the end of 2009, as a result been made. Depending on the EU’s decisions and emission right pri- of which demand for paper and, in particular, board revived. There re- ces, significant additional costs may be entailed for M-real as from main significant uncertainties connected to how the global economy 2013 due to the need to purchase emission rights for its operations. will develop, development that has a direct impact on the demand In addition, an increase in market energy prices would increase costs. and profitability of M-real’s main products. The uncertainty over the The risk of significant cost inflation is at least temporarily low in the development of demand also continues. current economic environment. 37

Liability risks areas. The production plants have prepared for potential disturbances M-real’s business operations involve various types of liability risks, in operation by drawing up crisis management, continuity and reco- the most central of which are general operational liability risks, en- very plans, for example. Some of the risks are borne by the company vironmental risks and product liability risks. Measures are taken to itself and some are selectively transferred by means of, for example, manage these risks by improving business processes, practices, insurance contracts, derivative contracts and terms and conditions quality requirements and the transparency of operations. Some of otherwise included in contracts, to be borne by insurance companies, the above-mentioned risks have been transferred to insurance com- banks and other counterparties. panies by means of insurance contracts. The most common loss risks are mainly covered by comprehen- sive global insurance contracts, such as: Business interruption risks Various kinds of large losses, major accidents, natural disasters, serio- - property and business interruption insurance us malfunctions in the key information systems, labour disputes and - general third-party and product liability insurance delivery problems of the most important raw materials may, in extreme - liability insurance for Directors and Officers cases, interrupt M-real’s business operations and even cause loss of - credit insurance customers. Continuity and recovery plans have been drawn up in the - cargo insurance. business areas and plants to mitigate these risks. In addition, some of the mill operation interruption risks have been selectively transferred Shares to insurance companies by way of insurance contracts. In 2009, the highest price for M-real’s B share on the NASDAQ OMX Helsinki Ltd. was EUR 1.57, the lowest EUR 0.19, and the average Personnel price EUR 0.66. At the end of the year, the price of the B share was M-real has paid special attention to ensuring the availability and re- EUR 1.53. tention of personnel by means of various development programmes The trading volume of B shares was EUR 321 million, 171 per cent and special measures. M-real endeavours to prepare for a genera- of the capital stock. The market value of the A and B shares totalled tional shift and other risks related to personnel by means of career EUR 517 million at the end of the year. The Company has a total of planning and job rotation. 328,165,612 shares, which are divided into 36,339,550 Series A shares and 291,826,062 Series B shares. The total number of voting rights, Financial risks conferred by shares, is 1,018,617,062. M-real’s profitability improved considerably during the second half of At the end of the year, Metsäliitto Cooperative owned 38.6 per cent 2009 compared to the first half of the year. In December, M-real laun- of the shares, and the voting rights conferred by these shares amounted ched new profit improvement measures whose positive effect on the to 60.5 per cent. International investors’ holdings increased to 19 per result for 2010 together with the programmes implemented during cent. The company’s CEO, Deputy to the CEO and Board members the preceding years will total approximately EUR 100 million by 2010. owned in total 0.4 per cent of the shares at the end of 2009. There are uncertainties and the risk of not achieving the desired profit On 5 February 2009, Financier de l’Echiquier SA’s holding in M-real improvement in full associated with the implementation of the internal decreased to 4.8 per cent of the share capital and 1.6 per cent of the profit improvement measures. voting rights. The company does not hold any of its own shares. The main financial risks involved in business operations relate mainly to currencies, interest rates, liquidity and counterparty risks Distributable funds and dividend and the use of derivative instruments. The financial risks are ma- The distributable funds of the parent company as of 31 December naged in accordance with the treasury policy approved by M-real’s 2009 were EUR -342,787,654.55 of which the result for the finan- Board of Directors. The aim is to hedge against significant financial cial year is EUR -120,580,449.73. The company therefore has no risks, balance the cash flow and give the business units time to ad- distributable funds. In its meeting on 4 February 2010, the Board just their operations to changing conditions. M-real’s financial risks of Directors decided to propose to the Annual General Meeting in and their management are described in more detail on pages 56–59 spring 2010, to be held on 24 March 2010, that no dividend is paid of this annual report. for the financial year 2009.

Preparing for and transferring risks Board of Directors and Auditors Identified risks are prepared for to the best of the company’s know- The Annual General Meeting of March 2009 confirmed the number ledge and as most appropriate for the company. M-real cooperates of members of the M-real Board of Directors as nine (9). The Annual actively with insurance companies related to risk management, for General Meeting elected as members of the Board of Directors example, by regularly executing risk evaluations on different business Martti Asunta, M. Sc. (Forestry); Kari Jordan, President and CEO of

38

Metsäliitto Group; Erkki Karmila, LL.M.; Kai Korhonen, M.Sc. (Eng); The combined profit impact of the new planned measures and the Liisa Leino, M.Edu; Runar Lillandt, Counsellor of Agriculture; Juha previous years’ profit improvement programmes is expected to be Niemelä, Honorary Counsellor; Antti Tanskanen, Minister and Erkki approximately EUR 100 million positive in 2010. In addition to busi- Varis, M.Sc. (Eng). The term of office of the Board members expires ness areas the decreasing cost trend is visible in Other operations. at the end of the next Annual General Meeting. Average total production input costs are not expected to change ma- At its organising meeting, the Board of Directors elected Kari terially during 2010. Jordan as its Chairman and Martti Asunta as its Vice Chairman. The In M-real’s main products, the prerequisites for profitable business Board further resolved to organise the Board committees as follows: have improved further. The operating result excluding non-recurring The members of the Audit Committee are Erkki Karmila (Chairman), items in the first quarter of 2010 is forecast to be better than in the Kai Korhonen, Antti Tanskanen and Erkki Varis. The members of the last quarter of 2009. The operating result excluding non-recurring Nomination and Compensation Committee are Kari Jordan (Chairman), items for 2010 is expected to be positive, provided that no material Martti Asunta, Liisa Leino, Runar Lillandt and Juha Niemelä. weakening takes place in the operating environment. The Annual General Meeting elected Authorised Public Accountants PricewaterhouseCoopers Oy as M-real’s auditor. The term of office of the auditor expires at the end of the next Annual General Meeting.

Events after the reporting period The company has no information about any material events after the reporting period.

Near-term outlook The demand for board is expected to remain good during the first quarter. Folding boxboard and liner prices are slightly increasing as a result of price increase measures. Demand for uncoated fine paper continued to improve during the fourth quarter, and seems to continue at a good level also during the first quarter of 2010. M-real has announced price increases of eight per cent across all main markets. The price increases will take effect at the beginning of March. The demand for speciality papers is still below the normal level but it is expected to improve during the first quarter. The prices of specia- lity papers have mainly remained stable, and no significant changes in the average price are expected. In December 2009, M-real launched a new EUR 80 million profit improvement programme for 2010. The result improvement of the new planned measures in 2010 is expected to be EUR 40 million.

39

Consolidated statement of Comprehensive income

EUR million Note 1.1. – 31.12.2009 1.1. – 31.12.2008 Continuing operations Sales 4 2,432 3,236 Change in stocks of finished goods and work in progress 7 -71 -2 Other operating income 6 252 182 Materials and services 7 -1,606 -2,155 Employee costs 7 -406 -441 Share of profit from associated companies 15 2 Depreciation, amortization and impairment charges 4, 8 -356 -315 Other operating expenses 7 -514 -566 Operating result -267 -61

Share of profit from associated companies 15 -16 -1

Net exchange gains/losses 9 5 13 Other financial income 9 25 17 Interest and other financial expenses 9 -105 -172 Result from continuing operations before tax -358 -204 Income taxes 10 27 34 Result for the period from continuing operations -331 -170 Discontinued operations Result for the period from discontinued operations 5 -23 -338 Result for the period -354 -508

Other comprehensive income Cash flow hedges 11 26 -41 Available for sale investments 11 -115 87 Translation differences 11 5 11 Income tax relating to components of other comprehensive income 11 27 -19 Other comprehensive income, net of tax -57 38

Total comprehensive income for the period -411 -470

Attributable to: Shareholders of parent company -358 -517 Minority interest 49 -354 -508 Total comprehensive income for the period attributable to: Shareholders of parent company -412 -481 Minority interest 111 -411 -470 Basic and diluted earnings per share for result attributable to the shareholders of parent company, EUR 12

From continuing operations -1.02 -0.55 From discontinued operations -0.07 -1.03 Total -1.09 -1.58

40 The notes are an integral part of these financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated balance sheet

EUR million Note 31.12.2009 31.12.2008 ASSETS Non-current assets Goodwill 13 13 51 Other intangible assets 13 32 51 Tangible assets 13, 37 1,130 1,808 Biological assets 14 0 57 Investments in associated companies 15 210 63 Available for sale investments 16, 25 317 440 Other non-current financial assets 17, 25 58 232 Deferred tax receivables 18 3 5 1,763 2,707 Current assets Inventories 19 313 505 Accounts receivables and other receivables 20, 25 497 615 Current income tax receivables 38 44 Derivative financial instruments 29 24 84

Cash and cash equivalent 21, 25 497 550 1,369 1,798

Total assets 3,132 4,505

SHAREHOLDERS´ EQUITY AND LIABILITIES

Equity attributable to shareholders of parent company 22 Share capital 558 558 Share premium account 667 667 Translation differences 2-9 Fair value and other reserves 194 259 Retained earnings -505 -146 916 1,329 Minority interest 857 Total shareholders´ equity 924 1,386 Non-current liabilities Deferred tax liabilities 18 162 232 Post employment benefit obligations 23 89 98 Provisions 24, 37 60 65 Borrowings 25 943 1,568 Other liabilities 26 12 18 1,266 1,981 Current liabilities Provisions 24,37 44 34 Current borrowings 25 467 538 Accounts payable and other liabilities 27 381 489 Current income tax liabilities 68 Derivative financial instruments 29 44 69 942 1,138

Total liabilities 2,208 3,119 Total shareholders' equity and liabilities 3,132 4,505

The notes are an integral part of these financial statements. 41

CONSOLIDATED BALANCE SHEET Statement of changes in shareholders’ equity

Equity attributable to shareholders of parent company Note Share Share Translation Fair value Retained Total Minority Total capital premium differences and other earnings interest EUR million account reserves Shareholders’ equity, 1 January 2008 558 667 -11 225 391 1,830 52 1,882 Dividends paid -20 -20 -20 Metsä-Botnia restructuring in Uruguay -6 -6 Comprehensive income for the period 11 2 34 -517 -481 11 -470 Shareholders' equity, 31 December 2008 558 667 -9 259 -146 1,329 57 1,386

Shareholders’ equity, 1 January 2009 558 667 -9 259 -146 1,329 57 1,386

Metsä-Botnia restructuring in Uruguay -50 -50 Comprehensive income for the period 11 11 -65 -358 -412 1 -411 Shareholders' equity, 31 December 2009 558 667 2 194 -504 916 8 924

42 The notes are an integral part of these financial statements.

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Consolidated cash flow statement

EUR million Note 2009 2008 Cash flow from operating activities Result for the period -354 -508 Adjustments to the result, total 31 324 619 Interest received 20 16 Interest paid -114 -189 Dividends received 11 Other financial items, net 55 -21 Income taxes paid 9 -22 Change in working capital 31 140 7 Net cash flow from operating activities 81 -97

Cash flow arising from investing activities Acquisition of other shares -3 0 Capital expenditure -70 -128 Proceeds from disposal of subsidiary shares, net of cash 5, 31 0 386 Proceeds from disposal of joint venture, net of cash 5 274 0 Proceeds from disposal of shares in associated companies 33 46 0 Proceeds from disposal of other shares 380 Proceeds from sale of fixed assets 98 Proceeds from long-term receivables 19 Increase in long-term receivables -49 0 Net cash flow arising from investing activities 211 355

Cash flow arising from financing activities Share issue, minority interest 02 Proceeds from non-current liabilities 71 46 Payment of non-current liabilities -483 -301 Proceeds from current liabilities, net -134 202 Change in current interest-bearing receivables, net 202 -18 Dividends paid 0 -20 Net cash flow arising from financing activities -344 -89 Change in Cash and Cash Equivalents -52 169

Cash and Cash Equivalents at beginning of period 550 380 Translation adjustments -1 1 Changes in Cash and Cash Equivalents -52 169 Cash and Cash Equivalents at end of period 21 497 550

The notes are an integral part of these financial statements. 43

CONSOLIDATED CASH FLOW STATEMENT Notes to the financial statement

1. Accounting policies the parent company controls at the end of the year, directly or indi- rectly, over 50 per cent of the voting rights or it otherwise exercises The principal accounting policies to be adopted in the preparation of control of the company. the consolidated financial statements are as follows. The financial period of all companies ended on 31 December 2009. Subsidiaries acquired or established during the financial period ha- Main operations ve been consolidated from the date of their acquisition. Companies M-real Corporation and its subsidiaries comprise a forest industry in which a controlling interest has been given up during the financial group, which operations are organized into four business segments: year are included in the consolidated financial statements up to the Consumer Packaging, Office Papers, Speciality Papers and Market time of sale. Pulp and Energy. The Group has manufacturing operations in five The financial statements of subsidiaries have been translated, countries in Europe. Europe is also the company’s main market area, as necessary, to be in line with the accounting policies applied in the but its products are sold worldwide. The Group’s other operations are Group’s financial statements. the head office along with ancillary functions that support business Mutual shareholding between Group companies has been eliminated operations. Group’s main product areas are folding boxboard, office using the acquisition cost method, according to which the identifiable papers and special papers. assets and liabilities of an acquired company are recognised at fair M-real Corporation is Group’s parent company that is domiciled value at the date of the acquisition and the remainder of the difference in Helsinki. The registered address of the company is Revontulentie between the acquisition cost and net assets is goodwill. Acquisition- 6, 02100 Espoo Finland, related expenses are included in the acquisition cost. The copy of the annual report can be obtained in M-real’s website All intra-Group transactions, unrealized margins on internal de- www.m-real.com or parent company’s head office Revontulentie 6, liveries, internal receivables and liabilities as well as internal distri- 02100 Espoo Finland. bution of profits have been eliminated. M-real Corporation’s consolidated financial statements have been Minority interests have been separated out from Group profit at- prepared in accordance with International Financial Reporting Standards tributable to shareholders of the parent and from shareholders’ equity (IFRS). The Group consolidated financial statements were authorized and presented as a separate item under equity. The minority interest for issue by the Board of Directors on 4 February 2010. in the accumulated losses is recognised in the consolidated financial According to Finnish Companies Act shareholders have possibility statements up to the amount of the investment. to accept or reject the financial statements in General Meeting of sha- reholders after date of publication. General Meeting of shareholders Associated companies also have possibility to decide to change financial statements. Associated companies are companies over which M-real Corporation exercises significant influence but does not control. Significant in- Accounting policies and measurement bases fluence primarily arises when the Group owns over 20 per cent of the M-real Corporation’s consolidated financial statements have been company’s votes, or the Group otherwise has a significant degree of prepared in accordance with the International Financial Reporting influence over the company but has no controlling interest. Associated Standards (IFRS), applying the IAS and IFRS standards and SIC and companies are consolidated in the financial statements using the equity IFRIC interpretations that were effective and approved by the EU at method. If the Group’s share of the losses of the associated company the date of the financial statements 31 December 2009. International exceeds the carrying amount of the investment, the investment will Financial Reporting Standards refer to the standards and their inter- be recorded in the balance sheet at nil value and the losses exceeding pretations approved for use in the EU by the Finnish Accounting Act the carrying amount will not be consolidated unless the Group has and the regulations set out pursuant to it in accordance with the pro- made a commitment to fulfil the liabilities of associated companies. cedure defined in the EU decree (EC) no. 1606/2002. The notes to the An investment in an associated company contains the goodwill ge- consolidated financial statements also comply with the requirements nerated by the acquisition. Unrealised profits between the Group and of Finnish accounting and Community legislation supplementing the associated companies are eliminated according to the Group’s holding. IFRS regulations. The Group’s share of the profits of associated companies is reported in The consolidated financial statements are presented in millions the income statement on a separate line ”Share of profits of associated of euros. companies” in operating profit if the associated company essentially The financial statements have been prepared based on historical is linked to Group’s business otherwise after operating profit. costs, except for biological assets, derivative contracts and certain other financial assets and liabilities that have been measured at fair value. Joint ventures Joint ventures are entities in which a company enters into a contrac- Principles of consolidation tual arrangement whereby it shares control over the finances and operations together with other parties. The Group’s holdings in joint Subsidiaries ventures are consolidated using the proportionate method line by li- The consolidated financial statements include the accounts of the pa- ne. Accordingly, M-real’s consolidated financial statements include an rent company M-real Corporation and all those subsidiaries in which amount of the joint ventures’ assets, liabilities, revenue and expenses 44

NOTES TO THE FINANCIAL STATEMENT corresponding to the company’s holding in them. Oy Metsä-Botnia been recognized at fair value based on price quotations in the mar- Ab, Äänevoima Oy and Ääneverkko Oy have been consolidated on a ket. Unrealised and realised gains and losses due to changes in fair proportionate basis line by line. After Metsä-Botnia transaction in value are recognized immediately in the income statement during the December 2009 Metsä-Botnia is handled as an associated company financial period in which they are incurred. from 8 December 2009 on. Derivatives not included in hedge accounting are also classified as financial assets held for trading. Their accounting principles and Transactions in foreign currency principles of determining their fair value are described below. The figures concerning the profit and financial position of Group units Held-to-maturity investments include those investments with a are presented in the currency that is used in the primary operating specific date of maturity which the Group has full intention and ability environment of the unit in question. The consolidated financial sta- to retain until the date of their maturity. The Group has no held-to- tements are presented in euros, which is the parent company’s ope- maturity investments. Loans and other receivables are non-derivative rating and reporting currency. Business transactions denominated financial assets with fixed or determinable payments that are not in foreign currencies are recognised in the operating currency using quoted in an active market. the rate of the transaction date. Monetary items denominated in fo- Held-to-maturity investments include those investments which reign currencies are translated into the operating currency using the the Group has full intention and ability to retain until the date of their rate of the closing date. Non-monetary items in foreign currencies maturity. Loans and other receivables comprise external and Metsäliitto recognised at fair value have been translated into the operating cur- Group’s internal accounts, loan and other receivables. Financial assets rency using the rate of the date on which the value was determined. designated in these categories are carried at amortised cost using the Otherwise, non-monetary items have been recognised using the rate effective interest method. of the transaction date. Available for sale financial assets consist of shares in listed compa- Any gains or losses resulting from transactions in foreign curren- nies and other companies. The fair values of shares in listed companies cies, and from the translation of monetary items, are recognised under are based on public quotation for shares at the Balance sheet date. financial income and expenses with the exception of liabilities classified The most important shareholding of not quoted companies consists as hedges for net investment in a foreign entity, for which the currency of 2.5 percentage stake in Finnish energy company Pohjolan Voima gains and losses are entered for the part of hedge proven effective in Oy. The ownership in Pohjolan Voima Oy is fair valued quarterly using the translation differences in other comprehensive income. weighted average of discounted cash flow method and previous tran- The income statements of Group companies whose reporting cur- sactions. The changes in fair value are recorded in fair value reserve rencies are other than euro are translated into euros using average in equity and transferred from shareholders’ equity to profit and loss exchange rates for the reporting period, and their balance sheets at account when the investment is sold or its value is impaired so that an the exchange rates prevailing at the balance sheet date. Translation impairment shall be charged for the investment. Other shares in not differences arising on translation and on applying the purchase met- quoted companies, where the fair value cannot be measured reliably hod of consolidation are entered in other comprehensive income. In are carried at cost less any impairment losses. conjunction with divestments of subsidiaries, either by selling or by An impairment of financial assets must be charged, if the book dissolving, translation differences accumulated by the time of divest- value of the financial asset exceeds the amount of money obtainable ment are entered in the income statement as part of the gain or loss for it, the assessment of which is based on, for example, the debtor’s from the divestment. financial difficulties, neglect of payment or disappearance of an active market for the item in question.. Financial assets Cash and cash equivalents comprise cash in hand, deposits held at Financial assets have been classified according to the IAS standards call with banks and other short-term highly liquid investments. Cash as follows: 1) Financial assets at fair value through profit or loss, 2) and cash equivalents include items with original maturities of three Held-to-maturity investments, 3) Loans and other receivables and months or less from the date of acquisition. 4) Available-for-sale financial assets. Categorisation depends on the The Group assesses at each balance sheet date whether there purpose for which the assets were acquired and is made at the time is objective evidence of impairment of a financial asset or group of they were originally recorded. Financial assets are initially recognised financial assets. Objective evidence of impairment of available-for- at fair value. Transaction costs are included in the fair value unless sale financial assets includes a significant or long-term decrease of the item is measured at fair value through profit and loss. Financial the value of the investment under the acquisition cost. If the fair value assets are derecognised when the Group has lost the contractual of investments has substantially gone under acquisition cost and ex- right to receive cash flows or it has transferred substantially risks ceeded the period of time defined by the Group, it shall indicate that and rewards of ownership to outside the Group. Financial asset the value of the investment may be impaired. If there is evidence of purchases and sales are recorded at the settlement date. impairment, the accumulated losses recognised in fair value reserve Investments acquired for trading have been classified as finan- shall be transferred to profit and loss. Impairment losses of equity cial assets at fair value through profit or loss. These may include, for instruments classified as available for sale financial assets shall not example, short-term and long-term money market deposits, com- be reversed through profit and loss. mercial papers and bonds. Financial assets held for trading have 45

NOTES TO THE FINANCIAL STATEMENT The criteria for determining whether there is objective evidence of When applying hedge accounting, at the inception of a hedging impairment of loans and other receivables include: relationship the Group has documented the relationship between - significant financial problems of the issuer or debtor; the hedged item and the hedging instruments as well as the hedging - breach of contractual terms and conditions, such as defaults on strategy observed. To meet the requirements of hedge accounting, the interest or capital payments; Group has also continuously carried out effectiveness testing to verify - concessions given by the Group to the debtor due to its financial that changes in the fair value of the hedging instrument for each hed- or legal reasons related to its financial problems that it would not ging relationship cover effectively enough, with respect to the hedged otherwise contemplate giving risk, any changes in the fair value of the hedged item. - probability of the debtor’s bankruptcy Changes in the fair value of derivatives that meet the criteria for - the financial asset in question no longer having an active market fair value hedging are recognised through profit and loss. Changes due to financial problems. in the fair value of a hedged asset or liability item are presented si- Impairment testing of trade receivables is described below in more milarly in terms of the hedged risk. Changes in the fair value of the detail with regard to the relevant accounting principles. effective portion of derivative instruments that meet the criteria for cash flow hedging are recognised directly in a hedging reserve in equi- The amount of the impairment loss is determined as the difference ty. The gains and losses recognised in equity are transferred to the between the carrying amount of the financial asset and the current income statement in the period in which the hedged item is entered value of the estimated cash flows of the financial asset discounted in the income statement. When the criteria for hedge accounting are using the original effective interest rate (excluding any non-realised no longer fulfilled, a hedging instrument matures or is sold or when future credit losses). Impairment of financial assets has to be recorded the gain or loss accrued from hedging the cash flow remain in equi- if the carrying amount of the financial asset exceeds its recoverable ty until the forecast transaction takes place. However, if the forecast amount. The carrying amount of the asset is decreased and the loss hedged transaction is no longer expected to occur, the gain or loss is entered in the consolidated income statement. If the amount of the accrued in equity is recognised immediately in the income statement. impairment loss decreases during a subsequent period and the dec- The fair value of derivatives is disclosed in current non-interest-bea- rease can be objectively linked to an event realised after the recording ring receivables or liabilities. The fair values of derivatives classified of the impairment (such as the debtor’s credit rating improving), the in accordance with the applied accounting practice are presented in impairment loss is reversed in the income statement. Notes to the accounts no. 29. The maturity analysis of cash flow hedge accounting is presented in Notes to the accounts no. 30. Financial liabilities The Group has classified all financial liabilities under “Other liabilities”. Currency hedging When a financial liability is entered in the accounts, it is measured at To hedge its foreign currency exposure, the Group has partly applied cost, which is equal to the fair value of the consideration received for hedge accounting in accordance with IAS 39 as so-called cash flow it. Transaction costs are included in the original carrying amount of all hedge. A separately defined portion of the highly probable forecast financial liabilities. Subsequently, all financial liabilities are measu- cash flow of sales in USD, GBP and SEK is the object of hedge accoun- red at amortized cost using the effective interest method. Derivative ting. A change in the fair value of a derivative hedge (currency forward contracts for which hedge accounting is not applied are classified contracts) proven effective is entered directly in shareholders’ equity in as ”Financial liabilities at fair value through profit or loss”. Financial the fair value reserve, and only after the realisation of the forecasted assets and liabilities are classified according to IAS 39 and fair values sales transaction it is entered in the income statement as an adjust- are presented in the Note 28. ment of the hedged sales. Changes in the fair value of other currency derivatives to hedge foreign currency exposure are recognized under Derivative financial instruments and hedge accounting financial items in the income statement. The fair values of forward fo- Derivative financial instruments are initially recognized in the balan- reign exchange contracts are based on forward prices prevailing at the ce sheet as fair value, which equals to it’s cost and thereafter during balance sheet date, and currency options are stated at market rates their term-to-maturity are revalued at their fair value. Gains and los- in accordance with the Black&Scholes model’s far value. ses resulting from recognition at fair value are treated in accounting as The hedging of a net investment in a foreign entity is dealt with in required with regard to the intended use of the derivative in question. the books like cash flow hedge. Changes in the fair value of a deriva- Derivatives are initially classified either as 1) Hedges of the exposure to tive and loan hedge proven effective are recognized directly against changes in fair value of receivables, liabilities or firm commitments, 2) the translation differences accumulated in shareholders’ equity. The Hedges of the cash flow from a highly probable forecast transaction, 3) ineffective portion of the hedge as well as the effect of the interest Hedges of a net investment in a foreign entity, 4) Derivatives to which it rate element of forward exchange contracts are recorded in financial has been decided not to apply hedge accounting or 5) Derivatives used income and expenses in the income statement. for trading. Derivatives that do not qualify for hedge accounting are classified as financial assets or financial liabilities at fair value through Interest hedging profit or loss. To hedge the fair value of separately defined loans with derivatives contracts (interest rate swaps and currency swaps), the Group has 46

NOTES TO THE FINANCIAL STATEMENT applied hedge accounting in accordance with IAS 39 as so-called fair on market prices. All sales and other transactions between segments value hedge. Changes in the fair value of both defined loans and de- are eliminated on consolidation. rivative contracts that meet the criteria for effective hedge accounting are recognized in financial income and expenses through profit and Non-current assets held for sale and discontinued operations loss. The fair value of loans is calculated in respect of interest rate risk An asset item/operation is classified as held for sale when the amount and currency risk elements, but any changes in the company’s credit corresponding to its carrying value will be generated primarily from risk premium have not been taken into account. sale of the asset item. Moreover, to hedge its interest rate exposure, the Group has part- Asset items classified as held for sale are measured at the lower ly applied hedge accounting in accordance with IAS 39 to hedging of of their carrying amount and fair value less costs to sell. Asset items contractual cash flows of floating interest rates of loans as so-called classified as held for sale are not depreciated or amortized. cash flow hedge. A change in the fair value of derivative contracts A discontinued operation is one which the Group has disposed of (interest rate swaps) is entered directly in shareholders’ equity in fair or that is classified as held for sale and represents a separate major value reserve. line of business or geographical area of operations. The profit or loss All other interest rate derivatives, to which hedge accounting is from discontinued operations after tax is shown as a separate item not applied, are stated at their fair value, and changes in fair value are in the consolidated income statement. recognized under financial items in the income statement. The fair values of forward rate agreements, interest rate futures and options Recognition of income are based on quoted market rates at the balance sheet date, and in- Sales are calculated after deducting indirect sales taxes, trade discounts terest rate swaps and currency swaps are measured at the present and other items adjusting sales. Revenue from the sale of goods is value of future cash flows, with the calculation based on market in- recognized as income when the significant risks and benefits asso- terest rate yield curve. ciated with ownership of the products have passed to the purchaser and the seller no longer has an actual right of possession or control Commodity risk hedging over the products. Revenue from the sale of services is recorded when To hedge its electricity price risk exposure, the Group has partly app- the services have been rendered. Dividend income is recognised when lied hedge accounting in accordance with IAS 39 as so-called cash the right to receive a payment is established. Interest income is re- flow hedge. A separately defined portion of the highly probable fore- cognised by applying the effective interest rate method. cast cash flow of electricity purchases in Finland and Sweden is the object of hedge accounting. Moreover hedge accounting is applied to Delivery and handling costs hedging against Metsä-Botnia pulp price risks as so-called cash flow Costs arising from the delivery and handling of goods are recorded in hedge. A change in the fair value of a derivative hedge (forward elect- operating expenses in the income statement. ricity contracts and pulp contracts) proven effective is entered directly in shareholders’ equity in fair value reserve, and only after the realisa- Research and development expenditure tion of the forecast electricity purchases or pulp sales it is entered in Research and development expenditure is recognized as an expense the income statement as an adjustment of the hedged purchases or at the time it is incurred. Development expenditure is capitalized if it sales. The ineffective part of electricity derivatives classified to hedge is probable that a development project will generate future economic accounting and other electricity, oil and pulp derivatives hedging com- benefit and the costs can be measured reliable. Capitalized develop- modity price risk are recognized at market rates at the balance sheet ment costs are amortised over their expected useful future lives. To date, and changes in fair value are entered in the income statement date, M-real does not have capitalized development expenditure. under ”Other income and expenses”. Embedded derivatives are valued at fair value, and changes in fair Borrowing costs value are entered under financial items in the income statement. The Borrowing costs are generally recognized as an expense in the pe- amount of embedded derivatives at the M-real Group is insignificant. riod in which they are incurred. When an item of property, plant and equipment is involved in a major and long-term investment project, Segment reporting the borrowing costs directly due to the acquisition and construction The Group’s operating segments are comprised of the Group’s business of the asset are included in the asset’s cost. areas. The business areas produce different products and services, and they are managed as separate units. Income taxes The operating segments are reported uniformly with internal Tax expense in the income statement is comprised of the current tax reporting submitted to the chief operational decision-maker. The and deferred taxes. Current tax and deferred tax that relates to items Corporate Management Team has been appointed as the chief ope- that are recognised in comprehensive income shall be recognised in rational decision-maker in charge of allocating resources to the ope- comprehensive income. Income taxes are recorded on an accrual rating segments and evaluating their performance. basis for the taxable income of each reporting unit, applying the tax The same accounting policies are applied in segment reporting as for the Group as a whole. Transactions between segments are based 47

NOTES TO THE FINANCIAL STATEMENT rate in force in each country at that time. Taxes are adjusted for any cations is recorded as an expense in the reporting period in which it taxes for previous periods. has been incurred. Deferred taxes and tax assets are calculated on all the temporary differences between the accounting value and the tax base. Deferred Emission rights tax liabilities are not recognised when the asset or liability in question Allowances received by the governments free of charge have initially is one that is originally entered at the carrying amount and does not been recognised as intangible assets and the corresponding govern- concern the merging of business operations, and the recognition of ment grant as advance payment in liabilities based on fair value at such an asset or liability does not have an impact on the accounting the date of initial recognition. Allowances are measured at its cost or result or taxable income at the date of the transaction. No deferred at their fair value if less. Allowances are not amortized. The emissi- taxes are recognised for non-deductible goodwill, and no deferred taxes ons produced are recognised as cost and as liability together with the are recognised for undistributed profits of subsidiaries to the extent corresponding government grant as income both based on the value that the difference will not likely realise in the predictable future. at the date of initial recognition. So rights consumed that are within The greatest temporary differences result from impairment on pro- the original range have no positive or negative effect on profit for the perty, plant and equipment, fair value of available-for-sale financial ass- period. The costs of purchasing additional rights to cover excess emis- ets and derivative instruments, defined benefit plans, unused tax losses sions or the sale of unused rights have effect on profit. and measurement at fair value in connection with acquisitions. Deferred taxes have been calculated by applying the tax rates in Other intangible assets force by the balance sheet date. Tax assets are recognized to the extent The cost of patents, licences and trademarks having a finite useful life that it is probable that taxable profit will be available against which a is capitalized in the balance sheet under intangible assets and amor- deductible temporary difference can be utilized. tized on a straight-line basis over their useful lives in 5–10 years.

Intangible assets Property, plant and equipment Property, plant and equipment is measured at original cost. The pro- Goodwill perty, plant and equipment of acquired subsidiaries is measured at Goodwill is the portion of the cost of an acquired subsidiary, associated fair value at the time of the purchase. Property, plant and equipment company or joint venture which exceeds the fair value of its net iden- is presented in the balance sheet at cost less accumulated deprecia- tifiable assets at the time of purchase. The acquisition cost includes tion and impairment losses. For investments in property, plant and also other direct costs related to acquisition. equipment requiring a long construction time, the interest incurred Goodwill is not amortized but is tested annually and always when during construction is capitalized in the balance sheet as part of the there is indication to determine any impairment. Goodwill is measured asset for the time that is necessary for bringing the asset to working at cost less accumulated impairment losses. An impairment loss is condition for its intended use. recorded as an expense in the income statement in the reporting pe- Property, plant and equipment is depreciated on a straight-line riod during which the impairment has been determined. Goodwill is basis over the following expected useful lives: allocated to cash-generating units for the purpose of impairment tes- ting. An impairment loss is recognised when the recoverable amount Buildings and constructions 20–40 years of the cash-generating unit is less than the carrying amount of that unit. Machinery and equipment The impairment loss is allocated first to any goodwill allocated to that Heavy power plant machinery 20–40 years unit and then to the other assets of the unit on a pro-rata basis based Other heavy machinery 15–20 years on the carrying amount of each asset in the unit. An impairment loss Lightweight machinery and equipment 5–15 years recognised for goodwill is not reversed in subsequent periods. Other tangible assets 5–20 years The gain or loss on disposal of an entity includes the carrying amount of goodwill allocated to that entity. Land and water areas are not depreciated. If the significant parts of an item of property, plant and equipment have useful lives of differing Other intangible assets length, each part is depreciated separately. The estimated economic lives are reviewed at each balance sheet Computer software date and if they differ significantly from previous estimates, the dep- Expenditure on developing and building significant new computer reciation periods are altered accordingly. software programs are recognized in the balance sheet as an intan- Subsequent costs of an item of property, plant and equipment shall gible asset and amortized over its useful life, which is not to exceed be recognised as an asset if and only if it is probable that future econo- five years. Direct expenses to be capitalized include consultancy and mic benefits associated with the item will flow to the entity and the cost of expert advisory fees paid to outside parties, software licences obtained the item can be measured reliably. The carrying amount of a component for the application, staff costs to the extent that they can be allocated which has been replaced with new a component shall be derecognised. directly to the project as well as other direct costs. Maintenance and All other repair and maintenance expenditures are recognised in profit operating expenditure related to computer software and EDP appli- and loss as incurred. 48

NOTES TO THE FINANCIAL STATEMENT Gains and losses arising on the sale and decommissioning of items le amount since the last impairment loss was recognized. Following of property, plant and equipment are calculated as the difference bet- such a reversal, the value of the asset item must not exceed the car- ween the net revenue obtained and the carrying amount. Capital gains rying amount which it had, less depreciation, prior to the recording and losses are included in operating profit in the income statement. of the impairment loss. When a non-current item of property, plant and equipment is An impairment loss recognized for goodwill is not reversed in classified as held for sale, the recording of depreciation on said asset subsequent periods. is discontinued. A non-current asset held for sale is measured at the lower of the carrying amount or the fair value less the expenses ne- Biological assets cessary to make the sale. Biological assets (living trees) are measured at fair value less the es- timated expenses of making a sale. The fair value of a stand of trees, Government grants excluding young seedlings, is based on the present value of expected Government grants received for the purpose of purchasing property, cash flows (revenue and expenses). The calculations take into account plant and equipment and similar are entered as deferred income in ba- the future growth of the stand as well as the environmental protection- lance sheet liabilities and recognized in other operating income during related limits on the forests. The calculation of income from fellings the actual useful life of the asset. Other grants are recorded as other and silvicultural costs is based on the prevailing price level as well as operating income in the income statement for the financial periods the company’s view of the future trend in prices and costs. Changes during which they are matched with the corresponding expenses. in the fair value of a stand of trees are included in operating profit during the financial period. At 31 December M-real has no biological Leases assets any more. Leases on property, plant and equipment for which the Group assu- mes substantially all the risks and rewards incident to ownership of Inventories the asset are classified as finance lease agreements. A finance lease Inventories are measured at the lower of cost and net realizable va- agreement is recognized in the balance sheet at an amount equal at lue. The cost of finished and semi-finished products comprises raw the inception of the lease to the fair value of the leased property or, materials, direct labour expenses, other direct expenses as well as if lower, at the present value of the minimum lease payments. The an appropriate share of fixed and variable production overheads. The corresponding lease payment liability is recorded in interest-bearing normal capacity of the production facilities is used as the divisor in liabilities under other non-current liabilities. An asset obtained on allocating overheads to the different production units. a finance lease is depreciated over the useful life of the asset or, if The value of inventories is determined using the FIFO (first-in, shorter, the lease term. Lease payments are split between financial first-out) method or, alternatively, the weighted average cost method expenses and a reduction in the lease liabilities. depending on the nature of the inventories. Net realizable value is the Lease agreements in which the risks and rewards incident to ow- estimated selling price that is obtainable less the costs of completion nership remain with the lessor are treated as other lease agreements and the costs necessary to make the sale. (operating leases). Lease payments under an operating lease are re- cognized as an expense in the income statement on a straight-line Accounts receivables basis over the lease term. Accounts receivables are measured at the expected net realizable value, which is the original invoicing value less estimated impair- Impairments ment provisions on the receivables. Impairment test is carried for all Asset carrying values are measured at the end of each reporting pe- receivables at bankruptcy or overdue over 180 days, when there is a riod to determine any impairment. To facilitate impairment testing, justifiable reason to assume that the Group will not receive payment the Group’s assets are divided into identifiable smaller units that are for the invoiced amount according to the original terms. substantially independent of the cash flows generated by other units. The carrying values of these cash-generating identifiable assets are Provisions always tested when there are indications that the value of the asset A provision is recognized in the balance sheet when the Group has a has been impaired, and any impairments are recorded as an expense. legal or constructive obligation as a result of a past event and it is pro- Nonetheless, those cash-generating units to which goodwill has been bable that settlement of the obligation will require a financial payment allocated are subjected to an impairment test annually. or cause a financial loss, and a reliable estimate can be made of the The recoverable amount of an asset is the higher of its net selling amount of the obligation. Where the effect of the time value of mo- price or fair value. Value in use is determined by discounting estimated ney is material, the amount of a provision is the present value of the future net cash flows. The discount rate is after-tax rate that reflects expenditures expected to be required to settle the obligation. If some current market assessments of the time value of money and the risks or all of the expenditure required to settle a provision is expected to specific to the assets. be reimbursed by another party, the reimbursement is recorded in An impairment loss recognized on an item of property, plant and the balance sheet as a separate asset, but only if it is virtually certain equipment in prior periods is reversed if, and only if, there has been that reimbursement will be received. a change in the estimates used to determine the asset’s recoverab- 49

NOTES TO THE FINANCIAL STATEMENT Restructuring Gains and losses resulting from the restriction of a defined benefit A restructuring provision is recorded for the financial period when plan or performance of the obligation are recognised at the time of the Group has incurred a legal or constructive obligation to make a the restriction or fulfilment. payment. Termination payments are recorded when a detailed plan has been made of the restructuring and the main points of the plan Share-based payment have been communicated to the employees who are affected by the A share-based incentive programme in which the payments are ma- arrangement. de either with equity instruments or cash has been established for the company’s top executives. The benefits issued in connection with Onerous contracts the scheme are measured at fair value at the date of granting them A provision is recognised for an onerous contract, when the unavoi- and charged to the income statement evenly during the vesting pe- dable costs of meeting the obligations under the contract exceed the riod. In schemes where the payments are made in cash, the entered economic benefits expected to be received under it. liability and change in its fair value is correspondingly scheduled as expenses. The effect of the schemes on profit is presented under Environmental obligations employee costs. Costs arising from environmental remediation which do not inc- rease present or future revenue are recorded as annual expenses. Earnings per share Environmental liabilities are recorded in accordance with present Undiluted earnings per share are calculated using the weighted environmental protection laws and regulations when it is probable average number of shares during the reporting period. In calcula- that the obligation which has arisen and its amount can be estima- ting earnings per share adjusted for the effect of dilution, the avera- ted reasonably. ge number of shares is adjusted for the dilution effect of any equity instruments that have been issued. In calculating earnings per share, Employee benefits earnings are taken to be the reported earnings attributable to the pa- rent company’s shareholders. Earnings, both undiluted and adjusted Pension benefits for the effect of dilution, are calculated separately for continuing and Pension plans are classified as either defined benefit or defined cont- discontinued operations. ribution plans. Under a defined contribution plan, the Group pays fixed contributions to a separate unit. The Group has no legal or constructive Dividends payable obligation to pay further contributions if the recipient of the payments Dividends payable by the company are recorded as a decrease in equity is not able to pay the pension benefits in question. All plans that do not in the period during which shareholders, in a general meeting, have meet these requirements are considered defined contribution plans. approved the dividend for payment. Contributions paid to defined contribution pension plans are expensed in the period to which they relate. Comparative figures The Group’s obligations associated with defined benefit pension Where necessary, comparative figures have been classified to conform plans have been calculated separately for each plan using the Projected to changes in presentation in the current year. Unit Credit Method. Pension expenditure is expensed for the employees’ period of service based on calculations made by authorised actuaries. In preparing these interim financial statements, the group has fol- In calculating the current value of the pension obligation, the market lowed the same accounting policies as in the annual financial state- return of high-quality bonds issued by the company is used as the ments for 2008 except for the effect of changes required by the adop- discount rate. The maturity of the bonds and treasury bills essentially tion of the following standards, interpretations and amendments on corresponds to the maturity of the calculated pension obligation. The 1 January 2009: pension plan assets measured at fair value at the balance sheet date, unrecognised actuarial gains and losses and retroactive work perfor- IAS 1 (Revised) Presentation of financial statements The revised mance are deducted from the present value of the pension obligation standard prohibits the presentation of items of income and expenses to be recognised in the balance sheet. (that is, ‘non-owner changes in equity’) in the statement of changes Actuarial gains and losses are recognised in the income statement in equity, requiring ‘non-owner changes in equity’ to be presented over the expected average remaining working lives of the employees separately from owner changes in equity in a statement of compre- to the extent that such gains and losses exceed the greater of 10 per hensive income. As a result the group presents in the consolidated cent of the present value of the benefit obligation and 10 per cent of statement of changes in equity all owner changes in equity, whereas the fair value of any plan assets. all non-owner changes in equity are presented in the consolidated Expenditure based on retroactive work performance is charged statement of comprehensive income. The revised standard also re- to the income statement in fixed instalments over the period during quires an entity to present a statement of financial position as at the which they are paid-up. If the benefits are paid-up immediately, they beginning of the earliest comparative period when the entity applies are immediately charged to the income statement. an accounting policy retrospectively or makes a retrospective restate- ment or when the entity reclassifies items in the financial statements. 50

NOTES TO THE FINANCIAL STATEMENT The change in accounting policy only impacts presentation aspects. provided they have particular features and meet specific conditions. Comparative information has been re-presented so that it also is in Before the amendment these instruments were classified as liability. conformity with the revised standard. The amendment does not have a material impact on the consolidated financial statements. IFRS 8 Operating segments IFRS 8 replaces IAS 14, ‘Segment repor- ting’, and aligns segment reporting with the requirements of the US IAS 39 (Amendment) Financial instruments: Recognition and measu- standard SFAS 131, ‘Disclosures about segments of an enterprise rement – Eligible Hedged Items’ The amendment prohibits designating and related information’. The new standard requires a ‘management inflation as a hedgeable component of a fixed rate debt. It also prohibits approach’, under which segment information is presented on the including time value in the one-sided hedged risk when designating same basis as that used for internal reporting purposes. The change options as hedges. The amendment does not have a material impact did not change the number of reportable segments presented nor on the consolidated financial statements. presentation. IFRS 7 (Amendment) Enhancing Disclosures on Financial Instruments IAS 23 (Revised) Borrowing costs Revised IAS 23 changes the accoun- The amendment requires enhanced disclosures about fair value me- ting policy in respect of borrowing costs relating to qualifying assets asurement and liquidity risk. In particular, the amendment requires for which the commencement date for capitalisation is on or after 1 disclosure of fair value measurements by levels of a fair value me- January 2009. The borrowing costs directly attributable to the acquisi- asurement hierarchy. The change in accounting policy only results in tion, construction or production of a qualifying asset shall be capitalised additional disclosures the in consolidated financial statements. as part of the cost of that asset. Previously all borrowing costs could be recognised as an expense immediately. The amendment does not IASB published changes to 34 standards in May 2008 as part of the change the accounting policy applied by the Group. annual Improvements to IFRSs project. The following presentation includes the most relevant changes the Group adopted in 2009. IFRIC 11 IFRS 2 – Group and treasury share transactions The inter- pretation provides guidance on whether share-based transactions IAS 1 (Amendment) Current assets and current liabilities The amend- involving treasury shares or involving group entities should be ac- ment clarifies that some rather than all financial assets classified as counted for as equity settled or cash-settled share-based payment held for trading in accordance with IAS 39 are current assets or liabi- transactions in the stand-alone accounts of the parent and group lities. Before the amendment some entities classified all derivatives companies. The interpretation does not have any impact on the con- in held for trading category as current. The held for trading category solidated financial statements. in paragraph 9 of IAS 39 is for measurement purposes and includes financial assets and liabilities that may not be held primarily for tra- IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum ding purposes. The amendment does not have any material impact Funding Requirements and their Interaction The interpretation is on the consolidated financial statements. applied to post-employment defined benefit plans and other long- term defined benefit plans under IAS 19, if the plan includes minimum IAS 19 (Amendment) Employee Benefits The amendment clarifies funding requirements. The interpretation also clarifies the criteria among others things that a plan amendment that results in a change for recognition of an asset on future refunds or reductions in future in the extent to which benefit promises are affected by future salary contributions. The interpretation does not have any impact on the increases is a curtailment, while an amendment that changes benefits consolidated financial statements. attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit IFRS 2 (Amendment) Share-based payment – vesting conditions and obligation. The amendment does not have any material impact on the cancellations The amendment clarifies that vesting conditions are consolidated financial statements. service conditions and performance conditions only. Other features of a share-based payment are non-vesting conditions. These features IAS 20 (Amendment) Accounting for government grants and disclosure would need to be included in the grant date fair value for transactions of government assistance After the amendment the benefit of a below with employees and others providing similar services; they would not market rate government loan is measured as the difference between impact the number of awards expected to vest or valuation there of the carrying amount in accordance with IAS 39 and the proceeds re- subsequent to grant date. All cancellations, whether by the entity or ceived with the benefit accounted for in accordance with IAS 20. The by other parties, should receive the same accounting treatment. The amendment does not have any material impact on the consolidated interpretation does not have any impact on the consolidated financial financial statements. statements. IAS 23 (Amendment) Borrowing costs The definition of borrowing costs IAS 1 and IAS 32 (Amendments) Financial Instruments Puttable at Fair has been amended so that interest expense is calculated using the Value and Obligations Arising on Liquidation The amendments classi- effective interest method defined in IAS 39. The amendment does not fy the puttable financial instruments financial instruments as equity, have any material impact on the consolidated financial statements. 51

NOTES TO THE FINANCIAL STATEMENT IAS 27 (Amendment) Consolidated and separate financial statements IFRIC 18* Transfers of Assets from Customers The interpretation cla- Where an investment in a subsidiary that is accounted for under IAS rifies the requirements of IFRS standards for agreements in which an 39, ‘Financial instruments: recognition and measurement’, is classi- entity receives from a customer an item of property, plant and equip- fied as held for sale under IFRS 5, ‘Non-current assets held-for-sale ment or cash to be invested in such an item that the entity must then and discontinued operations’, IAS 39 would continue to be applied. The use either to connect the customer to a network or to provide the amendment does not have any material impact on the consolidated customer with ongoing access to a supply of goods or services. The financial statements. interpretation does not have an impact on the consolidated financial statements. IAS 28 (Amendment) Investments in associates After the amendment, where an investment in associate is accounted for in accordance with IAS IFRIC 9 and IAS 39 (Amendment)* Reassessment of embedded de- 39, only certain rather than all disclosure requirements in IAS 28 need rivatives on reclassification The amendments to IFRIC 9 and IAS 39 to be made in addition to disclosures required by IAS 32 and IFRS 7. clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category all embedded derivatives have IAS 28 (Amendment) Investments in associates The amendment sta- to be assessed and, if necessary, separately accounted for in finan- tes that an investment in an associate is treated as a single asset for cial statements. The interpretation does not have an impact on the the purposes of impairment testing. Any impairment loss is not allo- consolidated financial statements. cated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to IFRS 2 (Amendment)* Share-based Payment – Group Cash-settled the investment balance to the extent that the recoverable amount of Share-based Payment Transactions The amendment to IFRS 2 cla- the associate increases. The amendment does not have any material rifies that an entity that receives goods or services from its suppliers impact on the consolidated financial statements. must apply IFRS 2 even though the entity has no obligation to make the required share-based cash payments. Management is asses- IAS 31 (Amendment) Interests in joint ventures The amendment states sing the impact of this interpretation on the financial statements of that where an investment in joint venture is accounted for in accordan- the group. ce with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32 IASB published changes to 12 standards or interpretations in April and IFRS 7. The amendment does not have any material impact on 2009 as part of the annual Improvements to IFRSs project, which will the consolidated financial statements. be adopted by the group in 2010. The following presentation includes the most relevant changes to the group.* IAS 36 (Amendment) Impairment of assets The amendment clarifies that where fair value less costs to sell is calculated on the basis of IFRS 2 (Amendment) Scope of IFRS 2 – Share-based Payment The discounted cash flows, disclosures equivalent to those for value-in- amendment is to confirm that in addition to business combinations use calculation should be made. The amendment does not have any as defined by IFRS 3 (revised) ‘Business combinations’, contributions material impact on the consolidated financial statements. of a business on formation of a joint venture and common control transactions are excluded from the scope of IFRS 2, ‘Share-based IAS 38 (Amendment) Intangible assets The amendment clarifies that payment’. Management is assessing the impact of these changes on a prepayment may only be recognised in the event that payment has the financial statements of the group. been made in advance of obtaining right of access to goods or receipt of services. This means that an expense will be recognised for mail IFRS 5 (Amendment) Non-current Assets Held for Sale and Discontinued order catalogues when the group has access to the catalogues and Operations The amendment to clarify that IFRS 5, ‘Non-current assets not when the catalogues are distributed to customers. The amend- held for sale and discontinued operations’, specifies the disclosures ment does not have any material impact on the consolidated finan- required in respect of non-current assets (or disposal groups) classi- cial statements. fied as held for sale or discontinued operations. Also clarifies that the general requirements of IAS 1 still apply, particularly paragraph 15 (to IAS 38 (Amendment) Intangible Assets The amendment deletes the achieve a fair presentation) and paragraph 125 (sources of estimation wording that states that there is ‘rarely, if ever’ support for use of a uncertainty) of IAS 1 Management is assessing the impact of these method that results in a lower rate of amortisation than the straight- changes on the financial statements of the group. line method. The amendment does not have any material impact on the consolidated financial statements. IFRS 8 (Amendment) Operating Segments Minor textual amendment to the standard, and amendment to the basis for conclusions, to cla- In addition to the new standards and interpretations presented in the rify that an entity is required to disclose a measure of segment ass- annual financial statements for 2008, the following standards and inter- ets only if that measure is regularly reported to the chief operating pretations and amendments to existing standards and interpretations decision-maker. The interpretation does not have an impact on the issued during the year 2009 will be adopted by the group in 2010: consolidated financial statements. 52

NOTES TO THE FINANCIAL STATEMENT IAS 1 (Amendment) Presentation of Financial Statements The amend- assessing the impact of these changes on the financial statements ment clarifies that the potential settlement of a liability by the issue of of the group. equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits IAS 39 (Amendment) Financial Instruments: Recognition and a liability to be classified as non-current (provided that the entity has Measurement The amendment to the scope exemption in paragraph an unconditional right to defer settlement by transfer of cash or other 2(g) of IAS 39 to clarify that: (a) it only applies to binding (forward) cont- assets for at least 12 months after the accounting period) notwithstan- racts between an acquirer and a vendor in a business combination to ding the fact that the entity could be required by the counterparty to buy an acquiree at a future date; (b) the term of the forward contract settle in shares at any time. The interpretation does not have an im- should not exceed a reasonable period normally necessary to obtain pact on the consolidated financial statements. any required approvals and to complete the transaction; and (c) the exemption should not be applied to option contracts (whether or not IAS 7 (Amendment) Statement of Cash Flows The amendment to re- currently exercisable) that on exercise will result in control of an entity, quire that only expenditures that result in a recognised asset in the nor by analogy to investments in associates and similar transactions. statement of financial position can be classified as investing activi- Management is assessing the impact of these changes on the finan- ties. The interpretation does not have an impact on the consolidated cial statements of the group. financial statements. IAS 39 (Amendment) Financial Instruments: Recognition and IAS 17 (Amendment) Leases The amendment deletes specific guidance Measurement The amendment to clarify when to recognise gains or regarding classification of leases of land, so as to eliminate inconsis- losses on hedging instruments as a reclassification adjustment in a tency with the general guidance on lease classification. As a result, cash flow hedge of a forecast transaction that results subsequently leases of land should be classified as either finance or operating using in the recognition of a financial instrument. The amendment clarifies the general principles of IAS 17. The interpretation does not have an that gains or losses should be reclassified from equity to profit or loss impact on the consolidated financial statements. in the period in which the hedged forecast cash flow affects profit or loss. The interpretation does not have an impact on the consolidated IAS 18 (Amendment) Revenue Additional guidance added to the ap- financial statements. pendix to IAS 18 Revenue regarding the determination as to whether an entity is acting as a principal or an agent. The interpretation does IFRIC 9 (Amendment) Reassessment of Embedded Derivatives The not have an impact on the consolidated financial statements. amendment to the scope paragraph of IFRIC 9 clarifies that it does not apply to possible reassessment, at the date of acquisition, to em- IAS 36 (Amendment) Impairment of Assets The amendment clari- bedded derivatives in contracts acquired in a combination between fies that the largest cash-generating unit (or group of units) to which entities or businesses under common control or the formation of a goodwill should be allocated for the purposes of impairment testing joint venture. The interpretation does not have an impact on the con- is an operating segment as defined in IFRS 8, ‘Operating segments’ solidated financial statements. (that is, before the aggregation of segments with similar economic characteristics permitted by IFRS 8). The interpretation does not have IFRIC 16 (Amendment) Hedges of a net investment in a foreign ope- an impact on the consolidated financial statements. ration The amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by IAS 38 (Amendment) Intangible Assets The amendment clarifies the any entity or entities within the group, including the foreign operation requirements under IFRS 3 (2008) regarding accounting for intangible itself, as long as the designation, documentation and effectiveness assets acquired in a business combination. Management is assessing requirements of IAS 39 that relate to a net investment hedge are sa- the impact of these changes on the financial statements of the group. tisfied. Management is assessing the impact of these changes on the financial statements of the group. IAS 38 (Amendment) Intangible Assets The amendment clarify the description of valuation techniques commonly used by entities when The following standards, interpretations and amendments will be measuring the fair value of intangible assets acquired in a business adopted in 2011 or later: combination that are not traded in active markets Management is assessing the impact of these changes on the financial statements IAS 32 (Amendment) Financial Instruments: Presentation – Classification of the group. of Rights Issues The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency IAS 39 (Amendment) Financial Instruments: Recognition and other than the functional currency of the issuer. Previously such rights Measurement. The amendment clarifies that pre-payment options, issues were accounted for as derivative liabilities. However, the amend- the exercise price of which compensates the lender for loss of inter- ment requires that, provided certain conditions are met, such rights est by reducing the economic loss from reinvestment risk should be issues are classified as equity regardless of the currency in which the considered closely related to the host debt contract. Management is exercise price is denominated. The Group will adopt the amendment 53

NOTES TO THE FINANCIAL STATEMENT in its 2011 financial statements. Management is assessing the impact 2. Key accounting estimates applied in the of this interpretation on the financial statements of the Group. financial statements and discretion used in IAS 24 (Revised)* Related Party Disclosures The revised standard the accounting principles simplifies the disclosure requirements for government-related en- tities and clarifies the definition of a related party. The revised stan- Preparing IRFS-compliant financial statements requires the use of dard still requires disclosures that are important to users of financial certain key accounting estimates. In addition, it requires the mana- statements but eliminates requirements to disclose information that gement to use its discretion in applying the accounting principles. is costly to gather and of less value to users. It achieves this balance The estimates made and discretion-based decisions are continuously by requiring disclosure about these transactions only if they are in- evaluated, and they are based on prior experience and other factors, dividually or collectively significant. The Group will adopt the revised such as expectations concerning future events. The expectations are standard in its 2011 financial statements. The interpretation does not considered to be reasonable, taking the circumstances into account. have an impact on the consolidated financial statements. The topics that are associated with key assumptions and estimates in terms of consolidated financial statements and areas that require IFRIC 19* Extinguishing Financial Liabilities with Equity Instruments significant discretion are described below. The interpretation clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished by Key accounting estimates the debtor issuing its own equity instruments to the creditor. IFRIC 19 requires a gain or loss to be recognised in profit or loss when a liability Impairment testing is settled through the issuance of the entity’s own equity instruments. The Group annually tests the goodwill and intangible assets not yet The amount of the gain or loss recognised in profit or loss will be the ready for impairment. Testing for impairment is carried out for other difference between the carrying value of the financial liability and the long-term assets if there are indications that the value of the assets fair value of the equity instruments issued. The Group will adopt the might be impaired. The recoverable amounts of cash-generating units revised standard in its 2011 financial statements. The interpretation are based on calculations of value in use. These calculations require does not have an impact on the consolidated financial statements. that estimates are made. The Zanders cash-generating unit that is included in the Speciality Papers operating segment generated an IFRIC 14 (Amendment)* Prepayments of a Minimum Funding Requirement impairment loss of EUR 66 million in 2009 and Office Papers’ Alizay The amendment is aimed at correcting an unintended consequence paper mill some EUR 47 million. The carrying amount of the units of IFRIC 14. As a result of the interpretation, entities are in some cir- were reduced to correspond to their recoverable amounts. A sensiti- cumstances not permitted to recognise some prepayments for mini- vity analysis of the substantial assumptions used in the impairment mum funding contributions as an asset. The amendment remedies testing and the impact of changes in them on the amount of impair- this unintended consequence by requiring prepayments in appropriate ment is presented in Note 8. circumstances to be recognised as assets. The Group will adopt the revised standard in its 2011 financial statements. The interpretation Pension plans does not have an impact on the consolidated financial statements. The current value of the pension obligations depends on various fac- tors that are determined using various actuarial assumptions. The IFRS 9* Financial Assets – Classification and Measurement The stan- discount rate is also included in the assumptions used in determining dard represents the first milestone in the IASB’s planned replacement the net expenditure (or income) arising from pension plans. Changes of IAS 39. It addresses classification and measurement of financial in these assumptions have an effect on the carrying amount of the assets. The next steps involve reconsideration and re-exposure of the pension obligations. classification and measurement requirements for financial liabilities, The appropriate discount rate is determined at the end of each impairment testing methods for financial assets, and development of year. This is a rate that should be used in determining the current enhanced guidance on hedge accounting. The Group will adopt the value of the future cash flows estimated to be required to fulfil the standard in its 2013 financial statements. The standard will have major pension obligations. In determining the appropriate discount rate, the impacts on accounting for financial instruments, and the management interest rates of long-term treasury notes or similar instruments are is currently starting to assess them. taken into consideration. Other key assumptions concerning pension obligations are based on the current market conditions. *The standard, interpretation or amendment to published standard or interpretation is still subject to endorsement by the European Union.

54

NOTES TO THE FINANCIAL STATEMENT Share-based reward scheme Key discretion-based decisions in applying the accounting The share-based incentive arrangements granted to the Group’s key policies employees are measured at fair value at the time of granting. The fair value is charged to the income statement over the vesting peri- Inventories od during which all the requirements for the right to arise must be The Group regularly reviews its inventories for situations where the fulfilled. The expense measured at the time of granting the shares inventories exceed their real value, contain downgraded items or their is based on an estimate of the number of shares to which a right is market value falls below the acquisition cost, and records a deduc- believed to arise at the end of the vesting period. Changes in the es- tion item that reduces the carrying amount of the inventories in the timates are recognised in the income statement. A total of EUR 0.1 case of such deductions. The management must make estimates of million was recognised as an expense on the financial period ended the future demand for the products for the purpose of such review. on 31 December 2009. Any changes in these estimates might lead to an adjustment in the carrying amount of the inventories in future periods. M-real’s balan- Financial instruments at fair value ce sheet included inventories amounting to EUR 313 million on 31 A fair value is determined for financial instruments not traded on an December 2009. open market using valuation methods. Discretion is used in selec- ting the various methods and making assumptions based primarily Accounts receivables on the market conditions prevailing at the end date of each reporting Accounts receivables are recognised according to the original in- period. The greatest item at fair value not traded on an open market voiced amount less impairment losses and refunds due to returns. is the investment in Pohjolan Voima shares, reported under available- Impairment losses are recognised on a case-by-case basis and based for-sale financial assets. Their price is determined based on realised on previous experience when there is objective proof that the recei- transactions and an analysis of discounted cash flows. The carrying vable cannot be collected in full. If the customers’ financial position amount of available-for-sale financial assets would be estimated to weakens so that it affects their solvency, further impairment losses be EUR 7 million lower or EUR 9 million higher should the rate used might need to be recognised for future periods. M-real’s balance sheet for discounting the cash flows differ by 10 per cent from the rate es- on 31 December 2009 included trade receivables amounting to EUR timated by the management. 301 million and impairment losses recorded for trade receivables amounting to EUR six million. Provisions A provision is recorded when the Group has a legal or constructive Impairment of equity investments classified as available-for- obligation as a result of a previous event and it is probable that the sale financial assets liability for payment will realise. The provisions are determined based The question when the value of available-for-sale equity investments is on previous experience. A provision for restructuring is made when impaired is solved according to the guidelines of IAS 39. This requires M-real has composed a detailed restructuring plan and communicated the use of significant discretion, e.g., in terms of for how long and to about the matter. A recorded provision illustrates the management’s what extent the fair value of the investment has been lower than the best estimate of the current value of future expenses, but actual ex- acquisition cost. In addition, it is necessary to estimate the financial penditure may differ from the estimate. Provisions amounted to EUR position of the investment object regarding the near-future outlook 104 million on M-real’s balance sheet on 31 December 2009. of the business operations, such as the profitability of the industry and sector, to find out whether there is objective proof of impairment. Income taxes Should it be considered that the reduction of the fair value to below The management’s discretion is required for determining the taxes the acquisition cost is entirely or partially significant and prolonged, based on the result for the period, deferred tax assets and liabilities an additional after tax loss of EUR 188 million would be recognised in and the extent to which deferred tax assets are recorded. The Group’s the financial statements for 2009 when the changes in fair value as- balance sheet on 31 December 2009 includes deferred tax assets of sociated with impaired available-for-sale financial assets recognised EUR 10 million recognised for confirmed losses. The Group is subject under equity are charged to the income statement. to income taxation in several countries. Estimating the total amount of income taxes at the level of the entire Group requires significant discretion. The final amount of tax is uncertain in terms of several business operations and calculations. The Group forecasts future tax audits and recognises liabilities based on estimates on whether furt- her taxes will need to be paid. If the associated final tax differs from the originally recorded amounts, the difference has an effect on both the tax assets and liabilities based on the taxable income for the pe- riod and deferred tax assets and liabilities in the period during which they are observed. 55

NOTES TO THE FINANCIAL STATEMENT 3. Management of financial risks value changes of hedges designated to hedge accounting to be ente- red directly in shareholders’ equity in fair value reserve. At the end of The financial risks associated with business operations are mana- the reporting period, the foreign exchange transaction exposure had ged in accordance with the financial policy endorsed by the Board of been hedged 4.9 months on average (2008: 4.6). During the reporting Directors and the senior management of the company. The policy de- period, the hedging level has varied between 3 and 5 months (4-6). fines focal instructions on the management of foreign currency, inter- The dollar’s hedging level was 7.2 months (4.0), of which the portion of est rate, liquidity and counterparty risks, and for the use of derivative hedge accounting was 1.8 months (1.5). The Swedish krona’s hedging financial instruments. Correspondingly, commodity risks are managed level was 4.7 months (5.3), of which the portion of hedge accounting according to the company’s commodity risk policy. The purpose is to was 3.6 months (4.7). The pound’s hedging level was 2.5 months (4.7), protect the company against major financial and commodity risks, to of which the portion of hedge accounting was 1.4 months (1.4). Hedges balance the cash flow and to allow the business units time to adjust allocated to hedge accounting have been used to hedge the portion of their operations to changing conditions. highly probable forecast sales of the currency transaction exposure. Metsä Group Financial Services Oyo (Metsä Finance) is specialized The translation risk of a net investment in a foreign entity is ge- in finance and functions as the Group’s internal bank. M-real’s holding nerated from the consolidation of the equity of subsidiaries and asso- in Metsä Finance is 51 per cent and Metsäliitto Cooperative’s holding ciated companies outside the euro area into euros in the consolidated is 49 per cent. Financial operations have been centralised to Metsä financial statements. According to the financial policy, 50–100 per cent Finance, which is in charge of managing the Group companies’ finan- of equity should be hedged. The translation risk of equity has been cial positions according to the strategy and financial policy, providing hedged through the use of forward transactions and foreign currency necessary financial services within the Metsäliitto Group and acting loans and the position has been kept hedged in all the main currencies. as an advisor in financial matters. Hedge accounting in accordance with IAS is applied to the hedging of the equity exposure. This allows the exchange gains and losses of Foreign currency risk effective hedging to be entered into the equity offsetting translation The Group’s foreign currency exposure consists of the risks associated differences. During the reporting period, on average 93 per cent (97) of with foreign currency flows, translation risk of net investments in fo- the equity position was hedged and at the end of the reporting period reign entities and economic currency exposure. Most of the Group’s 96 per cent (88). The translation risk in US dollars was eliminated in costs are incurred in the euro zone and to some extent in Sweden, but connection to the sale of Botnia’s units in Uruguay. a significant part of the sales is in other currencies. Sales revenue may The Group applies the Value-at-Risk method to assess the risk of therefore vary because of changes in exchange rates, while produc- its open foreign currency positions. The VaR is calculated on the devi- tion costs remain unchanged. Product prices are also often quoted ation from the three-month foreign currency exposure hedge norm in currencies other than the home currency. In the foreign currency defined in the financial policy. A 99 per cent confidence level on one transaction exposure, which consists of foreign currency denominated month period is applied to the VaR risk figure, i.e., the VaR indicates sales revenue and costs, are included foreign currency denominated that with a 1 per cent probability the market value of the open foreign sales receivables, accounts payable, received orders and a certain currency position depreciates more than the amount of the risk figure part of the forecast net currency cash flow. in a month. The risk mandates regarding hedging decisions have been The main currencies of the Group’s foreign currency transaction defined by restricting the company management’s powers by linking exposure are the US dollar, the British pound and the Swedish korma. them to maximum currency-specific hedging level changes and to a A strengthening of the dollar and the pound has a positive impact on VaR limit. Possible strategic decisions which exceed the policy risk the financial result and a weakening a negative impact. A weakening limits are made by the Board of Directors. The limit set for the M-real of the Swedish krona has a positive impact on the result. Other signifi- Group’s foreign currency risk is EUR 25 million (15) and the VaR is at cant currencies are AUD, CAD, CHF, DKK and NOK. The hedging policy the end of the reporting period EUR 7.9 million (12.7). Average during is to keep an amount corresponding to three months’ cash flows of the period has been EUR 8.8 million (8.6). The Value-at-Risk method all contractual or estimated currency flows consistently hedged. The is also used to assess the market risk of Metsä Finance’s trading hedging level can, however vary between 0–12 months as the finan- operations. Trading volume has been relatively low during the repor- cial policy has defined separate risk mandates for deviating from the ting year: Metsä Finance’s average VaR (of one day at 99 per cent) norm hedging. The Board of Directors decides on significant changes was only EUR 0.34 million in 2009 (0.18). The volumes and fair values in the hedging level if they see a reason to deviate from the norm set of derivatives used in the management of foreign currency risks are out in the financial policy. The amount of currency-specific hedging presented in Notes no. 29. depends on current exchange rates and market expectations, on the interest rate differences between the currencies and the significance Interest rate risks of the exchange rate risk for the financial result. The transaction ex- The interest rate risk is related mainly in the interest bearing receiva- posure is mainly hedged by forward transactions but also by the use bles and loans and currency hedging. Interest bearing receivables and of foreign currency loans and currency options. loans are presented in Notes no. 25. The most significant currencies Hedge accounting in accordance with IAS 39 is applied partially to in risk management are the euro, the US dollar, the British pound and the Swedish krona. The objective of the interest rate risk policy is to 56 the hedging of the currency transaction exposure, which allows fair

NOTES TO THE FINANCIAL STATEMENT minimise the negative impact of interest rate changes on the result electricity procurement, the hedge strategy is implemented in cooperation and the financial position, and to optimise financing costs within the with Metsäliitto Energy through Metsä Finance. The Central European framework of risk limits. The effect of interest rate changes on financial energy unit will implement the hedging of Central Europe’s electricity costs depends on the average interest fixing time of interest bearing price risks according to instructions of Metsäliitto Energy either by phy- assets and liabilities, which is measured in the Group by duration. sical contracts or by financial contracts through Metsä Finance. M-real As duration diminishes the rise of interest rates affects more quickly hedges the electricity price risk actively by setting the hedging norm at the interest expenses of financial liabilities. The maturity of the loan 80, 50, 30 and 20 per cent (85, 55, 25 and 0) share of the estimated net portfolio can be influenced, e.g., by adjusting between floating-rate position during the first, second, third and fourth successive 12-month and fixed-rate loans and by using interest rate derivatives. The Group periods. Hedge accounting in accordance with IAS 39 has been applied uses in its interest rate risk management interest rate swaps, interest partially to electricity hedging. Consequently the fair value of hedges rate futures and interest rate options. allocated to hedge accounting is entered in equity in fair value reser- The average interest duration norm based on the Group’s financial ve and only after the realisation of electricity purchases in the income policy is 6 months. The duration can, however, deviate from the hedging statement as an adjustment of the purchases. policy norm so that the decision of a deviation exceeding four months Approximately a third of M-real’s mills’ use of fuel is based on na- has to be made by the Board of Directors. The average duration of lo- tural gas. The hedging of natural gas price risks has been done with ans was 6.4 months at the end of the year (3.4). During the reporting physical, fixed-price contracts. In Finland only the oil-related portion period duration has varied between 2 and 7 months (3-6). At the end of the contract has been fixed. The prices of natural gas have typical- of 2009, an increase of one per cent in interest rates would increase ly been fixed to Fuel-Oil and/or Gas-Oil prices. In addition, the prices interest rate costs of the next 12 months by EUR 3.4 million (8.3). of gas supply to Finland have been fixed to the development of coal The Group is exposed to a risk of change in the value of derivatives import price and the energy price index. The premise of natural gas due to a change in market prices when using interest rate derivati- price risk hedging is, however, to hedge only the oil-related part of ves, since according to IAS 39 derivatives must be valued to their fair the contract by using oil derivatives and fixed-priced physical supply value in the balance sheet. However, the partial application of hedge contracts. The hedging strategy is based on a risk policy according to accounting will balance the effects of changes in the market value which Metsäliitto Energy makes the hedging decisions, and the Group of derivatives on the financial result. The Group is applying fair value Board of Directors makes significant strategic decisions. hedge accounting in accordance with IAS 39 to fixed-rate loans which Approximately 70 per cent (70) of electricity hedges have been have been converted by interest rate and currency swaps to floating- carried out by using physical supply contracts and 30 per cent (30) as rate financing. In addition, the Group is applying cash flow hedge ac- so-called financial hedges by using electricity derivatives. At the end counting in accordance with IAS 39 to the major part of the interest of the year, about 90 per cent (80) of financial hedges have been de- rate swaps by which floating-rate financing has been converted to signated to hedge accounting. All natural gas price risk hedges have fixed-rate financing. The gross nominal volume of interest rate deri- so far been implemented by using physical supply contracts. vatives at the time of financial statements (including currency swap The continuous hedging of the Group companies’ pulp price risk has contracts) is EUR 1,033 million (1,412), of which the portion of reversed not been seen as justified in the framework of the current operative contracts is EUR 300 million (487). Of the derivatives portfolio, EUR model. However, pulp derivatives are used selectively to hedge indivi- 534 million (746) is allocated to hedge accounting, and the portion of dual commercial positions generated in the Group companies. derivatives recognized in the balance sheet through profit or loss is The volumes and fair values of derivatives used in the manage- EUR 199 million (179). The maturity of interest rate swap and currency ment of commodity risks are presented in Notes no. 29. swap contracts varies between 1–5 years (1-6). Liquidity risk Commodity risk Liquidity risk is defined as the risk that funds and available funding In the hedging of commodity risks the Group applies risk management become insufficient to meet business needs, or that extra costs are policies defined separately for each selected commodity. According incurred in arranging the necessary financing. Liquidity risk is moni- to the policy, the management of commodity risks with regard to tored by estimating the need for liquidity needs 12–24 months ahead derivatives is accomplished by Metsä Finance based on the strategy and ensuring that the total liquidity available will cover a main part of approved by Board of Directors of M-real. So far the commodity hed- this need. According to the financial policy, the liquidity reserve must ging policy is applied to the management of the price risks of electri- at all times cover 80–100 per cent of the Group´s liquidity require- city and natural gas. Also transactions related to Emission rights are ment for the first 12 months and 50–100 per cent of the following managed by Metsä Finance. 12–24 months liquidity requirement. The objective is that at the most M-real’s target in managing the electricity price risk is to balance 20 per cent of the Group’s loans, including committed credit facilities, the effect of changes in the price of electricity on the Group’s result are allowed to mature within the next 12 months and at least 35 per and financial position. The main principle is to hedge the electricity cent of the total debt must have a maturity in excess of four years. purchase exposure, which consists of the difference of factory-specific Another target is to avoid keeping extra liquidity as liquid funds and electricity consumption estimates and power plant production shares instead maintain a liquidity reserve as committed credit facilities out- in the possession of the Group. With regard to the Finnish and Swedish side the balance sheet. 57

NOTES TO THE FINANCIAL STATEMENT The cornerstone of liquidity risk management is to manage the gement, Letters of Credits, bank and parent company guarantees and Group’s operative decisions in such a way that targets concerning in- Credit insurance are used to mitigate credit risk. Credit limits are ap- debtedness and sufficient liquidity reserve can be secured in all eco- proved according to credit risk management policy with approval limits nomic conditions. Liquidity risk is also managed by diversifying the use of varying values across the Group. Due to the ongoing challenging of capital and money markets to decrease dependency on any single economic environment, credit limits have been reviewed on a more financing source. The optimisation of the maturity structure of loans regular basis than in previous years. Customers have generally been is also emphasized in financial decisions. The Group has been able cooperating by providing interim financial statements. The Corporate to significantly stabilise the maturity structure of long-term loans by Credit Committee reviews and sets all major credit limits which are Eurobond issues in 2006 and divestments during 2007–2009. not supported by credit insurance and/or other security. Liquidity is on a good level. During 2009 liquidity was strengthened M-real implements regular impairment tests for customer ac- through the realisation of the Metsä-Botnia Uruguay transaction in counts receivables. Credit loss impairment is booked when a customer December and receiving a EUR 190 million cash payment out of Sappi enters legal bankruptcy, or becomes past due for more than 6 months Ltd Note related to the divestment of the Graphic Papers business at (180 days) without a valid payment plan or other valid reasons. Credit the end of 2008. The liquidity reserve was reduced by the maturity of loss provisions for the year were EUR 5.8 million, substantially above EUR 500 million Syndicated Loan Facility. The available liquidity was the historical annual average from 2000 to 2008 of EUR 3.8 million. EUR 776 (1,454) million at the end of the reporting period, of which 279 Excluding discontinued business in Graphics, credit loss provisions million (904) was committed credit facilities and 497 million (550) liquid for 2009 were EUR 2.2 million against historical annual average from funds and investments. In addition the Group had other interest-bearing 2000 to 2008 of EUR 1.4 million. The level of credit losses tailed off in receivables EUR 136 million (303). The Group had also at its disposal the final quarter of the year and in 2010 is expected to be at a lower short-term, uncommitted commercial paper programmes and credit level than 2009. The portion of overdue client receivables of all sales lines amounting to around EUR 529 million (550). At the end of 2009, receivables is at the time of financial statements 8.3 per cent (14.8), the liquidity reserve covers fully the forecasted financing need of 2010 of which 0.6 per cent (0.3) is overdue between 90–180 days and 0.4 and also the major part of financing need of 2011. On the longer term per cent (0.5) over 180 days. The specification of doubtful receivables the re-financing need is crucially affected by the cash flow development is in Notes no. 20. and possible future divestments. 25 per cent (31) of long-term loans The geographical structure of the accounts receivable is diver- and committed facilities fall due in a 12 month period and 24 percent sified and is reflecting the external sales structure presented in the (34) have a maturity of over four years. The average maturity of long- Segment information. Largest sources of credit risk exist in Great term loans is 2.4 years (2.9). The share of short-term financing of the Britain, Belgium, Germany, Italy, France and Spain. The share of lar- Group’s interest bearing liabilities is 4 per cent (10.5). gest individual customer (individual companies or groups of compa- nies under common ownership) credit risk exposure of M-real at the Counterparty risk end of 2009 represented 15 per cent (16) of total accounts receivable. Financial instruments carry the risk that the Group may incur losses 42 per cent (31) of accounts receivable was owed by ten customer should the counterparty be unable to meet its commitments. Such groups (individual companies or groups of companies under com- risk is managed by entering into financial transactions only with most mon ownership). creditworthy counterparties and within pre-determined limits. During The first three quarters of the year saw above historical average the reporting period, credit risks of financial instruments did not result overdue receivables. This was due to a continuing difficult economic in any losses. The financial counterparty risk is limited by the fact that environment in major markets and the challenging collections from the liquidity reserve is partially maintained in the form of committed customers of the discontinued graphic business. Quarter four saw credit facilities. Cash at bank and in hand, and other investments have much lower levels of late payment. Customer payment performance been spread to several banks and commercial papers of several insti- is expected to continue above historical levels in 2010 though lower tutions. Counterparty limits have been regularly adjusted by taking into than 2009. account the influence of the finance crisis to the financial position of As reported in the 2008, credit insurance credit limits declined ra- the used counterparties. Derivatives trading is regulated by the stan- pidly from the first quarter, especially for customers involved in forest dardised ISDA contracts made with the counterparties. products manufacture and distribution as the insurers moved to pro- The Group’s accounts receivables carry a counterparty risk that the tect themselves rather than offer a true view of the risk of a company Group may incur losses should the counterparty be unable to meet its bankruptcy. At the end of 2009, around 64 per cent of M-real’s trade commitments. Credit risk attached to sales receivables is managed on receivables were covered by insurance (excluding energy). M-real’s the basis of the credit risk management policies approved by operative internal analysis of the real risk of customer insolvency continued to management. Accounts receivable performance is followed monthly by support sales while controlling credit risk. Corporate Risk Management Team and Corporate Credit Committee. Credit quality of customers is assessed at regular intervals based on the customers’ financial statements, payment behaviour, credit agen- cies and credit ratings agencies. Individual credit limits are reviewed at least annually. From time to time, as deemed necessary by mana- 58

NOTES TO THE FINANCIAL STATEMENT Managing the capital 2009 2008 Terms capital and capital structure are used to describe investments Equity ratio, % 35 36 made in the company by its owners and retained earnings (together Net gearing ratio, % 63 74 equity) and debt capital (liabilities) as well as the relation between them. In managing its capital structure, the Group aims at maintaining an In case the company could not meet its obligations as defined by the efficient capital structure that ensures the Group’s operational condi- above mentioned key ratios and in order to avoid a breach of cont- tions in financial and capital markets in all circumstances despite the ract that could have and adverse effect on the company’s financial fluctuations typical to the sector. The company has a credit rating for position, it would need to renegotiate its financial arrangements, its long-term financing. Certain central target values, which corres- payback its loans or get its debtors to give up their claims to meet pond to standard requirements set by financing and capital markets, these obligations. have been defined for the capital structure. No target level has been defined for the credit rating. The Group’s capital structure is regularly assessed by the Group’s Board of Directors and its Audit Committee. The Group monitors the development of its capital structure through a key ratio that describes net gearing. The objective of the Group is to maintain its net gearing ratio at the maximum level of 100 per cent on average over the trade cycle. The key ratios describing the capital structure and the capital amounts used for the calculation of the key ratio were on 31.12.2009 and 31.12.2008 the following:

EUR million 2009 2008 Net gearing ratio, % 84 90 Interest-bearing borrowings 1, 410 2,106 ./. Liquid funds 497 550 ./. Interest-bearing current receivables 136 302 777 1,254

Equity attributable to shareholders of parent company 916 1,329 + Minority interest 8 57 924 1,386

In the company’s certain loan contracts a minimum limit of 30 per cent has been set for the Group’s equity ratio and a maximum limit of 120 per cent for the Group’s net gearing ratio. With regard to defining the equity, the calculation formula of key ratios as defined in the loan cont- racts deviates from the calculation formulas presented in the Annual Report. This is due to the fact that in loan contracts business value and deferred tax liabilities are taken into account when calculating the key ratio. Also the formula for calculating net gearing in the loan contracts deviates from the formula presented in the Annual report. This is caused by a EUR 300 million non-recurring write-off exclusion in the calculation of the key ratio. Other covenants in the Group’s loan agreements are customary terms and conditions including for example a negative pledge, restrictions on major asset disposals, limitations on subsidiary indebtedness, restrictions on changes of business and mandatory prepayment obligations upon a change of control of the Group. The Group has been in compliance with its covenants during the accounting periods 2009 and 2008. The capital structure’s key ratios calculated according to what is specified in the loan contracts were on 31.12.2009 and 31.12.2008 approximately the following:

59

NOTES TO THE FINANCIAL STATEMENT Hedging of foreign exchange transaction exposure 31 Dec. 2009 Annual transaction exposure 2009 2008 USD GBP SEK NOK DKK AUD Other Other Total Total long short Transaction exposure, net (mill. currency 447 196 -3 269 196 172 40 units) Transaction exposure,net (EUR million) 310 220 -319 24 23 25 17 -13 952 1 084 Transaction exposure hedging (EUR million) -186 -45 124 -4 -3 -8 -5 13 -388 -422 Hedging at the end of the year (months) 7.2 2.5 4.7 2.0 1.3 4.1 3.5 11.9 4.9 4.6 Average hedging in 2009 (months) 3.7 3.1 5.6 2.1 1.1 3.6 3.5 16.9 4.3 5.3

Hedging of net investments in a foreign entity 31 Dec. 2009 Equity exposure 2009 2008 USD GBP SEK Other Total Total Equity exposure (mill. currency units) 0 9 2,543 Equity exposure (EUR million) 0 10 248 4 263 484 Equity hedging (EUR million) 0 -10 -248 -2 -259 -426 Hedging at the end of the year, (%) 0 99 100 35 99 88 Average hedging in 2009, (%) 86 100 98 48 93 97

Interest rate risk / duration and re-pricing structure of loans (incl. Interest rate derivatives) 31.12.2009 31.12.2008 Loan Duration Average Interest rate Re-pricing structure of interest rates of loans Loan Duration Average Interest rate amount (months) interest sensitivity *) amount (months) interest sensitivity *) (EUR million) rate (%) (EUR million) 1–4/2010 5–8/2010 9–12/2010 2011 2012 2013 –>2013 (EUR million) rate (%) (EUR million) 1,410 6.4 6.0 3.4 1,040 120 30 48 14 21 137 2,106 3.4 7.0 8.3

*) Interest rate sensitivity is an estimate of the effect of an interest rate change of one percent in one direction on net interest cost based on year end exposure Hedging of electricity price risk exposure 31.12.2009 31.12.2008 GWh GWh Electricity exposure, net 2010 1,110 1,366 Electricity hedging 2010 991 946 Hedging at the end of the year (%) 89 69

Electricity price risk is hedged based on defined risk management policy on a time horizonof four years either by physical contracts or by financial contracts. The table is applying only to the hedging of electricity price risk of the following year. The net electricity exposure hasbeen calculated by taking into account the own and associated companies´ electricity production.

Interes rate trends Exchange rate trends Currency breakdown Foreign currency breakdown % EUR for loans for currency exposure 8 2.0 7 6 1.5 5 4

3 1.0 2 1 0 0.5 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Q EUR 93% Q USD 7% Q USD 33% Q GBP 23% Euribor 3 months EUR/USD Q SEK 33% Q AUD 3% USD 3 months EUR/GBP Q NOK 2% Q Others 6% 60 GBP 3 months

NOTES TO THE FINANCIAL STATEMENT Market risk sensitivity at 31 Dec. 2009 31.12.2009 Impact on equity exposure and annual transaction exposure 31.12.2009 Impact on Impact on Impact on Impact on Impact on financial net equity of net equity of annual annual assets foreign entities foreign entities transaction transaction and liabilities incl. hedging exposure expo- (cash flow) sure (cash flow) EUR million incl. hedging Interest rate risk (100 bp rise in interest rates) Effect on profit 1.1 -3.4 -1.9 Effect on other change in equity 0.5

Commodity risk (electricity price + 20%) Effect on profit 0.3 -3.6 3.8 Effect on other change in equity 7.1

FX risk (USD - 10%) Effect on profit 9.0 -31.0 -12.4 Effect on other change in equity 4.5 FX risk (GBP - 10%) Effect on profit -3.5 -22.0 -17.5 Effect on other change in equity 3.6 -1.0 0.0 FX risk (SEK - 10%) Effect on profit 2.6 31.9 19.5 Effect on other change in equity 15.3 -24.8 0.0

Items with + sign = positive effect = increase of assets / decrease of liabilities / increase of cash flow Items with - sign = negative effect = decrease of assets / increase of liabilities / decrease of cash flow

31.12.2008 Impact on equity exposure and annual transaction exposure 31.12.2008 Impact on Impact on Impact on Impact on Impact on financial net equity of net equity of annual annual assets foreign entities foreign entities transaction transaction and liabilities incl. hedging exposure expo- (cash flow) sure (cash flow) EUR million incl. hedging Interest rate risk (100 bp rise in interest rates) Effect on profit 1.2 -8.3 -6.4 Effect on other change in equity 0.7

Commodity risk (electricity price + 20%) Effect on profit -0.9 -10.2 1.9 Effect on other change in equity 13.0

FX risk (USD - 10%) Effect on profit 1.4 -39.2 -26.3 Effect on other change in equity 22.2 -19.5 -2.5 FX risk (GBP - 10%) Effect on profit 1.7 -18.7 -11.3 Effect on other change in equity 3.8 -1.6 0.0 FX risk (SEK - 10%) Effect on profit 3.1 38.2 21.3 Effect on other change in equity 8.7 -26.7 -2.9

IFRS 7 requires an entity to disclose a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how pro- fit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. The Group has recognized interest rates, electricity prices and foreign exchange rates as its key market risks and has set 1 per cent interest rate rise, 20 per cent rise in electricity pri- ce and 10 per cent weakening of USD, GBP and SEK as reasonably possible risk variables. These currencies represent about 89 per cent of Group’s annual transaction exposure. The nature of the market price risk is relatively linear so that the size of effects of opposite market price changes do not essentially differ from the presented figures. The scenarios have been calculated by using regular principles of calculating market values of financial instruments described in the Group Accounting policies. Figures at the reporting date reflect quite well the average market risk conditions throughout the reporting period. Additionally, the Group is presenting figures desc- ribing the effects of the risk variables to its equity exposure and annual transaction exposure (cash flow) to present a broader picture about market risks of interest rates, electricity prices and foreign exchange rates. Annual cash flows are based on estimates, but not existing commercial contracts. The impact on net equity has reduced due to sale of Botnia´s operations in Uruguay. Including equity hedging the impact is minor. The weakening of USD and GBP has a negative impact on an- nual cash flow and the weakening of SEK has a positive impact. Hedges reduce this impact depending on hedging strategy. The rise of electricity price has a negative impact on cash flow. As according to hedging policy the electricity price risk of the nearest year has mostly been hedged, the impact including hedges remains minor. 61 When the cash flow of the nearest year and all electricity hedges have been taken into account, the calculatory impact is slightly positive.

NOTES TO THE FINANCIAL STATEMENT 4. Segment information

The Corporate Management Team is the chief operational decision- The Group has not aggregated segments when identifying the repor- maker. The Corporate Management Team has determined that the table segments. operating segments are based on the reports used by the management Segment sales from external customers by geographical area are team in strategic decision-making. The Corporate Management Team based on the geographical location of the customer and segment ass- monitors the business operations based on the operating segments. ets and capital expenditure by geographical location of the assets. The sales of the reporting segments are mainly generated by sales of board and paper, but the sales of the Market Pulp and Energy opera- Consumer Packaging business area is an innovative supplier of high- ting segment includes sales of pulp to external customers and sales performance primary fibre-based paperboards, speciality papers and of energy from the pulp mills and through energy companies owned related packaging services. It serves carton printers, converters, brand by M-real. When adopting IFRS8-compliant reporting, the segments owners and merchants for end-uses such as beautycare, cigarettes, have remained the same as in IAS14-compliant reporting, as the in- consumer durables, foods, healthcare, graphics and wallcoverings. formation previously presented by the Group was already based on the management’s internal reporting. Office Papers business area is one of the European leading office pa- The accounting principles for the segment information are equal per producers. It produces, markets and sells a range of high quality to those of the Group. All inter-segment sales are based on market uncoated fine papers for use in offices and homes. Office Papers’ pro- prices and eliminated in consolidation. ducts are used for printing and copying, as well as for forms, envelo- The reporting result is operating result. Segment assets and liabi- pes, manuals and various business communications. lities are capital items directly used by the segments in their business operations or items that based on reasonable ground can be allocated Speciality Papers business area is a leading European speciality pa- to the segments. The goodwill arising from business combination have per producer. The core of the business is formed by the Zanders mills, been allocated to the operating segments based on matching principle. Reflex and Gohrmühle, in Germany. M-real’s speciality papers are used Unallocated capital items consist of tax and financial items and other e.g. for brochures, direct mail, annual reports, catalogues, art books, common group items. Investments consist of additions of posters, calendars and labels. The costumers are printers, publishers, tangible and intangible assets used over a longer period than one advertising agencies and paper merchants. In addition to the Zanders year. Other papers business area includes the Hallein mill in Austria.

Reportable segments Market Pulp and Energy reporting unit includes mainly pulp sales Consumer Packaging to external parties. Additionally, a minor part of the entity consists of Office Papers energy sales from the pulp mills or through M-real energy holdings. Speciality Papers Market Pulp and Energy Other operation includes Head Office, Sales net-operation, Group IT Other operation services and hedge accounting of sales revenue.

Sales by operating segment 2009 2008 EUR million External Internal Total External Internal Total Consumer Packaging 968 0 968 1,056 5 1,061 Office Papers 542 1 543 803 1 804 Speciality Papers 352 0 352 619 3 622 Market Pulp and Energy 508 0 508 644 0 644 Other operations 62 127 189 114 209 323 Elimination -128 -128 -218 -218 Continuing operations 2,432 2,432 3,236 0 3,236 62

NOTES TO THE FINANCIAL STATEMENT Operating result and return on capital employed by operating segment 2009 2008 Operating Return on Operating Return on result capital result capital EUR million employed, % employed, % Consumer Packaging 51 7.5 24 3,2 Office Papers -104 -21.2 -53 -7,4 Speciality Papers -151 -62.1 -59 -14,3 Market Pulp and Energy -91 -12.8 106 12,6 Other operations 28 -79 Group -267 -8.9 -61 -1,3 Share of results from associated companies -16 -1 Finance costs, net -75 -142 Income taxes 27 34 Discontinued operations -23 -338 Result for the period -354 -508

M-real’s joint venture Metsä-Botnia disposed 77 per cent of its shares in Pohjolan was also recognised as income at the same time. The gain was recorded in Voima Oy to UPM-Kymmene Oy. Market Pulp and Energy´s 2009 operating other operations´operating result. Market Pulp and Energy´s 2008 operating profit includes M-real’s share (30 per cent) of realised fair value and capital profit includes realised fair value and capital gain on the sale of Pohjolan gain of the deal, EUR 18 million. Voima shares, EUR 74 million. At the same time Metsä-Botnia sold its Uruguay business. M-real’s share of the gain on sale was some EUR 76 million. EUR 7 million of hedging gain

Assets, liabilities and goodwill by operating segment Assets Liabilities Goodwill EUR million 2009 2008 2009 2008 2009 2008 Consumer Packaging 710 984 154 182 5 10 Office Papers 539 684 119 128 8 8 Speciality Papers 229 669 164 253 33 Market Pulp and Energy 613 965 74 66 Other operations 290 329 229 197 Elimination -97 -48 -97 -48 Unallocated 848 922 1,565 2,341 Continuing operations 3,132 4,505 2,208 3,119 13 51

Capital expenditure, depreciation and impairment charges by operating segment Capital expenditure Depreciation Impairment charges EUR million 2009 2008 2009 2008 2009 2008 Consumer Packaging 11 25 89 80 4 Office Papers 22 33 58 72 47 16 Speciality Papers 11 20 20 38 66 66 Market Pulp and Energy 19 20 70 42 0 Other operations 10 76-3 0 Continuing operations 73 105 243 229 113 86 Discontinued operations 23 60 194 Group incl. discontinued operations 73 128 243 289 113 280

Segment assets include goodwill, other intangible assets, tangible assets, Capital employed is segment assets less segment liabilities. The formula for biological assets, investments in associated companies, inventories, accounts calculation of return on capital employed: Segment: Operating profit/Capital receivables and prepayments and accrued income (excl. interest and income employed (average) *100. Group: Profit from continuing operations before tax + tax items) Segment liabilities include non-interest-bearing liabilities (excl. interest expenses, net exchange gains/losses and other financial expenses/ interest and income tax items) Total assets ./. non-interest-bearing liabilities (average)*100 63

NOTES TO THE FINANCIAL STATEMENT In the following tables are presentented information of sales, assets and investments by geographical areas.

Geographical segments External sales Total non-current Capital expenditure by destination assets by country by country EUR million 2009 2008 2009 2008 2009 2008 Germany 410 440 103 179 5 4 Finland 263 439 1,218 1,648 23 35 Belgium 226 64 0 0 Great Britain 218 3720012 France 153 234 21 113 11 17 USA 103 155 0 0 Italy 99 156 0 0 Russia 94 109 0 16 The Netherlands 90 77 0 1 Switzerland 70 39 0 0 Sweden 63 136 326 331 15 20 Spain 56 93 0 0 Austria 55 73 91 95 5 5 Poland 35 82 0 0 Other Europe 197 327 0 0 Uruguay 4 17 0 319 13 22 Asia 152 290 0 0 Other countries 144 133 0 0 Continuing operations 2,432 3,236 1,759 2,702 73 105 Discontinued operations 23 Group incl. discontinued operations as reported in 2008 2,432 3,236 1,759 2,702 73 128

Non-current assets include other assets but derivatives, deferred tax receivables and assets related to defined benefit pension plans.

Personnel at year end by country Personnel by business segment, average 2009 2008 2009 2008 Finland 1,824 2,258 Consumer Packaging 1,575 1,664 Germany 1,228 1,414 Office Papers 1,424 1,561 Sweden 980 1,062 Speciality Papers 1,733 2,016 France 396 462 Market Pulp and Energy 19 19 Austria 203 644 Metsä-Botnia 501 569 The Netherlands 45 60 Other operations 661 1,020 Great Britain 44 102 Continuing operations 5,913 6,849 Uruguay 0 164 Discontinued operations 0 2,238 Other countries 183 380 Group total 5,913 9,087 Continuing operations 4,903 6,546 Personnel average include M-real’s share 30 per cent of Metsä-Botnia’s person- nel. Personnel at year end exclude M-real’s share of Metsä-Botnia’s personnel due to change in consolidation method from Investments in Joint Ventures (IAS 31) to Investments in Associates (IAS 28) from yearend on. Group’s income from one customer exceeded to some EUR 536 million or some 22 per cent of total sales. The sales included in Market Pulp and Energy, Office Paper, Consumer Packaging, Speciality Paper segments and other operations.

64

NOTES TO THE FINANCIAL STATEMENT 5. Disposed and discontinued operations Metsä-Botnia’s Uruguay business, result for the period (corresponding M-real’s 30 per cent ownership) M-real’s joint venture Metsä-Botnia had in Uruguay pulp mill and forest property. 2009 1.1.-31.12.2008 On 22 October Metsä-Botnia’s owners Metsäliitto, M-real and UPM-Kymmene Sales 93 122 signed agreement regarding the divestment of the pulp mill and forest located in Uruguay to UPM-Kymmene. The deal was materialized in December. The Other operating income 2 1 selling price was EUR 999 million and Metsä-Botnia recorded a gain of EUR Other operating expenses -73 -59 253 million. M-real owns 30 per cent of Metsä-Botnia and M-real’s share of Depreciation and impairment charges -8 -12 selling price and gain were EUR 300 million and EUR 76 million respectively. Operating profit 14 52 EUR 7 million of hedging gain was also recognised as income at the same ti- Financial items -4 -6 me. The gain has been entered in other operation. Profit before taxes 10 46 At the same time Metsä-Botnia’s ownership was restructured, in which M-real’s ownership rose from 30 per cent to 33 per cent. M-real sold three per Income taxes -1 0 cent to its parent company Metsäliitto. The note 33 Joint Ventures. Profit after taxes 9 46

M-real disposed Map Merchant operations in October 2007. The Map Merchant Group has been accounted as a discontinued operations and it´s post-tax profit and profit on disposal have been recognised as a separate item after Disposed assets, Metsä-Botnia Uruguay business continuing operations. The profit on disposal was EUR 77 million before tax (corresponding M-real’s 30 per cent ownership) including currency differences as well as other items. In 2008 the adjustment on the selling price had a negative effect of EUR 26 million on the result of EUR million discontinued operations. Other intangible assets 1 M-real disposed in December 2008 the Graphic Papers businesses for EUR Tangible assets 240 750 million. Graphic Papers business has been accounted as a discontinued Biological assets 52 operations and it´s post-tax profit and loss on disposal have been recognised Investments in associated companies 1 as a separate item after continued operations. Non-current financial assets 1 In 2009 the adjustment on the selling price and other items had a negative effect of EUR 23 million on the result of discontinued operations. Deferred tax assets 1 Inventories 30 Accounts receivables and other receivables 19 Discontinued operations, result Liquid assets 25 2009 2008 Total assets 370 Graphic Papers Adjustment on the selling price and other items -23 0 Borrowings 110 Graphic Papers, total -23 -312 Accounts payable and other liabilities 15 Map Merchant, adjustment on selling price -26 Total liabilities 125 Income statement, total -23 -338 Minority interest 50 Net assets 195 6. Other operating income

Exchange differences and related expenses 22 Total 217 EUR million 2009 2008 Selling price 300 Gains on disposal 143 90 Profit on sale 83 Rental income 3 2 Service revenue 37 23 Government grants 22 30 Income taxes 0 Other allowances and subsidies 2 1 Other operating income 45 36 Profit on sale after taxes 83 Total 252 182

Cash and cash equivalents received 300 M-real’s joint venture Metsä-Botnia disposed its Uruguay business. M-real’s Cash and cash equivalents in subsidiaries -26 share of gain on sale was EUR 83 million. At the same time Metsä-Botnia’s Net cash flow arising on disposal 274 ownership was restructured, in which M-real’s ownership rose from 30 percent to 33 per cent. M-real sold three per cent to its parent company Metsäliitto and recorded some EUR 33 million profit on sale. In addition Metsä-Botnia sold 77 per cent of its shares in Pohjolan Voima Oy. M-real recorded 30 per cent share of the profit or EUR 18 million. Sale of Pohjolan Voima shares increased in 2008 by EUR 74 million gains on disposal. Government grants concern the subsidies of training, healthcare and r&d expenses, energy subsidies and the carbon dioxide emission permits in accordance with the EU emission trading scheme. 65

NOTES TO THE FINANCIAL STATEMENT 7. Operating expenses

EUR million 2009 2008 Shareholding 2009 2008 Change in stocks of finished goods and -71 -2 EUR EUR work in progress Kari Jordan 801,759 32,125 84,500 Chairman Materials and services Martti Asunta - 28,625 57,750 Purchases during the financial period 1,377 1,927 Vice chairman Change in inventories 24 4 Erkki Karmila 87,315 77,905 59,400 External services 205 224 Kai Korhonen 87,315 75,905 48,000 1,606 2,155 Liisa Leino 87,315 56,305 Runar Lillandt 12,545 25,100 57,400 Employee costs Juha Niemelä 87,315 79,405 56,900 Wages and salaries 254 293 Antti Tanskanen 87,315 76,905 59,900 Social security costs Erkki Varis 100,715 57,805 Pension costs Total 1,351,594 510,080 423,850 Defined contribution plans 0 7 Defined benefit plans 23 29 Former members of the Board Other employee costs 129 112 Heikki Asunmaa 18,100 57,400 152 148 Kim Gran 15,100 Employee costs, total 406 441 Arimo Uusitalo 1,500 20,125 19,600 92,625 Share of profit from associated companies Share of Metsä-Botnia’s net result 20Total 529,680 516,475 8.12.–31.12.2009

Other operating expenses M-real’s Annual General Meeting held on 12 March decided that one half of the Rents 17 18 remuneration will be paid in cash while the other half is paid in the company’s Research and development costs 7 10 B-series shares to be acquired from the stock exchange between 16 and 20 Losses on fixed assets disposal 1 3 March 2009. Board members Kari Jordan, Martti Asunta and Runar Lillandt, Other operating expenses 489 535 who all receive remuneration from largest shareholder Metsäliitto Cooperative, Total 514 566 renounced their right to the annual remuneration. Salaries and emoluments paid to The Corporate Management Team we- re EUR 2,655,301.27. (2008 EUR 2 298 507.75). CEO Mikko Helander’s salary including benefits was 756,261.28 (in 2008 EUR 548 426,08). Main auditors fees According to the M-real’s pay scheme, executives can be paid a performan- The fees paid to PricewaterhouseCoopers are shown in the table below. The ce-related reward amounting to not more than 6 months’ salary. In addition audit fees are paid for the audit of the annual and quarterly financial statements to salaries and bonuses they are also entitled to participate in the company´s for the group reporting purposes as well as the audit of the local statutory fi- share based incentive program. Currently 8 executives are included in the nancial statements. Tax consultancy fees are the fees paid for tax consultancy program. The expenses recognised for share based payments were EUR 0 services and the like. million (2008 none) (note 35).

Pension commitments to management EUR million 2009 2008 The CEO of the parent company has the right to retire on a pension at the age Audit fees 1 2 of 62 years. The cost of lowering the retirement age or supplementing statu- tory pension security are generally covered by voluntary pension insurance. Tax consultancy 0 0 The expenses of the Management Team member´s defined pension plans Other fees 2 2 were EUR 0.1 million (2008 EUR 0.1 million) and the expenses of their defined Total 3 4 contribution plans were EUR 0.6 million (EUR 0.6 million). The Group has no off balance sheet pension liabilities on behalf of management. In the event that the CEO is dismissed, or in situation where control of the Company changes, he has the right to receive compensation corresponding The remuneration paid to the members of the Board of Directors and the to 18 months´salary. The period of notice is 6 months. The period of notice for Corporate Management Team other members of The Corporate Management Team is six months. For other The remuneration paid to the members of the Board of Directors and members of The Corporate Management Team, the period of additional seve- shareholding rance compensation varies from six to eighteen months in case of severance due to other reasons than member related The parent company has no commitments on behalf of persons belonging to the above-mentioned bodies or those who have previously belonged to them. At 31 December 2009, the Company´s CEO, the Deputy CEO or the members of the Board had no loans outstanding from the Company or its subsidiares. 66

NOTES TO THE FINANCIAL STATEMENT 8. Depreciation, amortization and impairment charges

EUR million 2009 2008 Impairment of Assets Depreciation M-real carries out a full impairment test at least once a year, during the last Other intangible assets 11 13 quarter based on the situation of 30 September. In addition, a sensitivity analy- Buildings 40 22 sis is made each quarter. Should the sensitivity analysis indicate impairment, a Machinery and equipment 188 188 full test will be initiated. The Audit Committee reviews the sensitivity analyses Other tangible assets 4 6 or impairment testing results quarterly. Continuing operations 243 229 In 2009 testing Office Papers cash generating unit (CGU) has been split Discontinued operations 0 60 into two CGUs: Alizay and Husum. Alizay’s product portfolio has developed Total 243 289 towards recycled fibre based products and has therefore grown apart from Impairment charges Husum’s product portfolio. Alizay paper mill is independent of Husum in pulp Goodwill 33 20 procurement and Alizay’s integration to its own pulp mill will end if the plan to Land 0 33 shutdown Alizay’s pulp mill will realise. Based on the before mentioned reasons Buildings 27 15 Alizay’s cash flows have become more independent from those of Husum and Machinery and equipment 52 18 it has become possible to define a utility value for Alizay independently and Other tangible assets 1 0 therefore Alizay and Husum are tested separately. Continuing operations 113 86 Discontinued operations 0 194 Testing principles Total 113 280 The accounting values of asset items or cash generating units are evaluated for possible value depreciation. Cash generating units are reporting segments or Depreciation and impairment charges smaller units to which a utility value can be defined to. If there are indications continuing operations, total 356 315 of value depreciation of an asset item or cash-generating unit, or if the unit’s accounting value includes or it has been allocated goodwill, it is evaluated how Goodwill impairments by segment much money the asset item or CGU can accumulate. The sum that can be ac- Consumer Packaging 0 4 cumulated is the utility value based on the cash flow against the asset item or Office Papers 0 7 CGU, or its net sales price. In 2009 testing all accumulated utility values are Speciality Papers 33 9 based on the cash flow against the asset or CGU. Continuing operations 33 20 The cash flow that the CGUs under testing can accumulate is based on Discontinued operations 0 101 five-year forecasts and the evenly-growing cash flows that follows them. Total 33 121 The essential testing assumptions are M-real management’s estimates and projections as well as 3rd party forecasts.The key factors affecting the pro- Other Impairments by segment jections are development of average paper and board prices, delivery volumes, Office Papers 47 9 foreign exchange rates, and capacity utilisation rates, cost development of key Speciality Papers 33 57 raw materials such as wood, pulp,chemicals and energy, the development of Continuing operations 80 66 personnel costs and other fixed costs as well as the discount rate. The key Discontinued operations 93 factors are similar to those used in 2008 testing. Furthermore the realisation Total 80 159 ofsavings and efficiency improvement measures as well as decided renewal investments have a significant impact on projected cash flows. M-real’s share of the cash flow and accounting value of Metsä-Botnia are allocated to CGUs in the proportion of their pulp purchases. For the situation on 30 September 2009 and for previous goodwill im- pairment tests the cash flows consequent to the 5-year projected cash flows are based on a 2 per cent fixed annual growth rate, which corresponds to the An impairment charges of EUR 113 million were recognised in 2009, EUR 33 realised long term nominal growth of the CGUs and business areas in ques- million on goodwill in Speciality Papers and EUR 80 million other impairment, tion. Average values for the key assumptions (price, volume, variable costs) of which EUR 33 million in Speciality Papers’ Zanders papermill in Germany during the projection period have been used as initial point for the cash flows and EUR 47 million in Office Papers’ Alizay papermill in France. In Alizay pul- following the forecast period. The fixed costs are based on the projected costs pmill an additional depreciation of EUR 28 million was recognised related to for the fifth year. the planned permanent closure of Alizay pulp mill. The discount rate used is M-real’s Weighted Average Cost of Capital (WACC). In 2008 impairment charges were made at Hallein mill (EUR 9 million When calculating WACC the cost of debt has been adjusted for the market re- on goodwill and EUR 57 other impairment) in Austria and at Husum mill in lated debt risk premium increases, even though M-real’s average interest rate Sweden (7 and 9 million). An impairment of EUR 194 million was recognised is lower on September 30, 2009. Both the cash flows and the discount rate are in disposed Graphic Papers business. calculated after tax, which means that the established discounted cash flows and utility values are before tax as set out in IAS 36. For testing carried out concerning situation 30 September 2009, the WACC after taxes was 7.83 per cent (2008: 8.10%) and for Botnia 6.67 per cent (8.10%). Management’s view is that the risk factors regarding future cash flows do not differ materially from one CGU to another.

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NOTES TO THE FINANCIAL STATEMENT The goodwill impairment test results are evaluated by comparing the recove- Cash (1) (2) (3) rable amount (V) with the carrying amount of the CGU (B) as follows: Generating V - Key assumption Required change in Unit (CGU) B1) order Ratio for V to equal B V B PK8 & price on 5-year projection period rease inaverage price V 5-10% > B Äänekoski (cumulative increase 11%) 2%-units lower Paper - WACC based on interest rates - WACC 3.0%-units V 10-15% > B and risk premiums at the time higher V 15-20% > B of testing V 20-50% > B Market 98 - Increasing average pulp price - Cumulative inc- V 50%- > B pulp & on 5-year projection period (cu- rease in average price Energy mulative increase 23%) 2) 3%-units lower The most important CGUs of M-real Group, the goodwill allocated to them as of - WACC based on interest rates - WACC 1.8%-units 31 December 2009 as well as their testing result as of 30 September 2009: and risk premiums at the time higher of testing - Wood costs as projected (cumu- - Cumulative average Cash Generating Unit Goodwill Test result (V-B)/B lative average price decrease 3% wood price increase by (EUR million) over the 5-year projection period) 3% over the projection Folding boxboard mills 1) 14 over 50% period 1) Kemiart Liners 10 over 50% 1) EUR million Kyro Paper 1) 1 over 50% 2) Average pulp price in 2009 was exceptionally low and at the end of 2009 pulp price had Simpele Paper 1) 1 20-50% already increased approximately 20 per cent compared to 2009 average price. Husum PM6 & PM7 8 over 50% Alizay 1) 1 <0%, impairment Husum PM8 & Äänekoski Paper 1) 3 20-50% Zanders 0 <0%, impairment Market Pulp and Energy 1) 7 20-50% 9. Financial income and expenses Myllykoski Paper Oy 35 per cent 2) 15 over 50% M-real Group total 60 EUR million 2009 2008 1) The amount includes the goodwill from M-real’s holding in Metsä-Botnia, which is shown Exchange differences in ”Investments in associated companies” in the balance sheet. 2) The amount includes the goodwill from M-real’s holding in Myllykoski Paper, which is Commercial items 1 2 shown in ”Investments in associated companies” in the balance sheet. Hedging / hedge accounting not applied 3 14 The ineffectiveness from hedges of net In the following CGUs a reasonably possible change in a key assumption re- investment in foreign operations 0 -1 sults in a situation where the carrying amount of the CGU exceeds the reco- Other items 1 -2 verable amount. Assumptions to which the recoverable amount of the CGU is Total 5 13 most sensitive are listed in the table. When considering the resulting effects of changes in other assumptions it was concluded that there are not corre- Valuation of financial assets and liabilities lations between assumptions that would materially change the result of the Gains and losses on financial assets or liabilities at testing. The pricing of end products is mainly driven by the demand and supply fair value through profit or loss balance, and that the cost base changes do not have a significant impact on (held for trading) 1 2 product pricing. Impairment charges from financial assets -30 0 Impairment charges from financial liabilities 31 Cash (1) (2) (3) 0 Generating V Key assumption Required change in Gains and losses on derivatives / hedge accounting 3-6 Unit (CGU) - B1) order not applied for V to equal B Gains and losses on hedging instrument in fair 13 72 Alizay 0 - Increasing end product average - No change required value hedges price on 5-year projection period Fair value adjustments of hedged item in fair value (cumulative increase 6%) hedges -6 -66 - WACC based on interest rates - No change required Total 12 2 and risk premiums at the time of testing Interest income from investments and other Zanders 0 - Increasing end product average - No change required interest bearing receivables 25 17 price on 5-year projection period Interest expenses from financial liabilities carried at (cumulative increase 8%) amortized cost using the effective interest method -109 -165 - WACC based on interest rates - No change required and risk premiums at the time Dividend income 0 0 of testing Other financial expenses -8 -9 - Completion of profit - No change required -92 -157 improvement programmes Financial income and expenses, net -80 -155 68

NOTES TO THE FINANCIAL STATEMENT M-real repurchased from the market its own EUR 400 million senior floating rate notes in the total par value of EUR 60 million. A gain of approximately EUR 11. Other items of comprehensive income 31 million was booked in financial income. In connection with divestment of Graphic Papers in December, M-real re- ceived EUR 220 million in interest-bearing vendor notes from Sappi. In August 2009 M-real agreed with Sappi that Sappi will repay the vendor notes at the price of Recorded in Reclassi- Total 86.5 per cent of their nominal value. This early repayment resulted in an appro- other items of fication ximately EUR 30 million loss that was booked in financial expenses. Comprehen- sive income Cash flow hedges Currency flow hedges recorded in equity 7 10. Income taxes transferred to income 15 statements's sales Interest flow hedges recorded in equity -1 EUR million 2009 2008 transferred to income 0 Income taxes for the financial period 3 11 statements's financial Income taxes for previous periods -2 2 Commodity hedges Change in deferred taxes -27 -47 recorded in equity 3 Other -1 0 transferred to income 2 Total -27 -34 stetments's purchases Total 9 17 26 Income tax reconciliation Available for sale investments recorded in equity -97 Result before taxes -358 -204 other operating income -18 Computed tax at Finnish statutory rate of 26% -93 -53 Total -97 -18 -115 Difference between Finnish and foreign rates 0 -1 Translation differences 17 Tax exempt income -33 -15 Net invest hedge -12 Non-deductible expenses 2 8 Total 5 5 Impairment of goodwill 8 5 Total -83 -1 -84 Previous years tax losses used during the period 0 -26 Tax losses with no tax benefit 88 45 Share of profit from associated companies 4 0 Income taxes for previous periods -2 3 Income tax relating to components of other comprehensive income Other -1 0 Income tax expense -27 -34 Before taxes Taxes After taxes Effective tax rate, % 7.5 16.7 Cash flow hedges 26 -7 19 Available for sale investments -115 30 -84 Translation differences 5 3 8 Total -84 26 -57

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NOTES TO THE FINANCIAL STATEMENT 2008 12. Earnings per share Recorded in Reclassi- Total other items of fication Comprehen- sive income Result for the period, EUR million 2009 2008 Cash flow hedges from continuing operations -335 -179 Currency flow hedges from discontinued operations -23 -338 recorded in equity -21 Total -358 -517 transferred to income statements's sales 3 Adjusted number of shares (average) 328,166 328,166 Interest flow hedges in thousands recorded in equity -3 transferred to income Basic and diluted earnings per share, EUR statements's financial -1 from continuing operations -1.02 -0.55 Commodity hedges from discontinued operations -0.07 -1.03 recorded in equity -18 Total -1.09 -1.58 transferred to income stetments's purchases -1 Total -42 1 -41 Available for sale investments recorded in equity 115 other operating income -28 Total 115 -28 87 Translation differences -15 Net invest hedge 26 Total 11 11 Total 84 -27 57

Income tax relating to components of other comprehensive income 2008 Before taxes Taxes After taxes Cash flow hedges -41 10 -31 Available for sale investments 87 -22 65 Translation differences 11 -7 4 Total 57 -19 38

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NOTES TO THE FINANCIAL STATEMENT 13. Intangible and tangible assets

Intangible assets Goodwill Other Intangible Construction Total EUR million assets in progress Acquisition costs, 1 Jan. 2009 51 197 0 248 Translation differences 0000 Increase 010010 Decrease -5 -27 -32 Transfers between items 0000 Acquisition costs, 31 Dec. 2009 46 180 0 226

Accumulated depreciation and impairment charges, 1 Jan. 2009 -146 -146 Translation differences 0 0 0 Accumulated depreciation on deduction and transfers 0 9 9 Depreciation for the period 0 -11 -11 Impairment charges -33 0 -33 Accumulated depreciation and impairment charges, 31 Dec. 2009 -33 -148 -181

Book value, 1 Jan. 2009 51 51 0 102 Book value, 31 Dec. 2009 13 32 0 45

Acquisition costs, 1 Jan. 2008 172 216 0 388 Translation differences 0 -1 0 -1 Increase 043043 Decrease 0 -70 -70 Transfers between items 0909 Acquisition costs, 31 Dec. 2008 172 197 0 369

Accumulated depreciation and impairment charges, 1 Jan. 2008 0 -178 -178 Translation differences 0 0 0 Accumulated depreciation on deduction and transfers 0 45 45 Depreciation for the period 0 -13 -13 Impairment charges -121 0 -121 Accumulated depreciation and impairment charges, 31 Dec. 2008 -121 -146 -267

Book value, 1 Jan. 2008 172 38 0 210 Book value, 31 Dec. 2008 51 51 0 102

In 2009 goodwill in Speciality Papers was impaired by EUR 33 million.

In 2008 impairment charges were made in Graphic Papers Business EUR 101 million, Consumer Packaging EUR 4 million, Office Papers EUR 7 million and in Speciality Papers EUR 9 million.

The carrying value of emission rights included in intangible assets was on 31 December EUR 10 million (17) and the fair value EUR 10 million (17). In addition intangible assets include among others computer software, patents and licenses.

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NOTES TO THE FINANCIAL STATEMENT Tangible assets Land and Buildings Machinery and Other tangible Construction in Total water equipment assets progress EUR million areas Acquisition costs, 1 Jan. 2009 113 1,048 4,158 87 28 5,434 Translation difference 0 7 57 2 0 66 Increase 7 3 47 1 11 69 Decrease -60 -194 -547 -15 -15 -831 Transfers between items 0 -5 15 0 -15 -5 Acquisition costs, 31 Dec. 2009 60 859 3,730 75 9 4,733

Accumulated depreciation and impairment charges, 1 Jan. 2009 -34 -601 -2,941 -50 0 -3,626 Translation difference 0 -6 -41 -1 -48 Accumulated depreciation on deduction and 0 81 278 9 368 transfers Depreciation for the period 0 -40 -173 -4 -217 Impairment charges and reversed impairment 0 -27 -52 -1 -80 charges Accumulated depreciation and impairment charges, -34 -593 -2,929 -47 -3,603 31 Dec. 2009

Book value, 1 Jan. 2009 79 447 1,217 37 28 1,808 Book value, 31 Dec. 2009 26 266 801 28 9 1,130

Land and Buildings Machinery and Other tangible Construction in Total water equipment assets progress EUR million areas Acquisition costs, 1 Jan. 2008 181 1,290 5,570 165 251 7,457 Translation difference 1 -20 -142 -3 -1 -165 Increase 10 6 108 6 26 156 Decrease -80 -282 -1,547 -82 -14 -2,005 Transfers between items 1 54 169 1 -234 -9 Acquisition costs, 31 Dec. 2008 113 1,048 4,158 87 28 5,434

Accumulated depreciation and impairment charges, 1 Jan. 2008 -3 -703 -3,827 -104 0 -4,637 Translation difference 0 16 107 3 126 Accumulated depreciation on deduction and 2 123 975 56 1,156 transfers Depreciation for the period 0 -22 -178 -5 -205 Impairment charges and reversed impairment -33 -15 -18 0 -66 charges Accumulated depreciation and impairment -34 -601 -2,941 -50 0 -3,626 charges, 31 Dec. 2008

Book value, 1 Jan. 2008 178 587 1,743 61 251 2,820 Book value, 31 Dec. 2008 79 447 1, 217 37 28 1,808

Impairment charges of EUR 80 million were recognised, of which EUR 33 million in Zanders papermill in Germany (Speciality Papers) and EUR 47 million in Alizay mill in France (Office Papers). In Alizay pulpmill an additional depreciation of EUR 28 million was recognised related to the planned permanent closure of Alizay pulp mill.

In 2008 impairment charges were made at Hallein mill in Austria (EUR 57 million) and at Husum mill in Sweden (EUR 9 million).

The capitalization of interest expenses in 2009 was EUR 0 million (3).The average interest rates in 2008 was 6.23 per cent, which represent the costs of the loan used to finance the projects. 72

NOTES TO THE FINANCIAL STATEMENT At 31 December 2009 tangible assets include assets acquired under finance 15. Investments in associated lease agreements

Machinery and Total EUR million 2009 2008 equipment At 1 Jan. 63 64 Acquisition costs 39 39 Share of results in associated companies -14 -1 Accumulated depreciation -18 -18 Dividend received 0 -1 Increases 162 0 Book value, 1 Jan. 2009 24 24 Decreases -1 1 Book value, 31 Dec. 2009 21 21 Translation differences 0 0 At 31 Dec. 210 63 At 31 December 2008 tangible assets include assets acquired under finance lease agreements The result includes non-recurring item of EUR -11 million from the Sunila pulp mill divested by Myllykoski Paper. Due the restructuring of M-real’s joint venture Metsä-Botnia in December, M-real changed Metsä-Botnia’s consoli- dation method from IAS 31 (Interests in Joint Ventures) to IAS 28 (Investments Machinery and Total in Associated). Line increases includes the effect of Metsä-Botnia’s changed equipment consolidation method. Acquisition costs 40 40 Unamortized amount of goodwill for associated companies at 31 Dec. 2009 Accumulated depreciation -16 -16 was EUR 45 million (15). The increase of goodwill comes from Metsä-Botnia’s changed consolidation method. Book value, 1 Jan. 2008 93 93 Book value, 31 Dec. 2008 24 24 Metsä-Botnia is included starting 8 Dec. 2009.

Additions include assets of EUR 1 million (EUR 0 million) acquired under fi- nance lease agreements. Biggest associated companies Country Assets Liabi- Sales Gain/ Owner- lities loss ship, % Metsä-Botnia Finland 859 466 87 2 30 14. Biological assets Group Kirkniemen Finland 7 3 0 0 48 Kartano Oy Biological assets, forest assets, have been recognised at fair value. The change in Myllykoski Paper Oy Finland 172 127 259 -23 35 fair value will be recognised yearly as income/cost in income statement. Due the Plastirol Oy Finland 22 7 24 2 39 restructuring of M-real’s joint venture Metsä-Botnia in December, M-real changed Metsä-Botnia’s consolidation method from IAS 31 (Interests in Joint Other 2 1 17 0 Ventures) to IAS 28 (Investments in Associated). From 8.12.2009 on M-real has Total 1,062 604 387 -19 not anymore biological assets. M-real had forest assets in Finland and in Uruguay. None of the associated companies were listed. EUR million 2009 2008 At 1 Jan. 57 47 Transaction and balances with associated companies Purchases during the period 8 11 EUR million 2009 2008 Sales during the period -1 0 Sales 1 0 Harvested during the period -5 -10 Purchases 35 4 Gains and losses arising from changes in fair -1 6 Interest income 0 0 values Interest expenses 0 0 Disposal -54 0 Receivables Decrease 0 0 Current receivables 7 7 Translation differences -4 3 Liabilities At 31 Dec. 0 57 Current liabilities 2 2

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NOTES TO THE FINANCIAL STATEMENT 16. Available for sale investments

Financial assets at fair value through profit or loss (non-current) EUR million 2009 2008 At 1 Jan. 0 17 Increases 0 0 Decreases 0 -17 Changes in fair values 0 0 At 31 Dec. 0 0

Available for sale financial assets 0 0 Shares in other companies Listed companies 39 32 Other companies 278 408 317 440 Total 317 440

Fair value hierarchy of financial assets and liabilities 2009 Note Level1 Level2 Level3 Total Financial assets at fair value through profit or loss, non-current 16 0 Available for sale financial assets 16 39 278 317 Financial assets at fair value through profit or loss, 2011 current Derivative financial assets 29 2 22 24

Derivative financial liabilities 29 3 41 44

2008 Note Level1 Level2 Level3 Total Financial assets at fair value through profit or loss, non-current 16 0 Available for sale financial assets 16 32 408 440 Financial assets at fair value through profit or loss, current 20 4 13 17 Derivative financial assets 29 84 84

Derivative financial liabilities 29 2 67 69

Financial assets and liabilities measured at fair value based on Level 3 Pohjolan Voima Oy shares classified as Available for sale financial assets (Level EUR million 2009 2008 3) is measured at fair value by using the weighted average of discounted cash Opening balance 408 326 flow method and the valuation based on earliertransactions. The fair value of Total gains and losses in profit or loss 18 74 the comparative year was measured based on discounted cash flow method. Total gains and losses in other comprehensive -121 87 Financial assets at fair value through profit or loss are mainly bonds, clas- income sified entirely as held for trading. Purchases Available for sale financial assets consist of listed companies and other Settlements -27 -79 companies. The fair value of listed companies are based on public quotation for shares at the Balance sheet date. The most significant ownership of listed Closing balance 278 408 companies is some two percentage stake of South African company Sappi Assets have been categorised according to IFRS 7 Paragraph 27 A and 27 B. Limited, which M-real received as a part of the Graphic papers business dis- posal in 2008. The fair value of these shares at the Balance sheet date was EUR 38.4 million. Level 1 is including assets valued based on quoted prices in active markets The most important shareholding of not quoted companies consists of 2.5 Level 2 is including assets valued based on inputs that are observable for the asset either directly or undirectly per centage stake in Finnish energycompany Pohjolan Voima Oy. The Group Level 3 is including inputs that are not based on observable market data has right for some 6.4 percentage proportion in Olkiluoto nuclear power plant (Pohjolan Voima´s B-shares), some 6.4 percentage proportion in Meripori coal- fired power plant (C2-shares). Group also has some 1.8 percentage proportion in new nuclear power plant under construction at Olkiluoto. 74

NOTES TO THE FINANCIAL STATEMENT Pohjolan Voima produces electricity and heat for its shareholders in Finland. 17. Non-current financial assets Pohjolan Voima trades with its shareholders and the prices paid to Pohjolan Voima Oy for energy are based on production costs, which generally are lower than the market prices. The ownership in Pohjolan Voima Oy is measured at fair value quarterly by using the weighted average of discounted cash flow EUR million 2009 2008 method and the valuation based on earlier transactions. The fair value of the Interest-bearing receivables comparative year was measured based on discounted cash flow method. The Loans from Group companies 49 1 WACC used was 4.67 percentage. 12 months rolling averages have been used Loans from associated companies 0 0 for the energy price estimates, which evens out the short-term energy price Other loan receivables 4 224 fluctuations. The changes in fair value less deferred tax calculated with Finnish 53 225 tax rate are recorded in fair value reserve in equity. The acquisition value of Non-interest bearing receivables shares in Pohjolan Voima Oy is EUR 26 million (28) and the fair value EUR 273 Loans from Group companies 4 4 million (402). The fair value of nuclear power shares (B- and B2-shares) was Loans from associated companies 0 0 some EUR 277 (390) million, of which EUR 255 million B-shares and EUR 22 Other loan receivables 0 3 million B2-shares and coal-fired power shares (C2-shares) some EUR -4 (-3) Defined benefit pension plans (Note 23) 1 0 million. The values in comparative year included 30 per cent stake of shares 57 owned by Metsä-Botnia. Total 58 232 The shareholder agreement prevents free selling of shares with others than shareholders. M-real’s joint venture Metsä-Botnia disposed in December 2009 77 per cent of its Pohjolan Voima Shares as part of restructuring of Metsä- In connection with divestment of Graphic Papers in December, M-real received Botnia. A realised fair value and gain from the sale of EUR 18 million (30 per- EUR 220 million in interest-bearing vendor notes from Sappi. In August M-real cent share) was recorded. agreed with Sappi that Sappi will repay the vendor notes at the price of 86.5 per M-real disposed in June 2008 some 6.7 percentage of the Pohjolan Voima cent of their nominal value. This early repayment resulted in an approximately shares in new nuclear power plant under construction at Olkiluoto. A realised EUR 30 million loss that was booked in financial expenses. fair value and gain from the sale of EUR 74 million was recorded. The high Loans from Group companies are loans granted to parent company energy prices have substantially increased the fair value of Pohjolan Voima Metsäliitto and to other subsidiaries of Metsäliitto. shares in 2008. Other shares in not quoted companies, where the fair value cannot be measured reliably are carried at cost less any impairment losses.

75

NOTES TO THE FINANCIAL STATEMENT 18. Deferred taxes

Reconciliation of deferred tax assets and liabilities during the period in 2009 As at 1 Jan. 2009 Charged in Disposals Translation Charged in As at 31 Dec. income differences other items of 2009 statement comprehensive EUR million income Deferred tax assets Pension obligation and other provisions 2 -1 1 Intercompany margins 3 -1 2 Unused tax losses and tax credit 10 10 Equity hedging 0 0 Other temporary differences 14 0 -3 0 -6 5 Deferred tax assets, total 29 -1 -4 0 -6 18 Netting against liabilities -243006-15 Deferred tax assets in Balance sheet 5 2 -4003

Deferred tax liabilities Appropriations 150 -30 -21 3 102 Available for sale financial assets recorded at fair value 97 -1 -30 66 Equity hedging 3 -3 0 Other temporary differences 9 -11009 Deferred tax liabilities, total 256 -28 -21 3 -33 177 Netting against assets -24 3 6 -15 Deferred tax liabilities in Balance sheet 232 -25 -21 3 -27 162 Deferred tax liabilities, net -227 27 17 -3 27 -159

Other temporary differences in deferred tax assets comes mostly from finance lease arrangements.

Reconciliation of deferred tax assets and liabilities during the period in 2008 As at 1 Jan. 2008 Charged in Disposals Translation Charged in As at 31 Dec. income differences other items of 2008 statement comprehensive EUR million income Deferred tax assets Pension obligation and other provisions 2 2 Intercompany margins 5 -2 3 Unused tax losses and tax credit 37 -17 -10 10 Equity hedging 7 -7 0 Other temporary differences 11 -1 -3 7 14 Deferred tax assets, total 55 -13 -13 0 0 29 Netting against liabilities -51 14 13 -24 Deferred tax assets in Balance sheet 410005

Deferred tax liabilities Appropriations 193 -36 0 -7 150 Available for sale financial assets recorded at fair value 75 22 97 Equity hedging 0 0 Other temporary differences 73 -24 -36 0 -4 9 Deferred tax liabilities, total 341 -60 -36 -7 18 256 Netting against assets -51 14 13 0 -24 Deferred tax liabilities in Balance sheet 290 -46 -23 -7 18 232 Deferred tax liabilities, net -286 47 23 7 -18 -227

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax relates to the same taxation authority on either the same taxable entity or different taxable entity, which intend to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously. On 31 December 2009 the net operating loss carry-forwards amounted to appr. EUR 35 (35) million, for which tax assets have been recognised. The operating loss carry-forwards mainly in Germany and France for which deferred tax assets have not been recognised due to uncertainty of the utilization of these loss carry-forwards amounted to appr. EUR 1,040 (825) million. These loss carry-forwards do not ex- pire. The deferred tax assets for these non recognised loss carry-forwards amounted to appr. EUR 290 (220) million. Other temporary differences in deferred tax assets 76 comes mostly from finance lease arrangements.

NOTES TO THE FINANCIAL STATEMENT 19. Inventories Doubtful accounts receivables Accounts receivables are recorded net of the following allowances for doubtful EUR million 2009 2008 accounts: Raw materials and consumables 114 186 EUR million 2009 2008 Work in progress 15 29 At 1 Jan. 5 9 Finished goods and goods for sale 181 268 Increases 9 1 Advance payments 3 22 Decreases -7 -5 313 505 At 31 Dec. 7 5

In 2009 or 2008 there were no substantial write-downs of inventories to net Prepayment and accrued income realisable value. Current Employee costs 0 1 Interest 2 0 Insurance 0 0 Others 22 18 Total 24 19 20. Accounts receivables and other receivables 21. Cash and cash equivalents

EUR million 2009 2008 EUR million 2009 2008 Financial assets at fair value through profit or loss Current investments 256 405 (current) Cash at bank and in hand 241 145 At 1 Jan. 16 0 Transferred from non-current assets 0 17 Total 497 550 Changes in the fair values 0 -1 Current investments are certificates of deposits and time deposits with original Decrease -15 0 maturities less than three months. At 31. Dec. 1 16

Financial assets at fair value through profit or loss are mainly bonds, classified entirely as held for trading.

Interest-bearing loan receivables Loans from Group companies 75 34 Loans from associated companies 7 28 Other loan receivables 1 0 83 62 Accounts receivables and other non-interest- bearing receivables From group companies Accounts receivables 3 2 Other receivables 26 11 Prepayment and accrued income 3 2 32 15 From associated companies Accounts receivables 0 3 03 From others Accounts receivables 300 439 Other receivables 57 61 Prepayment and accrued income 24 19 381 519 Accounts receivables and other receivables 497 615

Receivables from the Group companies are receivables from parent company Metsäliitto and from other subsidiaries of Metsäliitto. There are no loan receivables from the managing directors of the Group companies, members of the Board of Directors and their deputies as well as persons belonging to similar bodies.

77

NOTES TO THE FINANCIAL STATEMENT 22. Shareholders´ equity

Changes in share capital Share capital Share premium Total account EUR million Series A Series B At 1 Jan. 2008 62 496 667 1,225 2008 no changes At 31 Dec. 2008 62 496 667 1,225 2009 no changes At 31 Dec. 2009 62 496 667 1,225

Each series A share entitles its holder to twenty (20) votes at a General Meeting of Shareholders, and each series B share entitles the holder to one (1) vote. All shares carry the same right to receive a dividend. M-real’s A shares can be converted to B shares if shareholder or representative of the nominee registered shares makes a written request of the conversion to the company. The conversion does not include additional consideration.

Number of shares Series A Series B Total At 1 Jan. 2008 36,339,550 291,826,062 328,165,612 2008 no changes At 31 Dec. 2008 36,339,550 291,826,062 328,165,612 2009 no changes At 31 Dec. 2009 36,339,550 291,826,062 328,165,612

The Annual General Meeting on 13 March 2008 resolved to delete from the company’s Articles of Association the section concerning the par value of the company’s shares. All shares are paid-in.

Fair value and other reserves 23. Post-employment benefits EUR million 2009 2008 Fair value reserve 192 257 M-real operates a number of defined benefit pension plans and defined contri- Legal reserve and reserves stipulated by the 22 bution plans in different countries, which are arranged in accordance with local Articles of Association regulations and practices. Most of them are defined contribution plans. Total 194 259 The most significant pension plan in Finland is the statutory Finnish emp- loyee pension scheme (TYEL) according to which benefits are linked directly Share premium account to the employee´s earnings. The amount exceeding the par value of shares received by the company in con- In Finland there are pension schemes which are funded by contributors nection with share issue are recognised in share premium account. to insured schemes or to Metsäliitto Employees´ Pension Foundation. The Metsäliitto Employees´ Pension Foundation scheme is a defined benefit plan. Legal reserve and reserves stipulated by the Articles of Association There are other defined contribution pension plans in Finland, too. Legal reserve and reserves stipulated by the Articles of Association have been created and accumulated as a result of resolution by the General Meeting of Shareholders. Pension and other post-employment benefits EUR million 2009 2008 Fair value reserve Defined benefit pension plans 74 82 The reserve include the effective portion of fair value based on hedge accoun- Defined contribution pension plans 14 16 ting applied to interest, currency and commodity derivatives and the fair value Net liability 88 98 change of available for sale financial assets. Overfunded plan shown as asset 1 0 Translation differences Total liability in balance sheet 89 98 Translation differences include translation differences arising on translation of subsidiaries in other currencies than euro and gains and losses arising on hedging of net investments in these subsidiaries, when requirements of hed- geaccounting have been fulfilled.

Dividends After Balance sheet day The Board of Directors has not proposed any divi- dend to pay.

78

NOTES TO THE FINANCIAL STATEMENT Defined benefit pension plans Major categories of plan assets as a percentage of total plan assets, % Equity securities 38 39 EUR million 2009 2008 Debt securities 20 7 The amounts recognised in the balance sheet Real estate 15 16 Present value of funded obligations 42 45 Bonds 18 31 Present value of unfunded obligations 67 67 Others 9 7 109 112 Total 100 100

Fair value of plan assets -36 -31 Amounts for the current and previous periods Unrecognised actuarial gains and losses 1 1 Present value of defined benefit obligations -109 -112 Effect of Curtailment 0 0 Fair value of plan assets 36 31 Funded status -73 -81 Net liability in balance sheet 74 82 Experience adjustments on plan liabilities 0 0 The amounts recognised in the income statement Experience adjustments on plan assets -2 -2 Current service cost 3 4 Interest cost 6 6 Expected return on plan assets -2 -2 Net actuarial losses (gains) recognised in year -7 -1 Settlements 0 0 Profit / loss curtailment 0 0 The principal actuarial assumptions used: Total included in employee costs 0 7 2009 2008 Finland Discount rate % 4.75 3.75 The actual return on plan assets was EUR 6 million in 2009 ( 2008 EUR 3 Expected return on plan assets % 3.5 5.4 million) Future salary increases % 0.0 3.0 Future pension increases % 2.1 2.1 Changes in the present value of defined benefit obligations Expected average remaining working years of staff 0 3 Defined benefit obligation as at 1 Jan. 112 505 Current service cost 3 4 UK Interest cost 6 6 Discount rate % 5.7 6.0 Contribution by plan participations 0 -1 Expected return on plan assets % 6.80 6.75 Actuarial losses (gains) recognised in year -1 -4 Future salary increases % 4.3 3.6 Disposals 0 -403 Future pension increases % 3.3 2.6 Curtailments and settlements 0 -1 Expected average remaining working years of staff 13 14 Benefits paid -10 -4 Other adjustments 0 0 Germany Translation differences -1 10 Discount rate % 5.8 6.0 Defined benefit obligation as at 31 Dec. 109 112 Expected return on plan assets % n/a n/a Future salary increases % 2.5 2.5 Changes in the fair value of plan assets Future pension increases % 2.00 2.00 Fair value of plan assets as at 1 Jan. 31 388 Expected average remaining working years of staff 12 11 Expected return on plan assets 2 3 Actuarial losses (gains) recognised in year 4 -4 Austria Contribution by plan participants 1 1 Discount rate % 5.0 5.0 Contribution by the employer 1 -1 Expected return on plan assets % n/a n/a Disposals 0 -367 Future salary increases % 0 2.22 Settlements 0 0 Future pension increases % 2.11 2.22 Benefits paid -2 -1 Expected average remaining working years of staff 20 24 Translation differences -1 12 Fair value of plan assets as at 31 Dec. 36 31 Switzerland Discount rate % 3.3 3.0 Expected return on plan assets % 3.5 4.0 Future salary increases % 1.5 1.75 Group expects to contribute EUR 1 million to its defined benefit pension plans Future pension increases % 0.5 0.5 in 2010. Expected average remaining working years of staff 13 8

79

NOTES TO THE FINANCIAL STATEMENT 24. Provisions

Restructuring Environmental Other Total EUR million obligations provisions At 1 Jan. 2009 80 5 14 99 Translation differences 101 2 Increases 54 2 6 62 Decreases -45 -4 -2 -51 Unused amounts reversed -4 -2 -3 -9 Effect of discounting 100 1 At 31 Dec. 2009 87 1 16 104

The most significant increase in provision was cost provision related to the 25. Borrowings planned permanent closure of Alizay pulp mill, some EUR 14 million. In ad- dition a provision of EUR 12 million related to the terminated IT contract and total provision of EUR 17 million related to the profit impovement programme in Husum mill (9) in Sweden and in Reflex mill (8) in Germany. The closure of EUR million 2009 2008 Metsä-Botnia’s Kaskinen mill in Finland increased provision for restructuring Non-current interest-bearing financial liabilities by some EUR six million. (M-real’s 30 per cent share). M-real changed Metsä- Bonds 729 1,162 Botnia’s consolidation method from IAS 31 (Interests in Joint Ventures) to IAS Loans from financial institutions 73 287 28 (Investments in Associated) and the provision disappeared as at balance Pension loans 61 33 sheet day. Finance lease liabilities 27 31 Other provisions include provisions related leases, taxes, guarantees and Other liabilities 53 55 legal action. The non-current portion of total provision was some EUR 60 mil- Total 943 1,568 lion and current portion some EUR 44 million. The non-current portion will mostly be paid during year 2011. Current interest-bearing financial liabilities Current portion of long-term debt 406 317 Short-term loans 3 53 Bill of exchange payable 2 7 Other liabilities 56 161 Total 467 538

Interest-bearing financial liabilities, total 1,410 2,106

Interest-bearing financial assets Non-current Loan receivables 53 225 Others 53 225

Current Financial assets at fair value through profit or loss 1 16 Loan receivables and other receivables 83 61 Current investments at amortized cost 256 405 Cash at bank and in hand 241 145 580 627

Interest-bearing financial assets, total 633 852

Interest-bearing net liabilities, total 777 1,254

80

NOTES TO THE FINANCIAL STATEMENT Maturity of repayment and interest payment of financial liabilities 31.12.2009 EUR million Book value 2010 2011 2012 2013 2014 2015- Bonds and debentures 1,068 Repayment -339 -52 -101 -492 -84 0 Interest payment -70 -62 -57 -31 -4 0 Loans from financial institutions 98 Repayment -25 -28 -25 -20 0 0 Interest payment -1 -10000 Pension loans 99 Repayment -39 -11 -20 -20 -10 0 Interest payment -7 -5 -4 -2 0 0 Finance lease liabilities 31 Repayment -3 -3 -2 -1 -1 -20 Interest payment -1 -1 -1 0 0 -1 Other non-current interest-bearing liabilities 53 Repayment 0 0 0 -49 0 -4 Interest payment 0 -1 -1 -1 0 0 Non-current interest-bearing liabilities, total 1,349 Repayments in 2010 -406 Non-current interest-bearing liabilities in 943 balance sheet Total Repayment -406 -94 -148 -582 -95 -24 Interest payment -79 -70 -63 -34 -4 -1 Current interest-bearing liabilities 61 Repayment -61 Interest payment 0 Accounts payables and other liabilities 399 Repayment -387 -9 0 0 -1 -2 Total liabilities 1,809 Repayment -854 -103 -148 -582 -96 -26 Interest payment -79 -70 -63 -34 -4 -1 Guarantees agreements Derivative financial instrument liabilities 44 Interest rate swaps, interest payment 10 11 12600 Currency derivatives, interest payment -2,652 -3 -1000 Commodity derivatives, interest payment -1 -31000 Derivative financial instrument liabilities total -2,643 5 12600 Derivative financial instrument assets 24 Interest rate swaps, interest payment 000000 Currency derivatives, interest payment 2,63942000 Commodity derivatives, interest payment 100000 Derivative financial instrument assets total 2,64042000 Derivative financial instrument net of cash -3 9 14600

81

NOTES TO THE FINANCIAL STATEMENT Maturity of repayment and interest payment of financial liabilities 31.12.2008 EUR million Book value 2009 2010 2011 2012 2013 2014- Bonds and debentures 1,403 Repayment -240 -397 -52 -102 -494 -118 Interest payment -102 -94 -62 -56 -30 -6 Loans from financial institutions 341 Repayment -55 -56 -57 -87 -48 -38 Interest payment -12 -10 -8 -5 -2 -3 Pension loans 53 Repayment -20 -33 -1000 Interest payment -3 -20000 Finance lease liabilities 33 Repayment -2 -3 -3 -2 -2 -22 Interest payment -2 -2 -2 -2 -1 -5 Other non-current interest-bearing liabilities 55 Repayment 0 0 -2 0 -49 -4 Interest payment -3 -3 -3 -3 -3 0 Non-current interest-bearing liabilities, total 1,885 Repayments in 2009 -317 Non-current interest-bearing liabilities in 1,568 balance sheet Total Repayment -317 -489 -115 -191 -593 -182 Interest payment -122 -111 -75 -66 -36 -14 Current interest-bearing liabilities 221 Repayment -221 Interest payment -2 Accounts payables and other liabilities 514 Repayment -497 -6 -3 -3 -2 -3 Total liabilities 2,620 Repayment -1,035 -495 -118 -194 -595 -185 Interest payment -124 -111 -75 -66 -36 -14 Guarantees agreements Derivative financial instrument liabilities 69 Interest rate swaps, interest payment -6 -8 -8 -8 -4 0 Currency derivatives, interest payment -2,720 -10 -10 -7 -5 -3 Commodity derivatives, interest payment 4 -2 -4000 Derivative financial instrument liabilities total -2,722 -20 -22 -15 -9 -3 Derivative financial instrument assets 84 Interest rate swaps, interest payment 000000 Currency derivatives, interest payment 2,75988642 Commodity derivatives, interest payment 000000 Derivative financial instrument assets total 2,75988642 Derivative financial instrument net of cash 37 -12 -14 -9 -5 -1

82

NOTES TO THE FINANCIAL STATEMENT Bonds 26. Other non-current liabilities EUR Million Interest % 2009 2008 2002-2009 8.89 0 100 2002-2012 9.20 101 102 EUR million 2009 2008 2002-2014 9.40 84 115 Liabilities to Group companies 0 0 2004-2009 5.37 0 30 Liabilities to others 2004-2009 5.91 0 10 Accruals and deferred income 0 2 2004-2009 5.91 0 30 Other liabilities 12 16 2004-2011 3.02 30 0 Total non-interest-bearing non-current liabilities 12 18 2004-2011 3.20 10 0 2004-2011 3.27 12 0 Liabilities to Group companies are liabilities to parent company Metsäliitto and 2004-2011 5.54 0 30 other subsidiaries of Metsäliitto. 2004-2011 6.30 0 10 2004-2011 6.52 0 12 Non-current accruals and deferred income 2006-2009 7.69 0 70 Periodizations of employee costs 0 0 2006-2010 5.59 339 0 Accruals for compensation of rights to use 0 1 2006-2010 7.70 0 397 Periodizations of waste water expenses 0 0 2006-2013 8.75 0 490 Others 0 1 2006-2013 9.25 492 0 Total 0 2 2008-2018 7.00 0 7 1,068 1,403

27. Accounts payable and other liabilities

EUR million 2009 2008 Maturity of finance lease liabilities Liabilities to Group companies Accounts payable 36 31 Minimum lease The present value payments of minimum lease Other liabilities 15 42 payments Liabilities to associated companies EUR million 2009 2008 2009 2008 Accounts payable 2 20 Not later than 1 year 4432Other liabilities 0 1 1–2 years 3533Liabilities to others 2–3 years 2423Advance payments 6 8 3–4 years 2312Accounts payable 115 137 4–5 years 2311Other liabilities 115 129 Later than 5 years 21 26 20 22 Accruals and deferred income 92 121 34 45 31 33 Total 381 489

Future finance charges 3 12 Liabilities to Group companies are liabilities to parent company Metsäliitto and The present value other subsidiaries of Metsäliitto. of minimum lease payments 31 33 Current accruals and deferred income Periodizations of employee costs 42 47 Interests 15 22 The most significant finance lease agreement are power plant Äänevoima Oy´s Accruals of purchases 30 38 power plants. Äänevoima´s contract periods vary between 10 and 15 years. All Others 5 14 finance lease liabilities will be due in 2017 at the latest. These leases contain Total 92 121 renewal and purchase options.

83

NOTES TO THE FINANCIAL STATEMENT 28. Financial assets and liabilities classified according to IAS 39 and fair values

Financial assets 31.12.2009 EUR million Note Fair value Available Loans and Derivatives Amortised Total book Fair value through for sale fin. receivables at hedge cost value profit & loss assets accounting Non-current investments 16 317 317 317 Other non-current financial assets 17 58 58 58 Accounts receivables and other 20 1 496 497 497 receivables Cash and cash equivalent 21 497 497 497 Derivative financial instruments 29 24 0 24 24 Total 25 317 1,051 0 1,393 1,393

Financial liabilities Non-current interest-bearing 25 943 943 830 financial liabilities Other non-current financial 26 12 12 12 liabilities Current interest-bearing financial 25 467 467 458 liabilities Accounts payable and other 27 333 333 333 financial liabilities Derivative financial instruments 29 18 26 44 44 Total 18 0 0 26 1,755 1,799 1,677

Financial assets 31.12.2008 EUR million Note Fair value Available Loans and Derivatives Amortised Total book Fair value through for sale fin. receivables at hedge cost value profit & loss assets accounting Non-current investments 16 440 440 440 Other non-current financial assets 17 232 232 187 Accounts receivables and other 20 16 599 615 615 receivables Cash and cash equivalent 21 550 550 550 Derivative financial instruments 29 45 39 84 84 Total 61 440 1,381 39 0 1,921 1,876

Financial liabilities Non-current interest-bearing 25 1,568 1,568 1,097 financial liabilities Other non-current financial 26 18 18 18 liabilities Current interest-bearing financial 25 538 538 529 liabilities Accounts payable and other 27 430 430 430 financial liabilities Derivative financial instruments 29 42 27 69 69 Total 42 0 0 27 2,554 2,623 2,143

Accounts receivables and other receivables do not include advance payments, calculated by market rate. The discount rates applied are between 0.4 - 21.2 deferred tax assets and periodizations of employee costs (note 20). Accounts per cent (2008 2.5-38.0). Of interest bearing liabilities 84 per cent (95) is sub- payable and other financial liabilities do not include advance payments, defer- ject to variable rates and the rest to fixed rates. The average interest rate of red tax liabilities and periodizations of employee costs (note 27). interest-bearing liabilities at the end of 2009 was 6.0 per cent (2008: 7.0 per In M-real Group all interest-bearing liabilities are valued in the balance cent). The fair values of accounts and other receivables and accounts payables sheet at amortised cost based on effective interest method. Fair values in and other liabilities are not essentially deviating from the carrying amounts 84 the table are based on present value of cash flow of each liability or assets in ther balance sheet.

NOTES TO THE FINANCIAL STATEMENT 29. Derivatives

Derivatives, bookvalues 2009 2008 Assets Liabilities Net Assets Liabilities Net 24 44 -20 84 69 15

Nominal Fair value value Total Fair value Cash flow Equity hedges Derivatives/ Derivatives hedges hedges hedge held for accounting trading EUR million not applied 2009

Interest forward agreements 4 0 0 Interest rate options 0 0 0 Interest rate swaps 977 -3 -5 -1 3 0 Interest rate derivatives 981 -3 -5 -1030

Currency forward agreements 2,635 -6 5 -13 2 0 Currency option agreements 119 0 0 Currency swap agreements 52 -9 -9 Currency derivatives 2,806 -15 -9 5 -13 2 0

Electricity derivatives. 175 -2 -3 1 0 Pulp derivatives 0 0 0 Other commodity derivatives 8000000 Commodity derivatives 183 -2 0 -3010 Derivates total 3,970 -20 -14 1 -13 6 0

Nominal value also includes closed contracts to a total amount of EUR 2,158 million.

2008

Interest forward agreements 4 0 0 Interest rate options 0 0 0 Interest rate swaps 1,282 -9 -5 -1 -3 0 Interest rate derivatives 1,286 -9 -5 -1 0 -3 0

Currency forward agreements 2,673 40 -16 55 1 0 Currency option agreements 5 0 0 Currency swap agreements 127 -13 -13 Currency derivatives 2,805 27 -13 -16 55 1 0

Electricity commodity egreements 172 -2 -9 7 0 Pulp commodity agreements. 4 -1 -1 Other commodity agreements 9000000 Commodity derivativesl 185 -3 0 -9060 Derivates total 4,276 15 -18 -26 55 4 0

Nominal value also includes closed contracts to a total amount of EUR 2,069 million.

85

NOTES TO THE FINANCIAL STATEMENT 30. Maturity analysis of cash flow hedge accounting

Result of the hedging instrument is booked to the income statement at the realization of the cash flow. Contractual maturities of hedging instruments equals to the hedged cash flow.

EUR million 31.12.2009 EUR million 31.12.2008 Periods when the forecasted Highly Contractual Highly Highly Periods when the forecasted Highly Contractual Highly Highly cash flow are expected probable interest probable probable cash flow are expected probable interest probable probable to occur foreign cash flows commodity commodity to occur, foreign cash flows commodity commodity currency cash flows cash flows currency cash flows cash flows cash flows cash flows Q 1 64 -0.1 0 -2 Q 1 86 -1 1 -4 Q 2 60 -0.1 0 -5 Q 2 64 0 1 -4 Q 3 27 -0.1 0 -5 Q 3 40 -1 1 -4 Q 4 16 0.0 0 -2 Q 4 32 0 1 -5 Total in 2010 167 -0.3 0 -14 Total 2009 222 -2 4 -17 2011 -0.2 0 -18 2010 -1 0 -17 2012 0 -7 2011 -1 0 -13 2013 0 0 2012 -1 0 2014 2013 0 Cash flows total 167 -0.5 0 -39 Cash flows total 222 -5 4 -47 Total nominal values of Total nominal values of derivatives derivatives directed to hedge 167 30 0 39 directed to hedge 222 80 4 47 accounting accounting

31. Notes to Consolidated cash flow statement

EUR million 2009 2008 Adjustments to the profit Taxes 26 -45 Depreciation, amortization and impairment charges 356 569 Share of results in associated companies 14 1 Gains and losses on sale of fixed assets -148 -67 Finance costs, net 74 154 Provisions 2 7 Other adjustments 0 0 324 619

Change in working capital Inventories 122 -20 Accounts receivables and other receivables 116 6 Accounts payable and other liabilities -98 21 140 7

Disposals of subsidiaries M-real disposed in December 2008 Graphic Papers business and in February New Thames mill in Great Britain. The cash flow effect of disposed subsidiaries was EUR 386 million in 2008.

86

NOTES TO THE FINANCIAL STATEMENT 32. The Principal Subsidiaries 31 December 2009

Country Group’s holding, % Number of shares Shares and participations owned by the group Metsäliitto Cooperative Finland 179,171

Shares in subsidiaries In Finland Alrec Boiler Oy *) Finland 24.92 899 Oy Hangö Stevedoring Ab Finland 100.00 150 Kemiart Liners Oy Finland 100.00 2,000,000 Logisware Oy Finland 100.00 4,500 OOO Peterbox Russia 100.00 M-real International Oy Finland 100.00 10,000 Metsä Group Financial Services Oy Finland 51.00 25,500

In other countries M-real Deutsche Holding GmbH Germany 100.00 M-real Fine B.V. The Netherlands 100.00 1,000 M-real Holding France SAS France 100.00 520,000 M-real IBP Deals Americas Ltd USA 100.00 50 M-real IBP Deals Europe S.A. Belgium 100.00 1,000 M-real NL Holding B.V. The Netherlands 100.00 15,350 M-real Reinsurance AG Switzerland 100.00 19,997 M-real Sverige Ab Sweden 100.00 10,000,000 M-real UK Holdings Ltd Great Britain 100.00 146,750,000

*Consolidatition as a subsidiary under shareholders’ agreement.

87

NOTES TO THE FINANCIAL STATEMENT Country Group’s holding, % Number of shares Subgroups in Finland

M–real International Oy M-real Benelux B.V. The Netherlands 100.00 2,000 M-real Benelux n.v./s.a Belgium 100.00 2,921 M-real Board and Paper OOO Russia 100.00 100 M-real CZ, s.r.o. Czech Republic 100.00 M-real Deutschland GmbH Germany 100.00 1 M-real France SAS France 100.00 8,211 M-real Hellas Ltd Greece 51.00 306 M-real Hong Kong Ltd Hong Kong 100.00 100 M-real Shanghai Ltd China 100.00 M-real Ibéria S.A. Spain 100.00 147,871 M-real Ireland Ltd Ireland 100.00 5,000 M-real Italia s.r.l. Italy 100.00 100,000 M-real Kft Hungary 100.00 30 M-real ( Middle East & North Africa) Ltd Cyprus 100.00 742,105 M-real Polska Sp. Z o.o. Poland 100.00 232 M-real Nordic A/S Denmark 100.00 36 M-real Nordic AB Sweden 100.00 1,000 M-real Singapore Pte Ltd Singapore 100.00 10,000 M-real Schweiz AG Switzerland 100.00 100 M-real UK Ltd Great Britain 100.00 2,400 M-real USA Corporation USA 100.00 180

Subgroups in other countries M-real Sverige AB M-real Paper Tec Sverige AB Sweden 100.00 1,000

M-real Holding France SAS M-real Alizay SAS France 100.00 3,203,210 M-real Alizay SNC France 100.00 40,000,000

M-real Deutsche Holding GmbH M-real Zanders GmbH Germany 100.00 2,800,000 M-real New Jersey Service Co. USA 100.00 Metsäliitto Energie GmbH Germany 80.00 M-real Hallein AG Austria 98.60 69 M-real NL Holding B.V M-real IBP Deals (China) Ltd China 100.00 M-real IBP HK Ltd Hong Kong 100.00 7,009,900

M-real UK Holdings Ltd M-real UK Services Ltd Great Britain 100.00 115,800,001

88

NOTES TO THE FINANCIAL STATEMENT 33. Joint ventures

Joint ventures have been consolidated using line-by-line method proportionate Acquired assets Fair values to the M-real Group´s holding. Group´s consolidated Income statement and (three per cent) Balance sheet included assets, liabilities, income and costs as follows: Other intangible assets 6 Tangible assets 24 Milj. euroa 2009 2008 Non-current financial assets 0 Non-current assets 24 577 Inventories 4 Current assets 4 183 Accounts receivables and other receivables 4 Assets total 28 760 Cash and cash equivalent 0 Total assets 38 Non-current liabilities 26 215 Current liabilities 3 82 Deferred tax liabilities 5 Liabilities total 29 297 Provision 10 Borrowings 51 Sales 345 495 Accounts payable and other liabilities 3 Expenses 293 444 Total liabilities 69 The profit for the period 55 41 Net assets -31 Significant joint ventures: Group´s holding, % Oy Metsä-Botnia Ab 30,0 30,0 Acquisition costs 0 Äänevoima Oy 56,25 56,25 Goodwill 31

In December 2009 Metsä-Botnia’s ownership was restructured. Metsä-Botnia Sold assets Fair values acquired some 9.2 per cent of its own shares. M-real’s ownership rose by three Goodwill 4 per cent to 33 per cent. Other intangible assets 0 M-real sold three per cent to its parent company Metsäliitto and recorded Tangible assets 20 some EUR 33 million profit on sale. Non-current financial assets 1 Inventories 4 Accounts receivables and other receivables 3 Cash and cash equivalent 0 Total assets 32

Deferred tax liabilities 2 Provision 1 Borrowings 9 Accounts payable and other liabilities 4 Total liabilities 16

Net assets 16

Selling price 49 Profit on sale before taxes 33 Income taxes 0 Profit on sale after taxes 33

Cash and cash equivalents received 49 Cash and cash equivalents in subsidiaries -3 Net cash flow arising on disposal 46

At balance sheet day M-real owns 30 per cent of Metsä-Botnia. M-real changed the whole Metsä-Botnia’s consolidation method from IAS 31 (Interests in Joint Ventures) to IAS 28 (Investments in Associated) from 8 December 2009 on.

89

NOTES TO THE FINANCIAL STATEMENT 34. Contingent liabilities 35. Share based payment

Share incentive scheme 2005-2007 EUR million 2009 2008 On February 2005, M-real’s Board of Directors decided to adopt a share incen- For own liabilities tive scheme. The scheme offers target groups the possibility to be awarded Liabilities secured by pledges M-real Corporation’s B-shares for achieving the goals set for three incentive Loans from financial institutions 0 0 periods, each of one calendar year. Pledges granted 0 1 The periods during which the bonus can be earned are calendar years Liabilities secured by mortgages 2005, 2006 and 2007. The size of the bonus awarded under the share incentive Loans from financial institutions 31 47 scheme is linked to the Group’s operating profit (EBIT, 50 per cent weight) and Other liabilities 75 0 the return on capital employed (ROCE, 50 per cent weight). The bonus payable Real estate mortgages 106 47 under the share incentive scheme is paid in the form of M-real Corporation’s Liabilities secured by chattel mortgages B-shares. In addition, an amount corresponding at maximum to 1.5 times the Loans from financial institutions 3 0 value of the shares is paid cash to cover taxes. The respective bonus is paid Chattel mortgages 3 0 at the end of each incentive period, as a combination of cash and shares. The On behalf of Group companies achievement of the target set for the period involved determines how large a Real estate mortgages 0 4 share of the maximum bonus is paid to key personnel. Guarantee liabilities 2 0 The bonus is not paid if the person concerned ceases to be employed be- fore the award is paid. The person concerned must also continue to own the On behalf of associated companies shares at least two years after the date of the award payment. Guarantee liabilities 0 1 On behalf of others Share incentive scheme 2008-2010 Guarantee liabilities 0 2 On 16 January 2008, M-real’s Board of Directors decided to adopt a share in- Other liabilities centive scheme for 2008-2010. The scheme offers target groups the possibility As security for other commitments 0 1 to be awarded M-real Corporation’s B-shares for achieving the goals set for Leasing liabilities three incentive periods, each of one calendar year. The size of the bonus awar- Payments due in following 12 months 2 6 ded under the share incentive scheme is linked to the Group’s operating profit Payments later than the following 12 months 2 7 (EBIT, 50 per cent weight) and the return on capital employed (ROCE, 50 per cent weight). The size of the bonus awarded for vesting period 2009 is linked to Total adjusted cashflow (cashflow 2). The bonus payable under the share incentive Pledges 0 1 scheme is paid in the form of M-real Corporation’s B-shares. In addition, an Real estate mortgages 109 51 amount corresponding at maximum to the value of the shares is paid in cash Guarantees 2 3 to cover taxes. The achievement of the target set for the period involved deter- Promissory notes 0 0 mines how large a share of the maximum bonus is paid to key personnel. The bonus is not paid if the person concerned ceases to be employed before the Other liabilities 0 1 award is paid. The person concerned must also continue to own the shares at Leasing liabilities 4 13 least two years after the date of the award payment. Total 115 69

Other lease commitments M-real leases various offices and warehouses under non-cancellabe operating lease agreements. Some contracts are renewable at the end of the lease period.

Unconditional purchase agreement Tangible assets Payments due in following 12 months 0 0 Payments due later 1 1 11 Other purchases Payments due in following 12 months 1 35 Payments due later 0 5 140 Joint ventures Proportionate interest in Metsä-Botnia´s unconditional purchase agreement, tangible assets, was EUR 0.1 million (0).

90

NOTES TO THE FINANCIAL STATEMENT Share incentive Share incentive scheme scheme 2005-2007 2008-2010 Issued by the Board's decision Date of issue 4.2.2005 16.1.2008 Instrument: Equity-based reward scheme 2007 *) 2008 *) 2009 *) Total Maximum number of shares 80,000 90,000 70,000 240,000 Maximum number of shares in cash 80,000 90,000 70,000 240,000 Exercise date 3.1.2007 16.1.2008 3.2/5.2.2009 Vesting period starts 1.1.2007 1.1.2008 1.1.2009 Vesting period ends 31.12.2007 31.12.2008 31.12.2009 Obligation to hold shares, years 2 2 2 Conditions of vesting requirements obligation to work Criteria EBIT,ROCE EBIT,ROCE Cashflow 2 Date of vesting requirement 1.1.2010 1.1.2011 1.1.2012 Maximum validity, years 3 3 3 Payment shares and cash Binding time left, years 0 1 2 Number of key personnel (31.12.2009) 7 7 8 Realisationprice, eur 0 0 0 Fair value measuring**) Share price at grant date, EUR 4.81 2.54 0.45 Fair value of share at grant date*) EUR 4.57 2.42 0.52 Assumed dividends 0.24 0.12 0.00 Share price at the end of financial period**), EUR 2.10 0.69 1.53 Fair value at end of financial period 0 0 76,230 76,230 Effect on result and financial position

Expense for 2009, share based payment 0 0 23,732 23,732 Expense for 2009, share based payment, settled as equity 0 0 5,394 5,394 At the end 0 0 23,732 23,732 Amounts 1.1.2009 Outstanding at the beginning of period 80,000 90,000 0 170,000 Changes during the period Shares granted 0 70,000 70,000 Shares forfeited 0 Shares exercised 0 Shares expired 80,000 90,000 170,000 Amounts 31.12.2009 Outstanding at the end of period 0 0 70,000 70,000 Exercisable at the end of the period 0 0 70,000 70,000

*) The amounts in the table reflect the numbers of shares to be given on the base of sharebased payment. M-real has also committed not to pay more than 1.5 times the value of shares in cash for 2007and not more than the value of shares in cash for 2008 and 2009 (tax-portion). **) The fair value of the share-settled part at exercise date was the market price of M-real’s B-share less any dividend paid before the payment of the reward. Correspodningly, the fair value of the cash-settled part is estimated on every balance sheet date until the end of incentive period. The fair value of share-based payment is recognised to the amount based on best possible estimate of the reward, which is believed to be granted. The figures do not in- clude Metsä-Botnia’s figures.

91

NOTES TO THE FINANCIAL STATEMENT 36. Related party transactions

M-real´s ultimate parent company is Finnish Metsäliitto Cooperative. At 31 Transactions with Transactions with December 2009 Metsäliitto owned 38.6 per cent of M-real´s shares and 60.5 EUR million parent company sister companies per cent of the voting rights. 2009 2008 2009 2008 Sales 14 11 8 23 The significant other subsidiaries of Metsäliitto with whom M-real had busi- ness activities are as follows: Other operating income 35221 Purchases 192 303 136 268 Metsä Tissue Group Interest income-1522 Metsä-Botnia Group Interest expenses 2301 Metsäliitto Sverige Ab Metsäliitto France Receivables Non-current receivables 49045 The principal subsidiaries of M-real are listed in the Note 32. Current receivables 29 12 78 37 Liabilities In December 2009 Metsä-Botnia’s ownership was restructured. Metsä-Botnia Non-current liabilities 0000 acquired some 9.2 per cent of its own shares. M-real’s ownership rose by Current liabilities 16 131 90 97 three per cent to 33 per cent. M-real sold three per cent to its parent compa- ny Metsäliitto for EUR 50 million and recorded some EUR 33 million profit on sale in other operating income. At balance sheet day M-real owns 30 per cent (30 per cent) and Metsäliitto 53 per cent (23 per cent) of the shares in Metsä-Botnia. Metsä-Botnia has There are no doubtful receivables in the receivables from group companies. been consolidated using line-by-line method proportionate to the M-real´s And no bad debt was recognised during the period. No security has been gi- and Metsäliitto´s holding according to IAS 31, Interests in Joint Ventures, ven for group liabilities. (income statement for both 2009 and 2008 and balance sheet item for 2008). From 8 December on M-real consolidates Metsä-Botnia according to IAS 28 The compensations paid to management are presented in the Note 7. The pa- (Investments in Associated). rent company has no commitments on behalf of management nor receivables Metsä-Botnia purchases most of the wood used in production from from management. Transactions with associated companies are presented in Metsäliitto. The total wood purchases from Metsäliitto were EUR 192 million the Note 15. Joint ventures are presented in the Note 33. in 2009 (303). The price used was market price. Metsä-Botnia sells pulp to Metsä Tissue, M-real´s sister company, at market price. Metsä Group Financial Services Oy owned by M-real (51 per cent) and Metsäliitto (49 per cent) is Group´s internal bank. The interest rates are market based.

92

NOTES TO THE FINANCIAL STATEMENT 37. Environmental affairs 38. Events after the Balance sheet date

The company has no information about any material events after the Balance EUR million 2009 2008 sheet date. Income statement, incl. Graphic Papers Materials and services 18 22 Employee costs Wages and fees 4 4 Other employee costs 1 1 Depreciation 13 20 Other operating expenses 2 10 38 57 Balance sheet Tangible assets Acquisition costs, 1 Jan. 406 489 Increases 5 60 Decreases -91 -143 Depreciation -223 -234 Book value, 31 Dec. 97 172

Provisions Environmental obligations 1 5

CO2 emission allowances, continuing operations Possession of emission allowances, 1,000 tonnes 836 1,139 Emission produced (2008 verified), 1,000 tonnes 869 1,077 The sales of emission allowances (EUR million) 7,0 3,5

Only additional identifiable costs that are primarily intended to prevent, reduce or repair damage to the environment are included environmental costs. Environmental expenditures are capitalised if they have been incurred to prevent or reduce future damage or conserve resources and bring future economic benefits. 2008 figures include M-real’s share (30%) of of Metsä-Botnia’s emissi- on allowances. 2009 figures include M-real’s share (30%) of Metsä-Botnia’s Emission allowances till 8th of December only. Possession of emission allo- wances in 2009 excludes Metsä-Botnia.

93

NOTES TO THE FINANCIAL STATEMENT Shares and shareholders

Share capital and shares at 31 December 2009 Flaggings in 2009 The company’s paid-in share capital on the balance On 5 February 2009, Financier de l’Echiquier SA’s holding sheet date was EUR 557,881,540.40 and consisted of in M-real decreased to 4.8 per cent of the share capital 328,165,612 shares. The company has two series of and 1.6 per cent of the voting rights. shares. The number of series A shares was 36,339,550 and the number of series B shares 291,826,062. Each Impact of change in control series A share entitles its holder to twenty (20) votes Many of M-real’s financing agreements include a clause at a General Meeting of Shareholders, and each series under which its loans will mature before their stated B share entitles the holder to one (1) vote. All shares maturity if any new party will acquire control of M-real. carry the same right to receive a dividend. M-real’s A In addition, shareholders agreements include a provi- shares can be converted to B shares if shareholder or sion under which M-real must offer its shares in such representative of the nominee registered shares makes companies for sale to the other shareholders in such a written request of the conversion to the company. The companies in case of M-real’s change of control. conversion does not include additional consideration. Directors’ interest Stock Exchange listings and share price Shareholdings of the Board of Directors and the Corporate development Management Team are presented on pages 118-121. In 2009, the highest price of M-real’s B shares on the NASDAQ OMX Helsinki Ltd was EUR 1.57, the lowest Board of Directors’ authority to issue shares EUR 0.19, and the average price EUR 0.66. At year-end, The Board of Directors has authority to increase the the price of the B share was EUR 1.53. In 2008, the av- share capital through one or more rights issues and/ erage price was 1.59 and at year-end 0.69. The trading or more issues of convertible bonds such that in the volume of B shares was EUR 321 million, or 171 per rights issue or issue of convertible bonds, according to cent of the share capital. Finnish Companies Act, Chapter 10 a total maximum The combined market value of the A and B shares totaled of 58,365,212 M-real Corporation B shares can be sub- EUR 517 million at the year-end. At year-end, Metsäliitto scribed for, and that the company’s share capital can be Cooperative owned 38.6 per cent of M-real Corporation’s increased by a total maximum of EUR 99,220,860.40. shares, and the voting rights conferred by these shares The authorization will confer the right to disapply was 60.5 per cent. International investors’ holdings were shareholders’ pre-emptive right to subscribe for new 19 per cent. share and/or issues of convertible bonds and to decide on the subscription prices and other terms and condi- tions. Shareholder’s preemptive subscription rights can be disapplied providing that there is a significant financial reason for the company to do so, such as strengthening of the company’s balance sheet, mak- ing possible business structuring arrangements or taking other measures for developing the company’s business operations.

Changes in share capital and numbers of shares 1.1.2000 - 31.12.2009 Dividend policy Numbers of Share capital shares EUR million M-real’s dividend policy is stable and rewarding to 1999 Share capital, 31 Dec. 1999 138,999,425 233.8 shareholders, and aims at paying a dividend of at least 2000 Change in nominal value 1/3 of the Company’s earnings per share on average 5 May 2000, from share premium 2.5 over the business cycle, nonetheless taking into ac- funds count the Company’s gearing target. As the company’s Share capital, 31 Dec. 2000 138,999,425 236.3 2001 Rights issue 35,000,000 59.5 distributable own capital is negative, dividend can not Rights issue 5,000,000 8.5 be distributed for the financial year 2009. Share capital, 31 Dec. 2001 178,999,425 304.3 2002–2003 No changes Share capital, 31 Dec. 2003 178,999,425 304.3 2004 Rights issue 148,633,415 252.7 Rights issue 532,772 0.9 Share capital, 31 Dec. 2004 328,165,612 557.9 2005–2009 No changes Share capital, 31 Dec. 2009 328,165,612 557.9 94

SHARES AND SHAREHOLDERS Biggest shareholders 31.12.2009* A-share B-share Total % of shares % of votes 1 Metsäliitto Cooperative 25,751,535 100,978,057 126,729,592 38.62 60.48 2 Varma Mutual Pension Insurance Company 2,203,544 12,015,451 14,218,995 4.33 5.51 3 Ilmarinen Mutual Pension Insurance Company 3,534,330 3,028,211 6,562,541 2.00 7.24 4 Erkki Etola 0 5,500,000 5,500,000 1.68 0.54 5 Central Union of Agricultural Producers and Forest Owners 1,704,249 1,437,230 3,141,479 0.96 3.49 6 Mutual Pension Insurance Company Pension-Fennia 0 2,000,000 2,000,000 0.61 0.20 7 Fim Fenno Mutual Fund 0 1,830,773 1,830,773 0.56 0.18 8 Alfred Berg Small Cap Finland Mutual Fund 0 1,703,421 1,703,421 0.52 0.17 9 City of Turku 0 1,527,892 1,527,892 0.47 0.15 10 Alfred Berg Finland Mutual Fund 0 1,505,325 1,505,325 0.46 0.15 11 Evli Alexander Management 0 1,353,196 1,353,196 0.41 0.13 12 Veikko Laine Oy 0 910,000 910,000 0.28 0.09 13 BNP Paribas Arbitrage 0 858,582 858,582 0.26 0.08 14 Kari Jordan 0 801,759 801,759 0.24 0.08 15 Fim Forte Mutual Fund 0 738,510 738,510 0.23 0.07 16 Etera 100,000 579,218 679,218 0.21 0.25 17 Pertti Hämäläinen 0 632,365 632,365 0.19 0.06 18 Metsäliiton Toimenhaltijain Eläkesäätiö 16,070 577,900 593,970 0.18 0.09 19 Polaris Pensionsstiftelse 227,770 311,505 539,275 0.16 0.48 20 PH-Trans Oy 0 512,782 512,782 0.16 0.05

* Shareholders in the book-entry system. Does not include nominee registered shareholders

M-real A-share Number of shares Number of % Number of % Number of % shareholders shares votes 1–100 907 26.505 53,094 0.15 1,061,880 0.15 101–500 1,400 40.912 411,923 1.13 8,238,460 1.13 501–1 000 562 16.423 469,003 1.29 9,380,060 1.29 1 001–5 000 485 14.173 1,030,418 2.84 20,608,360 2.84 5 001–10 000 36 1.052 252,200 0.69 5,044,000 0.69 10 001–50 000 25 0.731 536,341 1.48 10,726,820 1.48 50 001–100 000 2 0.058 165,143 0.45 3,302,860 0.45 100 001–500 000 1 0.029 227,770 0.63 4,555,400 0.63 500 001– 4 0.117 33,193,658 91.34 663,873,160 91.34 Total 3,422 100 36,339,550 100.00 726,791,000 100.00 of which nominee registered 5 44,399 0.12 887,980 0.12 On waiting list, total 00 In joint accounts 00 Total in special accounts 00 Number issued 36,339,550 100.00 726,791,000 100.00

M-real B-share Number of shares Number of % Number of % Number of % shareholders shares votes 1–100 14,080 34.08 615,344 0.21 615,344 0.21 101–500 11,718 28.36 3,061,134 1.05 3,061,134 1.05 501–1 000 5,170 12.51 4,221,336 1.45 4,221,336 1.45 1 001–5 000 7,229 17.50 17,763,018 6.09 17,763,018 6.09 5 001–10 000 1,569 3.80 11,853,976 4.06 11,853,976 4.06 10 001–50 000 1,293 3.13 26,645,580 9.13 26,645,580 9.13 50 001–100 000 136 0.33 9,503,871 3.26 9,503,871 3.26 100 001–500 000 97 0.24 19,164,852 6.57 19,164,852 6.57 500 001– 23 0.06 198,996,951 68.19 198,996,951 68.19 Total 41,315 100.00 291,826,062 100.00 291,826,062 100.00 of which nominee registered 11 61,532,371 21.09 61,532,371 21.09 On waiting list, total 00 In joint accounts 00 Total in special accounts 00 Number issued 291,826,062 100 291,826,062 100 95

SHARES AND SHAREHOLDERS M-real Shareholders Share price development Earnings per share 31.12.2009 Index EUR

150 0,0

120 -0,5

90 -1,0 60

-1,5 30

0 -2,0

Q Financial and insurance 2007 2008 2009 2005 2006 2007 2008 2009 institutions 2% M-real A Public communities 8% Q M-real B Households 26% Q OMX Helsinki Forest Industry Index Q Metsäliitto 39% Q Other companies 4% Q Non-Finnish nationals 19% Q Non-profitmaking organizations 2%

M-real Voting Rights Traded volume 2008–2009 Shareholder’s equity per share 31.12.2009 EUR 120,000,000 8 7 100,000,000 6 80,000,000 5 60,000,000 4 3 40,000,000 2 20,000,000 1

0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 0 Q Financial and insurance 2008 2009 2005 2006 2007 2008 2009 institutions 1% Q A-share Q B-share Q Public communities 14%

Q Households 13% Dividend yield

Q Metsäliitto 61% % Q Other companies 2% Q Non-Finnish nationals 6% 3.0 Q Non-profitmaking organizations 4% 2.5

2.0

1.5

1.0

0.5

0.0 2005 2006 2007 2008 2009

96

SHARES AND SHAREHOLDERS Share performance 2009 2008 2007 2006 2005 Adjusted prices, euros A share high 2.40 3.40 5.80 5.67 5.00 low 0.54 0.77 3.00 3.66 3.94 at year end 1.94 0.83 3.40 4.81 4.24 average 1.52 1.88 4.42 4.61 4.46

B share high 1.57 3.28 5.94 5.62 4.93 low 0.19 0.67 2.96 3.26 3.82 at year end 1.53 0.69 3.25 4.79 4.22 average 0.66 1.59 4.56 4.41 4.36

Trading in shares, units of NASDAQ OMX Helsinki A share 1,513,161 1,757,960 3,060,113 1,910,151 1,075,633 % of total no. of A shares 4.2 4.8 8.4 5.3 3.0 B share 497,931,005 634,548,405 511,653,806 522,205,654 265,967,644 % of total no. of B shares 170.6 217.4 175.3 178.9 91.1

Number of shares at the year end A share 36,339,550 36,339,550 36,339,550 36,339,550 36,339,550 B share 291,826,062 291,826,062 291,826,062 291,826,062 291,826,062 Total 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612 Adjusted number of shares at year end 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612 Market capitalization of shares at year end, euros million 517.0 231.5 1,070.0 1,572.6 1,385.6 Number of shareholders* 42,766 40,555 38,067 39,984 43,350

* Shareholders in the book entry system. Does not include nominee registered shareholders

Figures per share EUR million 2009 2008 2007 2006 2005 Calculation of earnings per share

Result from continuing operations before tax -358 -204 -191 -280 -117 - minority interest -4 -9 1 3 -1 - taxation 27 34 23 11 -13 + Result from discontinued operations -23 -338 -27 -130 50 = Earnings -358 -517 -194 -396 -81

Adjusted number of shares (average) 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612

Earnings per share, EUR From continuing operations -1.02 -0.55 -0.51 -0.81 -0.40 From discontinued operations -0.07 -1.03 -0.08 -0.40 0.15 Earnings per share total, EUR -1.09 -1.58 -0.59 -1.21 -0.25 Shareholders` equity per share, EUR 2.79 4.05 4.93 5.62 6.92 Dividend per share, EUR 0.001) 0.00 0.06 0.06 0.12 Dividend per profit, % 0.0 0.0 -10.2 -5.0 -48.0 Nominal value per share, EUR - - 1.70 1.70 1.70 Dividend yield, % Series A 0.01) 0.0 1.8 1.2 2.8 Series B 0.01) 0.0 1.8 1.3 2.8 Price/earning ratio ( P/E ratio) Series A -1.8 -0.5 -5.8 -4.0 -17.0 Series B -1.4 -0.4 -5.5 -4.0 -16.9 P/BV , % Series A 69.5 20.5 60.9 76.8 56.6 Series B 54.8 17.0 58.2 76.5 56.3

1) Board of Directors proposes that no dividend is paid for 2009 97

SHARES AND SHAREHOLDERS Calculation of key ratios

Profitability Profit from continuing operations before tax 1) - direct taxes Return on equity (%) = Shareholders’ equity (average)

Profit from continuing operations before tax 1) + interest expenses, net exchange gains/losses and other financial expenses Return on capital employed (%) = Total equity + interest-bearing borrowings (average) Financial position Shareholders’ equity Equity ratio (%) = Total assets - advance payments received Interest-bearing borrowings Gearing ratio (%) = Shareholders’ equity

Interest-bearing borrowings - liquid funds - interest-bearing receivables Net gearing ratio (%) = Shareholders’ equity Shareholders’ equity + deferred tax liabilities Covenant equity ratio (%) = Total assets - advance payments received

Interest-bearing borrowings - liquid funds - interest-bearing receivables Covenant gearing ratio (%) = Shareholders’ equity + cumulative impairment losses (max EUR 300 million)

Share performace indicators Profit attributable to shareholders of parent company 2) Earnings per share = Adjusted number of shares (average)

Equity attributable to shareholders of parent company Shareholders´equity per share = Adjusted number of shares at 31 December

Dividends Dividend per share = Adjusted number of shares at 31 December

Dividend per share Dividend per profit (%) = Earnings per share

Dividend per share Dividend yield (%) = Share price at 31 December

Adjusted share price at 31 December Price/earnings ratio (P/E ratio) (%) = Earnings per share

Adjusted share price at 31 December P/BV (%) = Shareholders’ equity per share

Total traded volume per share (EUR) Adjusted average share price = Average adjusted number of shares traded during the financial year

Market capitalization = Number of shares x market price at 31 December

Other key figures Net cash flow arising from operating activities 3) Internal financing of capital = expenditure (%) Gross capital expenditure

Net cash flow arising from operating activities 3)+ net interest expenses Interest cover = Net interest expenses

Net cash flow arising from operating = Net cash flow arising from operating activities in the cash flow statement activities 3)

1) In 2000–2003 profit before extraordinary items 2) In 2000–2003 profit before extraordinary items - direct tax - minority interests 3) In 2000–2003 Funds from operations in the cash flow statement

98

CALCULATION OF KEY RATIOS Parent company accounts (Finnish accounting standards, FAS) Income statement

EUR million Note 1.1–31.12.2009 1.1–31.12.2008

Sales (1) 942 1,569 Change in stocks of finished goods and in work -3 -21 Other operating income (2) 95 246

Materials and services Raw materials and consumables Purchases during the financial period -584 -983 Change in inventories -3 4 External services -73 -125 -660 -1,104 Employee costs (3) Wages and salaries -54 -96 Social security expenses Pension expenses -16 -26 Other social security expenses -31 -53 -101 -175 Depreciation, amortisation and impairment charges (4) Depreciation according to plan -66 -112 Impairment charges 00 -66 -112 Other operating expenses -189 -418 Operating result 18 -15

Financial income and expenses (5, 6) Interest income from non-current investments Income from Group companies 253 Income from associated companies 225 11 Other interest and similar income Other interest and similar income 43 45 Net exchange gains/losses -15 43 Write-downs on non-current investments -332 -601 Other interest and similar expenses -112 -155 -189 -604 Loss before extraordinary items -171 -619

Extraordinary income and expenses (7) Extraordinary income 8 8 Loss before appropriations and taxes -171 -611

Appropriations Change in depreciation differences 50 81 Income taxes (8) -5 Loss for the financial period -121 -535

99

PARENT COMPANY ACCOUNTS (FINNISH ACCOUNTING STANDARDS, FAS) Parent company accounts Balance sheet

EUR million Note 31.12.2009 31.12.2008 EUR million Note 31.12.2009 31.12.2008

ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders´equity (16) Intangible assets (9) Share capital 558 558 Intangible rights 18 26 Share premium account 664 664 Other capitalized expenditure 5 6 Retained earnings -222 312 23 32 Loss for the financial period -121 -535 879 999 Tangible assets (10) Land and water areas 13 12 Approproations Buildings 135 144 Accumulated depreciation difference 200 250 Machinery and equipment 378 417 Other tangible assets 4 4 Provisions (17) Advance payment and construction in Provisions for pensions 10 13 progress 2 3 Other provisions 50 56 532 580 60 69

Investments (11) Liabilities Shares in Group companies 626 590 Non-current (18, 19, 20) Receivables from Group companies 84 119 Bond loans 736 1,165 Shares in associated companies 158 255 Loans from financial institutions 63 129 Receivables from associated Pension loans 61 33 companies Other liabilities 4 5 Other shares and holdings 60 60 864 1,332 Other receivables 220 928 1,244 Current (18, 19, 21, 22) 1,483 1,856 Bond loans 339 240 Loans from financial institutions 22 37 Current assets Pension loans 39 20 Inventories Advance payments 3 2 Raw materials and consumables 32 35 Accounts payable 49 51 Work in progress 2 2 Payables to Group companies 148 106 Finished goods and goods for resale 72 74 Payables to associated companies 1 1 Advance payment 2 11 Other liabilities 9 13 108 122 Accruals and deferred income 51 68 661 538 Receivables (12, 13, 14, 15) Current 1,525 1,870 Accounts receivables 123 136 Receivables from Group companies 879 599 Receivables from associated companies 7 11

Other receivables 21 22 Prepayment and accrued income 41 43 1,071 811

Cash and cash equivalents 2 399

Total equity and liabilities 2,664 3,188 Total assets 2,664 3,188

100

PARENT COMPANY ACCOUNTS Parent company accounts Cash flow statement

EUR million 2009 2008

Cash flow from Operating Activities Operating progfit 18 -16 Adjustments to operating profit a) 16 35 Change in net working capital b) 4 147 Interest -66 -104 Dividends received 227 65 Other financial items -22 75 Taxes Net cash flow from operations 177 202

Investments Puchase of shares -365 -125 Purchase of other fixed assets -16 -50 Sale of shares 142 80 Sale of other fixed assets 8 150 Increase in other non-current investments Decrease in other non-current investments 255 147 Total cash used in investments 24 202

Cash flow before financing 201 404

Financing Increase in non-current liabilities 60 4 Decrease in non-current laibilities -423 -265 Increase (-) or decrease (+) in interest-bearing non-current receivables -341 257 Increase (-) or decrease (+) in interest-bearing current receivables 90 16 Dividends paid -20 Group contribution 16 3 Total financing -598 -1

Change in liquid funds -397 399 Liquid funds at 1 Jan. 399 0 Liquid funds at 31 Dec. 2 399 a) adjustments to operating profit Depreciation 66 112 Gains (+) or losses (-) on sale of fixed assets -43 -125 Change in provisions -7 48 Write-downs on non-current investments Total 16 35 b) Change in net working capital Increase (-) or decrease (+) in stocks 15 65 Increase (-) or decrease (+) in non-interest bearing receivables 64 102 Increase (+) or decrease (-) in non-interest bearing current liabilities -75 -24 Total 4 147

101

PARENT COMPANY ACCOUNTS Parent Company Accounting policies

M-real Corporation’s financial statements have been Straight-line depreciation according to plan is based on prepared in accordance with Finnish accounting stan- the estimated useful life of the asset as follows: dards (FAS). Buildings and constructions 20–40 years Sales Heavy power plant machinery 20–40 years Sales are calculated after deduction of indirect sales ta- Other heavy machinery 20 years xes, trade discounts and other items adjusting sales. Lightweight machinery and equipment 5–15 years Other items 5–10 years Exchange rate differences Foreign exchange gains and losses have been booked to Depreciation is not recorded on the purchase cost of net exchange gains/losses under financial income and land and water areas. expense. Open and actual foreign exchange differences hedging sales are recorded immediately to financial in- Leasing come and expenses in the income statement. Lease payments are treated as rental expenses.

Transactions in foreign currency Environmental expenditure Transactions in foreign currency have been booked at Environmental expenditure comprises the specifiable the exchange rate on the day of the transaction. expenses of environmental protection measures ai- At the balance sheet date, receivables and liabilities ming primarily at combating, remedying or alleviating denominated in foreign currency have been translated environmental damage. into euros at the exchange rate quoted by the European Central Bank at the balance sheet date. Extraordinary income and expenses Group contribution, paid and received, are presented Pensions and pension funding in the income statement as extraordinary items, only. Statutory pension security is handled by pension in- The tax effect of extraordinary items is presented in the surance companies outside the Group. In addition to notes to the financial statements. statutory pension security, some salaried employees have supplementary pension arrangements which Appropriations are either insured, arranged through the Metsäliitto Finnish tax legislation offers the possibility to deduct Employees’ Pension Foundation or are an unfunded expenses prematurely from the profit for the financial liability of the company. The Metsäliitto Employees’ year and to transfer them to the balance sheet as pro- Pension Foundation is fully funded based on the cur- visions. The items are taken into account in tax filings rent value of its assets. only if they have been entered in the accounts. These Pension insurance premiums have been periodized items are presented in the appropriations in the income to correspond to the accrual-based wages and salaries statement. Among such items are depreciation on pro- given in the financial statements. perty, plant and equipment in excess of plan, which is stated as a depreciation difference in the balance sheet Research and development expenditure and as a change in the depreciation difference in the Research and development expenditure is recorded as income statement. an expense in the relevant financial period. Provisions Inventories Future costs and losses to which the Group is com- Inventories are measured at the lower of cost or net mitted and which are likely to be realized are included realizable value. In measuring inventories, the FIFO in the income statement under the appropriate expen- principle is observed or, alternatively, the weighted se heading and in the balance sheet under provisions average price method. for future costs whenever the precise amount and the time of occurrence are not known and in other cases Property, plant and equipment and depreciation they are included in accrued liabilities. These can be, for The carrying values of property, plant and equipment example, the pension liability or costs of discontinued are based on original acquisition costs less depreciation operations and restructuring costs. according to plan and impairment losses.

102

PARENT COMPANY ACCOUNTING POLICIES Notes to the parent company financial statements

EUR million 2009 2008 EUR million 2009 2008

1. Sales 5. Financial income and expenses Owing to the Group structure, the sales of the parent company Dividend income 227 64 has not been broken down by segments and market Interest income from non-current investments 17 32 Other interest income 26 13 2. Other operating income Write-downs on non-current investments -332 -601 Rental income 2 2 Interest expenses -106 -148 Gains on disposal of fixed assets 43 153 Other financial expenses -6 -7 Service revenue 7 50 -174 -647 Government grants 2 12 Net exchange differences -15 43 Other allowances and subsidies 21 1 Financial income and expenses, total -189 -604 Other 20 28 95 246 6. Exchange differences in Income statement Exchange differences on sales 1 -6 3. Empoyee costs Exchange differences on purchases 0 0 Wages and salaries for working hours 54 96 Exchange differences on financing -16 49 Pension expenses 16 26 Exchange differences, total -15 43 Other social security expenses 31 53 7. Extraordinary income and expenses 101 175 Extraordinary income Salaries and emoluments paid to management Group contribution received 0 8 Managing director and their alternates 0.8 0.5 Members of the Board and deputies 0.5 0.5 8. Income taxes 1.3 1.0 Income taxes for the financial period 0 -5 Income taxes for previous periods Main auditors fees 0-5 Fees paid to Pricewaterhouse Coopers were as Income taxes on ordinary operations 0 3 follows: Income taxes on extraordinary items 0 2 Audit fees 0.2 0.6 05 Tax consultancy 0.1 Other fees 0.2 0.5 9. Intangible assets 0.4 1.2 Intangible rights Acquisition costs, 1 Jan. 111 107 The audit fees are paid for the audit of the Increases 5 15 annual and quarterly financial statements. Transfers between items 7 Tax consultancy fees are the fees paid for the Decreases -7 -18 caonsultancy services and the like. Acquisition costs, 31 Dec. 109 111 Accumulated depreciation, 1 Jan. -85 -86 4. Depreciation according to plan and Accumulated depreciation on deduction and 14 impairment charges transfers Depreciation according to plan Depreciation for the period -6 -13 Intangible rights 6 13 Accumulated depreciation, 31 Dec. -91 -85 Goodwill Book value, 31 Dec. 18 26 Other capitalized expenditure 1 1 Goodwill Buildings and constructions 9 14 Acquisition costs, 1 Jan. 20 20 Machinery and equipment 49 82 Acquisition costs, 31 Dec. 20 20 Other tangible assets 1 2 Accumulated depreciation, 1 Jan. -20 -20 Total depreciation according to plan 66 112 Depreciation for the period Depreciation difference -50 -88 Accumulated depreciation, 31 Dec. -20 -20 Total depreciation 16 24 Book value, 31 Dec.

103

NOTES TO THE PARENT COMPANY FINANCIAL EUR million 2009 2008 EUR million 2009 2008

Other capitalized expenditure Other tangible assets Acquisition costs, 1 Jan. 15 40 Acquisition costs, 1 Jan. 9 14 Increases Increases - Decreases -25 Decreases 0 -5 Acquisition costs, 31 Dec. 15 15 Acquisition costs, 31 Dec. 9 9 Accumulated depreciation, 1 Jan. -9 -33 Accumulated depreciation, 1 Jan. -5 -8 Accumulated depreciation on Accumulated depreciation on deduction and transfers 25 deduction and transfers 5 Depreciation for the period -1 -1 Depreciation for the period 0 -2 Accumulated depreciation, 31 Dec. -10 -9 Accumulated depreciation, 31 Dec. -5 -5 Book value, 31 Dec. 5 6 Book value, 31 Dec. 4 4

10. Tangible assets Construction in progress Land and water areas Acquisition costs, 1 Jan. 3 28 Acquisition costs, 1 Jan. 12 16 Increases 3 3 Increases 1 Transfers between items -3 -25 Decreases -4 Decreases -1 -3 Acquisition costs, 31 Dec. 13 12 Acquisition costs, 31 Dec. 2 3 Book value, 31 Dec. 13 12 Book value, 31 Dec. 2 3

Buildings The undepreciated portion of capitalized interest expenses under the balance sheet item Acquisition costs, 1 Jan. 261 394 ”Buildings and constructions” at 31 Dec. 2009 was EUR 0.0 million (2008: EUR 0.0 milli- Increases 1 2 on) and under the balance sheet item ”Machinery and equipment” it was EUR 2.1 milli- Transfers between items 1 on (2008: EUR 2,4 million) There were no capitalized interest expenses during the 2009 Decreases -136 financial year (2008 EUR 0,0 million). Acquisition costs, 31 Dec. 262 261 11. Investments Accumulated depreciation, 1 Jan. -117 -167 Shares in Group companies Accumulated depreciation on Acquisition costs, 1 Jan. 590 1 054 deduction and transfers 63 Increases 362 125 Depreciation for the period -10 -13 Decreases -1 Accumulated depreciation, 31 Dec. -127 -117 Write-down -325 -589 Book value, 31 Dec. 135 144 Acquisition costs, 31 Dec. 626 590 Book value, 31 Dec. 626 590 Machinery and equipment Acquisition costs, 1 Jan. 1,190 1,804 Shares in associated companies Increases 8 30 Acquisition costs, 1 Jan. 255 309 Transfers between items 3 17 Write-down -54 Decreases -661 Decreases -97 Acquisition costs, 31 Dec. 1,201 1,190 Acquisition costs, 31 Dec. 158 255 Accumulated depreciation, 1 Jan. -773 -1,117 Book value, 31 Dec. 158 255 Accumulated depreciation on deduction and transfers 426 Other shares and holdings Depreciation for the period -50 -82 Acquisition costs, 1 Jan. 60 34 Accumulated depreciation, 31 Dec. -823 -773 Increases 3 32 Book value, 31 Dec. 378 417 Decreases -3 -6 Production machinery and equipment, 31 Dec. 365 370 Acquisition costs, 31 Dec. 60 60 Book value, 31 Dec. 60 60

104

NOTES TO THE PARENT COMPANY FINANCIAL EUR million 2009 2008 EUR million 2009 2008

Receivables from goup companies 13. Current receivables Acquisition costs, 1 Jan. 119 264 Receivables from Group companies Increases 988 Accounts receivables 5 7 Decreases -1,023 -145 Loan receivables 333 409 Acquisition costs, 31 Dec. 84 119 Other receivables 524 122 Book value, 31 Dec. 84 119 Prepayment and accrued income 17 61 Receivables from associated companies Receivables from associated companies Accounts receivables 2 Acquisition costs, 1 Jan. 2 Loan receivables 7 9 Increases Accrued income Decreases -2 Other receivables Transfers between items Accounts receivables 123 136 Acquisition costs, 31 Dec. Loan receivables Book value, 31 Dec. Other receivables 21 22 Prepayment and accrued income 41 43 Other receivables 1,071 811 Acquisition costs, 1 Jan. 220 Increases 220 14. Prepayment and accrued income Transfers between items -220 Insurance Acquisition costs, 31 Dec. 220 Taxes 37 37 Book value, 31 Dec. 220 Discounts Others 4 6 Investment, total 41 43 Acquisition costs, 1 Jan. 1,244 1,663 Increases 1,353 377 15. Interest-bearing receivables Decreases -1,344 -153 Loan receivables and other non-current Transfers between items 0 assets 84 339 Write-down -325 -643 Liquid funds and other current assets 861 917 Acquisition costs, 31 Dec. 1,148 1,244 945 1,256 Book value, 31 Dec. 928 1,244 16. Shareholders´equity Share capital, 1 Jan. 12. Loan receivables from management Series A shares 62 62 There are no loan receivables from the managing directors, members of Series B shares 496 496 the Board of Directors and their deputies as well as persons belonging to Share capital, 31 Dec. 558 558 similar bodies. Share premium account, 1 Jan./31 Dec. 664 664

Restricted equity, total 1,222 1,222

Retained earnings, 1 Jan. -222 332 Dividends paid -20 Loss for the period -121 -535 Retained earnings, 31 Dec. -343 -222

Unrestricted equity, total -343 -222

Shareholders´ equity, total 879 999

105

NOTES TO THE PARENT COMPANY FINANCIAL EUR million 1.1. Increase Decrease 31.12. EUR million 2009

17. Provisions 19. Non-current debts with amortization plan Provisions for pension 3 -1 2 Provisions for 10 1 -3 8 Bonds unemployment pension 2010 339 costs 2011 53 Restucturing 51 2 -21 32 2012 101 Provision for rental costs 2 3 5 2013 497 Other provisions 3 14 -4 13 2014 85 69 20 -29 60 2015 Total, at the end of the financial period 1,075

EUR million 2009 2008 Loans from financial institutions 2010 22 18. Liabilities 2011 22 Non-current 2012 22 Non-interest-bearing 4 4 2013 19 Interest-bearing 860 1,327 2014 864 1,332 2015 Total, at the end of the financial period 85 Current Non-interest-bearing 155 226 Pension loans Interest-bearing 506 312 2010 39 661 538 2011 11 2012 20 2013 20 Bonds Interest-% EUR million 2014 10 2002–2012 9.20 101 2015 2002–2014 9.40 85 Total, at the end of the financial period 100 2004–2011 3.02 30 2004–2011 3.20 10 Total 2004–2011 3.27 13 2010 400 2006–2010 5.59 339 2011 86 2006–2013 9.25 497 2012 143 Total 1,075 2013 536 2014 95 Total, at the end of the financial period 1,260

20. Non-current liabilities 2009 2008 Other liabilities Bonds 736 1,165 Loans from financial institutions 63 129 Pension loans 61 33 Other liabilities 4 5 864 1,332

21. Current liabilities Liabilities from Group companies 148 106 Liabilities from associated companies 1 1 Other liabilities Bonds 339 240 Loans from financial institutions 22 37 Pension loans 39 20 Advance payment 3 2 Accounts payable 49 51 Other liabilities 9 13 Accruals and deferred income 51 68 661 538 106

NOTES TO THE PARENT COMPANY FINANCIAL EUR million 2009 2008 EUR million 2009 2008

22. Accruals and deferred income 24. Environmental items Current Income statement Insurance 4 4 Materials and consumables 3 8 Personnel expenses 15 14 Employees costs Income tax Wages and salaries 1 1 Interests 13 16 Social security costs Accruals of purchases 11 8 Depreciation 3 5 Freight costs 1 1 Other operating charges 2 Discounts 13 18 914 Others -6 7 Balance sheet 51 68 Intangible and tangible assets Acquisition costs, 1 Jan. 69 77 Increases 1 6 Decreases -1 -13 23. Contingent liabilities Depreciation -29 -26 For own liabilities Book value, 31 Dec. 40 44 Liabilities secured by pledges Loans from financial institutions Provisions Other laibilities Other provisions 1 3 Pledges granted Liabilities secured by mortgages Loans from financial institutions 31 27 Only additional identifiable costs that are primarily intended to prevent, Other laibilities 75 reduce or repair damage to the environment are included environmental costs. Environmental expenditures are capitalised if they have been incurred Real estate mortgages 106 27 to prevent or reduce future damage or conserve resources and bring future On behalf of Group companies economic benefits. Pledges Real estate mortgages 4 Guarantees 1,557 1,557 On behalf of others Guarantees 1 1 Other liabilities Leasing commitments Payments due in the following year 1 1 Payments due in subsequent years 1 3 Total Real estate mortgages 106 31 Pledges Guarantees 1,559 1,558 Leasing liabilities 2 4 1,666 1,593

107

NOTES TO THE PARENT COMPANY FINANCIAL The Board´s proposal for the distribution of profits

The distributable funds of the parent company are EUR -342,787,654.55 of which the result for the period is EUR -120,580,449.73. The Board of Directors proposes to the Annual General Meeting that no dividend to be paid and the result for the period to be transferred to the Retained earnings account.

No material changes have been taken place in respect of the company´s financial position after the balance sheet date. The liquidity of the company is good.

Espoo, 4 February 2010

Kari Jordan Martti Asunta Erkki Karmila

Kai Korhonen Liisa Leino Runar Lillandt

Juha Niemelä Antti Tanskanen Erkki Varis

Mikko Helander CEO

108

THE BOARD´S PROPOSAL FOR THE DISTRIBUTION OF PROFITS Auditor’s report

To the Annual General Meeting of M-real Oyj assessments, the auditor considers internal control We have audited the accounting records, the financial relevant to the entity’s preparation and fair presentation statements, the report of the Board of Directors and of the financial statements and the report of the Board the administration of M-real Oyj for the year ended on of Directors in order to design audit procedures that are 31 December, 2009. The financial statements comprise appropriate in the circumstances. An audit also includes the consolidated balance sheet, statement of compre- evaluating the appropriateness of accounting policies hensive income, statement of changes in equity, cash used and the reasonableness of accounting estimates flow statement and notes to the consolidated financial made by management, as well as evaluating the overall statements, as well as the parent company’s balance presentation of the financial statements and the report sheet, income statement, cash flow statement and no- of the Board of Directors. tes to the financial statements. The audit was performed in accordance with good auditing practice in Finland. We believe that the audit Responsibility of the Board of Directors and the evidence we have obtained is sufficient and appropriate Managing Director to provide a basis for our audit opinion. The Board of Directors and the Managing Director are responsible for the preparation of the financial state- Opinion on the Consolidated Financial Statements ments and the report of the Board of Directors and In our opinion, the consolidated financial statements gi- for the fair presentation of the consolidated financial ve a true and fair view of the financial position, financial statements in accordance with International Financial performance and cash flows of the group in accordance Reporting Standards (IFRS) as adopted by the EU, as well with International Financial Reporting Standards (IFRS) as for the fair presentation of the financial statements as adopted by the EU. and the report of the Board of Directors in accordance with laws and regulations governing the preparation of Opinion on the Company’s Financial Statements the financial statements and the report of the Board of and the Report of the Board of Directors Directors in Finland. The Board of Directors is respon- In our opinion, the financial statements and the report sible for the appropriate arrangement of the control of of the Board of Directors give a true and fair view of both the company’s accounts and finances, and the Managing the consolidated and the parent company’s financial Director shall see to it that the accounts of the company performance and financial position in accordance with are in compliance with the law and that its financial af- the laws and regulations governing the preparation of fairs have been arranged in a reliable manner. the financial statements and the report of the Board of Directors in Finland. The information in the report of the Auditor’s Responsibility Board of Directors is consistent with the information in Our responsibility is to perform an audit in accordance the financial statements. with good auditing practice in Finland, and to express an opinion on the parent company’s financial statements, Other Opinions on the consolidated financial statements and on the re- We support that the financial statements and the con- port of the Board of Directors based on our audit. Good solidated financial statements should be adopted. auditing practice requires that we comply with ethical The proposal by the Board of Directors regarding the requirements and plan and perform the audit to obtain consideration of the annual result and the payment reasonable assurance whether the financial statements of dividend is in compliance with the Limited Liability and the report of the Board of Directors are free from Companies Act. We support that the Members of the material misstatement and whether the members of Board of Directors and the Managing Director of the the Board of Directors of the parent company and the parent company should be discharged from liability for Managing Director have complied with the Limited the financial period audited by us. Liability Companies Act. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in Espoo, 18 February 2010 the financial statements and the report of the Board of Directors. The procedures selected depend on the PricewaterhouseCoopers Oy auditor’s judgment, including the assessment of the Authorised Public Accountants risks of material misstatement of the financial sta- tements and of the report of the Board of Directors, Johan Kronberg whether due to fraud or error. In making those risk Authorised Public Accountant 109

AUDITOR’S REPORT Corporate Governance statement

This statement describing the corporate governance of Application of the Finnish Corporate Governance M-real Corporation (M-real or Company) has been issu- Code ed as a separate statement and published concurrently As a Finnish listed company, M-real applies the Finnish with the Company’s financial statements and Report of Corporate Governance Code (www.cgfinland.fi). This the Board of Directors. statement is compliant with recommendation 51 of M-real is a Finnish public limited company whose the code. M-real deviates from recommendation 26 of A and B series shares are subject to public trading on the code as follows: Erkki Varis, member of the Audit the Mid Cap list of NASDAQ OMX Helsinki Ltd. (Helsinki Committee, is the former Managing Director of the Stock Exchange). M-real’s operations are governed by Company’s associated company Oy Metsä-Botnia Ab Finnish laws and the regulations and rules set out pur- (until 2008) and is thus not independent of the Company suant to such laws. M-real also follows the rules and in terms of an overall evaluation. The Board of Directors recommendations of the Helsinki Stock Exchange as considers it important for the Audit Committee to have applicable to listed companies. specific know-how and competence in the Company’s M-real prepares its financial statements and interim industry in the prevailing circumstances. reports according to the International Financial Reporting Standards (IFRS). The financial statement documents General Meeting are prepared and published in Finnish and English. The General Meeting of Shareholders is the Company’s M-real’s headquarters are located in Espoo, Finland. highest decision-making body where shareholders The company’s registered domicile is Helsinki. use their decision-making power. Each shareholder is entitled to participate in the General Meeting by M-real’s administration and governance structure following the procedure described in the notice to the The Company’s statutory bodies are the General Meeting General Meeting. of Shareholders, the Board of Directors, the CEO and According to the Finnish Companies Act, the General the Deputy CEO. In addition, a Corporate Management Meeting decides on the following matters, among Team assists the CEO in the operative management of others: the company and coordination of its operations. The tasks and responsibilities of the different bodies are specified • amending the Articles of Association pursuant to the Finnish Companies Act. • approving the financial statements In M-real’s existing organisation, business areas are • profit distribution defined such that each business area is responsible for • mergers and demergers its own sales as well as production, and thus has a clear • acquisition and transfer of own shares profit responsibility. M-real’s business areas include • appointing the members of the Board and specifying Consumer Packaging, Office Papers, Speciality Papers, their compensation and the compensation for Board Market Pulp and Energy and Contract Manufacturing. committee members • appointing the auditor and specifying its compen- sation.

Shareholders are entitled to put forward a matter per- taining to the General Meeting to be addressed when the shareholder delivers a written request to this effect so well in advance that the matter can be included in Corporate Governance in M-real the notice to the meeting. In addition, the shareholder has a right to present questions on the items on the SHAREHOLDERS’ MEETING agenda of the General Meeting. A shareholder is entitled to participate in the General Meeting when he/she is included in the register of sha- BOARD OF DIRECTORS reholders eight (8) working days before the General Meeting. An Annual General Meeting takes place each BOARD COMMITTEES Financial and Nomination and Compensation year in June at the latest. INSIDER GUIDELINES Audit Committee Committee INTERNAL AUDITING CEO

DEPUTY TO CORPORATE CEO MANAGEMENT 110 TEAM

CORPORATE GOVERNANCE STATEMENT An Extraordinary General Meeting will convene if • monitoring that the Company’s Articles of Association the Board finds it necessary, or if the auditor or share- are complied with; convening the General Meeting and holders representing at least 10 per cent of all shares monitoring that the decisions made by the General deliver a written request to this effect in order to pro- Meeting are implemented cess a specified matter. • signing and presenting the annual financial state- ments to the Annual General Meeting for approval, Board of Directors and preparing a proposal for the use of profits The Board of Directors is responsible for the Company’s • approving the essential policies, regulations and gui- administration and arranging the Company’s operations delines governing the business operations properly according to applicable laws, the Articles of • deciding on who are permanent insiders in the com- Association and good corporate governance. Taking pany and accepting the Company’s insider rules into account the scope and quality of the Company’s • publishing or authorizing the CEO to publish all such operations, the Board takes care of matters that are information that is likely to have an impact on the far-reaching and unusual, and do not belong to the Company’s share value, or which otherwise has to Company’s day-to-day business operations. The Board be made public according to the Finnish Securities supervises M-real’s operations and management and Markets Act. decides on the corporate strategy, major investments, the Company’s organisation structure and significant The working order of the Board of Directors is presented financing matters. The Board supervises the proper in full on the M-real website (www.m-real.com/lnvestor arrangement of the Company’s operations, and it en- Relations/Corporate Governance). The Board can de- sures that accounting and asset management control, legate matters in its general responsibility to the CEO financial reporting and risk management have been and correspondingly take charge of decision-making organised in an appropriate manner. regarding a task of the CEO. For its operations, the Board of M-real has a written On an annual basis, the Board assesses its own working order. In accordance with its working order, the operations and the Company’s administration principles Board’s responsibilities include: and decides on necessary changes, if any. The Board convenes on a regular basis. In the finan- • appointing the CEO and accepting the appointment cial year 2009, the Board held a total of 18 meetings, of Corporate Management Team members, and seven of which were phone meetings. The attendance ensuring that the CEO takes care of the company’s rate of the members was on average 97 per cent. day-to-day administration according to the regula- tions and guidelines given by the Board Composition and Independence of the Board of • appointing members to the Board Committees and Directors accepting their working orders The composition and number of members of the • processing and accepting the corporate strategy and Board of Directors must facilitate effective fulfilment its main policies of the Board’s tasks. The composition of the Board of • accepting the annual operational plan Directors takes into account the development phase of • monitoring how company accounting, asset mana- the Company, the special requirements of the industry gement and risk control are arranged and the needs of the Company’s operations. Both sexes • deciding on significant investments, business acqui- are represented in the Board of Directors. A member sitions, divestments and closures of operations of the Board must possess the competence required • deciding on considerable investments and financing by the task and the opportunity to allocate sufficient arrangements time for the task. • deciding on the surrender and pledging of the According to the Articles of Association, a minimum Company’s significant real property of five and a maximum of ten regular members shall be • deciding on the granting of donations, or on the CEO’s appointed to the Board of Directors by the shareholders authority concerning them in the Annual General Meeting for a one-year period at • granting and cancelling the right to represent the a time. The number of consecutive terms is not limited. Company and the authority to sign on behalf of the At present, the Board has nine regular members. The Company Board appoints a Chairman and a Vice Chairman from among its members. The Annual General Meeting of 2009 appointed the following persons as members of the Board of Directors: 111

CORPORATE GOVERNANCE STATEMENT Mr Kari Jordan, born 1956, Chairman Remuneration of the members of the Board of Mr Martti Asunta, born 1955, Vice Chairman Directors Mr Erkki Karmila, born 1942, independent member The Annual General Meeting 2009 resolved to main- Mr Kai Korhonen, born 1951, independent member tain the remuneration of the members of the Board of Ms Liisa Leino, born 1960, independent member Directors unchanged, however to be converted to an Mr Runar Lillandt, born 1944 annual remuneration. Thus, the Chairman receives an Mr Juha Niemelä, born 1946, independent member annual remuneration of EUR 76,500, the Vice Chairman Mr Antti Tanskanen, born 1946, independent member EUR 64,500 and members EUR 50,400. One half of the Mr Erkki Varis, born 1948, independent of significant remuneration was decided to be paid in cash while the shareholders other half was to be paid in the Company’s B-series shares to be acquired from the stock exchange between A majority of the members of the Board of Directors 16 and 20 March 2009. Each Board member therefo- are independent of both the Company and its signifi- re received 87,315 M-real’s B-series shares. However, cant shareholders. Board members Erkki Karmila and Board members Kari Jordan, Martti Asunta and Runar Antti Tanskanen have acted as members independent Lillandt renounced their right to the annual remunera- of operative management continuously for more than tion for the term of membership in question. 12 years. Both individuals are recognized board pro- In addition, the members are paid a fee of EUR 500 fessionals and have had a significant career in other per each attended Board and committee meeting. positions outside of the Company and the industry. Karmila is the Chairman of the Audit Committee and Board committees has been elected as deputy to the Chairman of the Board Board committees provide assistance to the Board of in situations requiring special Board composition due Directors, preparing matters for which the Board is to independence requirements. Tanskanen, on the ot- responsible. The Board of Directors appoints an Audit her hand, enjoys a reputation of trust throughout the Committee and a Nomination and Compensation society and has several other positions of trust outside Committee from among its members. Every year after the Company. Therefore, the Board of Directors has the Annual General Meeting, the Board of Directors ap- deemed both Karmila and Tanskanen independent of points each committee’s chairman and members. The the Company and its significant shareholders based on Board of Directors and its committees can also seek an overall evaluation. assistance from external advisors. To assess the independence and impartiality of the Final decisions concerning matters related to the members of the Board of Directors, the members shall tasks of the committees are made by the Board of notify the company of circumstances that may have an Directors on the basis of committee proposals, exclu- impact on the member’s ability to act without conflict ding proposals made directly to the General Meeting of interest. In situations where the Board of Directors of Shareholders by the Nomination and Compensation processes a business or other contractual relationship Committee. or connection with Metsäliitto Cooperative or its other subsidiary, the Board of Directors acts, if necessary, without those of its members who are dependent on Metsäliitto Cooperative.

112

CORPORATE GOVERNANCE STATEMENT Audit Committee Nomination and Compensation Committee The Audit Committee is responsible for assisting the The task of the Nomination and Compensation Committee Board of Directors in ensuring that the company’s fi- is to assist the Board of Directors in matters related to nancial reporting, calculation methods, annual finan- the appointment and compensation of the company’s cial statements and other financial information made CEO, the Deputy CEO and the senior management and public by the company are correct, balanced, transpa- prepare matters related to the reward schemes for rent and clear. On a regular basis, the Audit Committee employees. In addition, the committee prepares for the reviews the internal control and management systems Annual General Meeting a proposal on the number of and monitors the progress of financial risk reporting Board members, Board composition and Board mem- and the auditing of the accounts. The Audit Committee ber compensation. The committee also recommends, assesses the efficiency and scope of internal auditing, prepares and proposes to the Board the CEO’s and the the Company’s risk management, key risk areas and Deputy CEO’s nomination, salary and compensation, compliance with applicable laws and regulations. The and further evaluates and provides the Board and the committee gives a recommendation to the Board con- CEO with recommendations concerning management cerning the appointment of auditors to the Company. rewards and compensation systems. The Audit Committee also processes the annual plan The committee consists of five Board members. It for internal auditing and the reports prepared on sig- convenes on a regular basis at least once a year. The com- nificant audits. mittee chairman provides the Board with the proposals The Audit Committee consists of four Board mem- made by the Committee. The tasks and responsibilities bers of whom three are independent of the Company and of the Nomination and Compensation Committee have its significant shareholders. Since the Annual General been specified in the committee’s working order, which Meeting of 2009, Erkki Karmila has been chairman of the the Board approves. Audit Committee, with Kai Korhonen, Antti Tanskanen Since the Annual General Meeting of 2009, Kari Jordan and Erkki Varis as members. has been chairman of the Nomination and Compensation The committee members must have adequate ex- Committee, with Martti Asunta, Liisa Leino, Runar pertise in accounting and financial statement policies. Lillandt and Juha Niemelä as members. The Audit Committee convenes on a regular basis, at The Nomination and Compensation Committee con- least four times a year. The Company’s auditor is heard vened five times during 2009 and the attendance rate of at the meetings. The committee chairman provides the members was on average 90 per cent. the Board with a report on each meeting of the Audit Committee. The tasks and responsibility areas have been specified in the committee’s working order which the Board has approved. When invited, the following persons are also rep- resented in the Audit Committee meetings the auditor, Chief Executive Officer and Chief Financial Officer as well as other management representatives and ex- ternal advisors. The Audit Committee convened five times during 2009 and the members participated in all meetings.

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CORPORATE GOVERNANCE STATEMENT CEO Deputy to the CEO CEO Mikko Helander is responsible for the daily mana- Mika Joukio, Senior Vice President of the Consumer gement of the Company’s administration according to Packaging business area, also acts as Deputy to the the guidelines and instructions given by the Board. In CEO. The Deputy to the CEO is responsible for car- addition, the CEO is responsible for ensuring that the rying out the CEO’s tasks when the CEO is unable to Company’s accounting has been carried out according perform his duties. to applicable laws and that asset management has been organised in a reliable manner. The CEO manages the Corporate Management Team company’s daily business and is responsible for cont- In the operative management of M-real, the CEO is as- rolling and steering the business areas. sisted by a Corporate Management Team, which consists The CEO has a written CEO contract approved by the of Mikko Helander, CEO, together with business area Board. The Board monitors the CEO’s performance and executives Mika Joukio (Consumer Packaging), Seppo provides a performance evaluation once a year. Puotinen (Office Papers), Heikki Husso (Speciality Papers) The contractual retirement age of the CEO is 62 and Soili Hietanen (Market Pulp and Energy) who report years. The Company has commissioned an additional to Helander. In addition, the Corporate Management pension insurance policy for the CEO, covering the pe- Team includes Matti Mörsky, CFO, and Mika Paljakka, riod between the contractual and statutory retirement SVP, HR. Helander acts as Chairman to the Corporate age of 63 years and entitling the CEO to receive a pen- Management Team. sion compensation equal to 60 per cent of his salary at With the exception of the CEO, members of the the time of retirement. According to Finnish pension Corporate Management Team have no extraordina- legislation, a person has the option to retire between ry pension arrangements which would deviate from the ages of 63 to 68. applicable pension legislation. With the exception of The Board appoints and discharges the CEO. The the CEO, the term of notice of Corporate Management Board can discharge the CEO without a specific rea- Team members is six months. Termination of employ- son. The CEO can also resign from his assignment. ment without cause entitles members of the Corporate The mutual term of notice is six months. The Board Management Team to receive a discharge compensa- may, however, decide to discharge the CEO without a tion equal to their 6 to 18-month salary. period of notice. The Corporate Management Team’s tasks and res- When the service contract of the CEO is terminated ponsibilities include planning investments, specifying by the Board, the CEO is entitled to receive discharge and preparing the company’s strategic guidelines, al- compensation equal to his 18-month salary. In addition, locating resources, controlling routine functions and in case the Company is divested, the CEO is entitled to preparing matters to be reviewed by the Board. resign from his assignment against a discharge com- The Corporate Management Team convenes at the pensation equal to his 24-month salary. Chairman’s invitation once a month, as a rule, and also otherwise when necessary.

Principles of compensation of operative management The purpose of the management’s compensation system Corporate Management Team is to compensate the management in a fair and compe- titive way for successfully and profitably implementing Mikko Helander the company’s strategy. The objective of the system is CEO also to encourage management in the development of the Company strategy and business to thus make ef- forts that benefit the Company as a whole. Matti Mörsky Mika Paljakka The Board approves the salary and compensation of CFO HR the CEO and the principles applied in the compensation of other Corporate Management Team members as well as the forms and basis for reward and incentive sche- Mika Joukio Seppo Puotinen Heikki Husso Soili Hietanen mes. The Nomination and Compensation Committee SVP SVP SVP SVP assists the Board in taking care of matters related to the Consumer Packaging Office Papers Specialty Papers Market Pulp and Energy Deputy to the CEO conditions of employment and salary of the manage-

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CORPORATE GOVERNANCE STATEMENT ment and prepares management compensation-related Internal control decisions that belong to the Board. The CEO decides on Being a listed company, M-real’s internal control is practical matters related to the compensation of other steered by the Finnish Companies Act and Securities senior management members according to the prin- Market Act, other laws and regulations applicable to ciples approved by the Board. the operations and the rules and recommendations of The monthly salary of CEO Mikko Helander is EUR the Helsinki Stock Exchange, including the Corporate 38,500. The salary includes car and phone benefits. In Governance Code. External control is carried out by addition, the Board may decide that the CEO receives M-real’s auditor and the authorities. bonus pay based on overall performance, up to a level In M-real, internal control covers financial reporting corresponding to his six-month salary. In 2009, the CEO and other monitoring. Internal control is implemented received a total of EUR 756,261 in salary, bonuses and by the Board and the operative management as well as other benefits. the entire personnel. Internal control aims at ensuring Other Corporate Management Team members also the achevement of the goals and objectives set for the have written employment or service contracts. The CEO Company; economical, appropriate and efficient use of makes a proposal to the Board on the appointment of resources; correct and reliable financial information and Corporate Management Team members. In 2009, the other management information; adherence to external rest of the Corporate Management Team received a regulations and internal policies; security of operations, total of EUR 1,899,040 in salary and bonuses. information and property in an adequate manner; and M-real also uses a share-based reward system for the arrangement of adequate and suitable manual and its senior management in 2008–2010. The possible an- IT systems to support operations. nual reward produced by the system is based on M-real Internal control is divided into (i) proactive control, Corporation’s results and cash flow development. A such as the specification of corporate values, general possible reward is paid partially as M-real’s B shares operational and business principles; (ii) daily control, and partially in cash. The maximum amount of the share such as operational systems and work instructions reward for 2009 totalled 50,000 B shares. Set targets related to operational steering and monitoring; and (iii) materialized in the level of 73 per cent entitling a share subsequent control, such as management evaluations based remuneration in the same proportion.The sha- and inspections, comparisons and verifications with res include a condition restricting their transfer for two the aim of ensuring that the goals are met and that the years after the end of the earning period. The system agreed operational and control principles are followed. covers seven senior management members. The corporate culture, governance and the approach to On 31 December 2009, neither the Board members control together create the basis for the entire process nor the CEO or the Deputy to the CEO had monetary loans of internal control. from the Company or its subsidiaries, and no collateral arrangements existed between them. Monitoring of the financial reporting process, credit control and authorisation rights Internal control, internal auditing and risk The financial organisations of the business areas and management the central administration are responsible for financial Profitable business requires that operations are mo- reporting. The units and business areas report the fi- nitored continuously and with adequate efficiency. nancial figures each month. The business areas’ control M-real’s internal management and control procedure functions check their units’ monthly performance and is based on the Finnish Companies Act, regulations and report them further to central administration. Business recommendations for listed companies, the Articles area profitability development and business risks and of Association and the Company’s own approved prin- opportunities are discussed in monthly meetings at- ciples and policies. The functionality of the Company’s tended by the senior management of the Company internal control is evaluated by the company’s internal and of the business area in question. The result will be auditing. Internal control is carried out throughout the reported to the Board and the Corporate Management organisation. Internal control methods include internal Team each month. The Company’s internal guidelines guidelines and reporting systems. provide detailed descriptions on the reporting and cont- The following describes the principles, objectives rol rules and the reporting procedure. and responsibilities of M-real’s internal control, risk management and internal auditing.

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CORPORATE GOVERNANCE STATEMENT Credit control in M-real has been centralised un- The action plan of internal auditing is prepared for der the credit committee, which convenes at least one calendar year at a time. The aim is to allocate the each quarter. The development of trade receivables is auditing to all functions and units at certain intervals. monitored in each sales company by credit controllers Auditing is annually allocated to areas that are in a key under the supervision of the Group’s VP of Credits. position regarding the evaluated risk and the Company’s Counterparty-specific credit limits are set within the objectives at the time. The topicality and appropriateness boundaries of the credit policy confirmed by the Board of the action plan are processed with the company’s in cooperation with centralised credit control and bu- management every six months. siness area management. The scope and coordination of the auditing opera- Authorisation rights concerning expenses, signi- tions are ensured through regular communication and ficant contracts and investments have been specified information exchange with other internal assurance continuously for different organisation levels according functions and the auditor. When necessary, internal to the decision-making authority policy confirmed by the auditing uses external services providers for temporary Board and the authority separately granted by the CEO additional resourcing or special expertise for carrying to other management personnel. Investment follow-up out demanding evaluation tasks. is carried out by the Group’s financial administration according to the investment policy confirmed by the Risk management Board. After pre-approval, investments are taken to Risk management is an essential part of M-real’s standard the management teams of the business areas and the business planning and leadership. Risk management Corporate Management Team within the framework of belongs to daily decision-making, operations follow-up the annual investment plan. Most significant investments and internal control, and it promotes and ensures that are separately submitted for Board approval. Investment the objectives set by the company are met. follow-up reports are compiled each quarter. Linking business management efficiently with ef- ficient risk management is based on the operational Internal auditing principles confirmed by the Company’s Board; the Internal auditing assists the Board and CEO with their aim of the principles is to maintain risk management control tasks by evaluating the quality of internal control as a process that is well defined, understandable and maintained in order to achieve the Company’s objectives. sufficiently practical. Risks and their development In addition, internal auditing supports the organisation are reported on a regular basis to the Board’s Audit by evaluating and ensuring the functionality of business Committee. Centralised risk management also takes processes, risk management and the management and care of the coordination and competitive bidding of administration systems. M-real’s insurance coverage. The key task of internal auditing is to assess the The most crucial objective of risk management is to efficiency and suitability of internal control concerning identify and evaluate those risks, threats and opportuni- the Company’s functions and units. In its assignment, ties which may have an impact on the implementation internal auditing evaluates how well the operational of the strategy and on how short-term and long-term principles, guidelines and reporting systems are ad- objectives are met. A separate risk review is also inclu- hered to, how property is protected and how efficiently ded in the most significant investment proposals. resources are used. Internal auditing also acts as an The business areas regularly evaluate and moni- expert in development projects related to its task area tor the risk environment and related changes as part and prepares special reports at the request of the Audit of their normal operational planning. The risks iden- committee or operative management. tified and their control are reported to the company’s Internal auditing operates under the supervision management, Audit Committee and the Board at least of the Audit Committee and the CEO. Audit observa- twice a year. Business risks also involve opportunities, tions, recommendations and the progress of measures and they can be utilised within the boundaries of the are reported to the management of the target audited, agreed risk limits. Conscious risk-taking decisions the Company management and the auditor. Every six must always be based on an adequate evaluation of months, internal audit reports its auditing measures, the risk-bearing capacity and the profit/loss potential, plans and operations to the Audit Committee. among other things.

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CORPORATE GOVERNANCE STATEMENT Risk management responsibilities in M-real are The most significant risks and uncertainties that the divided among different functions. The Board is res- Company is aware of are described in the Report of the ponsible for the Company’s risk management and con- Board of Directors. firms the Company’s risk management policy; the Audit Committee evaluates the adequacy of the Company’s Auditing risk management and the essential risk areas and pro- According to M-real’s Articles of Association, the Company vides the Board with related proposals. The CEO and the has one auditor who shall be an auditing firm authorised Management Team are responsible for the specification by the Central Chamber of Commerce of Finland. The and adoption of the risk management principles. They General Meeting appoints the auditor each year. According are also responsible for ensuring that the risks are ta- to the decision made by the Annual General Meeting of ken into account in the Company’s planning processes 2009, the Company’s auditor is PricewaterhouseCoopers and that risk reporting is adequate and appropriate. Oy which appointed Johan Kronberg, APA, as the auditor The VP of Risk Management reports to the CFO and is with main responsibility. The Audit Committee controls responsible for the Company’s risk management pro- the appointment procedure of the auditors and provides cess development, coordination, the implementation of the Board and the General Meeting with a recommen- risk evaluation and the essential insurance decisions. dation for the appointment of the auditor. Business areas and support functions identify and eva- In 2009, PricewaterhouseCoopers Oy received EUR luate the essential risks related to their own areas of 279,000 in auditing compensation, PricewaterhouseCoopers responsibility in their planning processes, prepare for internationally altogether EUR 1.1 million and other them, take necessary preventive action and report on auditing firms outside Finland EUR 46,000. In additi- the risks as agreed. on, PricewaterhouseCoopers received EUR 2.2 mil- M-real’s essential risk management elements in- lion for services not related to the actual auditing of clude implementing a comprehensive corporate risk the accounts. management process that supports the entire business, protecting property and ensuring business continuity, corporate security and its continuous development, as well as crisis management and continuity and reco- very plans. According to the risk management policy and principles, adequate risk management forms a necessary part of the preliminary review and imple- mentation stages of projects which are financially or otherwise significant.

The tasks of M-real’s risk management are to

• ensure that all identified risks with an impact on per- sonnel, customers, products, property, information assets, corporate image, corporate responsibility and operational capacity are controlled according to applicable laws and on the basis of best available information and financial aspects • ensure that the Company’s objectives are met • fulfil the expectations of stakeholders • protect property and ensure disruption-free business continuity • optimise the profit/loss possibility ratio • ensure the management of the company’s overall risk exposure and minimise the overall risks.

117

CORPORATE GOVERNANCE STATEMENT Board of directors

Kari Jordan Martti Asunta Erkki Karmila Kai Korhonen b. 1956 b. 1955 b. 1942 b. 1951 M.Sc. (Econ) M.Sc. (Forestry) Master of Laws 1968, Harvard M.Sc. (Eng), eMBA University Chairman of the Board (2005–) Member of the Board and Vice Member of the Board (2008–) Chairman of the Board (2008–) Member of the Board (1992–) Independent Board Member President and CEO of the Independent Board member Metsäliitto Group (2006–) Chairman of the Board of Senior Executive Vice President, CEO of Metsäliitto Cooperative Metsäliitto Cooperative (2008–) Executive Vice President of Stora Enso (1998–2007) (2004–) Member of the Board of Oy Metsä- the Nordic Investment Bank Member of the Supervisory Board Vice Chairman of the Board of Botnia Ab (2008–) (1993–2006) of Ilmarinen Mutual Pension Metsäliitto Cooperative (2006–) Member of the Board of Metsä Deputy Managing Director, Insurance Company (2006–2008) Chairman of the Board of Metsä Tissue Corporation (2008–) Finnish Export Credit (1981–1982) Vice Chairman of the Board Tissue Corporation (2004–) Member of the Board of Pellervo- and Managing Director of Finnish Forest Industries Member of the Board of Oy Metsä- Seura (2008–), Chairman of the (1982–1983) Federation (2006–2007) Botnia Ab (2004–) and Chairman Board (2010–) Executive Vice President Member of the Board of American of the Board (2006–) Member of the Board of Vapo Oy of Kansallis-Osake-Pankki Forest & Paper Association Vice Chairman of the Supervisory (2008–2009) (1983–1991) (2000–2003) Board of Vapo Oy (2005–2007) Director of the Invest in Finland Member of the Board of German and Vice Chairman of the Board Shares 17.2.2010: 4,000 B shares Bureau (1992) Pulp and Paper Association (2007–2009) (1995–2000) Shares 17.2.2010: 87,315 B shares Member of the Board of Shares 17.2.2010: 105,605 Confederation of Finnish B shares Industries EK (2005–) and Vice Chairman of the Board (2009–) Vice Chairman of the Board of Finnish Forest Industries Federation and member of Federation’s Working Group (2005–) and Chairman of the Board (2009–) Vice Chairman of the Board of Directors of Finnair Corporation (2003–) Member of the Supervisory Board of Varma Mutual Pension Insurance Company (2006–)

Holds several positions of trust in foundations and non-profit associations

Shares 17.2.2010: 801,759 B shares

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BOARD OF DIRECTORS Liisa Leino Runar Lillandt Juha Niemelä Antti Tanskanen Erkki Varis b. 1960 b. 1944 b. 1946 b. 1946 b. 1948 M.Sc. (Nutrition) Agricultrual school graduate M.Sc (Econ) Ph.D. (Econ) M.Sc. (Eng) Counsellor of Agriculture Doctor of Sciences in Economics Minister Member of the Board (2009–) Farmer and Technology h.c. Member of the Board (2009–) Member of the Board (1992–) Independent of significant Chairwoman of the Board of Member of the Board (1999–) Member of the Board (2007–) Independent Board member shareholders Directors of Leinovalu Oy since Independent Board member (2006–) Chairman of the Supervisory Chairman and CEO, OP Bank Member of the Board of Pohjolan Managing Director of Nurmi Board of Metsäliitto Cooperative Chairman, Confederation of Group (1997–2006) Voima Oy since (2000–2009) Group & Perkko Oy (2003–2004) (1998–) European Paper Industries (CEPI) Chairman of the Board of the President and CEO of Oy Metsä- Business Director of Sitra Member of the Board of Atria (2000–2002) State Pension Fund (2009–) Botnia Ab (1997–2008) (2002–2003) Corporation (2002–) CEO, UPM-Kymmene Corporation Chairman of the Board of the Member of the Metsäliitto Group Business Director of Gillette Member of the Board of the (1994–2004) University of Helsinki (2010–) Executive Management Team Central East Europe (1999–2002) Central Union of Swedish- Chairman of the Board of (2002–2008) Managing Director of Gillette/ speaking agricultural producers Veikkaus Oy (2002–) Shares 17.2.2010: 87,315 B-shares Managing Director of Oy Metsä- Braun (1996–1999) in Finland (SLC) (1988–) Member of the Board of Rauma Ab (1994–1996) Various positions in marketing of Chairman of the Board of Forestry Powerflute Oyj (2005–) Managing Director of Oy Nestlé Finland Oy (1989–1996) Center Rannikko (1996–) Member of the Board of Green Metsä-Botnia Ab, Kaskinen mill Member of the Board of Chairman of the Board of Resources AS (2008–), Chairman (1984–1990) Rautaruukki Oyj (2007–) Pohjanmaan Liha (2002) of the Board (2009–) Deputy to CEO of Oy Metsä-Botnia Member of the Central Chamber Chairman of the Board of Mellanå Ab (1990–1994) of Commerce of Finland Tax Plant Oy (1995–) Shares 17.2.2010: 87,315 B shares Member of A/S Baltic Pulp Committee (2007–) Supervisory Board (2004–2008) Member of the Board of Alko Oy Shares 17.2.2010: 12,545 B shares Member of the Competitiveness (2009–) Committee of the Finnish Forest Member of the Supervisory Industries Federation (2007–2008) Board of Varma Mutual Pension Chairman of the Board of Suomen Insurance Company (2007–) Laatukeskus ry (2005–2007) Member of the Board of Juho Chairman of the Board of Botnia Leino Foundation (2008–) S.A. (2003–2008)

Shares 17.2.2010: 87,315 B shares Shares 17.2.2010: 95,400 B shares

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BOARD OF DIRECTORS Management team of M-real Corporation

Mikko Helander Matti Mörsky Mika Joukio Heikki Husso b. 1960 b. 1952 b. 1964 b. 1961 MSc (Eng) MSc (Eng) MSc (Tech), MBA M.Sc. (Eng) Chief Executive Officer Chief Financial Officer Senior Vice President, Head of Senior Vice President, Head of Consumer Packaging Speciality Papers Joined the Metsäliitto Group Joined M-real in 1981. Corporate Deputy to CEO in 2003 and M-real in 2006. management team member as Joined M-real in 1989. Corporate Chairman of the M-real Corporate of 2006. Joined M-real in 1990. Corporate management team member as Management Team as of 2006. management team member as of 2009. Main positions: of 2006. Main positions: Product development and Main positions: Project Engineer and Production sales positions, Oy Fiskars Ab’s Main positions: Production and Development Manager, Valmet (1984–1990); plastic industry (1978–1980); Various positions in management Engineer, Technical Customer Managing Director, Kasten Hövik duties in corporate planning, and development tasks at Metsä- Service Engineer, Metsä-Serla (1990–1993); Head of Projects, G.A. Serlachius Oy (1981–1982); Serla and M-real since 1990: Kangas Paper Mill, Finland Coaters and Calanders, Valmet project manager, Stuart Edgar Assistant Production Manager (1989–1991); Quality Manager, (1993); head the operations, Ltd (1982–1986); General (1990–1996), Production Manager Metsä-Serla Kangas Paper Mill Valmet Rotomec S.p.a., Italy Manager, T-Drill Inc. (1986–1987); (1996–2001), Metsä-Serla Tako (1991–1992); Sales and Marketing (1994–1997); Vice President various positions in business Board Mill; Vice President and Manager, Speciality papers, and Chief Executive, Calander development and in M&A Mill Manager, M-real Äänekoski Metsä-Serla Kangas Paper Mill business, Valmet Corporation projects in Metsä-Serla, i.e. Vice Board Mill (2001–2004); Senior (1992–1997); Sales and Marketing (1997–1999); President, President, Business Development Vice President, Corporate Director, Speciality papers, MD Valmet Converting Group, UK (1987); General Manager, Hygiene Logistics and Supply Chain Papier, Germany (1997–2000); (1999–2003); Chief Executive Division of Holmen Hygiene AB (2004–2005); Vice President and Marketing Director, Digital Officer, Metsä Tissue Corporation (1989); General Manager, Kitchen Mill Manager, M-real Kyro Board printing papers, Metsä-Serla, (2003–2006); Chief Executive Furniture Division, Metsä- and Paper Mill (2005–2006); Vice Germany (2000); Business Officer and chairman of the Serla (1992); General Manager, President and Mill Manager, Development Director, Zanders corporate management team, Rantasalmi Loghouses (1994); M-real Kyro Board and Paper Feinpapiere AG, Germany (2001); M-real (2006–). Senior Vice President, Business Mill and M-real Tako Board Mill Vice President, Mill Manager, Development, M-real (1999–2009); (2006); Senior Vice President, M-real Zanders Reflex mill, Shares 17.2.2010: 55,000 B Chief Financial Officer, M-real Head of Consumer Packaging Germany (2001–2008); Managing shares. (May 2009–). business area (2006–) and Deputy Director, M-real Zanders GmbH, to CEO (2009–). Managing Director, M-real Shares 17.2.2010: no ownership. Deutsche Holding GmbH (2004–); Shares 17.2.2010: 8,000 B shares. Labour Relations Director, M-real Deutsche Holding GmbH (2004–2008); Vice President, Mill Manager, M-real Zanders, Gohrsmühle mill (2005–2008); Senior Vice President, Zanders Speciality Papers (January–June 2009); Senior Vice President, Head of Speciality Papers business area (June 2009–).

Shares 17.2.2010: 500 B shares.

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MANAGEMENT TEAM OF M-REAL CORPORATION Seppo Puotinen Soili Hietanen Mika Paljakka b. 1955 b. 1954 b. 1968 Lic Tech Ph.D. (Technology) Lic Econ and BA, MSc (Educ) Senior Vice President, Head of Senior Vice President, Head of Senior Vice President, Human Office Papers Market Pulp and Energy Resources and Total Quality Management Worked in Metsä-Serla in 1986– Joined M-real in 1986. Corporate 2000 and joined M-real again in management team member as Joined the Metsäliitto Group in 2004. Corporate management of 2009. 2000. Corporate management team member as of 2005. team member as of 2008. Main positions: Main positions: Post graduate studies, research Main positions: Assistant in applied mechanics, and lecturing (1979–1984); Project Human Resources Development University of Oulu (1981–1985); Engineer, PI Consulting, Finland Manager, Perlos Corporation researcher, KCL, Finland (1984–1986); Laboratory Engineer, (1994–2000); Human Resources (1985–1986); various positions in Laboratory of Paper Chemistry, Development Manager and business development, marketing Äänekoski, Finland, (1986–1989); Senior Vice President, Human and operational responsibility in Research and Development Resources, Oy Metsä-Botnia Ab Metsä-Serla: i.e. Vice President, Manager, Äänekoski Paper Mill (2000–2002); Vice President, Cartons Division, Corrugated (1989–1994); Production Manger, Business Development, M-real and Folding Carton operations M-real Äänekoski Paper Mill (2002–2003); Senior Vice (1999); Managing Director, SCA (1994–1997); Research and President, Human Resources Packaging, Finland, Russia and Development Coordinator, M-real & Management, Finnforest the Baltic countries (2000–2002); Paper Group, Äänekoski (1997– Corporation (2003–2008); Senior President, SCA’s Containerboard 2001); Research and Development Vice President, Human Resources Division, Brussels (2002–2004); Coordinator, M-real Paper Group, and Total Quality Management, Executive Vice President, Espoo, Finland (2000–2002); M-real (2008–) and Metsä-Botnia Corporate Strategy & Sales Vice President, Technology (2009–). Services, M-real (2004–2005); Manager, Coated Fine Paper Mills Senior Vice President, Head of (2001–2004); Vice President, Shares 17.2.2010: 16,000 B Office Papers business area Production and Technology, shares. (2005–) and Vice President and Commercial Printing (2005); Mill Manager, M-real Husum, Senior Vice President Production Sweden (2009–). and Technology, M-real Commercial Printing (2005–2007); Shares 17.2.2010: 1,000 A shares, Senior Vice President, Production 2,750 B shares. and Technology, M-real Graphic Papers (2007–2009); Senior Vice President, Head of Market Pulp and Energy (2009–).

Shares 17.2.2010: no ownership

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MANAGEMENT TEAM OF M-REAL CORPORATION Quaterly data

EUR million Total year Quarterly Sales 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 Consumer Packaging 968 1,061 255 250 237 226 248 274 274 266 Office Papers 543 804 132 133 131 147 174 203 204 223 Speciality Papers 352 622 73 80 82 117 147 153 158 164 Market Pulp and Energy 508 644 126 132 116 134 150 172 160 162 Other operations 189 323 59 56 40 34 57 77 87 102 Internal sales -128 -218 -39 -33 -21 -35 -54 -53 -54 -58 Sales 2,432 3,236 606 618 585 623 722 826 829 859

Operating result. excluding non-recurring 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 items Consumer Packaging 69 29 34 31 5 -1 -9 17 3 18 Office Papers -48 -29 0 -13 -18 -17 -14 -6 -7 -2 Speciality Papers -51 -15 -6 -11 -22 -12 -8 -3 -1 -3 Market Pulp and Energy -54 32 -9 -14 -19 -12 -2 12 12 10 Other operations -66 -52 -12 -15 -16 -23 -18 -17 -8 -9 EBITDA -150 -35 7 -22 -70 -65 -51 3 -1 14

Operating result and result before taxes 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 Consumer Packaging 51 24 33 31 4 -17 -13 17 3 17 Office Papers -104 -53 -54 -15 -18 -17 -38 -6 -7 -2 Speciality Papers -151 -59 -78 -10 -23 -40 -75 -3 -2 21 Market Pulp and Energy -91 106 -39 -15 -19 -18 -2 12 86 10 Other operations 28 -79 86 -15 -17 -26 -33 -28 -9 -9 Operating result 1) -267 -61 -52 -24 -73 -118 -161 -8 71 37 % of sales -11.0 -1.9 -8.6 -3.9 -12.5 -18.9 -22.3 -1.0 8.6 4.3 Share of results in associated companies -16 -1 -2 -1 -12 -1 0 0 -1 0 Exchange gains/losses 5 131220111-12 Other financial income and expences -80 -155 -21 -49 -14 4 -47 -38 -32 -37 Result before taxes -358 -204 -74 -72 -97 -115 -197 -45 37 2

Operating result. (% of sales) 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 Consumer Packaging 5.3 2.3 12.9 12.4 1.7 -7.5 -5.2 6.2 1.1 6.4 Office Papers -19.2 -6.6 -40.9 -11.3 -13.7 -11.6 -21.8 -3.0 -3.4 -0.9 Speciality Papers -42.9 -9.5 -106.8 -12.5 -28.0 -34.2 -51.0 -2.0 -1.3 12.8 Market Pulp and Energy -17.9 16.5 -31.0 -11.4 -16.4 -13.4 -1.3 7.0 53.8 6.2 M-real -11.0 -1.9 -8.6 -3.9 -12.5 -18.9 -22.3 -1.0 8.6 4.3

1) Metsä-Botnia’s net result is included in operating result starting from 8 December 2009

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QUATERLY DATA 1,000 tonnes Full year Quarterly Deliveries 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 Consumer Packaging 1,212 1,345 327 315 296 274 303 348 351 342 Office Papers 790 1,081 198 199 190 203 237 270 274 300 Speciality Papers 342 680 68 76 80 118 157 168 174 181 Paper businesses total 1,132 1,761 266 275 270 321 394 438 448 481 Market Pulp and Energy 1,155 1,115 246 295 327 287 264 291 279 281

Production 2009 2008 IV/2009 III/2009 II/2009 I/2009 IV/2008 III/2008 II/2008 I/2008 Consumer Packaging 1,232 1,336 342 323 275 292 293 347 335 361 Office Papers 795 905 213 181 202 199 177 226 245 257 Speciality Papers 319 705 71 75 74 99 160 170 186 190 Paper mills total 1,114 1,610 283 257 276 298 337 396 431 447 Metsä-Botnia's pulp 1) 863 990 203 219 210 231 235 270 233 252 M-real's pulp 1,120 1,486 316 263 264 277 303 377 391 415

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QUATERLY DATA Production capacities

BOARD MILLS 1,000 tonnes Country Machines Folding boxboard Linerboard Total Tampere Finland 2 205 205 Kyröskoski Finland 1 160 160 Äänekoski Finland 1 210 210 Simpele Finland 1 220 220 Kemi Finland 1 375 375 Total 6 795 375 1,170

PAPER MILLS 1,000 tonnes Country Machines Coated Coated Uncoated Speciality papers Total magazine paper fine paper fine papaer Äänekoski Finland 1 180 180 Simpele Finland 1 55 55 Kyröskoski Finland 1 105 105 Bergisch Gladbach Germany 2 180 80 260 Düren *) Germany 4 100 100 Husum Sweden 3 275 435 710 Alizay France 1 310 310 Total 13 275 180 925 340 1,720

*) Two paper machines in Düren accounting for 80 ktons of annual capacity planned to be closed.

PULP MILLS 1,000 tonnes Country Chemical Chemi-termo- Total pulp mechanical pulp (BCTMP) Husum Sweden 690 690 Alizay **) France 310 310 Hallein Austria 160 160 Joutseno Finland 280 280 Kaskinen Finland 300 300 Total 1,160 580 1,740 **) Alizay pulp mill to be permanently closed.

METSÄ-BOTNIA ***) 1,000 tonnes Country Chemical Total pulp Äänekoski Finland 500 500 Kemi Finland 590 590 Rauma Finland 630 630 Joutseno Finland 650 650 Total 2,370 2,370

***) M-real’s share of production capacicty is 30 per cent

OTHER SHAREHOLDINGS Coated magazine paper 230 Myllykoski Paper Oyj, (share 35 %), Finland Uncoated magazine paper 370 Myllykoski Paper Oyj, (share 35 %), Finland

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PRODUCTION CAPACITIES Ten years in figures

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Income statement, EUR million Sales 2,432 3,236 3,499 3,698 3,342 5,522 6,044 6,564 6,923 5,898 - change % -24.8 -7.5 -5.4 10.7 n/a -8.6 -7.9 -5.2 14.8 45.9 Exports from Finland 1,073 1,216 1,084 1,068 875 1,696 1,653 1,714 1,743 1,719 Exports and foreign subsidiaries 2,232 3,068 3,274 3,459 3,160 5,182 5,652 6,173 6,438 5,376 Operating profit -267 -61 -49 -172 11 28 74 324 389 604 - % of sales -11.0 -1.9 -1.4 -4.6 0.3 0.5 1.2 4.9 5.6 10.2 Profit from continuing operations before tax 1) -358 -204 -191 -280 -117 -108 -80 134 154 459 - % of sales -14.7 -6.3 -5.5 -7.6 -3.5 -2.0 -1.3 2.0 2.2 7.8 Result for the period from continuing oprations 2) -331 -170 -168 -270 -130 -125 -95 279 337 516 - % of sales -13.6 -5.3 -4.8 -7.3 -3.9 -2.3 -1.6 4.2 4.9 8.7 Balance sheet, EUR million Balance sheet total 3,132 4,505 5,481 6,458 6,580 6,486 7,106 7,410 8,005 7,798 Shareholders´ equity 916 1,329 1,830 2,055 2,459 2,393 2,245 2,461 2,341 1,953 Minority interest 8 58 52 63 45 37 19 75 60 52 Interest-bearing net liabilities 777 1,254 1,867 2,403 2,205 2,183 3,109 3,019 3,482 3,693 Dividends and figures per share Dividends, EUR million 03) 0 19.7 19.7 39.4 39.4 53.7 107.4 107.4 83.4 Dividend per share, EUR 03) 0 0.06 0.06 0.12 0.12 0.25 0.51 0.51 0.51 Dividend/profit, % 03) 0 -10.2 -5.0 -48.0 63.2 -58.8 166.7 109.1 27.3 Earnings per share, EUR -1.09 -1.58 -0.59 -1.21 -0.25 0.19 -0.43 0.30 0.46 1.85 Shareholders´equity per share, EUR 2.79 4.05 5.58 6.26 7.49 7.29 10.56 11.57 11.014) 11.834) Key figures - Profitability Return on capital employed, total % -8.9 -1.3 -0.8 -5.5 0.9 0.9 1.6 5.8 6.9 13.5 Return on equity, % -28.6 -10.4 -8.5 -14.8 -4.0 -5.7 -3.8 3.0 4.74) 15.54) Key figures - Financial position Equity ratio, % 29.6 30.8 34.4 32.8 38.1 37.5 31.9 34.2 30.04) 25.74) Gearing ratio, % 153 152 124 132 101 103 151 133 1624) 2044) Net gearing ratio, % 84 90 99 113 88 89 137 119 1454) 1844) Net cash flow arising from operating Activities 81 -97 127 223 136 217 417 521 608 692 Internal financing on capital expenditure; EUR million 111 -76 50 53 31 89 105 168 82 32 Net interest expenses, EUR million 6) 92 156 148 109 81 130 166.9 142.3 194.3 131.7 Interest cover 6) 1.9 0.4 1.9 3.0 2.7 2.7 3.5 4.7 4.1 6.3 Other key figures Gross capital expenditure, EUR million 73 128 259 428 452 245 397 310 740 2,150 - % of sales 5) 3.0 3.2 5.9 9.9 11.9 4.4 6.6 4.7 10.7 36.5 R&D expenditure, EUR million 6) 7101418222827262725 - % of sales 5) 0.3 0.3 0.4 0.5 0.6 0.5 0.4 0.4 0.4 0.4 Personnel, average 6) 5,913 6,849 8,267 9,849 10,429 16,532 20,372 21,070 22,237 17,351 - of whom in Finland 2,173 2,437 2,824 3,344 3,423 5,263 6,178 6,328 6,406 6,584

* The 2004–2009 figures are calculated according to International Financial Reporting Standards (IFRS) and 2000–2003 according to Finnish Accounting Standards (FAS), but 2000–2004 figures have not been restated due to disposal of Map Merchant Group and the Graphic Papers Business. 1) The 2000–2003 figures profit before extraordinary items 2) The 2000–2003 figures profit before taxes and minority interest 3) Board of Directors proposes that no dividend is paid for 2009 4) The convertible subordinated capital notes are included in liabilities 5) The key ratio for 2005–2009 has been calculated for continuing operations only 6) From continuing operations for 2005–2009 Calculation of key ratios is presented on page 98

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TEN YEARS IN FIGURES Corporate responsibility data per production unit

Personnel Production 1000 t/a Emissions to air t/a

31.12.2009 LTA FR Pulp Board and Particulates CO2 Sulphur NOx paper fossil (SO2) (NO2)

Alizay, France 380 28.9 34 238 27 9,595 120 347 Gohrsmühle, Germany 379 5.8 192 5.0 275,432 505 423 Hallein, Austria 202 17.7 93 48 9.5 30,727 67 216 Husum, Sweden 967 10.6 597 556 291 101,793 491 1,336 Joutseno BCTMP, Finland 49 26.1 219 1.5 25,783 0.50 10 Kaskinen BCTMP, Finland 68 46.2 176 15 8,306 49 120 Kemiart Liners, Finland 119 23.7 307 4.1 1,549 1.7 67 Kyro, Finland 245 20.6 204 0 146,607 0.069 115 Reflex, Germany 448 7.7 79 0 66,418 0 72 Simpele, Finland 369 22.5 233 6.0 78,274 217 207 Tako Board, Finland 206 21.3 169 0 67,815 0.030 66 Äänekoski Board, Finland 169 33.4 184 6.9 4,576 13 81 Äänekoski Paper, Finland 250 22.9 136 7.2 5,019 15 81

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CORPORATE RESPONSIBILITY DATA PER PRODUCTION UNIT Discharges to water t/a Waste t/a Management system Chain of Custody COD BOD1 Phos- Nitro- Total sus- Landfill Hazar- ISO ISO EMAS OHSAS ISO PEFC FSC pho- gen pended waste (dry) dous 9001 14001 22000 rus solids waste 786 53 9.6 57 163 1,244 68 x x x x 153 57 2.5 7.3 64 88 82 x x x x x 4,202 276 5.4 29 394 276 46 xxxx x 8,650 637 19 170 477 13 565 x x x x 473 5,0 0.16 2.9 7.7 86 11 x x x x 830 17 0.89 8.0 55 1,060 11 x x x x x 183251.412961344.7xx xxxx 346 39 1.0 12 71 139 14 x x x x x 68 26 1.3 0 26 176 76 x x x x x 343 16 1.6 13 35 8,007 15 x x x x x 201 90 0.75 1.0 43 226 20 x x xxxx 505 213 0.72 7.3 135 79 8.7 x x x x x 239 105 0.16 2.4 64 110 12 xxxx xx

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CORPORATE RESPONSIBILITY DATA PER PRODUCTION UNIT Financial reporting

M-real does not comment on its financial performance Investor relations or similar issues from the close of each reporting period M-real is committed to generating shareholder value. up to the publication of the report for said period, except M-real is set to improve its cost efficiency and profitability for information on a change in the market situation and and to intensify its operations and organization. M-real the rectification of incorrect information. offers up-to-date and easily utilizable information on the company regularly and openly. The company aims Financial Information to produce reliable and factual information concerning Financial reports are published in English and Finnish. its operations and financial position as well as the near- Annual reports and other publications can be ordered term outlook. All investors are treated equally. M-real from M-real Corporation by e-mail: communications@m- has described the general guidelines and defined the real.com, Revontulentie 6, 02100 Espoo, Finland, tel. responsibilities with reference to handling material in- +358 10 465 4134. M-real’s internet site www.m-real. formation and contacts with the financial market in its com material for investors is collected under the IR policy. The policy can be found in M-real’s web pages heading Investor Relations. Stock exchange releases, www.m-real.com. interim reports and financial information on these web pages are updated in real time. M-real company For shareholders’ information presentation on the site is updated when financial re- M-real Corporation will publish financial reports in the ports are published. Information on subjects such as year 2010 as follows. M-real’s products, customer cases, sales network and environmental issues and organization can be found Thursday 4 February 2010 on the web pages. Also, feedback can be sent through Financial results for 2009 the company site. M-real’s general e-mail address is [email protected]. Wednesday 5 May 2010 Interim report January–March 2010 Shares The company has total of 328,165,612 shares. Information Thursday 5 August 2010 on M-real Corporation’s shares is given in this report Interim report January–June 2010 on pages 94-97. M-real’s shares series A and B are quoted on the Mid Cap list of NASDAQ OMX Helsinki Thursday 27 October 2010 Ltd. The trading codes of the shares are MRLAV and Interim report January–October 2010 MRLBV, respectively.

Closed window Financial report Publication date

1 January to 4 February 2010 Financial results for 2009 Thu 4 February 2010 1 April to 5 May 2010 Interim report January–March Wed 5 May 2010 1 July to 5 August 2010 Interim report January–June Thu 5 August 2010 1 to 27 October 2010 Interim report January–September Wed 27 October 2010

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FINANCIAL REPORTING Annual General Meeting The Annual General Meeting of M-real will be held at Finlandia-talo, Helsinki hall, Mannerheimintie 13 e Helsinki, on Wednesday 24 March 2010 at 3 p.m. EET. Shareholders wishing to take part in the Annual General Meeting and to exercise their right to vote must be re- gistered on 12 March 2010 on the shareholders’ register of the company held by Euroclear Finland Ltd. A share- holder has to give prior notice to the company not later than by 10 a.m. EET on 19 March 2010 by telephone: +358 10 465 4190, by e-mail: [email protected] or in writing to M-real Oyj, Legal Services/Karjalainen, P.O. Box 20, 02020 METSÄ. Possible proxy documents should be delivered in originals to the above address before the last date of registration.The Board of Directors presents that no dividend is paid from the year 2009.

Share register Shareholder’s address, name and ownership changes are requested to be informed to that book-entry register which holds their book entry account.

Contact information EQUITY INVESTORS Matti Mörsky Tel. +358 10 465 4913 Fax +358 10 465 5232 [email protected]

EQUITY INVESTORS AND COMMUNICATIONS Juha Laine Tel. +358 10 465 4335 Fax +358 10 465 5232 [email protected] [email protected]

DEBT INVESTORS AND BANKER RELATIONSHIPS Ville Jaakonsalo Tel. +358 10 465 4255 Fax +35810 465 4695 [email protected]

Ilkka Punkari Tel. +358 10 465 5226 Fax +358 10 465 4695 [email protected]

General questions and comments on investor relations can be e-mailed to [email protected] www.m-real.com

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FINANCIAL REPORTING M-real Oyj BUSINESS AREAS Sales network Head office (Country, city) PO Box 20 Consumer Packaging 02020 Metsä, Finland Hallituskatu 1 Argentina and Uruguay Lebanon (Beirut) 33200 Tampere (Buenos Aires) Malta (San Gwann) Revontulentie 6 Finland Australia (Melbourne, Mexico (México) 02100 Espoo, Finland Tel. +358 10 4611 Sydney) Netherlands (Amsterdam) Tel. +358 10 4611 Fax +358 10 463 3158 Belgium (Brussels) Peru (Lima) Telefax +358 10 465 5232 Brazil (São Paulo) Poland (Warsaw) Mills (in Finland) Bulgaria (Sofia) Portugal (Cascais) Business ID 0635366-7 Joutseno Chile (Santiago) Romania (Bucharest) Kaskinen China (Hong Kong, Serbia (Belgrad) www.m-real.com Kemiart Liners Shanghai) Singapore (Singapore) Kyro Costa Rica (San José) South Africa (Cape Town, Simpele Cyprus (Paphos) Durban) Tako Czech Republic (Prague) Spain (Madrid) Äänekoski Finland (Espoo, Syria (Damascus) Tampere) Turkey (Istanbul) Office Papers France (Paris) United Kingdom (Chatham, Van Boshuizenstraat 12 Germany (Bergisch Maidenhead) 1083 BA Amsterdam Gladbach, Frankfurt, Ukraine (Kiev) Netherlands Hamburg) Hungary (Budapest) Tel. +31 20 572 7500 Greece (Athens) Russia (Moscow) Fax +31 20 572 7570 Iceland (Reykjavik) United States (Norwalk, CT) India (Mumbai) Mills (Country) Ireland (Dublin) Alizay (France) Israel (Tel Aviv) To locate contact details of Husum (Sweden) Italy (Milan) local M-real sales offices, Japan (Tokyo) please visit company website Speciality Papers Jordan (Amman) www.m-real.com An der Gohrsmühle 51465 Bergisch Gladbach Germany Tel. +49 2202 15 0 Fax +49 2202 15 2806

Mills (Country) Gohrsmühle (Germany) Reflex (Germany)

Market Pulp and Energy Revontulentie 6 02100 Espoo Finland Tel. +358 1046 11 Fax +358 1046 54148

Mills (Country) Hallein (Austria) Kaskinen (Finland)

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FINANCIAL REPORTING Paper information

Papers: Cover: Galerie Art Silk 300 g/m² Annual Report: Galerie Art Silk 130 g/m² Financial Statements: Galerie Art Silk 115 g/m²

Graphic design and layout: Ezpa Oy Photos: Kimmo Syväri, Jari Riihimäki and Sirpa Levonperä

Printer: Lönnberg Print

Additional copies: M-real Corporation Communications P.O. Box 20 FI-02020 METSÄ Finland Tel. +358 10 465 4134 E-mail: [email protected]

Also available as PDF: www.m-real.com

The Annual Report is available in English and Finnish

PEFC/02-31-128 Annual Report Annual Report M-real is Europe’s leading primary fibre

2009 paperboard producer and a major paper supplier. M-real offers its customers innovative high-performance paperboards and papers for consumer packaging, communications and advertising end-uses.