BASE PROSPECTUS
5FEB200717051850 UPM-KYMMENE CORPORATION (incorporated under the laws of the Republic of Finland with limited liability) (Business Identity Code: 1041090-0)
EUR 5,000,000,000
GLOBAL MEDIUM TERM NOTE PROGRAMME
Under the Global Medium Term Note Programme (the ‘‘Programme’’) described in this Base Prospectus (the ‘‘Base Prospectus’’), UPM-Kymmene Corporation (the ‘‘Company’’ and the ‘‘Issuer’’) may, subject to compliance with all relevant laws, regulations and directives, from time to time issue debt instruments (the ‘‘Notes’’) denominated in any currency (including euro) agreed between the Issuer and the relevant Dealer (as defined below). The aggregate principal amount of Notes outstanding will not at any time exceed euro 5,000,000,000 (or its equivalent in other currencies), subject to any duly authorised increase. All Notes denominated in the same currency, having the same maturity date, bearing interest, if any, on the same basis and at the same rate and the terms of which are otherwise identical, except for the issue date, interest commencement date and/or the issue price, will constitute a series (each, a ‘‘Series’’). The aggregate principal amount, any interest rate or interest calculation, the issue price, and any other terms and conditions not contained herein with respect to each Series of Notes will be established at the time of issuance and set forth in the applicable Final Terms (as defined below). The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), or any state securities laws and, subject to certain exceptions, may not be offered or sold directly or indirectly within the United States or to or for the account or benefit of U.S. persons, as defined in Regulation S under the Securities Act (‘‘Regulation S’’). The Notes may be offered for sale (i) in the United States only, to qualified institutional buyers (‘‘QIBs’’) within the meaning of, and in reliance on, Rule 144A under the Securities Act (‘‘Rule 144A’’) or another available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act; or (ii) outside the United States to non-U.S. persons in reliance on, and in accordance with, Regulation S, in each case, in compliance with applicable laws. See ‘‘Subscription and Sale’’. The Notes may be issued on a continuing basis to one or more of the Dealers specified herein and any additional Dealer appointed under the Programme from time to time, which appointment may be for a specific issue or on an ongoing basis (each a ‘‘Dealer’’ and, together, the ‘‘Dealers’’). References in this Base Prospectus to the ‘‘relevant Dealer’’ shall, in relation to any issue of Notes, be to the Dealer agreeing to subscribe for such Notes or, in the case of each issue of Notes syndicated amongst a group of Dealers, the Lead Manager of such issue. See ‘‘Risk Factors’’ beginning on page BP-9 for a discussion of certain factors to be considered in connection with an investment in the Notes. The applicable Final Terms to any series of Notes may describe additional risks to be considered. Application has been made for the Notes issued under the Programme to be admitted to listing on the Official List of the Luxembourg Stock Exchange and to trading on the regulated market of the Luxembourg Stock Exchange during the period of twelve months after the date of publication of this Base Prospectus. However, Notes may also be issued under the Programme on an unlisted basis or be admitted to listing, trading and/or quotation by other stock exchanges, listing authorities and/or quotation systems, and the Final Terms applicable to a Series will specify whether or not Notes of such Series have been admitted to trading on the regulated market of the Luxembourg Stock Exchange or admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system. The Luxembourg Stock Exchange’s Regulated Market is a regulated market for the purposes of the Markets in Financial Instruments Directive 2004/39/EC. This Base Prospectus may be used in connection with issues admitted to trading on the regulated market of the Luxembourg Stock Exchange for a period of one year from the date hereof. Application will be made for trading of Notes in the Private Offering, Resales and Trading through Automated Linkages (‘‘PORTAL’’) market of the National Association of Securities Dealers, Inc. This Base Prospectus cancels and replaces the Base Prospectus dated 7 March 2008. This Base Prospectus should be read and construed with any Final Terms.
Arranger for the Programme Citi Dealers BNP PARIBAS Citi Commerzbank Corporates & Markets Deutsche Bank Dresdner Kleinwort Merrill Lynch International Nordea, acting through either Nordea Bank The Royal Bank of Scotland Danmark A/S or Nordea Bank Finland Plc
The date of this Base Prospectus is 23 March 2009. THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND INCLUDE NOTES IN BEARER FORM THAT ARE SUBJECT TO U.S. TAX LAW REQUIREMENTS. THE NOTES MAY NOT BE OFFERED OR SOLD OR IN THE CASE OF BEARER NOTES, DELIVERED, DIRECTLY OR INDIRECTLY WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, AND NONE OF THE FOREGOING AUTHORITIES HAS CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS BASE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
Responsibility Statement The Issuer accepts responsibility for the information contained in this document, save for information from third party sources. The Issuer declares that, having taken all reasonable care to ensure that such is the case, the information contained in this document is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import. To the extent that information has been sourced from a third party, the Issuer declares that this information has been accurately reproduced. As far as the Issuer is aware, and able to ascertain from information published by any such third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. *** Notice This Base Prospectus has been approved by the Luxembourg Commission de Surveillance du Secteur Financier (the ‘‘CSSF’’), which is the Luxembourg competent authority for the purpose of Directive 2003/71/EC (the ‘‘Prospectus Directive’’) and relevant implementation measures of the Prospectus Directive into Luxembourg law, as a base prospectus issued in compliance with the Prospectus Directive and relevant implementing measures in Luxembourg for the purpose of giving information with regard to the issue of Notes under the Programme during the period of twelve months after the date of publication. This Base Prospectus constitutes a base prospectus for the purposes of Article 5.4 of Directive 2003/71/EC. This Base Prospectus should be read and construed together with any supplements hereto and, in relation to any Tranche (as defined herein) of Notes which is the subject of the Final Terms (as defined herein), should be read and construed together with the relevant Final Terms (as defined herein). The Issuer has confirmed to the Dealers named under ‘‘Subscription and Sale’’ below that this Base Prospectus (including for this purpose, all relevant Final Terms) contains all information which is (in the context of the Programme, the issue, offering and sale of the Notes) material; that such information is true and accurate in all material respects and is not misleading in any material respect; that any opinions, predictions or intentions by the Issuer expressed herein are honestly held or made and are not misleading in any material respect; that this Base Prospectus does not omit to state any material fact necessary to make such information, opinions, predictions or intentions (in the context of the programme, the issue, offering and sale of the Notes) not misleading in any material respect; and that all proper enquiries have been made to verify the foregoing. Each purchaser of Notes that bear a restrictive legend which is a U.S. person (other than certain U.S. persons buying for the account of non-U.S. persons) will be deemed to (i) represent that it is purchasing the Notes for its own account or for the benefit of an account with respect to which it exercises sole investment discretion and that it or such account is a QIB and (ii) acknowledge that the Notes have not been and will not be registered under the Securities Act and may not be reoffered, resold, pledged or otherwise transferred, except (A) in compliance with Rule 144A to a person who the seller reasonably believes is a QIB, (B) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), (C) outside the United States in compliance with Rule 903 or 904 of Regulation S, or (D) pursuant to an effective registration statement under the Securities Act, in each case
BP-2 in accordance with any applicable securities laws of any state of the United States. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. Each purchaser of Notes sold outside the United States in reliance on Regulation S will be deemed to have represented that it is not purchasing the Notes with a view to the resale, distribution or other disposition thereof to a U.S. person or in the United States prior to the end of the distribution compliance period (as defined in Regulation S). Except as otherwise indicated, terms used in this paragraph have the meanings given to them in Regulation S. For a description of these and certain further restrictions on offers and sales of the Notes and distribution of this Base Prospectus, see ‘‘Subscription and Sale’’ and ‘‘Transfer Restrictions’’. Notes offered hereby may be issued in registered form, without interest coupons (‘‘Registered Notes’’), or in bearer form, with or without interest coupons (‘‘Bearer Notes’’), as specified in the applicable Final Terms. Registered Notes sold within the United States to QIBs will, unless otherwise specified, be available only in book-entry form, and will be represented by a Registered Note in the form of a restricted global note certificate (the ‘‘Restricted Global Note Certificate’’) deposited on or about the issue date as specified in the applicable Final Terms with or on behalf of The Depository Trust Company (‘‘DTC’’) and will be registered in the name of its nominee. Registered Notes sold outside the United States to non-U.S. persons in reliance on Regulation S will, unless otherwise specified, be available only in book-entry form and will be represented by either (i) an unrestricted global note certificate (the ‘‘Unrestricted Global Note Certificate’’) deposited on or about the issue date as specified in the applicable Final Terms with or on behalf of DTC for the accounts of its direct and indirect participants, including Euroclear Bank SA/NV (‘‘Euroclear’’), and Clearstream Banking, societ´ e´ anonyme, Luxembourg (‘‘Clearstream, Luxembourg’’) or (ii) an international global note certificate (an ‘‘International Global Note Certificate’’) deposited with a common depositary located outside the United States (a ‘‘Common Depositary’’) for Euroclear and Clearstream, Luxembourg. On or prior to the 40th day after the later of the commencement of the offering and the date of delivery of the Notes of each Series, beneficial interests in an Unrestricted Global Note Certificate or an International Global Note Certificate representing Notes of such Series may be held only through Euroclear or Clearstream, Luxembourg. Bearer Notes will, unless otherwise specified, only be sold outside the United States to non U.S. persons in reliance on Regulation S and will, unless otherwise specified, initially be represented by a temporary global Note (a ‘‘Temporary Global Note’’) without interest coupons, deposited with or on behalf of a Common Depositary for Euroclear and Clearstream, Luxembourg. Beneficial interests in such Temporary Global Note shall be exchangeable for beneficial interests in a Permanent Global Note (as defined herein) in bearer form in an equal aggregate principal amount, not earlier than the 40th day after the applicable closing date upon certification in the form required by U.S. tax laws. See ‘‘Book-Entry; Delivery and Form of Notes’’. No person has been authorised to give any information or to make any representation not contained in or not consistent with this Base Prospectus or any other document entered into in relation to the Programme or any information supplied by the Issuer or such other information as is in the public domain and, if given or made, such information or representation should not be relied upon as having been authorised by the Issuer or any Dealer. No representation or warranty is made or implied by the Dealers or any of their respective affiliates, and neither the Dealers nor any of their respective affiliates makes any representation or warranty or accepts any responsibility as to the accuracy or completeness of the information contained in this Base Prospectus. Neither the delivery of this Base Prospectus or any Final Terms nor the offering, sale or delivery of any Note shall, in any circumstances, create any implication that the information contained in this Base Prospectus is true subsequent to the date hereof or the date upon which this Base Prospectus has been most recently supplemented or that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the condition (financial or otherwise) of the Issuer since the date thereof or, if later, the date upon which this Base Prospectus has been most recently supplemented or that any other information supplied in connection with the programme is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. This Base Prospectus does not constitute an offer to sell or an offer to buy in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction, nor does this Base Prospectus constitute an invitation to subscribe for or purchase any Notes and should not be considered as a recommendation by the Issuer or the Dealers that any recipient of this Base Prospectus should subscribe for or purchase any Notes. The distribution of this Base Prospectus and any Final Terms and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Base Prospectus or any Final Terms comes are required by the Issuer and the Dealers to
BP-3 inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Notes and on the distribution of this Base Prospectus or any Final Terms and other offering material relating to the Notes, see ‘‘Subscription and Sale’’. The Issuer will furnish each initial purchaser of Notes issued under the Programme with a copy of this Base Prospectus and each applicable supplement, including the relevant Final Terms describing the terms related to that Series of Notes. Unless the context otherwise requires, references to the Base Prospectus include this Base Prospectus, together with any supplements applicable to a particular Series of Notes. Neither this Base Prospectus nor any Final Terms constitutes an offer or an invitation to subscribe for or purchase any Notes and they should not be considered as a recommendation by the Issuer, the Dealers or any of them that any recipient of this Base Prospectus or any Final Terms should subscribe for or purchase any Notes. Each recipient of this Base Prospectus or any Final Terms shall be taken to have made its own investigation and appraisal of the condition (financial or otherwise) of the Issuer. The maximum aggregate principal amount of Notes outstanding at any one time under the programme will not exceed euro 5,000,000,000 (and for this purpose, any notes denominated in another currency shall be translated into euro at the date of the agreement to issue such Notes (calculated in accordance with the provisions of the Dealer Agreement)). The maximum aggregate principal amount of Notes which may be outstanding and guaranteed at any one time under the programme may be increased from time to time, subject to compliance with the relevant provisions of the Dealer Agreement as defined under ‘‘Subscription and Sale’’. In the Base Prospectus, unless otherwise specified, references to a ‘‘Member State’’ are references to a Member State of the European Economic Area, references to ‘‘US$’’, ‘‘U.S. dollars’’ or ‘‘dollars’’ are to United States dollars references to ‘‘£’’ or ‘‘British pound sterling’’ are to the lawful currency for the United Kingdom and references to ‘‘EUR’’, ‘‘A’’ or ‘‘euro’’ are to the single currency introduced at the start of the Economic and Monetary Union of the European Union (the ‘‘EU’’) pursuant to the Treaty establishing the European Community, as amended.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (THE ‘‘RSA 421-B’’) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
STABILISATION
IN CONNECTION WITH THE ISSUE OF ANY TRANCHE OF NOTES, THE DEALER OR DEALERS (IF ANY) NAMED AS THE STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) IN THE APPLICABLE FINAL TERMS MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF A STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE RELEVANT TRANCHE OF NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE RELEVANT TRANCHE OF NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE RELEVANT TRANCHE OF NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER(S) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
BP-4 CONTENTS
Page SUMMARY ...... BP-6 RISK FACTORS ...... BP-9 OTHER INFORMATION ...... BP-15 GENERAL DESCRIPTION OF THE PROGRAMME ...... BP-17 TERMS AND CONDITIONS OF THE NOTES ...... BP-22 BOOK-ENTRY; DELIVERY AND FORM OF NOTES ...... BP-46 FORM OF FINAL TERMS ...... BP-54 UPM-KYMMENE CORPORATION ...... BP-66 TAXATION ...... BP-137 SUBSCRIPTION AND SALE ...... BP-140 TRANSFER RESTRICTIONS ...... BP-145 GENERAL INFORMATION ...... BP-148 INDEX TO FINANCIAL STATEMENTS ...... F-1
BP-5 SUMMARY
This summary must be read as an introduction to this Base Prospectus and any decision to invest in the Notes should be based on a consideration of the Base Prospectus as a whole. Following the implementation of the Prospectus Directive in each Member State of the European Economic Area, no civil liability will attach to the Issuer in any Member State solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of this Base Prospectus. Where a claim relating to the information contained in this Base Prospectus is brought before a court in a Member State of the European Economic Area, the plaintiff may, under the national legislation of the Member State where the claim is brought, be required to bear the costs of translating the Base Prospectus before the legal proceedings are initiated. Words and expressions defined in the ‘‘Terms and Conditions of the Notes’’ below or elsewhere in this Base Prospectus have the same meanings in this summary.
Essential Characteristics and Risks Associated with the Issuer UPM is the leading producer of graphic papers and among the largest forestry companies in the world, in terms of capacity. It is also the world’s second largest producer of label materials and Europe’s largest producer of plywood, in terms of capacity. UPM’s core businesses are energy, chemical pulp, sawn timber, graphic papers, selected speciality papers, self-adhesive label materials and plywood. In recent years, UPM has introduced several new business initiatives, which are currently under development or have been recently implemented, such as Radio Frequency Identification (‘‘RFID’’) tags, wood plastic composites and biofuels. While UPM’s management believes that these business initiatives represent opportunities in the future, their financial impact has so far been limited. In 2008, the Group had sales of A9.5 billion and, as of 31 December 2008, the Group’s total assets amounted to A13.8 billion. The main markets for the Group’s products are Europe, which accounted for 73% of sales, North America, which accounted for 11% of sales, and Asia and other countries, which accounted for 16% of sales, each in 2008. UPM has production in 14 countries. Its paper production facilities rank among the world’s leading in terms of production efficiency. UPM’s operations are based on close integration of raw materials, energy and production. As of the date of this Base Prospectus, the Company is self-sufficient in chemical pulp and approximately 85% self-sufficient in electric power. UPM’s operations are organised in the following three business groups: Energy and pulp, Paper, and Engineered materials. The Energy and pulp business group consists of hydropower assets, UPM’s pulp mills in Finland and shares of associated pulp and energy companies. This business group is also responsible for forest and wood sourcing as well as UPM’s timber business. This business group seeks to secure competitive access to critical production inputs, such as forest biomass, pulp and energy. The Energy and pulp business group comprises three business areas: Energy, Pulp, and Forest and timber. UPM’s biofuel business is also included in the business group as a development unit. Biofuels are liquid or gaseous fuels for transport produced from biomass. The three business areas are managed as market-driven businesses even though most of their sales are internal. The Energy business area manages and develops UPM’s non-integrated power generation assets. The Pulp business area produces chemical pulp at UPM’s three modern pulp mills in Finland. The Forest and timber business area manages UPM’s forest holdings and sawmills. The Paper business group produces publication, fine and speciality papers. Publication paper is used in magazines, newspapers, manuals and booklets, books, catalogues, telephone directories, inserts, flyers, newspaper supplements and advertising materials. Fine paper is used in magazines, catalogues, inserts, advertising materials, copy papers, preprint applications and envelopes. Speciality paper is used for several end-uses in the labelling, packaging and mailing industries. The business group’s customers are mainly publishers and printers as well as merchants and paper converters. The Paper business group also includes UPM’s combined heat and power (‘‘CHP’’) plants operating on its paper mill sites. The CHP plants represent one-third of UPM’s total power generation and are mainly fuelled by biomass. UPM’s mechanical and recycled-fibre pulp production is fully integrated with its paper production with no external sales and, therefore, it is included in the Paper business group. The Paper business group’s annual production capacity is 11.5 million tonnes. The Engineered materials business group comprises two business areas: Label and Plywood. UPM’s RFID tags and wood plastic composites are also included in this business group as development units. The
BP-6 Label business area manufactures self-adhesive label materials for product and information labelling. The Plywood business area combines the unique characteristics of wood with the demanding customer focused construction and industrial end-use applications. Plywood is primarily used in the building, construction and transportation industries and in a number of special applications. The RFID tags development unit comprises the development and manufacture of tags and inlays based on RFID technology. The wood plastic composite development unit develops, manufactures, markets and sells high-quality wood plastic composite products made mainly from surplus paper and plastic left over from the production of self-adhesive label materials. The Group faces significant competition from multinational and local competitors, which may offer competing products with more attractive prices to the customers of the Group. Although the Group’s customer base is extensive and diverse, the loss of one major customer or a group of customers could have an adverse impact on the business of the Group. In addition, shifts in consumer preferences could materially affect the demand for the Group’s products and, thereby, the business, financial condition or results of operations of the Group. UPM’s financial performance is influenced by the cyclicality of the markets and pricing fluctuations for paper and forest products. In addition, the Group’s exposure to fluctuations in global exchange rates may have a significant effect on its business, financial condition or results of operations, as is also the case with adverse economic conditions in the markets in which the Group operates. UPM relies on third party suppliers for significant amounts of the raw materials used by the Group. Disruptions in the supply chain of and fluctuations, in the prices of these raw materials could materially affect the business of the Group. Similarly, natural catastrophes or sabotage could lead to a material adverse impact on the business, financial condition or results of operations of the Group. See ‘‘Risk Factors’’.
Essential Characteristics and Risks Associated with the Notes The Issuer may, subject to compliance with all relevant laws, regulations and directives, from time to time issue Notes denominated in any currency (including euro) agreed between the Issuer and the relevant Dealer. The aggregate principal amount of Notes outstanding will not at any time exceed A5,000,000,000 (or its equivalent in other currencies), subject to any duly authorised increase. The aggregate principal amount, any interest rate or interest calculation, the issue price, maturity and any other terms and conditions not contained herein with respect to each Series of Notes will be established at the time of issuance and set forth in the applicable Final Terms. The Issuer has not registered the Notes under the Securities Act and, subject to certain exceptions, the Notes may not be offered or sold within the United States or to U.S persons, as defined in Regulation S. The Notes may be offered for sale only (i) in the United States to QIBs within the meaning of, and in reliance on, Rule 144A or another available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act; or (ii) outside the United States to non U.S. persons in reliance on, and in accordance with, Regulation S, in each case, in compliance with applicable laws. Application has been made for the Notes issued under the Programme to be admitted to trading on the regulated market of the Luxembourg Stock Exchange. However, Notes may also be issued under the Programme on an unlisted basis or be admitted to listing, trading and/or quotation by other stock exchanges, listing authorities and/or quotation systems, and the Final Terms applicable to a Series will specify whether or not Notes of such Series have been admitted to trading on the regulated market of the Luxembourg Stock Exchange or admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system. Application will be made for trading of Notes in the PORTAL market of the National Association of Securities Dealers, Inc. The Notes shall be accepted for clearing through one or more clearing systems as specified in the applicable Final Terms. These systems shall include, in the United States, the systems operated by DTC and, outside the United States, the systems operated by Euroclear and Clearstream, Luxembourg. Because the Global Notes are held by or on behalf of DTC, Euroclear and Clearstream, Luxembourg, investors will have to rely on their procedures for transfer, payment and communications with the Issuer. The Notes may be issued in registered form, without interest coupons, or in bearer form, with or without interest coupons.
BP-7 The Notes issued under the Programme will be unsubordinated and unsecured obligations of the Issuer and will have the benefit of a negative pledge and the events of default set out in the ‘‘Terms and Conditions of the Notes’’. The Notes may be redeemed prior to maturity at par or at such other Redemption Amount as may be specified in the Final Terms. There is no active trading market for the Notes unless, in the case of any particular Tranche, such Tranche is to be consolidated with and form a single series with a Tranche of Notes which is already issued. Any adverse change in an applicable credit rating of the Issuer and/or the Notes (if applicable) could adversely affect the trading price for the Notes issued under the Programme.
BP-8 RISK FACTORS
Prospective investors should read the entire Base Prospectus. Words and expressions defined in the ‘‘Terms and Conditions of the Notes’’ below or elsewhere in this Base Prospectus have the same meanings in this section. Investing in the Notes involves certain risks, including the risk that investors may lose the value of their entire investment, or a part of it. Prospective investors should consider, among other things, the risks discussed below. UPM regards risk management as a systematic and proactive means to analyse and manage opportunities and threats relating to its business operations. UPM’s Board of Directors has approved the overall objectives of risk management for the Group and has confirmed its principles and implementation procedures. UPM’s Audit Committee has the responsibility to oversee that risk management activities are aligned with UPM’s risk management policy and that risk assessment focuses on internal audit activities. The main risk factors that have been identified as potentially having a material adverse impact on the business, financial condition or results of operations of the Group are set out below. They have been classified as strategic risks, operational risks, financial risks and hazard risks. Also set out below are certain risks relating to the Notes. The presentation of risks discussed below is not exhaustive and there can be other risks that could have a material adverse impact on the business, financial condition or results of operations of the Group.
Risk Relating to the Notes There is no active trading market for the Notes. Notes issued under the Programme will be new securities which may not be widely distributed and for which there is currently no active trading market (unless in the case of any particular Tranche, such Tranche is to be consolidated with and form a single series with a Tranche of Notes which is already issued). If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Issuer. Although application has been made for the Notes issued under the Programme to be admitted to trading on the regulated market of the Luxembourg Stock Exchange, there can be no assurance that such application will be accepted, that any particular Tranche of Notes will be so admitted or that an active trading market will develop. Accordingly, there can be no assurance as to the development or liquidity of any trading market for any particular Tranche of Notes, and investors may lose the value of their entire investment or a part of it, as the case may be.
The Notes may not be freely transferred. The Issuer has not registered, and will not register, the Notes under the Securities Act or any other applicable securities laws. Accordingly, the Notes are subject to certain restrictions on resale and other transfer thereof as set forth in the section entitled ‘‘Transfer Restrictions’’. As a result of these restrictions, the Issuer cannot be certain of the existence of a secondary market for the Notes or the liquidity of such a market if one develops. Consequently, a holder of Notes and an owner of beneficial interests in those Notes must be able to bear the economic risk of their investment in the Notes for the term of the Notes.
The Notes may be redeemed prior to maturity. Unless in the case of any particular Tranche of Notes the relevant Final Terms specify otherwise, in the event that the Issuer would be obliged to increase the amounts payable in respect of any Notes due to any withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Republic of Finland or a political subdivision thereof or any authority therein or thereof having power to tax, the Issuer may redeem all outstanding Notes in accordance with the Conditions. In addition, if in the case of any particular Tranche of Notes the relevant Final Terms specify that the Notes are redeemable at the Issuer’s option in certain other circumstances, the Issuer may choose to redeem the Notes at times when prevailing interest rates may be relatively low. In such circumstances, an investor may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the relevant Notes.
Because the Global Notes are held by or on behalf of Euroclear, Clearstream, Luxembourg and/or DTC investors will have to rely on their procedures for transfer, payment and communication with the Issuer. Notes issued under the Programme may be represented by one or more Global Notes. Such Global Notes will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg or with or on behalf of DTC. Except in the circumstances described in the relevant Global Note, investors will not be entitled to
BP-9 receive definitive Notes. Euroclear, Clearstream, Luxembourg and/or DTC will maintain records of the beneficial interests in the Global Notes. While the Notes are represented by one or more Global Notes, investors will be able to trade their beneficial interests only through Euroclear and/or Clearstream, Luxembourg and/or DTC. While the Notes are represented by one or more Global Notes, the Issuer will discharge its payment obligations under the Notes by making payments to the common depositary for Euroclear and Clearstream, Luxembourg or to DTC or a nominee thereof for distribution to their account holders. A holder of a beneficial interest in a Global Note must rely on the procedures of Euroclear, Clearstream, Luxembourg and/or DTC to receive payments under the relevant Notes. The Issuer has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes. Holders of beneficial interests in the Global Notes will not have a direct right to vote in respect of the relevant Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by Euroclear, Clearstream, Luxembourg and/or DTC to appoint appropriate proxies.
The credit ratings of the Issuer may not be reliable, and changes to the credit ratings could affect the value of the Notes. The credit ratings of the Issuer are set out under the heading ‘‘UPM-Kymmene Corporation— Operating and Financial Review and Prospects—Cash Flow—Cash Used in Financing Activities’’ starting on page BP-121. The credit ratings of a Tranche of Notes (if any) will be provided in the relevant Final Terms. Where a Tranche of Notes is rated, such ratings will not necessarily be the same as the ratings described herein. Moreover, the credit ratings of the Notes may not reflect the potential impact of all risks relating to the value of the Notes. In addition, real or anticipated changes in the credit ratings of the Issuer or the credit ratings of the Notes will generally affect the market value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Any adverse change in an applicable credit rating could adversely affect the trading price for the Notes issued under the Programme.
Risks Relating to the Issuer (i) Strategic Risks Competition. The paper, forest products and energy markets are highly competitive. UPM has, from time to time, experienced price pressures from competitors in its main business areas and geographic market areas and has experienced particularly large fluctuations in operating margins due to this competitive environment. UPM principally competes with a number of large multinational paper and forest products companies as well as with numerous regional or more specialised competitors. Although UPM’s management believes that UPM’s financial position is currently sound in relation to many other industry participants, there can be no assurance that UPM will have sufficient financial resources to respond to these competitive pressures in the future. UPM’s failure to do so could have a material adverse impact on the business, financial condition or results of operations of the Group.
Consumer preferences. Over the last several decades, consumer expectations with respect to paper used for such items as magazines, newspapers, catalogues, advertising, direct mail, packaging and label materials and other similar uses have become both more demanding and more diverse. The trend towards a greater use of computers and electronic media is also having an effect on the current consumption patterns for paper and is expected to continue to have such effect in the future. UPM’s ability to continue to meet the shifting demands of consumers depends upon a variety of factors, including its ability to foresee and/or identify changes in consumer preferences, requiring alteration of UPM’s strategies, the technical capabilities of manufacturing facilities, the speed of, and the costs associated with, the shifting of production at such facilities and the success of various research and development programmes. There can be no assurance that UPM will be able to successfully adapt to future changes in consumer demands or that such changes will not have a material adverse impact on the business, financial condition or results of operations of the Group.
Mergers and acquisitions. The paper and forest products industry has in the past and could also in the future experience a further wave of consolidation, driven, in part, by a desire to achieve economies of scale and synergies. UPM may seek growth through mergers or acquisitions in order to stay competitive or to enter into new areas of operation. Such acquisitions may not be available to UPM, or may not be available at the times or on terms acceptable to UPM. The mergers and acquisitions, which UPM may enter into or
BP-10 make, could involve risks, including those concerning UPM’s ability to successfully integrate and manage acquired operations and personnel, as well as to successfully achieve the economies of scale or synergies sought. The integration of acquired businesses may also lead to a possible deterioration of UPM’s financial condition, a loss of key employees of the acquired companies or a diversion of management attention away from other ongoing business concerns. If valuation premises, in the case of a merger or acquisition, prove to be incorrect, for example, regarding demand and product pricing, UPM may be required to record material impairment charges in future periods.
Suitability of the business portfolio. Although UPM’s management believes that UPM’s product portfolio and geographic spread of operations are currently quite suited for profitable business, the demand for its main products and overall business conditions in its major markets may change. For example, changes may take place as a consequence of the changing consumer behaviour. UPM cannot, therefore, be certain that its current portfolio will ensure adequate returns in the future.
Significance of the largest customers. UPM sells a significant proportion of its products to several major customers, including certain significant printing houses and merchant distributors, which resell the products. Although UPM is not dependent on any specific customer or group of customers, the loss of one or more of its major customers, if not replaced on similar terms, could have a material adverse impact on the business, financial condition or results of operations of the Group. UPM’s ten largest customers accounted for approximately A1.5 billion, or 16%, of its sales in 2008, and its largest customer accounted for approximately A0.4 billion, or 4%, of its sales in 2008.
Environmental regulations. UPM is subject to various environmental laws and regulations in the jurisdictions in which it operates, governing, among others, wood procurement, use of recycled material and different forms of production discharges and emissions. Its environment-related processes and management are based on the goal of full compliance with such laws and regulations, and environmental investments, audits and measurements are carried out on a continuing basis. UPM is currently not involved in any major legal proceedings concerning environmental matters that could reasonably be expected to have a material adverse impact on the business, financial condition or results of operations of the Group, nor is UPM’s management aware of any claims or potential liability concerning environmental matters that could reasonably be expected to have a material adverse impact on the business, financial condition or results of operations of the Group. However, the risk of substantial environmental costs and liabilities is inherent in industrial operations, including the paper and forest products industry, and there can be no assurance that significant costs and liabilities will not be incurred in the future or that the adoption of increasingly strict environmental laws, regulations and enforcement policies could not result in substantially increased costs and liabilities in the future. See ‘‘UPM-Kymmene Corporation—Environmental and Regulatory Matters’’.
Political risks. UPM has manufacturing operations in certain emerging markets, including, among others, China and Russia. The political, economic and legal systems in these countries may be less predictable than those in countries with more established and sustained institutional structures. Political or economic upheaval and changes in laws may have a material adverse impact on UPM’s operations in these countries and, in turn, the amount of income from, and the value of, the investments UPM has made in relation to its operations in such countries. Investments or procurement in these countries may also be subject to other risks and uncertainties, such as unfavourable tax treatment, trade restrictions, inflation, currency fluctuations and nationalisation. Emerging markets represented approximately A1.5 billion, or 16%, of UPM’s sales in 2008.
(ii) Operational Risks Cyclical nature of the markets and pricing fluctuations. The markets for paper and forest products are cyclical, being characterised by periods of imbalance between supply and demand, during which prices of paper and forest products can fluctuate significantly. These demand-supply imbalances may be caused by such factors as economic growth and trends in advertising, capacity investments, inventory build-up and changes in end-use patterns. There can be no assurance that current price levels for UPM’s paper and forest products will be maintained, that any additional price increases will be achieved or that the industry will not add new capacity, thereby potentially causing an imbalance between supply and demand.
BP-11 Business environment risk. UPM’s business could be adversely affected by a global market downturn and economic slowdown such as the current global financial crisis, which began with the subprime mortgage financial crisis in the United States in 2006 and became a global financial crisis beginning in July 2007. As the global financial crisis has continued during 2008 and 2009, it has had an increasing impact on the economies of a number of jurisdictions. A change in international investor sentiment brought about by the continuing global financial crisis has been widely recognised as adversely affecting the availability of capital and funding for corporate issuers worldwide. UPM’s management is not in a position to reliably estimate the effects of the current global financial crisis or any possible further deterioration in the liquidity of the financial markets and their increased volatility on UPM’s financial position.
Availability and price of major production inputs. In 2008, third-party suppliers accounted for approximately 90% of UPM’s wood requirements and approximately 15% of its electric power needs. Other production inputs, such as chemicals, fillers and recovered paper, are obtained from third-party suppliers. Disruptions in the supply of key inputs would impact UPM’s manufacturing operations. This could result in, for example, interruption or downscaling of production or change in the product mix, or increased costs resulting from price increases for critical inputs, shifts in the availability and price of wood, especially in the Baltic Rim area, or uncertainties with respect to how the proposed policies resulting from the EU climate and energy package affect the availability and cost of fibre and energy. See ‘‘UPM-Kymmene Corporation—Environmental and Regulatory Matters’’. This could, in turn, have a material adverse impact on the business, financial condition or results of operations of the Group. See ‘‘UPM-Kymmene Corporation—UPM’s Wood Procurement’’.
Partnerships. UPM currently works with a number of partners in the area of new product development, new businesses and new growth markets, and, in view of the highly competitive market situation, UPM is likely to increase the number of these partnerships in order to complement its business and seek higher efficiency. Partnerships may, however, create risks to UPM’s profitability, for example, through changes occurring within the partner company or changes in the manner a partnership operates. Partnership arrangements may also be too rigid to enable timely changes required, for example, in connection with changes in the market conditions or the particular economy. Further, UPM’s partners may have different approaches with respect to the business of the partnerships and there can be no assurance that, in such situations, UPM will be able to reach an agreement with its partners. Because UPM will not have sole control of these entities, its partners may have the right to make certain decisions on key business matters with which UPM does not agree. In some cases, strategic or joint venture partners may choose not to continue partnerships that they have with UPM. Any of these factors could affect UPM’s ability to pursue its stated strategies with respect to these entities and may have a material adverse impact on the business, financial condition or results of operations of the Group.
Ability to recruit and retain skilled employees. To meet the challenges of sustainable growth and to improve the efficiency of its operations, UPM must continue to recruit and retain skilled employees. UPM is continuously evaluating its recruitment, compensation and career development policies and taking measures to attract and retain skilled personnel. There can be no assurance that UPM will not encounter shortages of sufficient numbers of appropriately skilled personnel in the future. Such shortages could have a negative effect on UPM’s business operations.
Financial control procedures. Effective internal control procedures are necessary to provide reliable and accurate financial reporting. If UPM cannot provide reliable financial reports or prevent fraud, its financial results could be negatively affected. Inadequate internal controls could also cause investors to lose confidence in UPM’s reported financial results, which could have a negative effect on the market price of its shares and other securities.
Litigation. The Group is a defendant or plaintiff in a number of legal proceedings. These legal proceedings primarily involve claims arising out of commercial law issues. Certain competition authorities are continuing investigations into alleged antitrust activities with respect to various products of the Company. The U.S. Department of Justice, the EU authorities and the authorities in several EU countries, Canada and certain other countries have granted UPM conditional full immunity with respect to certain conduct disclosed to the authorities. The U.S. and Canadian investigations have been closed, and the European Commission has tentatively closed its investigation of the European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets. UPM has been named as a defendant in multiple class-action lawsuits against labelstock and magazine paper manufacturers in the United States. In
BP-12 the aggregate, these matters may implicate or result in substantial adverse publicity, penalties and damages. It is possible that any ultimate liability could be material to the business, financial condition or results of operations of the Group. At this time, however, it is not possible for UPM to estimate any potential liability. See ‘‘UPM-Kymmene Corporation—Legal Proceedings’’.
(iii) Financial Risks Changes in exchange and interest rates. As a consequence of the global nature of its business, UPM is exposed to risks associated with changes in exchange rates, which may have a material adverse impact on the business, financial condition or results of operations of the Group. Exchange rate exposure primarily affects UPM’s export operations to the extent that its sales are denominated in currencies other than those in which manufacturing costs are incurred (e.g., non-euro denominated sales by UPM’s operations based in the EU member states participating in the Economic and Monetary Union of the EU). In general, the introduction of the euro has reduced UPM’s exposure to such currency risk. Nevertheless, a part of UPM’s sales and purchases continues to be denominated in currencies (consisting primarily of the U.S. dollar and the British pound sterling) other than the euro. In addition, UPM’s reported earnings may be affected by fluctuations between the euro and the non-euro currencies in which UPM’s various foreign subsidiaries report their results of operations when such results of operations are translated back into euro. To manage exposure to such exchange rate fluctuations, UPM closely monitors its exposure to currency risks while simultaneously hedging a portion of such risks using certain financial instruments, including forward foreign exchange agreements and currency swaps. There can be no assurance, however, that the exchange rate fluctuations between the euro and other currencies, such as the U.S. dollar or the British pound sterling, will not have a material adverse impact on the business, financial condition or results of operations of the Group in the future. Further, changes in interest rates may have a considerable impact on the value of UPM’s assets (for example, biological assets), which are valued on a discounted cash flow model.
Financing. Securing the continuity of UPM’s operations, requires sufficient funding under all circumstances. The global financial crisis may have an adverse impact on the availability of UPM’s debt financing or may increase the costs related to it, although UPM’s management estimates that UPM’s financial assets and available credit facilities are sufficient to secure UPM’s liquidity. The capital tied-up in net working capital and the level of capital expenditure have a fundamental effect on the adequacy of financing. A prolonged economic downturn could adversely affect UPM’s attempts to release some of its net working capital. Currently, UPM has no particularly large-scale investment schemes underway, and UPM’s management estimates that the Group is well positioned to manage its capital expenditure levels in the coming years. In February 2009, Moody’s Investors Service, Inc. (‘‘Moody’s’’) changed UPM’s credit rating from Baa3 to Ba1 with a stable outlook and Standard & Poor’s Rating Services, a division of The McGraw Hill Companies, Inc (‘‘Standard & Poor’s’’) placed its BBB- credit rating for UPM on review for a possible downgrade. These adverse developments in the credit markets and in UPM’s credit ratings, as well as other future adverse developments, such as further deterioration in the global financial markets and the worsening of general economic or market conditions or the weakening of UPM’s business and/or financial performance, could negatively impact UPM’s ability to issue additional debt securities as well as the amount and terms of the debt securities it is able to issue. These factors could also negatively impact the refinancing of UPM’s two major committed revolving credit facilities that are maturing in 2012. UPM’s business, financial condition and results of operations could be adversely affected to the extent the terms of any new debt securities that UPM issues or the terms of any new revolving credit facilities that UPM enters into are less favourable than the terms of the debt securities or the terms of the revolving facilities being refinanced, thereby. The terms of such debt securities and/or new credit facilities may also give the lenders additional rights, preferences and/or privileges senior to those of UPM’s shareholders and may impose restrictions on UPM’s operations that have an adverse impact on UPM’s ability to pursue its strategic goals or may otherwise adversely impact the development of its business.
Payment defaults of customers. There is a risk of non-payment or non-performance by UPM’s customers in connection with the sale of its products. In particular, continued weakness in the general economic environment may result in increased defaults by customers and increased losses. UPM has various programmes in place to monitor and mitigate customer credit risk and insurance policies cover most of UPM’s trade receivables but there can be no assurance that such steps will be effective in eliminating losses resulting from payment defaults.
BP-13 (iv) Hazard Risks UPM operates a significant number of manufacturing facilities all over the world, most of which it owns, and is also the largest private owner of forestland in Finland. UPM is exposed to risks in various areas such as occupational health and safety, environment, fire, natural events and premises security. These risks are managed through established management procedures and loss prevention programmes. However, there can be no assurance that such procedures and programmes will be effective in avoiding the realisation of such risks. UPM also transfers insurable risks through insurance arrangements, subject to terms and conditions, if they exceed its risk tolerance. Insurance cover is subject to applicable conditions and there can be no assurance that UPM’s insurance policies would be sufficient to cover potential damages arising from such insurable risks, including those resulting from war, terrorism or natural catastrophes.
BP-14 OTHER INFORMATION
1. UPM-KYMMENE CORPORATION In this Base Prospectus, ‘‘UPM’’, the ‘‘Company’’, the ‘‘Issuer’’ and the ‘‘Group’’ refer to UPM-Kymmene Corporation or UPM-Kymmene Corporation and its consolidated subsidiaries, as the context may require. UPM-Kymmene Corporation is incorporated as a stock corporation organised under the laws of the Republic of Finland and registered in the Trade Register maintained by the National Board of Patents and Registration of Finland, under the business identity code 104 1090-0. UPM’s registered office is located at Etelaesplanadi¨ 2, FI-00101 Helsinki, Finland, telephone +358-204-15111.
2. FORWARD-LOOKING STATEMENTS This Base Prospectus contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words ‘‘believe’’, ‘‘expect’’, ‘‘anticipate’’, ‘‘intend’’, ‘‘plan’’ ‘‘will’’, ‘‘would’’, ‘‘may’’, ‘‘could’’, ‘‘continue’’ and similar expressions identify forward-looking statements. These statements appear in a number of places in this Base Prospectus and include statements regarding the intent, belief or current expectations of the Issuer or its respective officers with respect to, among other things, (i) the use of proceeds of the offering of Notes, (ii) the Issuer’s financing plans, (iii) trends affecting the Issuer’s business, financial condition or results of operations, (iv) the impact of competition and (v) future plans and strategies. These statements reflect the Issuer’s views with respect to such matters. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. Prospective investors are cautioned not to place undue reliance on these forward-looking statements, which in any event speak only as of the date of this Base Prospectus. The Issuer undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed under ‘‘Risk Factors’’ beginning on page BP-9 of this Base Prospectus.
3. ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS UPM-Kymmene Corporation is organised under the laws of Finland, with its domicile in Helsinki. Most of the directors and executive officers of UPM and certain of the experts named herein are non-residents of the United States. All or a substantial portion of the assets of such non-resident persons and of the Company are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or the Company, or to enforce against them, in U.S. courts, judgments obtained in such courts predicated upon civil liability provisions of the federal securities laws of the United States. UPM has been advised by Mr. Juha Makel¨ a,¨ General Counsel of the Company, that there is doubt as to the enforceability in Finland, in original actions or actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal securities laws of the United States.
4. AVAILABLE INFORMATION To permit compliance with Rule 144A in connection with resales of the Notes, for so long as any Notes remain outstanding and are ‘‘restricted securities’’ within the meaning of Rule 144(a)(3) under the Securities Act, the Issuer has agreed to furnish upon request of a holder or beneficial owner of such Notes, or to a prospective purchaser designated by such holder or beneficial owner, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act and will otherwise comply with the requirements of Rule 144A(d)(4) under the Securities Act if, at the time of such request, the Issuer is neither a reporting company under Section 13 or Section 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder. For so long as the Notes are admitted to trading on the Luxembourg Stock Exchange and the rules of the exchange so require, the above mentioned information will also be made available at the principal office of the Luxembourg Listing Agent in Luxembourg.
BP-15 5. FINANCIAL AND OTHER INFORMATION UPM produces its financial statements in accordance with International Financial Reporting Standards, as adopted by the EU (‘‘IFRS’’). UPM’s consolidated financial statements under IFRS for the year ended 31 December 2008 were approved by its Board of Directors on 5 February 2009, and will be presented for approval by its shareholders in the annual general meeting of the shareholders scheduled to be held on 25 March 2009. UPM’s consolidated financial statements are audited in accordance with Finnish Standards on Auditing for statutory purposes. Except as otherwise indicated, information regarding sales for each of the Group’s divisions, as presented herein, includes inter-divisional sales. Certain financial terms and indicators used in this Base Prospectus are calculated by UPM as follows: • ‘‘Return on capital employed’’ or ‘‘ROCE’’ for the Group is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). • ‘‘Return on capital employed’’ for the operating segments of the Group is calculated by multiplying (i) 100 by (ii) (a) operating profit, divided by (b) non-current assets plus stocks (inventories) and trade receivables, minus trade payables (average). • ‘‘EBITDA’’ for the operating segments of the Group and for the Group means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. References in this Base Prospectus to ‘‘EU countries’’ are to the following 25 member states of the EU: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, and, as from 1 January 2007, also to Bulgaria and Romania. However, for any financial or statistical information for periods prior to 1 May 2004 references to ‘‘EU countries’’ are to the following 15 EU member states that comprised the European Union prior to such date: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom. References in this Base Prospectus to ‘‘North America’’ are to Canada and the United States. UPM has derived certain information contained in this Base Prospectus concerning European demand and prices for printing papers from reports prepared by Confederation of European Paper Industries Print (‘‘CEPIPRINT’’) and Confederation of European Paper Industries Fine (‘‘CEPIFINE’’). Beginning from 2004, the data reported by these organisations for the European market has been revised to include the 27 current EU member states, together with an additional group of 22 European countries, which comprise mainly Eastern European countries and autonomous states. Prior to 2004, the data reported by CEPIPRINT and CEPIFINE for the European market focused solely on a group of Western European countries, which was more limited in scope than the current reporting market. Neither organisation has made available information for the revised definition of the European market for periods prior to 2004. Accordingly, the European demand and pricing information for the year 2004 and onwards provided in this Base Prospectus refers to the revised definition of the European market and for periods prior to 2004 to the previous sample group of Western European countries. The Issuer’s primary source for stating its position in the paper industry is based on the information received from the independent consulting firm Poyry¨ Group Oyj (‘‘Poyry¨ ’’). For labels business and wood products, the Issuer utilises its own business intelligence expertise. All references herein to tonnes are to metric tonnes, which are equal to 1,000 kilograms.
BP-16 GENERAL DESCRIPTION OF THE PROGRAMME
The following general description of the Programme does not purport to be complete and is qualified in its entirety by the remainder of this Base Prospectus. Words and expressions defined in ‘‘Book-Entry; Delivery and Form of Notes’’ or ‘‘Terms and Conditions of the Notes’’ below shall have the same meanings in this general description of the Programme.
Issuer: UPM-Kymmene Corporation Arranger: Citigroup Global Markets Limited Dealers: BNP Paribas Citigroup Global Markets Limited Commerzbank Aktiengesellschaft Deutsche Bank AG, London Branch Dresdner Bank Aktiengesellschaft Merrill Lynch International Nordea Bank Danmark A/S Nordea Bank Finland Plc The Royal Bank of Scotland plc and any other Dealer appointed from time to time by the Issuer either generally in respect of the Programme or in relation to a particular Tranche of Notes. Trustee: Citicorp Trustee Company Limited Principal Paying Agent: Citibank, N.A., London Branch Paying and Transfer Agents: BGL Societ´ e´ Anonyme Citibank, N.A., London Branch Registrar: Citibank, N.A., London Branch Luxembourg Listing Agent: BGL Societ´ e´ Anonyme Listing and Trading: Application has been made for the Notes to be issued under the Programme to be admitted to listing on the Official List of the Luxembourg Stock Exchange and to trading on the regulated market of the Luxembourg Stock Exchange. However, Notes may be issued under the Programme on an unlisted basis or be admitted to listing, trading and/or quotation by other stock exchanges, listing authorities and/or quotation systems, and the Final Terms applicable to a Series will specify whether or not Notes of such Series will be admitted to trading on the regulated market of the Luxembourg Stock Exchange or admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system. This Base Prospectus may be used in connection with issues admitted to trading on the regulated market of the Luxembourg Stock Exchange for a period of one year of the date hereof. Application will be made for trading of Notes to be issued under the Programme in PORTAL. See ‘‘General Information’’. Clearing Systems: Notes shall be accepted for clearing through one or more clearing systems as specified in the applicable Final Terms. These systems shall include, in the United States, the system operated by DTC and, outside the United States, the systems operated by Euroclear and Clearstream, Luxembourg. Notes that are intended to be sold in both the United States and the euro markets will clear through DTC. Notes that are intended to be sold primarily outside the United States will clear through Euroclear, Clearstream, Luxembourg and/or any other clearing system specified in the applicable Final Terms.
BP-17 Programme Amount: Up to euro 5,000,000,000 (or its equivalent in other currencies) aggregate principal amount of Notes outstanding at any time may be issued by UPM-Kymmene Corporation. Issuance in Series: Notes will be issued in Series. Each Series may comprise one or more Tranches issued on different issue dates. The Notes of each Series will all be subject to identical terms, except that the issue date and the amount of the first payment of interest may be different in respect of different Tranches. The Notes of each Tranche will all be subject to identical terms in all respects save that a Tranche may comprise Notes of different denominations. Final Terms: Each Tranche will be the subject of Final Terms which, for the purposes of that Tranche only, complete the Terms and Conditions of the Notes and this Base Prospectus and must be read in conjunction with this Base Prospectus. The terms and conditions applicable to any particular Tranche of Notes are the Terms and Conditions of the Notes as supplemented, amended and/or replaced by the relevant Final Terms. Forms of Notes: Notes may be issued in registered form, without interest coupons (‘‘Registered Notes’’), or in bearer form, with or without interest coupons (‘‘Bearer Notes’’). In the case of Registered Notes, the Issuer will deliver (i) an Unrestricted Global Note Certificate (as defined below) and a Restricted Global Note Certificate (as defined below) or (ii) an International Global Note Certificate (as defined below), as specified in the relevant Final Terms. Registered Notes offered within the United States to QIBs in reliance on Rule 144A will, unless otherwise specified in the applicable Final Terms, be available only in book-entry form, and will be represented by a Registered Note in the form of a restricted global note certificate (a ‘‘Restricted Global Note Certificate’’) deposited on or about the issue date as specified in the applicable Final Terms with or on behalf of DTC and registered in the name of its nominee. Registered Notes sold outside the United States to non-U.S. persons in reliance on Regulation S will, unless otherwise specified in the applicable Final Terms, be available only in book-entry form and will be represented by an unrestricted global note certificate (an ‘‘Unrestricted Global Note Certificate’’) deposited on or about the issue date as specified in the applicable Final Terms with or on behalf of DTC for the accounts of its direct or indirect participants, including Euroclear and Clearstream, Luxembourg. On or prior to the 40th day after the later of the commencement of the offering and the date of delivery of the Notes of each Series, beneficial interests in an Unrestricted Global Note Certificate representing Notes of such Series may be held only through Euroclear or Clearstream, Luxembourg. Beneficial interests in the Restricted Global Note Certificates and Unrestricted Global Note Certificates will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct or indirect participants (including Euroclear and Clearstream, Luxembourg). Except as described herein, Individual Note Certificates (as defined herein) will not be issued in exchange for beneficial interests in Registered Global Note Certificates. See ‘‘Book-Entry; Delivery and Form of Notes’’. The Restricted Global Note Certificates will bear a legend setting forth transfer restrictions and may not be transferred except in
BP-18 compliance with the transfer restrictions set forth therein. Transfers of interests from a Unrestricted Global Note Certificate to Restricted Global Note Certificate are subject to certification requirements. Registered Notes sold outside the United States in reliance on Regulation S, which are not part of a Series which is also offered in the United States, may be represented, in whole or in part, by an International Global Note Certificate that is deposited with or on behalf of the Common Depositary for Euroclear and Clearstream, Luxembourg, or a nominee thereof, outside the United States for credit to the respective accounts of beneficial owners of the Notes represented thereby. Bearer notes will, unless otherwise specified, only be sold outside the United States to non-U.S. persons in reliance on Regulation S and will, unless otherwise specified in the applicable Final Terms, initially be represented by a Temporary Global Note without interest coupons attached, deposited with or on behalf of a Common Depositary located outside the United States for Euroclear and Clearstream, Luxembourg. Interests in a Temporary Global Note will be exchangeable (i) for interests in a permanent global Note in bearer form, without coupons (a ‘‘Permanent Global Note’’), (ii) in whole but not in part for definitive Notes in bearer form (each, a ‘‘Definitive Bearer Note’’) or (iii) directly for interests in a Registered Global Note Certificate, no earlier than the 40th day after the applicable closing date upon certification of non-U.S. beneficial ownership as required by U.S. Treasury regulations. Bearer Notes may be exchangeable for Registered Notes. Registered Notes will not be exchangeable for Bearer Notes. See ‘‘Terms and Conditions of the Notes—Condition 3’’ and ‘‘Book-Entry; Delivery and Form of Notes’’. Currencies: Notes may be denominated in euro, U.S. dollars, Australian dollars, Canadian dollars, Danish kroner, Hong Kong dollars, Japanese yen, New Zealand dollars, Norwegian kroner, pounds sterling, Swedish kronor, Swiss francs and/or in any other currency or currencies, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements. Payments in respect of Notes may, subject to such compliance, be made in and/or linked to, any currency or currencies other than the currency in which such Notes are denominated. Status of the Notes: The Notes issued under the Programme will be unsubordinated and unsecured obligations of the Issuer. Issue Price: Notes may be issued at any price and either on a fully or partly paid basis, as specified in the relevant Final Terms. The price and amount of Notes to be issued under the Programme will be determined by the Issuer and the relevant Dealer(s) at the time of the issue in accordance with prevailing market conditions. Maturities: Any maturity, subject, in relation to specific currencies, to compliance with all applicable legal and/or regulatory and/or central bank requirements. Redemption: Notes may be redeemable at par or at such other Redemption Amount (detailed in a formula, index or otherwise) as may be specified in the relevant Final Terms. Notes may also be redeemable in two or more instalments on such dates and in such manner as may be specified in the relevant Final Terms. Where Notes have a maturity of less than one year and either (a) the issue proceeds are received by the Issuer in the United Kingdom or (b) the activity of issuing the Notes is carried on from an
BP-19 establishment maintained by the Issuer in the United Kingdom, such Notes must (a) have a minimum redemption value of £100,000 (or its equivalent in other currencies) and be issued only to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses; or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses or (b) be issued in other circumstances which do not constitute a contravention of section 19 of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’) by the Issuer. Optional Redemption: Notes may be redeemed before their stated maturity at the option of the Issuer (either in whole or in part) and/or the Noteholders to the extent (if at all) specified in the relevant Final Terms. Tax Redemption: Except as referred to in ‘‘Optional Redemption’’ above, early redemption will only be permitted for tax reasons as described in Condition 10(b) (Redemption and Purchase—Redemption for tax reasons). Interest: Notes may be interest-bearing or non-interest bearing. Interest (if any) may accrue at a fixed rate or a floating rate or other variable rate or be index-linked and the method of calculating interest may vary between the issue date and the maturity date of the relevant Series. Denominations: Notes issued under the Programme which are to be admitted to trading on a regulated market situated or operating within a Member State or which are to be offered to the public in one or more Member States (where the terms ‘‘regulated market’’ and ‘‘offer to the public’’ are within the meaning of any measures implementing the Prospectus Directive in any relevant Member State) may not (a) have a minimum denomination of less than A1,000 (or nearly equivalent in another currency) or (b) carry the right to acquire shares (or transferable securities equivalent to shares) issued by the Issuer or by any entity belonging to the Issuer’s group. Subject thereto, Notes will be issued in such denominations as may be specified in the relevant Final Terms, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements. Negative Pledge: The Notes will have the benefit of a negative pledge as described in Condition 5 (Negative Pledge). Cross Default: The Notes will have the benefit of a cross default as described in Condition 13 (Events of Default). Taxation: All payments in respect of Notes will be made free and clear of withholding taxes of the Republic of Finland, unless the withholding is required by law. In that event, the Issuer will (subject as provided in Condition 12 (Taxation)) pay such additional amounts as will result in the Noteholders receiving such amounts as they would have received in respect of such Notes had no such withholding been required. Governing Law: English law. Enforcement of Notes in In the case of Global Notes, individual investors’ rights against the Global Form: Issuer will be constituted and governed by the trust deed dated 23 March 2009 (such trust deed as modified, amended and/or supplemented from time to time, the ‘‘Trust Deed’’) a copy of which will be available for inspection at the specified office of the Principal Paying Agent. Selling Restrictions: The Notes have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdiction of the United States. The Notes may not be offered or sold or in the
BP-20 case of Bearer Notes, delivered, directly or indirectly within the United States or to or for the account or benefit of U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirement of the Securities Act. For a description of certain local and worldwide restrictions on offers, sales and deliveries of Notes and on the distribution of offering material in and under the laws of the United States of America, the European Economic Area, the United Kingdom, The Netherlands and Japan, see ‘‘Subscription and Sale’’ below.
BP-21 TERMS AND CONDITIONS OF THE NOTES
The following are the Terms and Conditions of the Notes which, as supplemented, modified or replaced by the relevant Final Terms, will be applicable to each Series of Notes:
1. Introduction Programme: UPM-Kymmene Corporation (the ‘‘Company’’ and the ‘‘Issuer’’) has established a Global Medium Term Note Programme (the ‘‘Programme’’) for the issuance of up to euro 5,000,000,000 in aggregate principal amount of notes (the ‘‘Notes’’), which may be issued by the Company. (a) Final Terms: Notes issued under the Programme are issued in series (each a ‘‘Series’’) and each Series may comprise one or more tranches (each a ‘‘Tranche’’) of Notes. Each Tranche is the subject of the Final Terms (the ‘‘Final Terms’’) which supplement these terms and conditions (the ‘‘Conditions’’). The terms and conditions applicable to any particular Tranche of Notes are these Conditions as supplemented, amended and/or replaced by the relevant Final Terms. In the event of any inconsistency between these Conditions and the relevant Final Terms, the relevant Final Terms shall prevail. (b) Trust Deed: The Notes are constituted by an amended and restated trust deed dated 23 March 2009 (such trust deed as modified, amended and/or supplemented from time to time, the ‘‘Trust Deed’’) made between the Issuer and Citicorp Trust Company Limited as trustee (the ‘‘Trustee’’, which expression includes any successor trustee appointed from time to time in connection with the Notes). (c) Paying Agency Agreement: The Notes are the subject of an amended and restated paying agency agreement dated 7 March 2008 (as amended or supplemented from time to time, the ‘‘Paying Agency Agreement’’) between the Issuer, the Trustee, Citibank, N.A., London Branch as registrar (the ‘‘Registrar’’, which expression includes any successor registrar appointed from time to time in connection with the Notes), Citibank, N.A., London Branch as principal paying agent (the ‘‘Principal Paying Agent’’, which expression includes any successor principal paying agent appointed from time to time in connection with the Paying Agency Agreement) and as transfer agent, and BGL Societ´ e´ Anonyme (together with the Principal Paying Agent, the ‘‘Paying Agents’’, which expression includes any successor or additional paying agents appointed from time to time in connection with the Paying Agency Agreement) and as transfer agents (together with the transfer agent mentioned above, the ‘‘Transfer Agents’’, which expression shall include any successor or additional transfer agents appointed from time to time in connection with the Notes). (d) The Notes: All subsequent references in these Conditions to ‘‘Notes’’ are to the Notes which are the subject of the relevant Final Terms. Copies of the relevant Final Terms are available for inspection by Noteholders during normal business hours at the Specified Office of the Principal Paying Agent and are obtainable at the specified office of the Paying Agent in Luxembourg, the initial Specified Offices of which are set out below. (e) Summaries: Certain provisions of these Conditions are summaries of the Trust Deed and the Paying Agency Agreement and are subject to their detailed provisions. The holders of the Notes (the ‘‘Noteholders’’) and the holders of the related interest coupons, if any, (the ‘‘Couponholders’’ and the ‘‘Coupons’’, respectively) are bound by, and are deemed to have notice of, all the provisions of the Trust Deed and the Paying Agency Agreement applicable to them. Copies of the Trust Deed and the Paying Agency Agreement are available for inspection by Noteholders during normal business hours at the Specified Offices of each of the Paying Agents, the initial Specified Offices of which are set out below.
2. Interpretation (a) Definitions: In these Conditions the following expressions have the following meanings: ‘‘Accrual Yield’’ has the meaning given in the relevant Final Terms; ‘‘Additional Business Centre(s)’’ means the city or cities specified as such in the relevant Final Terms; ‘‘Additional Financial Centre(s)’’ means the city or cities specified as such in the relevant Final Terms; ‘‘Bankruptcy Law’’ means the Bankruptcy Act 2004 (20.02.2004/120) or any similar law, or any similar law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganisation or relief of debtors or any amendment to, succession to or change in any such law;
BP-22 ‘‘Business Day’’ means: (i) in relation to any sum payable in euro, a TARGET Settlement Day and a day on which commercial banks and foreign exchange markets settle payments generally in each (if any) Additional Business Centre; and (ii) in relation to any sum payable in a currency other than euro, a day on which commercial banks and foreign exchange markets settle payments generally in London, in the Principal Financial Centre of the relevant currency and in each (if any) Additional Business Centre; ‘‘Business Day Convention’’, in relation to any particular date, has the meaning given in the relevant Final Terms and, if so specified in the relevant Final Terms, may have different meanings in relation to different dates and, in this context, the following expressions shall have the following meanings: (i) ‘‘Following Business Day Convention’’ means that the relevant date shall be postponed to the first following day that is a Business Day; (ii) ‘‘Modified Following Business Day Convention’’ or ‘‘Modified Business Day Convention’’ means that the relevant date shall be postponed to the first following day that is a Business Day unless that day falls in the next calendar month in which case that date will be the first preceding day that is a Business Day; (iii) ‘‘Preceding Business Day Convention’’ means that the relevant date shall be brought forward to the first preceding day that is a Business Day; (iv) ‘‘FRN Convention’’, ‘‘Floating Rate Convention’’ or ‘‘Eurodollar Convention’’ means that each relevant date shall be the date which numerically corresponds to the preceding such date in the calendar month which is the number of months specified in the relevant Final Terms as the Specified Period after the calendar month in which the preceding such date occurred provided, however, that: (A) if there is no such numerically corresponding day in the calendar month in which any such date should occur, then such date will be the last day which is a Business Day in that calendar month; (B) if any such date would otherwise fall on a day which is not a Business Day, then such date will be the first following day which is a Business Day unless that day falls in the next calendar month, in which case it will be the first preceding day which is a Business Day; and (C) if the preceding such date occurred on the last day in a calendar month which was a Business Day, then all subsequent such dates will be the last day which is a Business Day in the calendar month which is the specified number of months after the calendar month in which the preceding such date occurred; and (v) ‘‘No Adjustment’’ means that the relevant date shall not be adjusted in accordance with any Business Day Convention; ‘‘Calculation Agent’’ means the Principal Paying Agent or such other Person specified in the relevant Final Terms as the party responsible for calculating the Rate(s) of Interest and Interest Amount(s) and/or such other amount(s) as may be specified in the relevant Final Terms; ‘‘Calculation Amount’’ has the meaning given in the relevant Final Terms; ‘‘Coupon Sheet’’ means, in respect of a Note, a coupon sheet relating to the Note; ‘‘Day Count Fraction’’ means, in respect of the calculation of an amount for any period of time (the ‘‘Calculation Period’’), such day count fraction as may be specified in these Conditions or the relevant Final Terms and: (i) if ‘‘Actual/Actual (ICMA)’’ is so specified, means: (a) where the Calculation Period is equal to or shorter than the Regular Period during which it falls, the actual number of days in the Calculation Period divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and
BP-23 (b) where the Calculation Period is longer than one Regular Period, the sum of: (A) the actual number of days in such Calculation Period falling in the Regular Period in which it begins divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and (B) the actual number of days in such Calculation Period falling in the next Regular Period divided by the product of (a) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; (ii) if ‘‘Actual/365’’ or ‘‘Actual/Actual (ISDA)’’ is so specified, means the actual number of days in the Calculation Period divided by 365 (or, if any portion of the Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365); (iii) if ‘‘Actual/365 (Fixed)’’ is so specified, means the actual number of days in the Calculation Period divided by 365; (iv) if ‘‘Actual/360’’ is so specified, means the actual number of days in the Calculation Period divided by 360; (v) if ‘‘30/360’’ is so specified, means the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
[360x(Y2 – Y1)] + [30x(M2 – M1)] + (D2 – D1) Day Count Fraction = 360 where:
‘‘Y1’’ is the year, expressed as a number, in which the first day of the Calculation Period falls;
‘‘Y2’’ is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘M1’’ is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
‘‘M2’’ is the calendar month, expressed as number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘D1’’ is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
‘‘D2’’ is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31 and D1 is greater than 29, in which case D2 will be 30’’; (vi) if ‘‘30E/360’’ or ‘‘Eurobond Basis’’ is so specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
[360x(Y2 – Y1)] + [30x(M2 – M1)] + (D2 – D1) Day Count Fraction = 360 where:
‘‘Y1’’ is the year, expressed as a number, in which the first day of the Calculation Period falls;
‘‘Y2’’ is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘M1’’ is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
‘‘M2’’ is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘D1’’ is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
BP-24 ‘‘D2’’ is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31, in which case D2 will be 30; and (vii) if ‘‘30E/360 (ISDA)’’ is so specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
[360x(Y2 – Y1)] + [30x(M2 – M1)] + (D2 – D1) Day Count Fraction = 360 where:
‘‘Y1’’ is the year, expressed as a number, in which the first day of the Calculation Period falls;
‘‘Y2’’ is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘M1’’ is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
‘‘M2’’ is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
‘‘D1’’ is the first calendar day, expressed as a number, of the Calculation Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and
‘‘D2’’ is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30, provided, however, that in each such case the number of days in the Calculation Period is calculated from and including the first day of the Calculation Period to but excluding the last day of the Calculation Period; ‘‘Early Redemption Amount (Tax)’’ means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms; ‘‘Early Termination Amount’’ means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, these Conditions or the relevant Final Terms; ‘‘Extraordinary Resolution’’ has the meaning given in the Trust Deed; ‘‘Final Redemption Amount’’ means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms; ‘‘Finnish GAAP’’ means accounting principles generally accepted in the Republic of Finland including IFRS; ‘‘First Interest Payment Date’’ means the date specified in the relevant Final Terms; ‘‘Fixed Coupon Amount’’ has the meaning given in the relevant Final Terms; ‘‘Guarantee’’ means, in relation to any Indebtedness of any Person, any obligation of another Person to pay such Indebtedness including (without limitation): (i) any obligation to purchase such Indebtedness; (ii) any obligation to lend money, to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness; (iii) any indemnity against the consequences of a default in the payment of such Indebtedness; and (iv) any other agreement to be responsible for such Indebtedness; ‘‘IFRS’’ means the International Financial Reporting Standards issued by the International Accounting Standards Board as adopted by the EU from time to time and related interpretations in accordance with which the Issuer is required to prepare its consolidated accounts from 2005 at the latest, following the publication of the European Commission Regulation (EC) No. 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC)
BP-25 No. 1606/2002 of the European Parliament and Council as may be modified or supplemented, if applicable, by Finnish law in accordance with the discretionary options; ‘‘Indebtedness’’ means any indebtedness of any Person for money borrowed, whether incurred, assumed or guaranteed, other than trade credit in the ordinary course of business; ‘‘Interest Amount’’ means, in relation to a Note and an Interest Period, the amount of interest payable in respect of that Note for that Interest Period; ‘‘Interest Commencement Date’’ means the Issue Date of the Notes or such other date as may be specified as the Interest Commencement Date in the relevant Final Terms; ‘‘Interest Determination Date’’ has the meaning given in the relevant Final Terms; ‘‘Interest Payment Date’’ means the First Interest Payment Date and any date or dates specified as such in, or determined in accordance with the provisions of, the relevant Final Terms and, if a Business Day Convention is specified in the relevant Final Terms: (i) as the same may be adjusted in accordance with the relevant Business Day Convention; or (ii) if the Business Day Convention is the FRN Convention, Floating Rate Convention or Eurodollar Convention and an interval of a number of calendar months is specified in the relevant Final Terms as being the Specified Period, each of such dates as may occur in accordance with the FRN Convention, Floating Rate Convention or Eurodollar Convention at such Specified Period of calendar months following the Interest Commencement Date (in the case of the first Interest Payment Date) or the previous Interest Payment Date (in any other case); ‘‘Interest Period’’ means each period beginning on (and including) the Interest Commencement Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date; ‘‘ISDA Definitions’’ means the 2006 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of the Notes of the relevant Series (as specified in the relevant Final Terms) as published by the International Swaps and Derivatives Association, Inc.); ‘‘Issue Date’’ has the meaning given in the relevant Final Terms; ‘‘Lien’’ means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property; ‘‘Margin’’ has the meaning given in the relevant Final Terms; ‘‘Maturity Date’’ has the meaning given in the relevant Final Terms; ‘‘Maximum Redemption Amount’’ has the meaning given in the relevant Final Terms; ‘‘Minimum Redemption Amount’’ has the meaning given in the relevant Final Terms; ‘‘Optional Redemption Amount (Call)’’ means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms; ‘‘Optional Redemption Amount (Put)’’ means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms; ‘‘Optional Redemption Date (Call)’’ has the meaning given in the relevant Final Terms; ‘‘Optional Redemption Date (Put)’’ has the meaning given in the relevant Final Terms; ‘‘Participating Member State’’ means a Member State of the European Communities which adopts the euro as its lawful currency in accordance with the Treaty; ‘‘Payment Business Day’’ means: (i) if the currency of payment is euro, any day which is: (A) a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and (B) in the case of payment by transfer to an account, a TARGET Settlement Day and a day on which dealings in foreign currencies may be carried on in each (if any) Additional Financial Centre; or
BP-26 (ii) if the currency of payment is not euro, any day which is: (A) a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and (B) in the case of payment by transfer to an account, a day on which dealings in foreign currencies may be carried on in the Principal Financial Centre of the currency of payment and in each (if any) Additional Financial Centre; ‘‘Permitted Liens’’ means: (i) Liens existing as of the relevant Issue Date; (ii) Liens on the Property of any existing entity at the time such Property was acquired by the Issuer or the relevant Subsidiary (whether by merger, consolidation, purchase of assets or otherwise) or existing at the time the entity became a Subsidiary or merged with the Issuer or the relevant Subsidiary; provided, however, that such Liens (a) are not created, incurred or assumed in connection with, or in contemplation of, such Property being acquired by the Issuer or such Subsidiary and (b) do not extend to any other Property of the Issuer or any Subsidiary; (iii) Liens arising in relation to any Project Finance Debt; (iv) Liens created for the purposes of any securitisation or similar asset backed off-balance sheet financing arrangement; ‘‘Person’’ means any individual, company, corporation, firm, partnership, joint venture, association, organisation, state or agency of a state or other entity, whether or not having separate legal personality; ‘‘Principal Financial Centre’’ means, in relation to any currency, the principal financial centre for that currency provided, however, that: (i) in relation to euro, it means the principal financial centre of such Member State of the European Communities as is selected (in the case of a payment) by the payee or (in the case of a calculation) by the Calculation Agent; and (ii) in relation to Australian dollars, it means either Sydney or Melbourne and, in relation to New Zealand dollars, it means either Wellington or Auckland; in each case as is selected (in the case of a payment) by the payee or (in the case of a calculation) by the Calculation Agent; ‘‘Project Finance Debt’’ means any indebtedness incurred in relation to any asset solely for purposes of financing the whole or any part of the acquisition, creation, construction, improvement or development of such asset where the financial institutions to whom such indebtedness is owed have recourse solely to the applicable project borrower (where such project borrower is formed solely or principally for the purpose of the relevant project) and/or to such asset (or any derivative asset thereto) or any other similar non-recourse indebtedness which is properly regarded as project finance debt; ‘‘Property’’ of any Person means all types of real, personal, tangible, intangible or mixed property (including any related contractual rights) owned by such Person whether or not included in the most recent consolidated balance sheet of such Person under Finnish GAAP; ‘‘Put Option Notice’’ means a notice which must be delivered to a Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder; ‘‘Put Option Receipt’’ means a receipt issued by a Paying Agent to a depositing Noteholder upon deposit of a Note with such Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder; ‘‘Rate of Interest’’ means the rate or rates (expressed as a percentage per annum) of interest payable in respect of the Notes specified in relevant Final Terms or calculated or determined in accordance with the provisions of these Conditions and/or the relevant Final Terms; ‘‘Redemption Amount’’ means, as appropriate, the Final Redemption Amount, the Early Redemption Amount (Tax), the Optional Redemption Amount (Call), the Optional Redemption Amount (Put), the Early Termination Amount or such other amount in the nature of a redemption amount as may be specified in, or determined in accordance with the provisions of, the relevant Final Terms;
BP-27 ‘‘Reference Banks’’ has the meaning given in the relevant Final Terms or, if none, four (or if the Principal Financial Centre is Helsinki, five) major banks selected by the Calculation Agent in the market that is most closely connected with the Reference Rate; ‘‘Reference Price’’ has the meaning given in the relevant Final Terms; ‘‘Reference Rate’’ has the meaning given in the relevant Final Terms; ‘‘Regular Period’’ means: (i) in the case of Notes where interest is scheduled to be paid only by means of regular payments, each period from and including the Interest Commencement Date to but excluding the First Interest Payment Date and each successive period from and including one Interest Payment Date to but excluding the next Interest Payment Date; (ii) in the case of Notes where, apart from the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular Date, where ‘‘Regular Date’’ means the day and month (but not the year) on which any Interest Payment Date falls; and (iii) in the case of Notes where, apart from one Interest Period other than the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular Date, where ‘‘Regular Date’’ means the day and month (but not the year) on which any Interest Payment Date falls other than the Interest Payment Date falling at the end of the irregular Interest Period; ‘‘Relevant Date’’ means, in relation to any payment, whichever is the later of (a) the date on which the payment in question first becomes due and (b) if the full amount payable has not been received in the Principal Financial Centre of the currency of payment by the Principal Paying Agent on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders; ‘‘Relevant Financial Centre’’ has the meaning given in the relevant Final Terms; ‘‘Relevant Indebtedness’’ means any Indebtedness which is in the form of or represented by any bond, note, debenture, debenture stock, loan stock, certificate or other instrument which is, or is capable of being, listed, quoted or traded on any stock exchange or in any securities market (including, without limitation, any over-the-counter market) (not being a loan or a participation in a loan or a similar instrument representing an interest in a loan); ‘‘Relevant Screen Page’’ means the page, section or other part of a particular information service (including, without limitation, Reuters) specified as the Relevant Screen Page in the relevant Final Terms, or such other page, section or other part as may replace it on that information service or such other information service, in each case, as may be nominated by the Person providing or sponsoring the information appearing there for the purpose of displaying rates or prices comparable to the Reference Rate; ‘‘Relevant Time’’ has the meaning given in the relevant Final Terms; ‘‘Reserved Matter’’ has the meaning given in Schedule 4 of the Trust Deed; ‘‘Significant Subsidiary’’ means at the relevant time any Subsidiary that, together with the Subsidiaries of such Subsidiary, is or are the owner(s) of more than 10% of the consolidated assets of the Issuer and its respective Subsidiaries as at the end of the relevant fiscal year, all as calculated in accordance with IFRS and as shown on the consolidated financial statements of the Issuer and its Subsidiaries for such fiscal year; ‘‘Specified Currency’’ has the meaning given in the relevant Final Terms; ‘‘Specified Denomination(s)’’ has the meaning given in the relevant Final Terms; ‘‘Specified Office’’ has the meaning given in the Paying Agency Agreement; ‘‘Specified Period’’ has the meaning given in the relevant Final Terms; ‘‘Subsidiary’’ means, at any particular time, a company which is then directly or indirectly controlled, or more than 50% of whose issued equity share capital (or the equivalent) is beneficially owned, by the Issuer and/or one or more of its Subsidiaries. For a company to be ‘‘controlled’’ by another means that the other (whether directly or indirectly and whether by the ownership of share capital, the possession of
BP-28 voting power, contract or otherwise) has the power to appoint and/or remove all or a majority of the members of the Board of Directors or other governing body of that company or otherwise controls or has the power to control the affairs and the policies of that company; ‘‘Talon’’ means any bearer talons appertaining to the Bearer Notes (as defined below) of any Series or, as the context may require, a specific number thereof and includes any replacement Talons issued pursuant to Condition 15; ‘‘TARGET2’’ means the Trans-European Automated Real-time Gross Settlement Express Transfer payment system which utilises a single shared platform and which was launched on 19 November 2007; ‘‘TARGET Settlement Day’’ means any day on which TARGET2 is open for the settlement of payments in euro; ‘‘Treaty’’ means the Treaty establishing the European Communities, as amended; and ‘‘Zero Coupon Note’’ means a Note specified as such in the relevant Final Terms. (b) Interpretation: In these Conditions: (i) if the Notes are Zero Coupon Notes, references to Coupons and Couponholders are not applicable; (ii) if Talons are specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Coupons shall be deemed to include references to Talons; (iii) if Talons are not specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Talons are not applicable; (iv) any reference to principal shall be deemed to include the Redemption Amount, any additional amounts in respect of principal which may be payable under Condition 10 (Redemption and Purchase) and Condition 12 (Taxation), any premium payable in respect of a Note and any other amount in the nature of principal payable pursuant to these Conditions; (v) any reference to interest shall be deemed to include any additional amounts in respect of interest which may be payable under Condition 12 (Taxation) and any other amount in the nature of interest payable pursuant to these Conditions; (vi) references to Notes being ‘‘outstanding’’ shall be construed in accordance with the Trust Deed; (vii) if an expression is stated in Condition 2 (Interpretation) to have the meaning given in the relevant Final Terms, but the relevant Final Terms give no such meaning or specify that such expression is ‘‘not applicable’’ then such expression is not applicable to the Notes; and (viii) any reference to the Paying Agency Agreement or the Trust Deed shall be construed as a reference to the Paying Agency Agreement or the Trust Deed, as the case may be, as amended and/or supplemented up to and including the Issue Date of the Notes.
3. Form, Denomination and Title (a) Form of Notes: Notes are issued in bearer form (‘‘Bearer Notes’’) or in registered form (‘‘Registered Notes’’), as specified in the Final Terms. Bearer Notes are serially numbered. Registered Notes are not exchangeable for Bearer Notes. (b) Coupons and Receipts: Interest-bearing Bearer Notes have attached thereto at the time of their initial delivery coupons (‘‘Coupons’’), presentation of which will be a prerequisite to the payment of interest save in certain circumstances specified herein. In addition, if so specified in the Final Terms, such Notes have attached thereto at the time of their initial delivery a Talon for further coupons and the expression ‘‘Coupons’’ shall, where the context so requires, include Talons. Bearer Notes, the principal amount of which is repayable by instalments (‘‘Instalment Notes’’) have attached thereto at the time of their initial delivery, payment receipts (‘‘Receipts’’) in respect of the instalments of principal. (c) Denomination of Bearer Notes: Bearer Notes are in the denomination or denominations (each of which denomination is integrally divisible by each smaller denomination) specified in the
BP-29 Final Terms. Bearer Notes of one denomination may not be exchanged for Bearer Notes of any other denomination. (d) Denomination of Registered Notes: Registered Notes are in the minimum denomination specified in the Final Terms or integral multiples thereof. (e) Title to Bearer Instruments: Title to Bearer Notes, Receipts and Coupons passes by delivery. References herein to the ‘‘Holders’’ of Bearer Notes or of Receipts or Coupons are to the bearers of such Bearer Notes or such Receipts or Coupons and the term ‘‘Noteholders’’ shall have a corresponding meaning. The Holder of any Bearer Note, Coupon or Registered Note will (except as otherwise required by applicable law or regulatory requirement) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest thereof or therein, any writing on the relevant Note or Certificate, or any theft or loss thereof) and no person shall be liable for so treating such Holder and the Issuer, the Trustee, the Paying Agents and the Registrar shall not be required to obtain proof thereof or as to the identity of the Holder. (f) Register: The Registrar will maintain a register (the ‘‘Register’’) in respect of the Notes in accordance with the provisions of the Paying Agency Agreement. In these Conditions, the ‘‘Holder’’ of a Registered Note means the person in whose name such Note is for the time being registered in the Register (or, in the case of a joint holding, the first named thereof) and ‘‘Noteholder’’ shall be construed accordingly. A certificate (each, a ‘‘Note Certificate’’) will be issued to each Noteholder in respect of its registered holding. Each Note Certificate will be numbered serially with an identifying number which will be recorded in the Register. (g) Title to Registered Notes: The Holder of each Note shall (except as otherwise required by law) be treated as the absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing on the Note Certificate relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such Note Certificate) and no person shall be liable for so treating such Holder. (h) Transfers of Registered Notes: Subject to paragraphs (f) and (g) above and paragraph (n) below, a Registered Note may be transferred upon surrender of the relevant Note Certificate, with the endorsed form of transfer duly completed, at the Specified Office of the Registrar or any Transfer Agent (including the Transfer Agent located in Luxembourg), together with such evidence as the Registrar or (as the case may be) such Transfer Agent may reasonably require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided, however, that a Registered Note may not be transferred unless the principal amount of Registered Notes transferred and (where not all of the Notes held by a Holder are being transferred) the principal amount of the balance of Registered Notes not transferred are authorised holdings. (i) Exchange of Bearer Notes for Registered Notes: If so specified in the Final Terms and subject to the provisions of Conditions 3(l) (Rule 144A Legends) to 3(m) (No Transfer), the Holder of Bearer Notes may exchange the same for the same aggregate principal amount of Registered Notes upon the terms and subject to the conditions set forth in the Paying Agency Agreement. In order to exchange a Bearer Note for a Registered Note, the Holder thereof shall surrender such Bearer Note at the specified office outside the United States of the Principal Paying Agent, the Registrar or any Transfer Agent together with a written request for the exchange. Each Bearer Note so surrendered must be accompanied by all unmatured Receipts and Coupons appertaining thereto other than the Coupon in respect of the next payment of interest falling due after the exchange date (as defined in Condition 3(j) (New Certificate)) where the exchange date would, but for the provisions of Condition 3(j) (New Certificate), occur between the Record Date (as defined in Condition 11(b)(iii) (Payments on Registered Notes)) for such payment of interest and the date on which such payment of interest falls due. (j) New Certificate: A Certificate representing each new Registered Note or Notes to be issued upon the transfer of a Registered Note or the exchange of a Bearer Note for a Registered Note will, within three Relevant Banking Days of the transfer date or, as the case may be, the exchange date be available for collection by each relevant Holder at the specified office of the Registrar or the Transfer Agent (including the Transfer Agent located in Luxembourg) (as the case
BP-30 may be) or, at the option of the Holder requesting such exchange or transfer be mailed (by uninsured post at the risk of the Holder(s) entitled thereto) to such address(es) as may be specified by such Holder. For these purposes, a form of transfer or request for exchange received by the Registrar, the Principal Paying Agent or the Transfer Agent (as the case may be) after the Record Date in respect of any payment due in respect of Registered Notes shall be deemed not to be effectively received by the Registrar, the Principal Paying Agent or the Transfer Agent (as the case may be) until the day following the due date for such payment. For the purposes of these Terms and Conditions: (i) ‘‘Relevant Banking Day’’ means a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in the place where the specified office of the Registrar or the Transfer Agent is located and, in the case only of an exchange of a Bearer Note for a Registered Note where such request for exchange is made to the Principal Paying Agent, in the place where the specified office of the Principal Paying Agent is located; (ii) the ‘‘exchange date’’ shall be the Relevant Banking Day following the day on which the relevant Bearer Note shall have been surrendered for exchange in accordance with Condition 3(i) (Exchange of Bearer Notes for Registered Notes); and (iii) the ‘‘transfer date’’ shall be the Relevant Banking Day following the day on which the relevant Registered Note shall have been surrendered for transfer in accordance with Condition 3(h) (Transfers of Registered Notes). (k) No charge for exchange or transfer: The issue of new Registered Notes on transfer or on the exchange of Bearer Notes for Registered Notes will be effected without charge by or on behalf of the Issuer, the Principal Paying Agent, the Registrar or the Transfer Agent, but upon payment by the applicant of (or the giving by the applicant of such indemnity as the Issuer, the Principal Paying Agent, the Registrar or the Transfer Agent may require in respect of) any tax, duty or other governmental charges which may be imposed in relation thereto. (l) Rule 144A Legends: Upon the transfer, exchange or replacement of Registered Notes bearing the Rule 144A legend (the ‘‘Rule 144A Legend’’) set forth in the form of the Note Certificate scheduled to the Trust Deed, the Registrar or any Transfer Agent shall deliver only Registered Notes represented by Note Certificates that also bear such legend unless either (i) such transfer, exchange or replacement occurs one or more years after the later of (1) the original issue date of such Notes or (2) the last date on which the Issuer, or any affiliate of the Issuer as notified to the Registrar or such Transfer Agent by the Issuer as provided in the following sentence, was the beneficial owner of such Notes (or any predecessor of such Notes) or (ii) there is delivered to the Registrar of such Transfer Agent an opinion reasonably satisfactory to the Issuer of counsel experienced in giving opinions with respect to questions arising under the securities laws of the United States to the effect that neither such legend nor the restrictions on transfer set forth therein are required in order to maintain compliance with the provisions of such laws. The Issuer has covenanted in the Trust Deed that it will not acquire any beneficial interest, and will cause its ‘‘affiliates’’ (as defined in paragraph (a) (1) of Rule 144 under the Securities Act of 1933, as amended (the ‘‘Securities Act’’)) not to acquire any beneficial interest, in any Registered Note represented by a Note Certificate bearing the Rule 144A Legend unless it notifies the Registrar and the Transfer Agents of such acquisition. The Registrar, the Transfer Agents and all Holders shall be entitled to rely without further investigation on any such notification (or lack thereof). (m) No transfer: No Holder may require the transfer of a Registered Note to be registered or a Bearer Note to be exchanged for a Registered Note during the period of 15 days ending on the due date for the payment of any principal or interest in respect of such Note. (n) Regulations concerning transfers and registration: All transfers of Notes and entries on the Register are subject to the detailed regulations concerning the transfer of Notes scheduled to the Paying Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Trustee and the Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any Noteholder who requests in writing a copy of such regulations. A copy of such regulations are available (free of charge) from the principal office in Luxembourg of the Luxembourg Listing Agent.
BP-31 4. Status The Notes constitute direct, general and unconditional obligations of the Issuer which will at all times rank pari passu among themselves and at least pari passu with all other present and future unsecured obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
5. Negative Pledge So long as any Note remains outstanding, the Issuer shall not, and shall procure that none of its Subsidiaries will, create or permit to subsist any Lien (other than a Permitted Lien) upon the whole or any part of its present or future undertaking, assets or revenues (including uncalled capital) to secure any Relevant Indebtedness or Guarantee of Relevant Indebtedness without (a) at the same time or prior thereto securing the Notes equally and rateably therewith to the satisfaction of the Trustee or (b) providing such other security for the Notes as the Trustee may in its absolute discretion consider to be not materially less beneficial to the interests of Noteholders or as may be approved by an Extraordinary Resolution of Noteholders.
6. Fixed Rate Note Provisions (a) Application: This Condition 6 (Fixed Rate Note Provisions) is applicable to the Notes only if the Fixed Rate Note Provisions are specified in the relevant Final Terms as being applicable. (b) Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 11 (Payments). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition 6 (Fixed Rate Note Provisions) (as well after as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Principal Paying Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment). (c) Fixed Coupon Amount: The amount of interest payable in respect of each Note for any Interest Period shall be the relevant Fixed Coupon Amount and, if the Notes are in more than one Specified Denomination, shall be the relevant Fixed Coupon Amount in respect of the relevant Specified Denomination. (d) Calculation of Interest Amount: The amount of interest payable in respect of each Note for any period for which a Fixed Coupon Amount is not specified shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction and rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of such Note divided by the Calculation Amount. For this purpose a ‘‘sub-unit’’ means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent.
7. Floating Rate Note and Index-Linked Interest Note Provisions (a) Application: This Condition 7 (Floating Rate Note and Index-Linked Interest Note Provisions) is applicable to the Notes only if the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable. (b) Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 11 (Payments). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition 7 (Floating Rate Note and Index-Linked Interest Note Provisions) (as well after as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Principal Paying Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).
BP-32 (c) Screen Rate Determination: If Screen Rate Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be determined by the Calculation Agent on the following basis: (i) if the Reference Rate is a composite quotation or customarily supplied by one entity, the Calculation Agent will determine the Reference Rate which appears on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date; (ii) in any other case, the Calculation Agent will determine the arithmetic mean of the Reference Rates which appear on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date; (iii) if, in the case of (i) above, such rate does not appear on that page or, in the case of (ii) above, fewer than two such rates appear on that page or if, in either case, the Relevant Screen Page is unavailable, the Calculation Agent will: (A) request the principal Relevant Financial Centre office of each of the Reference Banks to provide a quotation of the Reference Rate at approximately the Relevant Time on the Interest Determination Date to prime banks in the Relevant Financial Centre interbank market in an amount that is representative for a single transaction in that market at that time; and (B) determine the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested, the Calculation Agent will determine the arithmetic mean of the rates (being the nearest to the Reference Rate, as determined by the Calculation Agent) quoted by major banks in the Principal Financial Centre of the Specified Currency, selected by the Calculation Agent, at approximately 11.00 a.m. (local time in the Principal Financial Centre of the Specified Currency) on the first day of the relevant Interest Period for loans in the Specified Currency to leading European banks for a period equal to the relevant Interest Period and in an amount that is representative for a single transaction in that market at that time, and the Rate of Interest for such Interest Period shall be the sum of the Margin and the rate or (as the case may be) the arithmetic mean so determined; provided, however, that if the Calculation Agent is unable to determine a rate or (as the case may be) an arithmetic mean in accordance with the above provisions in relation to any Interest Period, the Rate of Interest applicable to the Notes during such Interest Period will be the sum of the Margin and the rate (or as the case may be) the arithmetic mean last determined in relation to the Notes in respect of a preceding Interest Period. (d) ISDA Determination: If ISDA Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be the sum of the Margin and the relevant ISDA Rate where ‘‘ISDA Rate’’ in relation to any Interest Period means a rate equal to the Floating Rate (as defined in the ISDA Definitions) that would be determined by the Calculation Agent under an interest rate swap transaction if the Calculation Agent were acting as Calculation Agent for that interest rate swap transaction under the terms of an agreement incorporating the ISDA Definitions and under which: (i) the Floating Rate Option (as defined in the ISDA Definitions) is as specified in the relevant Final Terms; (ii) the Designated Maturity (as defined in the ISDA Definitions) is a period specified in the relevant Final Terms; and (iii) the relevant Reset Date (as defined in the ISDA Definitions) is either (A) if the relevant Floating Rate Option is based on the London inter-bank offered rate (LIBOR) for a currency, the first day of that Interest Period or (B) in any other case, as specified in the relevant Final Terms. (e) Index-Linked Interest: If the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable, the Rate(s) of Interest applicable to the Notes for each Interest Period will be determined in the manner specified in the relevant Final Terms.
BP-33 (f) Maximum or Minimum Rate of Interest: If any Maximum Rate of Interest or Minimum Rate of Interest is specified in the relevant Final Terms, then the Rate of Interest shall in no event be greater than the maximum or be less than the minimum so specified. (g) Calculation of Interest Amount: The Calculation Agent will, as soon as practicable after the time at which the Rate of Interest is to be determined in relation to each Interest Period, calculate the Interest Amount payable in respect of each Note for such Interest Period. The Interest Amount will be calculated by applying the Rate of Interest for such Interest Period to the Calculation Amount, multiplying the product by the relevant Day Count Fraction rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of the relevant Note divided by the Calculation Amount. For this purpose, a ‘‘sub-unit’’ means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent. (h) Calculation of other amounts: If the relevant Final Terms specify that any other amount is to be calculated by the Calculation Agent, the Calculation Agent will, as soon as practicable after the time or times at which any such amount is to be determined, calculate the relevant amount. The relevant amount will be calculated by the Calculation Agent in the manner specified in the relevant Final Terms. (i) Publication: The Calculation Agent will cause each Rate of Interest and Interest Amount determined by it, together with the relevant Interest Payment Date, and any other amount(s) required to be determined by it together with any relevant payment date(s) to be notified to the Paying Agents and each stock exchange (if any) on which the Notes are then listed as soon as practicable after such determination but (in the case of each Rate of Interest, Interest Amount and Interest Payment Date) in any event not later than the first day of the relevant Interest Period. Notice thereof shall also promptly be given to the Noteholders and the Luxembourg Stock Exchange. The Calculation Agent will be entitled to recalculate any Interest Amount (on the basis of the foregoing provisions) without notice in the event of an extension or shortening of the relevant Interest Period. If the Calculation Amount is less than the minimum Specified Denominations, the Calculation Agent shall not be obliged to publish each Interest Amount but instead may publish only the Calculation Amount and the Interest Amount in respect of a Note having the minimum Specified Denomination. (j) Notifications etc: All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes of this Condition by the Calculation Agent will (in the absence of manifest error) be binding on the Issuer, the Trustee, the Paying Agents, the Noteholders and the Couponholders and (subject as aforesaid) no liability to any such Person will attach to the Calculation Agent in connection with the exercise or non-exercise by it of its powers, duties and discretions for such purposes.
8. Zero Coupon Note Provisions (a) Application: This Condition 8 (Zero Coupon Note Provisions) is applicable to the Notes only if the Zero Coupon Note Provisions are specified in the relevant Final Terms as being applicable. (b) Late payment on Zero Coupon Notes: If the Redemption Amount payable in respect of any Zero Coupon Note is improperly withheld or refused, the Redemption Amount shall thereafter be an amount equal to the sum of: (i) the Reference Price; and (ii) the product of the Accrual Yield (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Principal Paying Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).
9. Dual Currency Note Provisions (a) Application: This Condition 9 (Dual Currency Note Provisions) is applicable to the Notes only if the Dual Currency Note Provisions are specified in the relevant Final Terms as being applicable.
BP-34 (b) Rate of Interest: If the rate or amount of interest falls to be determined by reference to an exchange rate, the rate or amount of interest payable shall be determined in the manner specified in the relevant Final Terms.
10. Redemption and Purchase (a) Scheduled redemption: Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their Final Redemption Amount on the Maturity Date, subject as provided in Condition 11 (Payments). (b) Redemption for tax reasons: The Notes may be redeemed at the option of the Issuer in whole, but not in part: (i) at any time (if neither the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable); or (ii) on any Interest Payment Date (if the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable), on giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable) and at their Early Redemption Amount (Tax), together with interest accrued (if any) to the date fixed for redemption, if: (1) the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 12 (Taxation) as a result of any change in, or amendment to, the laws or regulations of the Republic of Finland or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, (including a holding by a court of competent jurisdiction) which change or amendment becomes effective on or after the date of issue of the first Tranche of the Notes; and (2) such obligation cannot be avoided by the Issuer taking reasonable measures available to it provided, however, that no such notice of redemption shall be given earlier than: (1) where the Notes may be redeemed at any time, 90 days prior to the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due; or (2) where the Notes may be redeemed only on an Interest Payment Date, 60 days prior to the Interest Payment Date occurring immediately before the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver or procure that there is delivered to the Trustee (1) a certificate signed by two directors of the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred and (2) an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts as a result of such change or amendment. Upon the expiry of any such notice as is referred to in this Condition 10(b) (Redemption for tax reasons), the Issuer shall be bound to redeem the Notes in accordance with this Condition 10(b) (Redemption for tax reasons). (c) Redemption at the option of the Issuer: If the Call Option is specified in the relevant Final Terms as being applicable, the Notes may be redeemed at the option of the Issuer in whole or, if so specified in the relevant Final Terms, in part on any Optional Redemption Date (Call) at the relevant Optional Redemption Amount (Call) on the Issuer’s giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable and shall oblige the Issuer to redeem the Notes or, as the case may be, the Notes specified in such notice on the relevant Optional Redemption Date (Call) at the Optional Redemption Amount (Call) plus accrued interest (if any) to such date). (d) Partial redemption: If the Notes are to be redeemed in part only on any date in accordance with Condition 10(c) (Redemption at the option of the Issuer), the Notes to be redeemed shall be selected by the drawing of lots in such place as the Trustee in the case of Bearer Notes approves and in such manner as the Trustee considers appropriate, subject to compliance with applicable law and the rules of each stock exchange, listing authority and/or quotation system on which the Notes have then been admitted to listing,
BP-35 trading and/or quotation, and the notice to Noteholders referred to in Condition 10(c) (Redemption at the option of the Issuer) shall specify the serial numbers of the Notes so to be redeemed and, in the case of Registered Notes, each Note shall be redeemed in part in the proportion which the aggregate principal amount of the outstanding Notes to be redeemed on the relevant date stipulated in Condition 10(c) bears to the aggregate principal amount of outstanding Notes on such date. If any Maximum Redemption Amount or Minimum Redemption Amount is specified in the relevant Final Terms, then the Optional Redemption Amount (Call) shall in no event be greater than the maximum or be less than the minimum so specified. (e) Redemption at the option of Noteholders: If the Put Option is specified in the relevant Final Terms as being applicable, the Issuer shall, at the option of the Holder of any Note redeem such Note on the Optional Redemption Date (Put) specified in the relevant Put Option Notice at the relevant Optional Redemption Amount (Put) together with interest (if any) accrued to such date. In order to exercise the option contained in this Condition 10(e) (Redemption at the option of Noteholders), the Holder of a Note must, not less than 30 nor more than 60 days before the relevant Optional Redemption Date (Put), deposit with any Paying Agent such Note together with all unmatured Coupons relating thereto and a duly completed Put Option Notice in the form obtainable from any Paying Agent. The Paying Agent with which a Note is so deposited shall deliver a duly completed Put Option Receipt to the depositing Noteholder. No Note, once deposited with a duly completed Put Option Notice in accordance with this Condition 10(e) (Redemption at the option of Noteholders), may be withdrawn; provided, however, that if, prior to the relevant Optional Redemption Date (Put), any such Note becomes immediately due and payable or, upon due presentation of any such Note on the relevant Optional Redemption Date (Put), payment of the redemption moneys is improperly withheld or refused, the relevant Paying Agent shall mail notification thereof to the depositing Noteholder at such address as may have been given by such Noteholder in the relevant Put Option Notice and shall hold such Note at its Specified Office for collection by the depositing Noteholder against surrender of the relevant Put Option Receipt. For so long as any outstanding Note is held by a Paying Agent in accordance with this Condition 10(e) (Redemption at the option of Noteholders), the depositor of such Note and not such Paying Agent shall be deemed to be the Holder of such Note for all purposes. (f) No other redemption: The Issuer shall not be entitled to redeem the Notes otherwise than as provided in paragraphs (a) to (e) above. (g) Early redemption of Zero Coupon Notes: Unless otherwise specified in the relevant Final Terms, the Redemption Amount payable on redemption of a Zero Coupon Note at any time before the Maturity Date shall be an amount equal to the sum of: (i) the Reference Price; and (ii) the product of the Accrual Yield (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) the date fixed for redemption or (as the case may be) the date upon which the Note becomes due and payable. Where such calculation is to be made for a period which is not a whole number of years, the calculation in respect of the period of less than a full year shall be made on the basis of such Day Count Fraction as may be specified in the Final Terms for the purposes of this Condition 10(g) (Early redemption of Zero Coupon Notes) or, if none is so specified, a Day Count Fraction of 30E/360. (h) Purchase: The Issuer or any of its respective Subsidiaries may at any time purchase Notes in the open market or otherwise and at any price, provided that all unmatured Coupons and Receipts are purchased therewith.
11. Payments (a) Payments on Bearer Notes: (i) This Condition 11(a) (Payments on Bearer Notes) is applicable in relation to Notes in bearer form. (ii) Payment of amounts (other than interest) due in respect of Bearer Notes will be made against presentation and (save in the case of partial payment) surrender of the relevant Bearer Notes at the specified office of any of the Paying Agents.
BP-36 (iii) Payment of amounts in respect of interest on Bearer Notes will be made: (A) in the case of Notes without Coupons attached thereto at the time of their initial delivery, against presentation of the relevant Notes at the specified office of any of the Paying Agents outside (unless Condition 11(a)(iv) applies) the United States; and (B) in the case of Notes delivered with Coupons attached thereto at the time of their initial delivery, against surrender of the relevant Coupons or, in the case of interest due otherwise than on a scheduled date for the payment of interest, against presentation of the relevant Notes, in either case at the specified office of any of the Paying Agents outside (unless Condition 11(a)(iv) applies) the United States. (iv) Payments of amounts due in respect of interest on the Notes and exchanges of Talons for Coupon sheets in accordance with Condition 11(a)(vii) will not be made at the specified office of any Paying Agent in the United States (as defined in the United States Internal Revenue Code and Regulations thereunder) unless (A) payment in full of amounts due in respect of interest on such Notes when due or, as the case may be, the exchange of Talons at all the specified offices of the Paying Agents outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions and (B) such payment or exchange is permitted by applicable United States law without involving adverse tax consequences to the Issuer as certified to the Trustee by the Issuer. If paragraphs (A) and (B) of the previous sentence apply, the Issuer shall forthwith appoint a further Paying Agent with a specified office in New York City in respect of the relevant Series of Notes to which paragraphs (A) and (B) apply. (v) If the due date for payment of any amount due in respect of any Note is not a Relevant Financial Centre Day and a Local Banking Day (each as defined in Condition 11(c)(iii) (Payments—General Provisions)), then the Holder thereof will not be entitled to payment thereof until the next day which is such a day, (or as otherwise specified in the Final Terms) and from that next day and thereafter will be entitled to receive payment by cheque on any Local Banking Day, and will be entitled to payment by transfer to a designated account on any day which is a Local Banking Day, a Relevant Financial Centre Day and a day on which commercial banks and foreign exchange markets settle payments in the relevant currency in the place where the relevant designated account is located and no further payment on account of interest or otherwise shall be due in respect of such delay or adjustment unless there is a subsequent failure to pay in accordance with these Conditions in which event interest shall continue to accrue as provided in Condition 6(b) (Fixed Rate Note Provisions— Accrual of interest) or, if appropriate, Condition 7(b) (Floating Rate Note and Index-Linked Interest Note Provisions—Accrual of Interest). (vi) Each Note initially delivered with Coupons or Talons attached thereto should be presented and, save in the case of partial payment of the Redemption Amount, surrendered for final redemption together with all unmatured Coupons and Talons relating thereto, failing which: (A) if the Final Terms specify that this paragraph (A) of Condition 11(a)(vi) is applicable (and, in the absence of specification, this paragraph (A) shall apply to Notes which bear interest at a fixed rate or rates, or in fixed amounts) and subject as hereinafter provided, the amount of any missing unmatured Coupons (or, in the case of a payment not being made in full, that portion of the amount of such missing Coupon which the Redemption Amount paid bears to the total Redemption Amount due) (excluding, for this purpose, but without prejudice to paragraph (C) below, Talons) will be deducted from the amount otherwise payable on such final redemption, the amount so deducted being payable against surrender of the relevant Coupon at the specified office of any of the Paying Agents at any time within ten years of the Relevant Date applicable to payment of such Redemption Amount; (B) if the Final Terms specify that this paragraph (B) of Condition 11(a)(vi) is applicable (and, in the absence of specification, this paragraph (B) shall apply to Notes which bear interest at a floating rate or rates or in variable amounts) all unmatured Coupons (excluding, for this purpose, but without prejudice to paragraph (C) below, Talons) relating to such Notes (whether or not surrendered therewith) shall become void and no payment shall be made thereafter in respect of them; and
BP-37 (C) in the case of Notes initially delivered with Talons attached thereto, all unmatured Talons (whether or not surrendered therewith) shall become void and no exchange for Coupons shall be made thereafter in respect of them. The provisions of paragraph (A) of this Condition 11(a)(vi) (Payments on Bearer Notes) notwithstanding, if any Notes should be issued with a maturity date and an Interest Rate or Rates such that, on the presentation for payment of any such Note without any unmatured Coupons attached thereto or surrendered therewith, the amount required by paragraph (A) to be deducted would be greater than the Redemption Amount otherwise due for payment, then, upon the due date for redemption of any such Note, such unmatured Coupons (whether or not attached) shall become void (and no payment shall be made in respect thereof) as shall be required so that, upon application of the provisions of paragraph (A) in respect of such Coupons as have not so become void, the amount required by paragraph (A) to be deducted would not be greater than the Redemption Amount otherwise due for payment. Where the application of the foregoing sentence requires some but not all of the unmatured Coupons relating to a Note to become void, the relevant Paying Agent shall determine which unmatured Coupons are to become void, and shall select for such purpose Coupons maturing on later dates in preference to Coupons maturing on earlier dates. (vii) In relation to Notes initially delivered with Talons attached thereto, on or after the due date for the payment of interest on which the final Coupon comprised in any Coupon sheet matures, the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent outside (unless Condition 11(a)(iv) applies) the United States in exchange for a further Coupon Sheet (including any appropriate further Talon), subject to the provisions of Condition 14 below. Each Talon shall, for the purpose of these Terms and Conditions, be deemed to mature on the Interest Payment Date on which the final Coupon comprised in the relative Coupon sheet matures. (b) Payments on Registered Notes: (i) This Condition 11(b) (Payments on Registered Notes) is applicable in relation to Notes in registered form. (ii) Payment of the Redemption Amount (together with accrued interest) due in respect of Registered Notes will be made against presentation and, save in the case of partial payment of the Redemption Amount, surrender of the relevant Certificate at the specified office of the Registrar or any Transfer Agent. If the due date for payment of the Redemption Amount of any Registered Note is not a Relevant Financial Centre Day as defined in Condition 11(c)(iii) (Payments—General Provisions)), then the Holder thereof will not be entitled to payment thereof until the next day which is such a day, and from that next day and thereafter will be entitled to receive payment by cheque on any Local Banking Day, and will be entitled to payment by transfer to a designated account on any day which is a Local Banking Day, a Relevant Financial Centre Day and a day on which commercial banks and foreign exchange markets settle payment in the relevant currency in the place where the relevant designated account is located and no further payment on account of interest or otherwise shall be due in respect of such postponed payment unless there is a subsequent failure to pay in accordance with these Terms and Conditions in which event interest shall continue to accrue as provided in Condition 6(b) (Fixed Rate Note Provisions—Accrual of Interest) or, as appropriate Condition 7(b) (Floating Rate Note and Index-Linked Interest Note Provisions—Accrual of Interest). (iii) Payment of amounts (whether principal, interest or otherwise) due (other than the Redemption Amount) in respect of Registered Notes will be paid to the Holder thereof (or, in the case of joint Holders, the first-named) as appearing in the Register as at opening of business (local time in the place of the specified office of the Registrar) on the fifteenth Relevant Banking Day (as defined in Condition 3(j) (New Certificate) before the due date for such payment (the ‘‘Record Date’’). (iv) Notwithstanding the provisions of Condition 11(c)(ii) (Payments—General Provisions), payment of amounts (whether principal, interest or otherwise) due (other than the Redemption Amount) in respect of Registered Notes will be made in the currency in which such amount is due by cheque and posted to the address (as recorded in the Register) of the
BP-38 Holder thereof (or, in the case of joint Holders, the first-named) on the Relevant Banking Day (as defined in Condition 3(j) (New Certificate) not later than the relevant due date for payment unless prior to the relevant Record Date the Holder thereof (or, in the case of joint Holders, the first-named) has applied to the Registrar and the Registrar has acknowledged such application for payment to be made to a designated account denominated in the relevant currency (in the case of payment in Japanese Yen to a non-resident of Japan, a non-resident account) in which case payment shall be made on the relevant due date for payment by transfer to such account. In the case of payment by transfer to an account, if the due date for any such payment is not a Relevant Financial Centre Day, then the Holder thereof will not be entitled to payment thereof until the first day thereafter which is a Relevant Financial Centre Day and a day on which commercial banks and foreign exchange markets settle payment in the relevant currency in the place where the relevant designated account is located and no further payment on account of interest or otherwise shall be due in respect of such postponed payment unless there is a subsequent failure to pay in accordance with these Terms and Conditions in which event interest shall continue to accrue as provided in Condition 6(b) (Fixed Rate Note Provisions—Accrual of Interest) or, as appropriate, Condition 7(b) (Floating Rate Note and Index-Linked Interest Note Provisions—Accrual of Interest). (c) Payments—General Provisions: (i) Save as otherwise specified in these Conditions, this Condition 11(c) (Payments—General Provisions) is applicable in relation to Notes whether in bearer or in registered form. (ii) payment of amounts due (whether principal, interest or otherwise) in respect of Notes or Coupons will be made in the currency in which such amount is due (A) by cheque or (B) at the option of the payee, by transfer to an account denominated in the relevant currency specified by the payee. Payments will, without prejudice to the provisions of Condition 12 (Taxation), be subject in all cases to any applicable fiscal or other laws and regulations. (iii) For the purposes of these Conditions: (A) ‘‘Relevant Financial Centre Day’’ means, in the case of any currency other than euro, a day on which commercial banks and foreign exchange markets settle payments in the Relevant Financial Centre and in any other Relevant Financial Centre specified in the Final Terms or, in the case of payments in euro, a TARGET Settlement Day; and (B) ‘‘Local Banking Day’’ means a day (other than a Saturday or Sunday) on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in the place of presentation of the relevant Note or Coupon as the case may be. (iv) No commissions or expenses shall be charged to the holders of Notes or Coupons in respect of such payments.
12. Taxation (a) Gross up: All payments of principal and interest in respect of the Notes and the Coupons by or on behalf of the Issuer shall be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by the Republic of Finland or any political subdivision therein or any authority thereof or therein having power to tax, unless the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law. In that event, the Issuer shall pay such additional amounts as will result in the receipt by the Noteholders and the Couponholders after such withholding or deduction of such amounts as would have been received by them if no such withholding or deduction had been required, except that no such additional amounts shall be payable in respect of any Note or Coupon: (i) held by or on behalf of a Noteholder or Couponholder which is liable to such taxes, duties, assessments or governmental charges in respect of such Note or Coupon by reason of its having some connection with the jurisdiction by which such taxes, duties, assessments or charges have been imposed other than the mere holding of such Note or Coupon; or
BP-39 (ii) where the relevant Note or Coupon is presented or surrendered for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder of such Note or Coupon would have been entitled to such additional amounts if it had presented or surrendered such Note or Coupon for payment on the last day of such period of 30 days; or (iii) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive; or (iv) held by or on behalf of a Noteholder or Couponholder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in an EU country. (b) Taxing jurisdiction: If the Issuer becomes subject at any time to any taxing jurisdiction other than the Republic of Finland, references in these Conditions to the Republic of Finland shall be construed as references to the Republic of Finland and/or such other jurisdiction. (c) Additional Amounts: Any reference in these Terms and Conditions to ‘‘principal’’ and/or ‘‘interest’’ in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under Conditions 10, 11 and 12 or under any undertakings given in addition to or in substitution for this Condition pursuant to the Trust Deed. Unless the context otherwise requires, any reference in these Terms and Conditions to ‘‘principal’’ shall include any premium payable in respect of any Note, any Instalment Amount or Redemption Amount and any other amounts in the nature of principal payable pursuant to these Terms and Conditions and ‘‘interest’’ shall include all amounts payable pursuant to Conditions 6 and 7 and any other amounts in the nature of interest payable pursuant to these Terms and Conditions.
13. Events of Default If any of the following events occurs and is continuing (each an ‘‘Event of Default’’), then the Trustee at its discretion may, and if so requested in writing by the holders of at least one-quarter in principal amount of the outstanding Notes of such Series or if so directed by an Extraordinary Resolution of the Holders of such Series shall (subject in the case of the happening of any of the events mentioned in paragraphs (b) to (f) below (inclusive) and, in relation to any Significant Subsidiary, paragraphs (b) to (h) below (inclusive) to the Trustee having certified in writing that the happening of such event is, in its opinion, materially prejudicial to the interests of the Holders of such Series and in all cases to the Trustee having been indemnified or provided with security to its satisfaction) give written notice to the Issuer that the Notes of such Series are, and they shall accordingly thereby become, immediately due and repayable at their outstanding principal amount (or as otherwise specified in the Final Terms), together with accrued interest without further action or formality: (a) default in the payment of any instalment of principal or interest upon any of the Notes as and when the same shall become due and payable and, in the case of a default in the payment of any instalment of interest, continuance of such default for a period of 30 days; or (b) failure or default on the part of the Issuer duly to observe or perform any other of the obligations, covenants or agreements on the part of the Issuer contained in the Trust Deed and the Conditions and where such failure has remained unremedied for a period of 45 days after the date on which the Trustee has given written notice to the Issuer specifying such failure, stating that such notice is a ‘‘Notice of Default’’ under the Notes and demanding that the Issuer remedy the same; or (c) execution of an unappealable judgment or arbitral award is sought or enforced against any part of the property, assets or revenue of the Issuer or any Significant Subsidiary incorporated in the Republic of Finland; or (d) subject to Condition 23, the Issuer or any Significant Subsidiary ceases to carry on the business it carried on at the date of issuance of such Series or enters into a new or unrelated business which is not permitted by the constitutive documents of the Issuer or its Significant Subsidiary as in effect as at the date of issuance of such Series; or
BP-40 (e) at any time any act, condition or thing required to be done, fulfilled or performed in order (i) to enable the Issuer lawfully to enter into, exercise its respective rights and perform and comply with its respective obligations expressed to be assumed under the Notes (ii) to ensure that those obligations expressed to be assumed are legal, valid and binding, and (iii) to make the Notes and the Trust Deed admissible in evidence in the Republic of Finland, and/or England is not done, fulfilled or performed; or (f) any Indebtedness of the Issuer or any Subsidiary in the aggregate outstanding principal amount of US$20,000,000 or more or its equivalent in any other currency or currencies either (i) becoming due and payable prior to the due date for payment thereof by reason of acceleration thereof following default by the Issuer or any Subsidiary or (ii) not being repaid at, and remaining unpaid after, maturity as extended by the period of grace, if any, applicable thereto, or any guarantee given by the Issuer or any Subsidiary in respect of Indebtedness of any other person in the aggregate outstanding principal amount of US$20,000,000 or more or its equivalent in any other currency or currencies not being honoured when, and remaining dishonoured after becoming, due and called (except that, in the cases of (i) and (ii) hereof, it shall not be an Event of Default if such Indebtedness has not been paid as a result of a bona fide dispute which is being contested in good faith and by appropriate proceedings and in respect of which sufficient and proper reserves in cash or other readily recognisable liquid assets have been made in accordance with IFRS); or (g) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Issuer or any Significant Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking reorganisation, arrangement, adjustment or composition of or in respect of the Issuer or any Significant Subsidiary under any Bankruptcy Law, or appointing a receiver, liquidator, administrator, assignee, trustee, sequestrator (or other similar official) of the Issuer or any Significant Subsidiary under any Bankruptcy Law, or appointing a receiver, liquidator, administrator, assignee, trustee, sequestrator (or other similar official) of the Issuer or any Significant Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order is unstayed and in effect for a period of 60 consecutive days; or (h) the institution by the Issuer or any Significant Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganisation or relief under any Bankruptcy Law or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Issuer or any Significant Subsidiary or of any substantial (in the opinion of the Trustee) part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due; or (i) the Issuer is unable to pay its Indebtedness as it falls due, commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its Indebtedness or makes a general assignment for the benefit of a composition with its creditors. The Trust Deed provides that, in the absence of manifest error, the Trustee is entitled to rely on a certificate of the Auditors (as defined in the Trust Deed) or a certificate signed by two Authorised Signatories (as defined in the Trust Deed) certifying that in their opinion a Subsidiary is or is not or was or was not at any particular time or during any particular period a Significant Subsidiary.
14. Prescription Claims for principal shall become void unless the relevant Notes are presented for payment within ten years of the appropriate Relevant Date. Claims for interest shall become void unless the relevant Coupons are presented for payment within five years of the appropriate Relevant Date.
15. Replacement of Notes and Coupons If any Note, Coupon, Receipt or Talon is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Principal Paying Agent or any Paying Agents (in the case of Bearer Notes, Coupons, Receipts and Talons) or of the Registrar or any Transfer Agent (in the case of Registered
BP-41 Notes) (each a ‘‘Replacement Agent’’), subject to all applicable laws and the requirements of any stock exchange, listing authority and/or quotation system on which the Notes have then been admitted to listing, trading and/or quotation, upon payment by the claimant of all expenses incurred in connection with such replacement and upon such terms as to evidence, security, indemnity and otherwise as the Issuer and the Replacement Agent may require. Mutilated or defaced Notes, Note Certificates, Coupons, Receipts and Talons must be surrendered before replacements will be delivered therefor.
16. The Paying Agents, the Registrar, the Transfer Agents and the Calculation Agent The initial Paying Agents, Registrar and Transfer Agents and their respective initial specified offices are specified below. The Calculation Agent in respect of any Notes shall be specified in the Final Terms. The Issuer reserves the right at any time (with the prior written approval of the Trustee) to vary or terminate the appointment of any Paying Agent (including the Principal Paying Agent), the Registrar, any Transfer Agent or the Calculation Agent and to appoint additional or other Paying Agents, another Registrar, additional or other Transfer Agents or another Calculation Agent provided however that it will at all times maintain (i) a Principal Paying Agent, (ii) in the case of Registered Notes, a Registrar (iii) so long as the Notes are admitted to listing, trading and/or quotation by any stock exchange, listing authority and/or quotation system, a Paying Agent, a Registrar and Transfer Agent each with a specified office in such place as may be required by the rules of such stock exchange, listing authority and/or quotation system (iv) in the circumstance described in Condition 11(a)(iv) (Payments on Bearer Notes), a Paying Agent with a specified office in New York City, and (v) a Calculation Agent where required by the Conditions applicable to any Notes (in the case of (i), (ii) and (iii) with a specified office located in such place (if any) as may be required by these Conditions). The Issuer undertakes that it will ensure that it maintains a paying agent in an EU country that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive. The Paying Agents, the Registrar, the Transfer Agents and the Calculation Agent reserve the right (with the prior written approval of the Trustee) at any time to change their respective specified offices to some other specified office in the same city. Notice of all changes in the identities or specified offices of any Paying Agent, the Registrar, any Transfer Agent or the Calculation Agent will be given promptly by the Issuer to the Trustee and the Holders in accordance with Condition 21 (Notices). The Paying Agents, the Registrar, the Transfer Agents and the Calculation Agent act solely as agents of the Issuer or, following the occurrence of an Event of Default or a Potential Event of Default (as defined in the Trust Deed), the Trustee and, save as provided in the Paying Agency Agreement or any other agreement entered into with respect to their appointment, do not assume any obligations towards or relationship of agency or trust for any Holder of any Note or Coupon and each of them shall only be responsible for the performance of the duties and obligations expressly imposed upon it in the Paying Agency Agreement or other agreement entered into with respect to its appointment or incidental thereto.
17. Enforcement At any time after the occurrence of an Event of Default, the Trustee may, at its discretion and without further notice, institute such proceedings against the Issuer as it may think fit to enforce the terms of the Trust Deed and the Notes, but it need not take any such proceedings unless (i) it shall have been so directed by an Extraordinary Resolution or so requested in writing by Holders holding at least one-quarter in principal amount of Notes outstanding, and (ii) it shall have been indemnified and/or secured to its satisfaction. No Holder, Couponholder or Receiptholder may proceed directly against the Issuer, unless the Trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing.
18. The Trustee The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility and to be paid its costs and expenses in priority to the claims of the Noteholders, Receiptholders or Couponholders. The Trustee is entitled to enter into business transactions with the Issuer and any entity related to the Issuer without accounting for any profit. In the exercise of its powers and discretions under these Conditions and the Trust Deed, the Trustee will have regard to the interests of the Noteholders as a class and will not be responsible for any
BP-42 consequence for individual Noteholders or Couponholders as a result of such holders being connected in any way with a particular territory or taxing jurisdiction.
19. Meetings of Noteholders; Modification and Waiver (a) Meetings of Noteholders: The Trust Deed contains provisions for convening meetings of the Holders of the Notes of any Series to consider matters relating to the Notes, including the modification of any provision of these Conditions or the Trust Deed. Any such modification may be made if sanctioned by an Extraordinary Resolution. Such a meeting may be convened by the Trustee, the Issuer or by the Trustee upon the request in writing of the Holders of the Notes of any Series holding not less than one-tenth of the aggregate principal amount of such outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary Resolution will be two or more persons holding or representing one more than half of the aggregate principal amount of the outstanding Notes of such Series or, at any adjourned meeting, two or more persons being or representing Holders of Notes of such Series whatever the principal amount of the Notes of such Series held or represented; provided, however, that any proposal relating to a Reserved Matter may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which two or more persons holding or representing not less than three-quarters or, at any adjourned meeting, one quarter of the aggregate principal amount of the outstanding Notes of such Series form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Holders of the Notes of such Series, whether present or not. In addition, a resolution in writing signed by or on behalf of all Noteholders who for the time being are entitled to receive notice of a meeting of Noteholders under the Trust Deed will take effect as if it were an Extraordinary Resolution. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. (b) Modification: The Trustee may (subject to certain exceptions) without the consent of the Holders of the Notes or the Coupons or Receipts appertaining thereto (i) agree to any modification of these Conditions or of the Trust Deed (other than in respect of Reserved Matters (as defined in terms of the Trust Deed)) which, in any case, in the opinion of the Trustee, is not materially prejudicial to the interests of the Holders of such Notes or is of a formal, minor, or technical nature or which is made to correct a manifest error, or (ii) waive or authorise any breach or proposed breach by the Issuer of any of the provisions of these Conditions applicable to such Notes or the Trust Deed or determine that an Event of Default or a Potential Event of Default shall not be treated as such, provided that in either case, in the Trustee’s opinion, the interests of the Holders of such Notes will not be materially prejudiced thereby. Any such modification, waiver, authorisation or determination shall be binding on the Holders of such Notes and, unless the Trustee agrees otherwise, shall be notified to the Holders of such Notes as soon as practicable thereafter. In connection with the exercise of its powers, trusts, authorities or discretions (including but not limited to, those in relation to any proposed modification, waiver, authorisation or determination as aforesaid) in relation to any Series of Notes, the Trustee shall have regard to the interest of the Holders of such Notes as a class and, in particular, but without prejudice to the generality of the foregoing, shall not have regard to the consequences of such exercise for individual Holders resulting from their being, for any purpose, domiciled or resident in, or otherwise connected with, or subject to any jurisdiction of, any particular territory. No Holder of a Note, Coupon or Receipt shall be entitled to claim from the Issuer any indemnification or payment in respect of any tax consequence of any such substitution upon individual Holders except to the extent already provided for in Condition 12 (Taxation) and/or any undertaking given in addition to, or in substitution for, Condition 12 (Taxation).
20. Further Issues The Issuer may from time to time, without the consent of the Noteholders create and issue further Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes of the Issuer.
21. Notices (a) To Holders of Bearer Notes: Notices to Holders of Bearer Notes will, save where another means of effective communication has been specified herein or in the Final Terms, be deemed to be validly given if (i) published in a leading daily newspaper having general circulation in London (which is expected to be the Financial Times) and (ii) in the case of any Notes which are admitted to trading on the regulated
BP-43 market of the Luxembourg Stock Exchange (so long as such Notes are admitted to trading on the regulated market of the Luxembourg Stock Exchange and the rules of that exchange so require), in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu) or (in the case of (i) or (ii)), if such publication is not practicable in the opinion of the Trustee, if published in a leading English language daily newspaper having general circulation in Europe approved by the Trustee. The Issuer shall also ensure that notices are duly published in compliance with the requirements of each stock exchange, listing authority and/or quotation system on which the Notes have been admitted to listing, trading and/or quotation. Any notice so given will be deemed to have been validly given on the date of first such publication (or, if required to be published in more than one newspaper, on the first date on which publication shall have been made in all the required newspapers). Holders of Coupons will be deemed for all purposes to have notice of the contents of any notice given to Holders of Bearer Notes in accordance with this Condition. (b) To Holders of Registered Notes: Notices to Holders of Registered Notes will be deemed to be validly given if sent by first class mail (or equivalent) or (if posted to an overseas address) by air mail to them (or, in the case of joint Holders, to the first-named in the Register) at their respective addresses as recorded in the Register, and will be deemed to have been validly given on the fourth weekday after the date of such mailing or, if posted from another country, on the fifth such day. If, at the relevant time, it is a requirement of applicable law or regulations and with respect to Registered Notes admitted to trading on the regulated market of the Luxembourg Stock Exchange, any notices to Holders shall also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu) or, in either case, if such publication is not practicable, in a leading English language newspaper having general circulation in Europe. Any such notice shall be deemed to have been validly given only after the date of such publication.
22. Rounding For the purposes of any calculations referred to in these Conditions (unless otherwise specified in these Conditions or the relevant Final Terms), (a) all percentages resulting from such calculations will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (with 0.000005% being rounded up to 0.00001%), (b) all United States dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one half cent being rounded up), (c) all Japanese Yen amounts used in or resulting from such calculations will be rounded downwards to the next lower whole Japanese Yen amount, and (d) all amounts denominated in any other currency used in or resulting from such calculations will be rounded to the nearest two decimal places in such currency, with 0.005 being rounded upwards.
23. Consolidation, Merger and Sale of Assets The Issuer may, without the consent of the Noteholders, consolidate with, or merge into, or sell, transfer, lease or convey its assets substantially as an entirety to any other entity, provided that the Issuer has certified to the Trustee that (i) any successor entity expressly assumes the obligations of the Issuer under the Notes and any Coupons or the Trust Deed (as applicable) including any additional amounts (as referred to in Condition 12(c)), and (ii) after giving effect to the transaction, no Event of Default (as defined in Condition 13) and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing. In the case of an assumption by a successor entity of the Issuer’s obligation under the Notes and any Coupons to pay such additional amounts, references in Condition 12(a) or (b) to ‘‘the Republic of Finland’’ shall be deemed to refer to the jurisdiction in which such successor entity is organised.
24. Contracts (Rights of Third Parties) Act 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.
25. Governing Law and Jurisdiction 25.1 Governing Law: The Trust Deed, the Notes and all non-contractual obligations arising out of or in connection with the Notes or the Trust Deed are governed by, and shall be construed in accordance with, English law.
BP-44 25.2 Jurisdiction: The Issuer has in the Trust Deed (i) submitted irrevocably to the exclusive jurisdiction of the courts of England for the purposes of settling any dispute (a ‘‘Dispute’’) arising out of or in connection with the Trust Deed or the Notes (including a dispute relating to the existence, validity, cancellation (in the case of the Notes) or termination (in the case of the Trust Deed) or any non-contractual obligation arising out of or in connection with the Notes or the Trust Deed) or the consequences of their nullity; (ii) agreed that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary; (iii) agreed that the submission to the courts of England (as described in (i) above) is for the benefit of the Trustee and the Noteholders only, as a result, nothing in the Trust Deed prevents the Trustee or any Noteholder from taking proceedings relating to a Dispute (‘‘Proceedings’’) in any other courts with jurisdiction and to the extent allowed by law, the Trustee and Noteholders may take concurrent Proceedings in any number of jurisdictions; (iv) designated a person in England to accept service of any process on their behalf; (v) consented to the enforcement of any judgment and (vi) waived any immunity from any legal process it may otherwise have been afforded in any jurisdiction.
BP-45 BOOK-ENTRY; DELIVERY AND FORM OF NOTES
General Unless otherwise specified in the applicable Final Terms, the Notes shall be represented initially by one or more global Notes (collectively, the ‘‘Global Notes’’). Registered Notes shall be represented initially by one or more Global Notes in registered form, without Coupons (each, a ‘‘Global Note Certificate’’), which shall be registered in the name of DTC, as depositary, or a successor or nominee thereof, and which shall be deposited on behalf of the purchasers thereof with a custodian for DTC. Beneficial interests in the Restricted Global Note Certificates and Unrestricted Global Note Certificates as such terms are defined below shall be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Purchasers of Notes may elect to hold interests in Restricted Global Note Certificates and Unrestricted Global Note Certificates through any of DTC (in the United States), Clearstream, Luxembourg or Euroclear if they are participants in such systems or indirectly through organizations which are participants in such systems. If specified in the applicable Final Terms, Registered Notes sold outside the United States pursuant to Regulation S may be represented, in whole or in part, by a Registered Global Note Certificate that is deposited with or on behalf of a Common Depositary for Euroclear and Clearstream, Luxembourg or a nominee thereof for credit to the respective accounts of beneficial owners of the Notes represented thereby (an ‘‘International Global Note Certificate’’). International Global Note Certificates will be subject to special restrictions and procedures referred to under ‘‘International Global Note Certificates’’ below. Bearer Notes shall be represented initially by a temporary Global Note in bearer form, without Coupons (a ‘‘Temporary Global Note’’), which shall be deposited with a Common Depositary for Clearstream, Luxembourg and Euroclear, unless otherwise specified in the applicable Final Terms. Beneficial interests in such Temporary Global Note shall be exchangeable for beneficial interests in a Permanent Global Note, in an equal aggregate principal amount, no earlier than the 40th day after the applicable closing date upon certification of non-U.S. ownership, as set forth in the Paying Agency Agreement. Such exchange will be made upon certification to the effect that the holder is (i) a person that is not a United States person, (ii) a United States person that is (A) a foreign branch of a United States financial institution (as defined in United States Treasury Regulations Section 1.165-12(c)(1)(iv)) subscribing for or purchasing for its own account or for resale or (B) a United States person who acquired Notes through a foreign branch of a United States financial institution and who holds the Notes through such financial institution on the date of such certification (and in each case (A) or (B), that the financial institution agrees to comply with the requirements of section 163(j)(3)(A), (B) or (C) of the United States Internal Revenue Code and the United States Treasury Regulations thereunder or (iii) a financial institution that acquired Notes for purposes of resale during the restricted period (as defined in United States Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and such financial institution certifies that it has not acquired the Notes for purposes of resale directly or indirectly within the United States or its possessions or to a United States person. A financial institution, whether or not described in (i) or (ii) above, that purchases Notes for purposes of resale during the restricted period, may only give the certification described in (iii) above. Except in the limited circumstances described below or as otherwise set forth in the applicable Final Terms, owners of beneficial interests in the Global Notes shall not be entitled to receive Notes in definitive form. For details of how Notes may be transferred see ‘‘Terms and Conditions of the Notes—Condition 3 (Form, Denomination and Title)’’. In the United States securities market, the presumption is that settlement of all trades of Notes will occur on the basis of the trade date plus three days (‘‘T+3’’). Registered Notes may be issued in the form of one or more Global Note Certificates in an aggregate principal amount equal to the principal amount of the Notes of such Series, which shall be exchangeable in the limited circumstances described below for Notes in the form of individual note certificates (‘‘Individual Note Certificates’’). Bearer Notes will initially be issued in the form of a Temporary Global Note, without Coupons, in an initial aggregate principal amount equal to the principal amount of the Notes of such Series not initially sold to U.S. persons, which shall be exchangeable as described below.
BP-46 Registered Global Note Certificates General Unless otherwise specified in the applicable Final Terms, Registered Notes of the same Series will be represented, in whole or in part, by either (i) a Restricted Global Note Certificate and an Unrestricted Global Note Certificate that is deposited with or on behalf of DTC and registered in the name of its nominee and deposited with the custodian for DTC, for credit to the respective accounts of beneficial owners of the Notes represented thereby (a ‘‘U.S. Global Note’’) or (ii) an International Global Note Certificate. Restricted Global Note Certificates and Unrestricted Global Note Certificates are U.S. Global Notes sold in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. U.S. Global Notes will be subject to special restrictions and procedures referred to under ‘‘U.S. Global Notes’’ below.
U.S. Global Notes Notes that are sold in reliance on Rule 144A will be represented by a restricted Global Note Certificate (a ‘‘Restricted Global Note Certificate’’), unless otherwise specified in the applicable Final Terms. A Restricted Global Note Certificate (and any Notes issued in exchange therefor) will be subject to certain restrictions on transfer set forth therein and in the Paying Agency Agreement and will bear the legend regarding such restrictions described under ‘‘Transfer Restrictions’’. Notwithstanding Condition 21 (Notices), so long as the Restricted Global Note Certificate is held on behalf of DTC, notices to Noteholders represented by the Restricted Global Note Certificate may be given by delivery of the relevant notice to DTC; provided, however, that, so long as the Notes are admitted to trading on the regulated market of the Luxembourg Stock Exchange and its rules so require, notices will also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu). Registered Notes that are sold outside the United States in reliance on Regulation S will be represented by an unrestricted Global Note Certificate (an ‘‘Unrestricted Global Note Certificate’’), unless otherwise specified in the applicable Final Terms. On or prior to the 40th day after the later of the commencement of the offering and the date of delivery of the Notes represented by an Unrestricted Global Note Certificate, a beneficial interest therein may be transferred to a person who takes delivery in the form of an interest in a Restricted Global Note Certificate of the same Series, but only upon receipt by the Registrar of a written certification from the transferor (in the form provided in the Paying Agency Agreement) to the effect that such transfer is being made to a person who the transferor reasonably believes is purchasing for its own account or accounts as to which it exercises sole investment discretion and that such person and each such account is a QIB within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. After such 40th day, such certification requirement will no longer apply to such transfers. Beneficial interests in a Restricted Global Note Certificate may be transferred to a person who takes delivery in the form(s) of an interest in an Unrestricted Global Note Certificate of the same Series, whether before, on or after such 40th day, but only upon receipt by the Registrar of a written certification from the transferor (in the form provided in the Paying Agency Agreement) to the effect that such transfer is being made in accordance with Rule 903 or Rule 904 of Regulation S or Rule 144A and that, if such transfer occurs on or prior to such 40th day, the interest transferred will be held immediately thereafter through Euroclear or Clearstream, Luxembourg. Any beneficial interest in a U.S. Global Note that is transferred to a person who takes delivery in the form of an interest in another U.S. Global Note of the same Series will, upon transfer, cease to be an interest in the former U.S. Global Note, will become an interest in the latter U.S. Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in the latter U.S. Global Note for as long as it remains such an interest. Notwithstanding Condition 21 (Notices), so long as the Unrestricted Global Note Certificate is held on behalf of DTC, notices to Noteholders represented by the Unrestricted Global Note Certificate may be given by delivery of the relevant notice to DTC; provided, however, that, so long as the Notes are admitted to trading on the regulated market of the Luxembourg Stock Exchange and its rules so require, notices will also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu).
BP-47 Book-Entry System Upon the issuance of a U.S. Global Note, DTC or its custodian will credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such U.S. Global Note to the accounts of persons who have accounts with DTC. Ownership of beneficial interests in a U.S. Global Note will be limited to persons who have accounts with DTC (including Euroclear and Clearstream, Luxembourg), or persons who hold interests through participants. Ownership of beneficial interests in the U.S. Global Notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants), which may include Euroclear and Clearstream, Luxembourg, as described below. So long as DTC, or its nominee, is the registered holder of a U.S. Global Note, DTC or such nominee, as the case may be, will be considered the sole owner and holder of the Notes represented by such U.S. Global Note for all purposes under the Trust Deed, the Paying Agency Agreement and the Notes. Unless DTC notifies the Issuer that it is unwilling or unable to continue as depositary for such Note, or ceases to be a ‘‘Clearing Agency’’ registered under the Exchange Act, or an Event of Default has occurred and is continuing with respect to such Note, owners of beneficial interests in such U.S. Global Note will not be entitled to have any portions of such U.S. Global Note registered in their names, will not receive or be entitled to receive physical delivery of Notes in definitive form and will not be considered the owners or holders of such U.S. Global Note (or any Notes represented thereby) under the Trust Deed, the Paying Agency Agreement or the Notes. If DTC is at any time unwilling or unable to continue as a depositary and a successor depositary is not appointed by the Issuer within 90 days, the Issuer will (i) issue Restricted Individual Note Certificates in exchange for the relevant Restricted Global Note Certificate and/or (ii) issue an International Global Note Certificate in exchange for the relevant Unrestricted Global Note Certificates. In the case of Restricted Individual Note Certificates issued in exchange for Restricted Global Note Certificates, such Restricted Individual Note Certificates will bear, and be subject to, the legend described under ‘‘Transfer Restrictions’’. Except in the limited circumstances described in this paragraph, owners of beneficial interests in a U.S. Global Note will not be entitled to receive physical delivery of Individual Note Certificates. In addition, no beneficial owner of an interest in a U.S. Global Note will be able to transfer that interest except in accordance with DTC’s applicable procedures (in addition to those under the Paying Agency Agreement and, if applicable, those of Euroclear and Clearstream, Luxembourg). Investors may hold their interests in an Unrestricted Global Note Certificate through Euroclear or Clearstream, Luxembourg, if they are participants in such systems, or indirectly through organizations which are participants in such systems. Beginning 40 days after the later of the commencement of the offering and the date of delivery of the Notes represented by such Unrestricted Global Note Certificate (but not earlier), investors may also hold such interests through organizations other than Euroclear and Clearstream, Luxembourg that are participants in the DTC system. Euroclear and Clearstream, Luxembourg will hold interests in an Unrestricted Global Note Certificate on behalf of their participants through customers’ securities accounts in their respective names on the books of their respective depositaries, which in turn will hold such interests in customers’ securities accounts in the depositaries’ names on the books of DTC. Unless otherwise indicated in the applicable Final Terms, Citibank N.A., London Branch will initially act as common depositary for Clearstream, Luxembourg, and Euroclear. Investors may hold their interests in a Restricted Global Note Certificate directly through DTC, if they are participants in such system, or indirectly through organizations which are participants in such system. Payments of the principal of and any premium, interest, and other amounts on any U.S. Global Note will be made to DTC or its nominee as the registered owner thereof. Neither the Issuer, the Trustee, the Registrar, the Transfer Agent nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a U.S. Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Issuer expects that DTC or its nominee, upon receipt of any payment in respect of a U.S. Global Note held by it or its nominee, will immediately credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such U.S. Global Note as shown on the records of DTC or its nominee. The Issuer also expects that payments by participants to owners of beneficial interests in a U.S. Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of
BP-48 customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in accordance with DTC’s procedures and will be settled in same-day funds. The laws of some states of the United States require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests in a U.S. Global Note to such persons may be limited. Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of a person having a beneficial interest in a U.S. Global Note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate of such interest. Transfers between participants in Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the Notes described above, cross- market transfers between DTC, on the one hand, and directly or indirectly through Euroclear or Clearstream, Luxembourg participants, on the other hand, will be effected by DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depositary; however, such crossmarket transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines. Euroclear or Clearstream, Luxembourg, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in any U.S. Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream, Luxembourg participants may not deliver instructions directly to the depositaries for Euroclear or Clearstream, Luxembourg. Because of time zone differences, the securities account of a Euroclear or Clearstream, Luxembourg participant purchasing an interest in a U.S. Global Note from a DTC participant will be credited during the securities settlement processing day (which must be a business day for Euroclear or Clearstream, Luxembourg, as the case may be) immediately following the DTC settlement date and such credit of any transactions in interests in a U.S. Global Note settled during such processing day will be reported to the relevant Euroclear or Clearstream, Luxembourg participant on such day. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a U.S. Global Note by or through a Euroclear or Clearstream, Luxembourg participant will be received for value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day following settlement in DTC. DTC has advised the Issuer that it will take any action permitted to be taken by a holder of a U.S. Global Note (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account with DTC interests in such U.S. Global Note are credited and only in respect of such portion of the aggregate principal amount of such U.S. Global Note as to which such participant or participants has or have given such direction. However, if there is an Event of Default under a U.S. Global Note, DTC will exchange such U.S. Global Note for legended Notes in definitive form, which it will distribute to its participants. DTC has advised the Issuer as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, ‘‘a banking organization’’ under the laws of the State of New York a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the Uniform Commercial Code and a ‘‘Clearing Agency’’ registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. DTC participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Like DTC, Euroclear and Clearstream, Luxembourg hold securities for participating organizations. They also facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of such participants. Euroclear and
BP-49 Clearstream, Luxembourg provide various services to their participants, including the safekeeping, administration, clearance, settlement, lending and borrowing of internationally traded securities. Euroclear and Clearstream, Luxembourg interface with domestic securities markets. Euroclear and Clearstream, Luxembourg participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear and Clearstream, Luxembourg is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear and Clearstream, Luxembourg participant, either directly or indirectly. Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of interests in the U.S. Global Notes among participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by DTC, Clearstream, Luxembourg or Euroclear or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
International Global Note Certificates Registered Notes sold outside the United States in reliance on Regulation S, which are not part of a Series which is also offered in the United States, may be represented, in whole or in part, by an international global note certificate (an ‘‘International Global Note Certificate’’) that is deposited with or on behalf of the Common Depositary for Euroclear and Clearstream, Luxembourg, or a nominee thereof, outside the United States for credit to the respective accounts of beneficial owners of the Notes represented thereby. International Global Note certificates are sold in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Investors may hold their interests in an International Global Note Certificate through Euroclear or Clearstream, Luxembourg, if they are participants in such systems, or indirectly through organizations that are participants in such systems. Euroclear and Clearstream, Luxembourg will hold interests in an International Global Note Certificate on behalf of their participants through customers’ securities accounts in their respective names on the books of their respective depositaries. So long as the Common Depositary, or its nominee, is the registered holder of an International Global Note Certificate, the Common Depositary or such nominee, as the case may be, will be considered the sole owner and holder of the Notes represented by such International Global Note Certificate for all purposes under the Trust Deed, the Paying Agency Agreement and such Notes. Owners of beneficial interests in an International Global Note Certificate will not be entitled to have any portion of such International Global Note Certificate registered in their names, will not receive or be entitled to receive delivery of Individual Note Certificates in exchange for their interests in an International Global Note Certificate and will not be considered the owners or holders of such International Global Note Certificate (or any Notes represented thereby) under the Trust Deed, the Paying Agency Agreement or the Notes. In addition, no beneficial owner of an interest in an International Global Note Certificate will be able to transfer that interest except in accordance with applicable procedures of Euroclear and Clearstream, Luxembourg (in addition to those under the Paying Agency Agreement referred to herein). Payments of the principal of and any premium, interest and other amounts on any International Global Note Certificate will be made to the Common Depositary or its nominee as the registered owner thereof. Neither the Issuer, the Trustee, the Registrar, the Transfer Agent nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in an International Global Note Certificate or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests. Notwithstanding Condition 21 (Notices), so long as the International Global Note Certificate is held on behalf of Euroclear, Clearstream, Luxembourg or any other clearing system, notices to Noteholders represented by the International Global Note Certificate may be given by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or (as the case may be) such other clearing system; provided, however, that, so long as the Notes are admitted to trading on the regulated market of the Luxembourg Stock Exchange and its rules so require, notices will also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu).
BP-50 The Issuer expects that each of Euroclear and Clearstream, Luxembourg, upon receipt of any such payment in respect of an International Global Note Certificate held by a Common Depositary or its nominee, will immediately credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such International Global Note Certificate as shown on the records of Euroclear or Clearstream, Luxembourg, as the case may be. The Issuer also expects that payments by participants to owners of beneficial interests in an International Global Note Certificate held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. All Notes represented by an International Global Note Certificate will be offered and sold pursuant to Regulation S, and the restrictions on and procedures for transfer of beneficial interests in such International Global Note Certificate and any Restricted Global Note Certificate of the same Series will be the procedures applicable to Unrestricted Global Note Certificates and Restricted Global Note Certificates described above under ‘‘U.S. Global Notes’’, with such modifications as may be specified in such Notes and the applicable Final Terms.
Bearer Notes Bearer Notes shall initially be issued in the form of a Temporary Global Note, without Coupons, in an initial aggregate principal amount equal to the principal amount of the Notes of such Series not initially sold to U.S. persons, which shall be exchangeable, unless otherwise specified in the Final Terms, (i) for a Permanent Global Note, without Coupons attached (together with Temporary Global Notes, ‘‘Global Bearer Notes’’), which shall in turn be exchangeable (in whole, but not in part) in limited circumstances in the form of Definitive Bearer Notes, with or without Coupons attached, or for interests in a Global Note Certificate of such Series, (ii) in whole but not in part, directly for Definitive Bearer Notes, with or without Coupons attached, which shall in turn be exchangeable at the option of the Noteholder for interests in a Global Note Certificate of such Series or (iii) directly for interests in a Global Note Certificate. Purchasers in the United States (including its territories, its possessions and other areas subject to its jurisdiction) will not be able to receive Bearer Notes. The Principal Paying Agent shall deliver each Temporary Global Note executed and authenticated as provided in the Trust Deed to the Common Depositary for the benefit of Euroclear and Clearstream, Luxembourg for credit against payment in immediately available funds on the date of settlement to the respective accounts of the holders of the Notes of the Series represented by such Temporary Global Note. So long as the Common Depositary, or its nominee, is the bearer of a Global Bearer Note, the Common Depositary or such nominee, as the case may be, will be considered the sole owner and holder of the Notes represented by such Global Bearer Note for all purposes under the Trust Deed, the Paying Agency Agreement and such Notes. Owners of beneficial interests in a Global Bearer Note will not be considered the owners or holders of such Global Bearer Note (or any Notes represented thereby) under the Trust Deed, the Paying Agency Agreement or the Notes. In addition, no beneficial owner of an interest in a Global Bearer Note will be able to transfer that interest except in accordance with applicable procedures of Euroclear and Clearstream, Luxembourg (in addition to those under the Paying Agency Agreement referred to herein). Payments of the principal of and any premium, interest and other amounts on any Global Bearer Note will be made to the Common Depositary for Euroclear and Clearstream, Luxembourg or its nominees as the bearer thereof. Neither the Issuer, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Bearer Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Issuer expects that each of Euroclear and Clearstream, Luxembourg, upon receipt of any such payment in respect of a Global Bearer Note held by a Common Depositary or its nominee, will immediately credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Bearer Note as shown on the records of Euroclear or Clearstream, Luxembourg, as the case may be. The Issuer also expects that payments by participants to owners of beneficial interests in a Global Bearer Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants.
BP-51 On or after the date (the ‘‘Exchange Date’’) which is the earlier of (i) the first Business Day following the expiration of a period of 40 days after the date on which the Notes of such Series were issued and (ii) the first day on which interest, if any, is paid on the Notes of such Series, beneficial interests in the Temporary Global Note of a Series as to which the Principal Paying Agent has received certification as to the non-U.S. beneficial ownership thereof as required by U.S. Treasury regulations and as set forth in the Paying Agency Agreement will, upon presentation thereof by the Common Depositary to the Principal Paying Agent, be exchanged (i) for interests in a Permanent Global Note of such Series, (ii) directly for interests in a Global Note Certificate of such Series or (iii) in whole but not in part, directly for one or more Definitive Bearer Notes of the same Series, in each case pursuant to the procedures set forth in the next sentence, with respect to that portion of such Temporary Global Note; provided, however, that, if Definitive Bearer Notes and (if applicable) Coupons have already been issued in exchange for a portion of such Temporary Global Note or for all of the Notes represented for the time being by such Permanent Global Note because Euroclear and/or Clearstream, Luxembourg do not regard the Permanent Global Note to be fungible with such Definitive Bearer Notes, then such Temporary Global Note may only thereafter be exchanged for Definitive Bearer Notes and (if applicable) Coupons pursuant to the terms of the Trust Deed, the Paying Agency Agreement and of such Notes. At any time after the Exchange Date, upon 40 days’ notice (which may be given at any time prior to, on or after the Exchange Date) to the Principal Paying Agent by Euroclear or Clearstream, Luxembourg, as the case may be, acting at the request of or on behalf of the beneficial owner or owners of a Global Bearer Note, and, in the case of a Temporary Global Note, upon receipt of the certifications required by U.S. Treasury regulations referred to above, and, unless otherwise agreed, upon payment by the Holder of reasonable costs, interests in the Temporary Global Note or Permanent Global Note of a Series may be exchanged, in whole but not in part, for Definitive Bearer Notes of such Series with Coupons, if applicable, attached; provided, however, that, if Definitive Bearer Notes and (if applicable) Coupons have already been issued in exchange for a portion of such Temporary Global Note or for all of the Notes represented for the time being by such Permanent Global Note because Euroclear and/or Clearstream, Luxembourg do not regard the Permanent Global Note to be fungible with such Definitive Bearer Notes, then such Temporary Global Note may only thereafter be exchanged for Definitive Bearer Notes and (if applicable) Coupons pursuant to the terms of the Trust Deed, the Paying Agency Agreement and of such Notes. Any Definitive Bearer Note delivered in exchange for a beneficial interest in a Temporary Global Note or Permanent Global Note shall bear substantially the same legends as are set forth on the face of the Temporary or Permanent Global Bearer Note for which it was exchanged. No Bearer Note may be delivered nor may any interest be paid on any Bearer Note until the person entitled to receive such Bearer Note or such interest furnishes the certifications required by U.S. Treasury Regulations referred to above. Upon the terms and conditions set out in the Paying Agency Agreement, Permanent Global Bearer Notes and Definitive Bearer Notes may be exchanged for the same aggregate principal amount of Individual Note Certificates of the same Series in authorized denominations, or, if so indicated in the applicable Final Terms, for beneficial interests in a Global Note Certificate, at the request in writing of the Holder and, in the case of an exchange of Definitive Bearer Notes, upon surrender of such Definitive Bearer Notes to be exchanged (together with all unmatured Coupons, if any, relating to it) to the specified office of the Registrar, its duly authorized agent or any other Transfer Agent. Where, however, a Definitive Bearer Note is surrendered for exchange after the fifteenth Business Day before the due date for any payment of interest, or such other record Date as may be applicable, the Coupon in respect of that payment of interest need not be surrendered with it. No holder of any Note may require a Permanent Global Note or Definitive Bearer Note to be exchanged for a Registered Note during the period of 30 days ending on the due date for any payment of principal on that Note. Notes issued pursuant to the exchanges described above will be available from the specified office of the Registrar, its duly authorised agent or any other Transfer Agent (including the Transfer Agent located in Luxembourg). Subject as provided below, until exchanged in full, Global Bearer Notes of a Series shall in all respects be entitled to the same benefits under the Trust Deed and the Paying Agency Agreement as Definitive Bearer Notes of such Series authenticated and delivered thereunder, except that principal of and any premium, interest, additional amounts and other amounts on a Temporary Global Note will not be payable unless a certification, as described herein, is given by the persons appearing in the records of Euroclear or Clearstream, Luxembourg as the owner of the Temporary Global Note or portions thereof being presented for payment, and unless a corresponding certification by Euroclear or Clearstream, Luxembourg shall have been delivered prior to each such date on which such amounts are to be paid.
BP-52 Each Global Bearer Note will contain provisions which modify the Terms and Conditions of the Notes as they apply to the Global Bearer Note. The following is a summary of certain of those provisions:
Notices: Notwithstanding Condition 21 (Notices), while all the Notes are represented by the Temporary Global Note (or by the Temporary Global Note and the Permanent Global Note) deposited with a depositary or a common depositary for Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system, notices to Noteholders may be given by delivery of the relevant notice to Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system and, in any case, such notices shall be deemed to have been given to the Noteholders in accordance with the Condition 21 (Notices) on the date of delivery to Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system; provided, however, that, so long as the Notes are admitted to trading on the regulated market of the Luxembourg Stock Exchange and its rules so require, notices will also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu). In relation to the Permanent Global Note only:
Exercise of call option: In connection with an exercise of the option contained in Condition 10(c) (Redemption at the option of the Issuer) in respect of some but not all of the Notes, the rights of accountholders with a clearing system in respect of the Notes will be governed by the standard procedures of Euroclear, Clearstream, Luxembourg or any other clearing system (as the case may be).
Exercise of put option: In order to exercise the option contained in Condition 10(e) (Redemption at the option of Noteholders) the bearer of the Permanent Global Note must give notice to the Principal Paying Agent (via the relevant clearing system) within the time limits relating to the deposit of Notes with a Paying Agent set out in the Conditions substantially in the form of the notice available from any Paying Agent, except that the notice shall not be required to contain the serial numbers of the Notes in respect of which the option has been exercised, and stating the principal amount of Notes in respect of which the option is exercised and at the same time presenting the Permanent Global Note to the Principal Paying Agent, or to a Paying Agent for notation. In the case of any Tranche of Notes having a maturity of more than 365 days, the following legend will appear on all Global Bearer Notes and Definitive Bearer Notes and any related Coupons or Talons: ‘‘Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in sections 165(j) and 1287(a) of the Internal Revenue Code’’. The sections referred to in the above legend provide that a United States taxpayer, with certain exceptions, will not be permitted to deduct any loss, and will not be eligible for capital gains treatment with respect to any gain realized on any sale, exchange or redemption of Bearer Notes or any related Coupons. Notwithstanding any other provision herein, Bearer Notes with maturities of one year or less may be issued as specified in the applicable Final Terms.
BP-53 FORM OF FINAL TERMS
Final Terms dated [ ] UPM-KYMMENE CORPORATION (Incorporated under the laws of the Republic of Finland with limited liability) Issue of [Aggregate Principal Amount of Tranche] [Title of Notes] under the EUR 5,000,000,000 Global Medium Term Note Programme The Base Prospectus referred to below (as completed by these Final Terms) has been prepared on the basis that, except as provided in sub-paragraph (ii) below, any offer of Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (2003/71/EC) (each, a ‘‘Relevant Member State’’) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of the Notes. Accordingly any person making or intending to make an offer of the Notes may only do so: (i) in circumstances in which no obligation arises for the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer; or (ii) in those Public Offer Jurisdictions mentioned in Paragraph 33 of Part A below, provided such person is one of the persons mentioned in Paragraph 33 of Part A below and that such offer is made during the Offer Period specified for such purpose therein. Neither the Issuer nor any Dealer has authorised, nor do they authorise, the making of any offer of Notes in any other circumstances.
PART A—CONTRACTUAL TERMS
Option 1: The following paragraphs should only be inserted for issues to be admitted to trading on an EU regulated market and/or offered to the public in the European Economic Area. This document constitutes the Final Terms relating to the issue of Notes described herein. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated 23 March 2009 [and the Base Prospectus Supplement dated [ ]] (the ‘‘Base Prospectus’’) which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the ‘‘Prospectus Directive’’). These Final Terms contain the final terms of the Notes for the purposes of Article 5(4) of the Prospectus Directive and must be read in conjunction with such Base Prospectus [as so supplemented]. Full information on the Issuer and the offer of the Notes described herein is only available on the basis of the combination of these Final Terms and the Base Prospectus [as supplemented]. The Base Prospectus [and the Base Prospectus Supplement] [is][are] available for viewing at the website of the regulated market of the Bourse de Luxembourg (www.bourse.lu) and copies may be obtained from the Issuer at Etelaesplanadi¨ 2, FI-00130 Helsinki and the Paying Agents, BGL Societ´ e´ Anonyme at 50 Avenue John F Kennedy, L-2951 Luxembourg and Citibank, N.A., London Branch at Citigroup Centre, Canary Wharf, London E14 5LB. The following alternative language applies if the first tranche of an issue which is being increased was issued under a Base Prospectus with an earlier date. [Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the ‘‘Conditions’’) set forth in the Base Prospectus dated [original date] [and the Base Prospectus Supplement dated [ ](1)] which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the ‘‘Prospectus Directive’’). These Final Terms contain the final terms of the Notes and must be read in conjunction with the Base Prospectus dated [current date] [and the Base Prospectus Supplement dated [ ]] (together, the ‘‘Base Prospectus’’, save in respect of the Conditions which are extracted from the Base Prospectus dated [original date] and are attached hereto.]
(1) Only include details of a Base Prospectus Supplement in which the conditions have been amended for the purposes of all the issues under the Programme.
BP-54 Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Prospectuses dated [original date] and [current date] [and the Base Prospectuses Supplements dated [ ] and [ ]]. The Base Prospectuses [and the Base Prospectus Supplement] are available for viewing at the website of the regulated market of the Bourse de Luxembourg (www.bourse.lu) and copies may be obtained from the Issuer at Etelaesplanadi¨ 2, FIN-00130 Helsinki and the Paying Agents, BGL Societ´ e´ Anonyme at 50 Avenue John F Kennedy, L-2951 Luxembourg and Citibank, N.A., London Branch at Citigroup Centre, Canary Wharf, London E14 5LB. [Include whichever of the following apply or specify as ‘‘Not Applicable’’ (N/A). Note that the numbering should remain as set out below, even if ‘‘Not Applicable’’ is indicated for individual paragraphs or subparagraphs. Italics denote guidance for completing the Final Terms.] [When completing final terms or adding any other final terms or information, consideration should be given as to whether such terms or information constitute ‘‘significant new factors’’ and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.]
Option 2: (The following paragraphs should only be inserted for issues of Notes which are not to be admitted to trading on an EU regulated market and/or offered to the public in the European Economic Area): This document constitutes the Final Terms relating to the issue of Notes described herein. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated 23 March 2009. These are the Final Terms of the Notes and must be read in conjunction with such Base Prospectus. The following alternative language applies if the first tranche of an issue which is being increased was issued under a Base Prospectus with an earlier date. [Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the ‘‘Conditions’’) set forth in the Base Prospectus dated [original date]. These are the Final Terms of the Notes and must be read in conjunction with the Base Prospectus dated [current date] [and the Base Prospectus Supplement dated [ ], save in respect of the Conditions which are extracted from the Base Prospectus dated [original date] and are attached hereto.] [End of Options] [Include whichever of the following apply or specify as ‘‘Not Applicable’’ (N/A). Note that the numbering should remain as set out below, even if ‘‘Not Applicable’’ is indicated for individual paragraphs or subparagraphs. Italics denote guidance for completing the Final Terms.] Unless stated otherwise, include all the items listed in Part A—Contractual Terms of these Final Terms in connection with all Notes. References in the drafting notes to retail issues are to issues of Notes with a denomination of less than A50,000 to be admitted to trading on an EU Regulated Market and/or offered to the public in the EEA and references to wholesale issues are to issues of Notes with a denomination of at least A50,000 to be admitted to trading on an EU Regulated Market.
1. Issuer: [ ] [ ] 2. [(i)] Series Number: [ ] [(ii) Tranche Number: [ ] (If fungible with an existing Series, details of that Series, including the date on which the Notes become fungible).] 3. Specified Currency or Currencies: [ ] 4. Aggregate Principal Amount [of Notes [only include words in square brackets for wholesale admitted to trading]: issues] [(i)] Series: [ ] [(ii) Tranche: [ ]]
BP-55 5. [(i)] Issue Price: [ ]% of the Aggregate Principal Amount [plus accrued interest from [insert date. (if applicable)] [(ii) Dealer Commission: [ ] 6. (i) Specified Denominations: [ ] [EUR 50,000 and integral multiples of EUR 1,000 in excess thereof up to and including EUR 99,000. No notes in definitive form will be issued with a denomination above [EUR 99,000]] [In relation to any issue of Notes which have a denomination consisting of the minimum Specified Denomination plus a higher integral multiple of another smaller amount, it is possible that the Notes may be traded in amounts in excess of B50,000 (or its equivalent) that are not integral multiples of B50,000 (or its equivalent). In such a case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than the minimum Specified Denomination may not receive a definitive Note in respect of such holding (should Definitive Bearer Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to a Specified Denomination] [Notes issued under the programme which are to be admitted to trading on a regulated market situated or operating within a Member State or which are to be offered to the public in one or more Member States (where the terms ‘‘regulated market’’ and ‘‘offer to the public’’ are within the meaning of any measures implementing the Prospectus Directive in any relevant Member State) may not have a minimum denomination of less than B1,000 (or nearly equivalent in another currency)] (ii) Calculation Amount: 7. [(i)] Issue Date: [ ] [(ii)] Interest Commencement Date: [Specify/Issue Date/Not Applicable] 8. Maturity Date: [specify date or (for Floating Rate Notes) Interest Payment Date falling in or nearest to the relevant month and year] [If the Maturity Date is less than one year from the Issue Date and either (a) the issue proceeds are received by the Issuer in the United Kingdom or (b) the activity of issuing the Notes is carried on from an establishment maintained by the Issuer in the United Kingdom, the Notes must (i) have a minimum redemption value of £100,000 (or its equivalent in other currencies) and be sold only to ‘‘professional investors’’ or (ii) another applicable exemption from section 19 of the FSMA must be available.] 9. Interest Basis: [% Fixed Rate] [[specify reference rate] +/ % Floating Rate] [Zero Coupon] [Index Linked Interest] [Other (specify)] (further particulars specified below) 10. Redemption/Payment Basis: [Redemption at par] [Index Linked Redemption]
BP-56 [Dual Currency] [Partly Paid] [Instalment] [Other (specify)] 11. Change of Interest or Redemption/ [Specify details of any provision for convertibility of Notes Payment Basis: into another interest or redemption/payment basis] 12. Put/Call Options: [Investor Put] [Issuer Call] [(further particulars specified below)] 13. Method of distribution: [Syndicated/Non-syndicated]*
PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 14. Fixed Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate[(s)] of Interest: [ ]% per annum [payable [annually/semi-annually/ quarterly/monthly/ other (specify)] in arrear] (ii) Interest Payment Date(s): [ ] in each year [adjusted in accordance with [specify Business Day Convention and any applicable Business Centre(s) for the definition of ‘‘Business Day’’/not adjusted] (iii) Fixed Coupon Amount[(s)]: [ ] per Calculation Amount (iv) Day Count Fraction: [30/360]/[Actual/Actual (ICMA)/other] [If neither of these options applies, give details] (v) Broken Amount(s): [ ] per Calculation Amount, payable on the Interest Payment Date falling [in/on] [ ] (vi) Other terms relating to the [Not Applicable/give details] method of calculating interest: 15. Floating Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Specified Period(s)/Specified [ ] Interest Payment Dates: (ii) First Interest Payment Date: [ ] (iii) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (vi) Additional Business Centre(s): [ ] (v) Manner in which the Rate(s) of [Screen Rate Determination/ISDA Determination/ Interest is/are to be determined: other (give details)] (vi) Party responsible for calculating [ ] the Rate(s) of Interest and Interest Amount(s) (if not the [Agent]):
BP-57 (vii) Screen Rate Determination: Reference Rate: [ ] Interest Determination Date(s): [ ] Relevant Screen Page: [ ] Relevant Time: [ ] Relevant Financial Centre: [ ] (viii) ISDA Determination: Floating Rate Option: [ ] Designated Maturity: [ ] Reset Date: [ ] (ix) Margin(s): [+/ ] [ ]% per annum (x) Minimum Rate of Interest: [ ]% per annum (xi) Maximum Rate of Interest: [ ]% per annum (xii) Day Count Fraction: [ ] (xiii) Fall back provisions, rounding [ ] provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions: 16. Zero Coupon Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) [Amortisation/Accrual] Yield: [ ]% per annum (ii) Reference Price: [ ] (iii) Any other formula/basis of [ ] determining amount payable: 17. Index-Linked Interest Note/other [Applicable/Not Applicable] variable-linked interest Note Provisions (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Index/Formula/other variable: [give or annex details] (ii) Calculation Agent responsible for [ ] calculating the interest due: (iii) Provisions for determining [ ] Coupon where calculated by reference to Index and/or Formula and/or other variable: (iv) Determination Date(s): [ ] (v) Provisions for determining [ ] Coupon where calculation by reference to Index and/or other variable is impossible or impracticable or otherwise disrupted:
BP-58 (vi) Interest or calculation period(s): [ ] (vii) Specified Interest Payment Dates: [ ] (viii) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (ix) Additional Business Centre(s): [ ] (x) Minimum Rate/Amount of [ ]% per annum Interest: (xi) Maximum Rate/Amount of [ ]% per annum Interest: (xii) Day Count Fraction: [ ] 18. Dual Currency Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate of Exchange/method of [give details] calculating Rate of Exchange: (ii) Calculation Agent, if any, [ ] responsible for calculating the principal and/or interest due: (iii) Provisions applicable where [ ] calculation by reference to Rate of Exchange impossible or impracticable: (iv) Person at whose option Specified [ ] Currency(ies) is/are payable:
PROVISIONS RELATING TO REDEMPTION 19. Call Option [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): [ ] (ii) Optional Redemption Amount(s) [ ] per Calculation Amount of each Note and method, if any, of calculation of such amount(s): (iii) If redeemable in part: (iv) Minimum Redemption Amount: [ ] per Calculation Amount (v) Maximum Redemption Amount: [ ] per Calculation Amount (vi) Notice period (if other than as [ ] set out in the Conditions): 20. Put Option [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): [ ] (ii) Optional Redemption Amount(s) [ ] per Calculation Amount of each Note and method, if any, of calculation of such amount(s):
BP-59 (iii) Notice period (if other than as [ ] [If setting notice periods which are different to those in set out in the Conditions): the terms and conditions, please consider the practicalities of distribution of information through intermediaries, for example, clearing systems, as well as any other notice requirements which may apply, for example, as between the Issuer and the Trustee or Agents.] 21. Final Redemption Amount of each Note [[ ] per Calculation Amount] In cases where the Final Redemption Amount is Index-Linked or other variable-linked: (i) Index/Formula/variable: [give or annex details] (ii) Calculation Agent responsible for [ ] calculating the Final Redemption Amount: (iii) Provisions for determining Final [ ] Redemption Amount where calculated by reference to Index and/or Formula and/or other variable: (iv) Determination Date(s): [ ] (v) Provisions for determining Final [ ] Redemption Amount where calculation by reference to Index and/or Formula and/or other variable is impossible or impracticable or otherwise disrupted: (vi) Payment Date: [ ] (vii) Minimum Final Redemption [ ] per Calculation Amount Amount: (viii) Maximum Final Redemption [ ] per Calculation Amount Amount: 22. Early Redemption Amount of each Note Early Redemption Amount(s) per [ ] Calculation Amount payable on redemption for taxation reasons or on event of default or other early redemption and/or the method of calculating the same (if required or if different from that set out in the Conditions):
GENERAL PROVISIONS APPLICABLE TO THE NOTES 23. Form of Notes: If issued in Bearer Form: [Temporary Global Note exchangeable for a Permanent Global Note which is exchangeable for Definitive Bearer Notes] [on [ ] days’ notice] [at any time] [in the limited circumstances specified in the Permanent Global Note].(1)
(1) This option (and no other) must be selected in the case of bearer notes issued in specified denominations of A50,000 and integral multiples of EUR1,000 in excess therof up to and including EUR99,000.
BP-60 [Temporary Global Note exchangeable for Definitive Bearer Notes on [ ] days’ notice.] If issued in Registered Form: (i) Registrar and Transfer Agents: [Name and specified offices] (ii) DTC or PORTAL Application: [Yes/No] [Provide details] (iii) Form of Registered Notes: [Restricted Global Note Certificate and Unrestricted Global Note Certificate] [International Global Note Certificate] (iv) Details of exchange of interests in [Specify] Registered Notes: 24. Financial Centre(s) or other special [Not Applicable/give details. Note that this item relates to provisions relating to Payment Dates: the date and place of payment, and not interest period end dates, to which items 15(ii), 16(iii) and 18(vi) relate]. 25 Talons for future Coupons or Receipts [Yes/No. If yes, give details] to be attached to Definitive Bearer Notes (and dates on which such Talons mature): 26. Details relating to Partly Paid Notes: [Not Applicable/give details] amount of each payment comprising the Issue Price and date on which each payment is to be made and [consequences (if any) of failure to pay, including any right of the Issuer to forfeit the Notes and interest due on late payment]: 27. Details relating to Instalment Notes: [Not Applicable/give details] amount of each instalment, date on which each payment is to be made: 28. Consolidation provisions: [Not Applicable/The provisions in Condition 23 apply] 29. Other final terms: [Not Applicable/give details]
DISTRIBUTION [In the left hand column under ‘‘Distribution’’ the words in the square brackets should be included in retail issues only] 30. (i) If syndicated, names [and [Not Applicable/give names, [and for retail issues only, addresses] of Managers [and addresses and underwriting commitments and (include underwriting commitments]: names and addresses of entities agreeing to underwrite the issue on a firm commitment basis and names and addresses of the entities agreeing to place the issue without a firm commitment or on a ‘‘best efforts’’ basis if such entities are not the same as the Managers)]] (ii) [Date of Subscription [ ] Agreement]: (iii) Stabilising Manager(s) (if any): [Not Applicable/give name] 31. If non-syndicated, name [and the [Not Applicable/give name [and address]] address] of Dealer: 32. [Total Commission and Concession:] [ ]% of the Aggregate Nominal Amount]
BP-61 33. Non-exempt Offer: [Not Applicable] [An offer of the Notes may be made by the Managers [and [specify, if applicable]] other than pursuant to Article 3(2) of the Prospectus Directive in [specify relevant Member State(s)—which must be jurisdictions where the Prospectus and any supplements have been passported] (‘‘Public Offer Jurisdictions’’) during the period from [specify date] until [specify date] (‘‘Offer Period’’). See further ‘‘Terms and Conditions of the Offer’’ in Part B below. 34. The Netherlands* [Only in respect of Notes having a specified denomination of less than EUR 50,000 (or the equivalent thereof in any other currency): [selling restriction (A) applies: qualified investors only] or [selling restriction (B) applies: no distribution into The Netherlands]; [and] [Only in respect of Zero Coupon Notes: selling restriction (C) applies] [In respect of other Notes: Not Applicable] 35. Additional selling restrictions: [Not Applicable/give details]
* Select appropriate selling restriction(s) for each issue by the Company.
PURPOSE OF FINAL TERMS These Final Terms comprise the final terms required for the issue [and] [public offer in the Public Offer Jurisdictions] [and] [admission to trading on the regulated market of the Luxembourg Stock Exchange of the Notes described herein] pursuant to the euro 5,000,000,000 Global Medium Term Note Programme of UPM-Kymmene Corporation as Issuer.
RESPONSIBILITY The Issuer accepts responsibility for the information contained in these Final Terms. [[ has been extracted from [ ]. The Issuer confirms that such information has been accurately reproduced and that, so far as it is aware, and is able to ascertain from information published by [ ], no facts have been omitted which would render the reproduced inaccurate or misleading (not required where Notes will not be admitted to trading on an EU regulated market and/or offered to the public in the European Economic Area).] Signed on behalf of UPM-Kymmene Corporation: By: Duly authorised
BP-62 PART B—OTHER INFORMATION
1. LISTING AND ADMISSION TO TRADING: (i) Listing: [Official List of the Luxembourg Stock Exchange/other (specify)/None] (ii) Admission to trading: [Application has been made for the Notes to be admitted to trading on [ ] with effect from [ ].] [Not Applicable.] (iii) Estimate of total expenses related [for wholesale issues only] [ ] to admission to trading: 2. RATINGS Ratings: The Notes to be issued have been rated: [S & P: [ ]] [Moody’s: [ ]] [[Other]: [ ]] [for retail issues only, need to include a brief explanation of the meaning of the ratings if this has previously been published by the rating provider.] (The above disclosure should reflect the rating allocated to Notes of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.) 3. [NOTIFICATION The Commission de Surveillance du Secteur Financier [has been requested to provide/has provided—include first alternative for an issue which is contemporaneous with the establishment or update of the Programme and the second alternative for subsequent issues] the [include names of competent authorities of host Member States] with a certificate of approval attesting that the Prospectus has been drawn up in accordance with the Prospectus Directive.] 4. INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE [ISSUE/OFFER] Need to include a description of any interest, including conflicting ones, that is material to the issue/ offer, detailing the persons involved and the nature of the interest. [May be satisfied by the inclusion of the following statement: ‘‘Save as discussed in [‘‘Subscription and Sale’’] so far as the Issuer is aware, no person involved in the offer of the Notes has an interest material to the offer’’.] 5. REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS AND TOTAL EXPENSES [(i) Reasons for the offer: [ ] (See [‘‘Use of Proceeds’’] wording in Prospectus—if reasons for offer different from making profit and/or hedging certain risks will need to include those reasons here.)] [(ii)] Estimated net proceeds: [ ] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding.)
BP-63 [(iii)] Estimated total expenses: [ ] [Include breakdown of expenses.] [(If the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies it is only necessary to include disclosure of net proceeds and total expenses at (ii) and (iii) above where disclosure is included at (i) above.)] 6. [Fixed Rate Notes only—YIELD Indication of yield: [ ]. [Calculated as [include details of method of calculation in summary form] on the Issue Date.] [insert for retail issues only] [As set out above], the yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.] 7. [Floating Rate Notes only—HISTORIC INTEREST RATES [include item 7 for retail issues only] Details of historic [LIBOR/EURIBOR/other] rates can be obtained from [Reuters].] 8. [Index-linked or other variable-linked Notes only—PERFORMANCE OF INDEX/FORMULA/OTHER VARIABLE, AND OTHER INFORMATION CONCERNING THE UNDERLYING (To be included for derivative securities to which Annex XII of the Prospectus Directive Regulation applies): Need to include details of where past and future performance and volatility of the index/formula/other variable can be obtained and a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident. [Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained. Where the underlying is not an index need to include equivalent information. Include other information concerning the underlying required by Paragraph 4.2 of Annex XII of the Prospectus Directive Regulation.] The Issuer [intends to provide post-issuance information [specify what information will be reported and where it can be obtained]] [will not provide any post-issuance information, except if required by any applicable laws and regulations]. 9. [Dual Currency Notes only—PERFORMANCE OF RATE[S] OF EXCHANGE [required for retail issues only] AND EXPLANATION OF EFFECT ON VALUE OF INVESTMENT] Need to include details of where past and future performance and volatility of the relevant rate[s] can be obtained [and a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident.] [text in square brackets required for retail issues only] OPERATIONAL INFORMATION 10. ISIN Code: [ ] 11. Common Code: [ ] 12. CUSIP No.: [ ] [If applicable] 13. Any clearing system(s) other than the [Not Applicable/give name(s) and number(s)] Depositary Trust Company/Euroclear Bank SA/NV and Clearstream Banking, societ´ e´ anonyme, Luxembourg and the relevant identification number(s): 14. Delivery: Delivery [against/free of] payment 15. Names and addresses of Additional [ ] Paying Agent(s) (if any):
BP-64 16. Names and addresses of Calculation [ ] Agent(s) (if any): 17. Applicable TEFRA Rules: [D Rules/Not Applicable] 18. Rule 144A: [Applicable/Not Applicable] TERMS AND CONDITIONS OF THE OFFER [Consider the circumstances in which the items specified below need to be completed or marked ‘‘Not Applicable’’ by reference to the requirements of the relevant home and/or host Member States where any non-exempt public offer is being made, in compliance with the Prospectus Directive, as implemented in such Member States.] 19. Offer Period: [[ ] to [ ]] 20. Offer Price: [ ] 21. Conditions to which the offer is subject: [Not Applicable/give details] 22. Description of the application process: [Not Applicable/give details] 23. Description of possibility to reduce [Not Applicable/give details] subscriptions and manner for refunding excess amount paid by applicants: 24. Details of the minimum and/or [Not Applicable/give details] maximum amount of application: 25. Details of the method and time limits [Not Applicable/give details] for paying up and delivering the Notes: 26. Manner and date in which results of the [Not Applicable/give details] offer are to be made public: 27. Procedure for exercise of any right of [Not Applicable/give details] pre-emption, negotiability of subscription rights and treatment of subscription rights not exercised: 28. Categories of potential investors to [Not Applicable/give details] which the Notes are offered and whether tranche(s) have been reserved for certain countries: 29. Process for notification to applicants of [Not Applicable/give details] the amount allotted and the indication whether dealing may begin before notification is made: 30. Amount of any expenses and taxes [Not Applicable/give details] specifically charged to the subscriber or purchaser: 31. Name(s) and address(es), to the extent [None/give details] known to the Issuer, of the placers in the various countries where the offer takes place:
BP-65 UPM-KYMMENE CORPORATION
Company Overview UPM is the leading producer of graphic papers and among the largest forestry companies in the world, in terms of capacity. It is also the world’s second largest producer of label materials and Europe’s largest producer of plywood, in terms of capacity. UPM’s core businesses are energy, chemical pulp, sawn timber, graphic papers, selected speciality papers, self-adhesive label materials and plywood. In recent years, UPM has introduced several new business initiatives, which are currently under development or have been recently implemented, such as RFID tags, wood plastic composites and biofuels. While UPM’s management believes that these business initiatives represent opportunities in the future, their financial impact has so far been limited. In 2008, the Group had sales of A9.5 billion and, as of 31 December 2008, the Group’s total assets amounted to A13.8 billion. The main markets for the Group’s products are Europe, which accounted for 73% of sales; North America, which accounted for 11% of sales; and Asia and other countries, which accounted for 16% of sales, each in 2008. UPM has production in 14 countries. Its paper production facilities rank among the world’s leading in terms of production efficiency. UPM’s operations are based on close integration of raw materials, energy and production. As of the date of this Base Prospectus, the Company is self-sufficient in chemical pulp and approximately 85% self-sufficient in electric power. UPM’s operations are organised in the following three business groups: Energy and pulp, Paper, and Engineered materials. The Energy and pulp business group consists of hydropower assets, UPM’s pulp mills in Finland and shares of associated pulp and energy companies. This business group is also responsible for forest and wood sourcing as well as UPM’s timber business. This business group seeks to secure competitive access to critical production inputs, such as forest biomass, pulp and energy. The Energy and pulp business group comprises three business areas: Energy, Pulp, and Forest and timber. UPM’s biofuel business is also included in the business group as a development unit. Biofuels are liquid or gaseous fuels for transport produced from biomass. The three business areas are managed as market-driven businesses even though most of their sales are internal. The Energy business area manages and develops UPM’s non-integrated power generation assets. The Pulp business area produces chemical pulp at UPM’s three modern pulp mills in Finland. The Forest and timber business area manages UPM’s forest holdings and sawmills. The Paper business group produces publication, fine and speciality papers. Publication paper is used in magazines, newspapers, manuals and booklets, books, catalogues, telephone directories, inserts, flyers, newspaper supplements and advertising materials. Fine paper is used in magazines, catalogues, inserts, advertising materials, copy papers, preprint applications and envelopes. Speciality paper is used for several end-uses in the labelling, packaging and mailing industries. The business group’s customers are mainly publishers and printers as well as merchants and paper converters. The Paper business group also includes UPM’s CHP plants operating on its paper mill sites. The CHP plants represent one-third of UPM’s total power generation and are mainly fuelled by biomass. UPM’s mechanical and recycled-fibre pulp production is fully integrated with its paper production with no external sales and, therefore, it is included in the Paper business group. The Paper business group’s annual production capacity is 11.5 million tonnes. The Engineered materials business group comprises two business areas: Label and Plywood. UPM’s RFID tags and wood plastic composites are also included in this business group as development units. The Label business area manufactures self-adhesive label materials for product and information labelling. The Plywood business area combines the unique characteristics of wood with the demanding customer focused construction and industrial end-use applications. Plywood is primarily used in the building, construction and transportation industries and in a number of special applications. The RFID tags development unit comprises the development and manufacture of tags and inlays based on RFID technology. The wood plastic composite development unit develops, manufactures, markets and sells high-quality wood plastic composite products made mainly from surplus paper and plastic left over from the production of self-adhesive label materials.
BP-66 Development of the Company General On 30 April 1996, UPM-Kymmene Corporation was incorporated in the Republic of Finland as a result of the merger of two companies, Kymmene Corporation (‘‘Kymmene’’) and Repola Ltd (‘‘Repola’’), which were also incorporated in Finland. Prior to the merger, United Paper Mills Ltd (‘‘United Paper Mills’’) had been a paper and forest products subsidiary of Repola. Kymmene’s origins date back to 1872. Kymmene made its first international acquisition in 1932. In the 1960s and 1970s, Kymmene expanded its operations into Germany (Nordland Papier). In the 1980s, Kymmene merged with Oy Kaukas Ab of Finland, built a new light weight coated paper mill in Irvine in Scotland (Caledonian Paper), and acquired Oy Wilh. Schauman Ab of Finland. In the 1990s, Kymmene acquired the French newsprint producer Chapelle Darblay S.A. The predecessor companies of Repola were founded in the late nineteenth century. In 1920, the ownership of three paper mills was consolidated to form United Paper Mills. During the decades that followed, United Paper Mills expanded its operations, reaching new markets throughout Europe. In the 1980s, United Paper Mills built a greenfield newspaper mill in Shotton, Wales, acquired the Stracel pulp mill in Strasbourg in France and built a newsprint mill on the same site. In 1989, United Paper Mills acquired Kajaani Oy in Finland. Rauma-Repola Oy (‘‘Rauma-Repola’’) had become, over the decades, an international forest products and engineering company. Also, in the 1980s, the group acquired Rosenlew Oy in Finland and made a series of international acquisitions to strengthen its market positions in engineered products. In 1990, United Paper Mills and Rauma-Repola merged to form the international forest products and engineering group Repola. All engineering operations of the merged companies were combined to form Rauma Corporation and their forest industry operations were combined within United Paper Mills. In May 1997, Rauma Corporation became an affiliated company following a share sale and dividend payment in the form of shares. In 1999, Rauma Corporation merged with Valmet Corporation, a Finnish engineering company, to form Metso Corporation (‘‘Metso’’), giving UPM a shareholding of approximately 15% in the new company, which was sold in March 2005. As part of its strategy to expand in areas where it is, or has the capacity to be, a leader in the industry, UPM acquired, in October 1997, Blandin Paper Company in the United States and, in October 2000, Repap Enterprises (later UPM Miramichi), Inc. in Canada (in January 2009, UPM sold its former paper mill and related assets of UPM Miramichi to Umoe Solar AS of Norway), which made the Company one of the three largest suppliers of magazine paper in North America. In March 1998, UPM acquired a 49% interest in a paper mill project at Changshu near Shanghai in China. In August 2000, UPM acquired the remaining 51% of the Changshu paper mill, providing it with a significant presence in fine paper manufacturing in China. This presence was further strengthened by the commissioning of a new fine paper machine at this mill in mid-2005. In November 2001, UPM completed the largest acquisition of its company history, when it purchased four of the six paper mills of the German G. Haindl’sche Papierfabriken KGaA (‘‘Haindl’’) for a total enterprise value of A2,690 million. Besides targeted acquisitions, UPM has divested certain non-core businesses. These include the divestments of the Simpele paperboard mill in Finland and Joutseno pulp mill in Finland in 1997, Walki Films in 2002, Loparex Group in 2005 and Walki Wisa in 2007. UPM has also divested its wood-based building supplies businesses. In 2004, it divested Brooks Group and ANCO Trae A/S and, in 2006, it divested Puukeskus Oy (‘‘Puukeskus’’). In 2007, UPM divested its port operators, Oy Rauma Stevedoring Ltd and Oy Botnia Shipping Ab.
Profit Improvement Programmes To improve its profitability and cost competitiveness, UPM has implemented major profit improvement programmes over the last decade. UPM’s three year profitability programme 2006-2008 included the elimination of uncompetitive capacity and restructuring of operations and resulted in estimated A190 million annual savings in fixed costs. UPM has closed three paper mills: Voikkaa (2006), Miramichi (2007) and Kajaani (2008) and two pulp mills: Miramichi in Canada (2004) and Tervasaari in Finland (2008). In June 2008, UPM closed down the Luumaki¨ timber components and planing mill. In December 2008, UPM closed down the Leivonmaki¨ sawmill in Finland. Altogether approximately 1.8 million tonnes of paper producing capacity and 0.4 million tonnes of chemical pulp capacity has been
BP-67 closed during 2004–2008. These restructurings have also led to a reduction of workforce which, for continuing businesses, has decreased by approximately 17% since the end of 2003. In September 2008, UPM announced new measures to further improve the efficiency in all of its business groups and business areas. Negotiations with employee representatives are expected to be concluded during the first half of 2009. Once negotiations are concluded, streamlining of operations is expected to result in annual savings of approximately A70 million in fixed costs. In November 2008, UPM’s Label business area announced a plan to restructure its European operations in order to improve the business area’s cost competitiveness and profitability. The plan includes a reduction in coating capacity, closure of a number of self-adhesive labelstock production lines and reduction of slitting capacity in Finland, France, Germany, Hungary and the United Kingdom. The final decisions will be taken after consultation and negotiation with employees in the relevant countries. The aim is to reduce annual operating costs by approximately A25 million, with no material impact on sales. In addition to the above, UPM has continued pursuing a variety of tailored strategic and operative initiatives in order to improve efficiency, increase the value added component of its production and lower its variable and fixed costs. In its strategy implementation in 2008, UPM focused on European profitability, new growth markets and new businesses. See ‘‘—Strategic Steps 2008’’ below. UPM’s most recent competitiveness developments include, but are not limited to: (i) improving energy and cost efficiency at its paper mills, (ii) developing the Group’s Chinese platform, (iii) completion of the pulp mill investment in Finland in June 2008, (iv) completing an investment programme in its pressure sensitive labelstock business and (v) planning of a pulp mill, sawmill and oriented strand board (‘‘OSB’’) mill investment in Northwestern Russia through its 50/50-owned joint venture with a local partner Sveza Group.
Structure Until 30 November 2008, UPM’s operations were organised into three business areas: Paper Divisions, Label Division and Wood Products Division. The Paper Divisions business area was further divided into Magazine Papers Division, Newsprint Division and Fine and Speciality Papers Division. In 2008, UPM changed its business structure in order to improve UPM’s ability to leverage its competitive advantages. Beginning in December 2008, UPM’s operations have been organised into the following three business groups: • Energy and pulp, which comprises the following business areas: • Energy; • Pulp; and • Forest and timber. • Paper; and • Engineered materials, which comprises the following business areas: • Label; and • Plywood. UPM’s biofuel business is included in the Energy and pulp business group as a development unit. See ‘‘—New Businesses’’ below. UPM’s RFID tags and wood plastic composite businesses are included in the Engineered materials business group as development units. See ‘‘—Strategic Steps 2008—New Businesses’’ and ‘‘—Other Operations’’ below. Currently, UPM reports financial information for the following seven business areas: Energy, Pulp, Forest and timber, Paper, Label, Plywood and Other operations. The Other operations business area includes the following development units: RFID tags, wood plastic composites, biofuels, certain logistics services and the central administrative functions for the Group.
Business Strategy UPM’s vision is to be the frontrunner in the new forest industry. It creates value from renewable and recyclable materials.
BP-68 UPM’s business portfolio consists of energy, chemical pulp, sawn timber, graphic papers, selected speciality papers, self-adhesive label materials and plywood. In the long-term, UPM aims to increase its emphasis on new growth markets, engineered materials, energy and competitively produced pulp in its business portfolio. Fibre-based businesses continue to form the cornerstone of UPM’s strategy. In the new business environment, cost efficiency, change readiness and innovation are key factors for UPM’s success. UPM’s development requires a solid financial position and profitability at all times. It seeks to secure its profitability and cash flow through effective cost management. UPM seeks to secure competitive access to critical production inputs by having its own chemical pulp, energy and forest resources. As of the date of this Base Prospectus, UPM is self-sufficient in chemical pulp and approximately 85% self-sufficient in electric power. Going forward, UPM focuses on three strategic priorities: improving profitability in Europe, advancing in new growth markets and developing new business opportunities, which were already UPM’s areas of focus in 2008. See ‘‘—Strategic Steps 2008’’ below. In Europe, UPM’s goal is to be a competitive supplier leveraging its efficient production facilities and operational efficiencies through the value chain as well as leveraging its access to pulp, energy, wood and recycled fibre. In new growth markets, UPM aims to grow through investments, as well as through acquisitions and partnerships. Regions that have market potential, access to competitive raw materials and a competitive cost base are of primary interest to UPM. UPM’s new business opportunities include, for example, RFID tags, wood plastic composites and biofuels. In-house know-how forms the basis for further business development. UPM seeks to enter into new businesses both organically and through acquisitions.
Strategic Steps 2008 European Profitability By the end of 2008, UPM’s three year profitability programme 2006-2008 was completed as planned and it resulted in annual cost savings of approximately A190 million in fixed costs, as compared to the cost level of 2006. In 2008, UPM sought to secure its profitability eliminating capacity by closing its least competitive paper and pulp production lines in Finland. In December 2008, UPM permanently closed the Kajaani paper mill and the Tervasaari pulp mill in Valkeakoski in Finland. In October 2008, UPM announced temporary layoffs at its Heinola plywood mill in Finland to take effect in 2009, due to the rapidly declining birch plywood market situation. The employee negotiations that were concluded in December concerned all employees in all personnel groups at the mill. Currently, the mill employs approximately 230 people. In November 2008, UPM announced its plans to restructure the European operations of its Label business area in order to improve the business area’s cost competitiveness and profitability. UPM continued to restructure its sawmilling business, and, in December 2008, permanently closed its Leivonmaki¨ sawmill in Finland. The Luumaki¨ timber components and planing mill in Finland was closed down in June 2008. In addition, UPM continued to streamline its operations in all of its business groups, business areas and functions. In 2008, UPM continued to build a new CHP plant utilising biomass at the Caledonian mill in Scotland. When completed, the new power plant seeks to increase UPM’s share of renewable energy sources. The investment was targeted to quality and efficiency improvements.
New Growth Markets In 2008, UPM opened two labelstock production facilities. In February 2008, UPM Raflatac’s production plant commenced operations in Dixon, Illinois in the United States. In November 2008, labelstock production commenced in Wroclaw in Poland.
BP-69 In April 2008, UPM signed an agreement to form a joint venture company, OOO Borea with the Russian Sveza Group. The goal is to build a state-of-the-art forest industry facility in the Vologda region of Northwest Russia. The feasibility study on the project is ongoing. In 2008, UPM started the modernisation of its Chudovo plywood mill in Russia aiming at efficiency improvement and increased value added production. The project is scheduled to be completed in 2009. UPM also completed the plywood mill expansion in Otepa¨a¨ in Estonia, in 2008. Currently, UPM is building a plywood coating line at the Otepa¨a¨ mill in order to increase the processing value of plywood products. This project is scheduled to be completed by the end of 2009.
New Businesses In December 2008, UPM opened a new production facility producing wood plastic composites in Bruchsal in Germany and, thereby, expanded its production of innovative wood plastic composites made of fibre and plastics surplus originating from its labelstock production. In 2008, UPM began the production of RFID tags and inlays in Guangzhou, in China. The new manufacturing site serves the fast-growing Asian market in all RFID end-use areas. UPM and Lassila & Tikanoja Oyj (‘‘L&T’’), a Finnish environmental management and property and plant support service company, developed a new ethanol and energy production concept that, for the first time, utilises commercial and industrial waste, such as paper, cardboard, wood and plastic. Based on test results, UPM’s management expects the concept to offer business prospects in the future. In 2008, UPM, together with Andritz/Carbona, began testing gasification technology at the pilot plant in Chicago, Illinois in the United States.
Financial Targets and Dividend Policy Following the implementation of its new business structure that became effective on 1 December 2008, UPM established new financial targets for each business group and business area, as well as for the entire Group. The new financial targets emphasise the importance of cash flow and UPM’s financial flexibility in steering its business groups and business areas. UPM’s long-term target is an operating profit margin that exceeds 10%. The return on equity target is at least five percentage points above the yield of a ten-year risk-free investment such as the Finnish government’s euro-denominated bonds. At the end of 2008, the minimum target for return on equity, as defined above, was 8.7%. UPM’s aim is to keep its gearing ratio below 90%. UPM has further emphasized the priority of debt reduction. UPM intends to pay as an annual dividend at least one-third of its net cash flow from operating activities less operational capital expenditure. To promote stability in dividends, net cash flow will be calculated as an average over a three-year period. Remaining funds are to be allocated between growth capital expenditure and debt reduction. UPM’s net cash flow from operating activities in 2008 was A628 million and operational capital expenditure was A235 million.
Major Shareholders To the knowledge of UPM’s management, UPM is not, directly or indirectly, controlled by another corporation, by any government or by any other entity and there are no arrangements under which a change of control may, at a subsequent date, result.
BP-70 The following table sets forth UPM’s major shareholders as of 27 February 2009, based on registered share ownership as reflected in the share register:
As of 27 February 2009 Number of Percent of Percent of Shares Shares Votes Ilmarinen Mutual Pension Insurance Company ...... 13,132,901 2.53 2.53 Varma Mutual Pension Insurance Company ...... 11,553,899 2.22 2.22 Gustaf Serlachius (representing five shareholders) ...... 6,309,811 1.21 1.21 OP-Delta Investment Fund ...... 5,572,274 1.70 1.07 The State Pension Fund ...... 5,400,000 1.04 1.04 Svenska litteratursallskapet¨ i Finland ...... 3,827,080 0.74 0.74 Suomi Mutual Life Assurance Company ...... 3,185,000 0.61 0.61 The Local Government Pensions Institution ...... 2,274,937 0.46 0.46 Etera Mutual Pension Insurance Company ...... 2,055,000 0.40 0.40 Sellan Intresentter Ab ...... 1,925,000 0.37 0.37 Nominee registered and foreign shareholders ...... 318,893,447 61.33 61.33 Others ...... 145,740,739 28.03 28.03 Total ...... 519,970,088 100.00 100.00
To the knowledge of UPM’s management, there were two holders of 5% or more of the Company’s shares as of 27 February 2009.
As of 27 February 2009 Number of Percent of Percent of Shares Shares Votes Norges Bank ...... 26,067,273 5.01 5.01 Franklin Resources Inc.(1) ...... 51,673,151 6.73 9.94
(1) These shares were held through accounts managed by affiliated investment advisors of Franklin Resources Inc. as of 30 October 2008. On that date, Franklin Resources, Inc. held 34,930,146 shares and in addition held voting rights in 16,743,005 shares. This represented 6.73% of UPM-Kymmene Corporation’s total number of shares in issue (being 519,970,088) and 9.94% of total voting rights as of 30 October 2008. UPM is unable to determine the exact holdings of these accounts as of dates other than the dates on which they notify the Company of their holdings on the basis of the flagging rules of the Finnish Securities Market Act (495/1989, as amended), or the dates of the annual or extraordinary general meetings of shareholders of UPM-Kymmene Corporation, at which time these entities have elected to register their holdings.
Corporate Structure UPM is the leading producer of graphic papers and among the largest forestry companies in the world, in terms of capacity. It is also the world’s second largest producer of label materials and Europe’s largest producer of plywood, in terms of capacity. UPM’s core businesses are energy, chemical pulp, sawn timber, graphic papers, selected speciality papers, self-adhesive label materials and plywood. In recent years, UPM has introduced several new business initiatives, which are currently under development or have been recently implemented, such as RFID tags, wood plastic composites and biofuels. While UPM’s management believes that these business initiatives represent opportunities in the future, their financial impact has so far been limited. In 2008, the Group had sales of A9.5 billion and, as of 31 December 2008, the Group’s total assets amounted to A13.8 billion. The main markets for the Group’s products are Europe, which accounted for 73% of sales; North America, which accounted for 11% of sales; and Asia and other countries, which accounted for 16% of sales, each in 2008.
BP-71 The following tables set forth the percentages of UPM’s sales of A9.5 billion and A10.0 billion in 2008 and 2007, respectively, by business area and by geographic market area:
Year ended 31 December 2008 2007 (Percentage of Group sales(1)) Business Area Energy ...... 1 1 Pulp ...... 1 0 Forest and timber ...... 9 10 Paper ...... 72 71 Label ...... 10 10 Plywood ...... 5 5 Other operations ...... 2 3 Total ...... 100 100
(1) Sales % represents third-party sales.
Year ended 31 December 2008 2007 (Percentage of Group sales) Market Area EU countries: Germany ...... 17 17 United Kingdom ...... 11 12 Finland ...... 10 9 France ...... 6 6 Other EU countries ...... 24 24 Total EU countries ...... 68 68 Other European countries ...... 5 5 North America ...... 11 12 Asia ...... 11 10 Other countries(1) ...... 5 5 Total ...... 100 100
(1) Includes Africa, South America, Mexico, Australia and Oceania.
Energy Business Area General The Energy business area manages and develops UPM’s power generation assets that are not integrated into paper mills, generating and procuring electricity for UPM and for market sales. The Energy business area is also responsible for UPM’s electricity distribution and natural gas procurement.
BP-72 The following table sets forth certain financial and statistical data regarding the Energy business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Energy Sales ...... 478 379 EBITDA(1) ...... 207 118 % of sales ...... 43.3 31.1 Share of results of associated companies and joint ventures ...... (26) (17) Depreciation, amortisation and impairment charges ...... (6) (6) Operating profit ...... 175 95 % of sales ...... 36.6 25.1 Special items ...... — — Operating profit excluding special items ...... 175 95 % of sales ...... 36.6 25.1 Electricity deliveries, MWh ...... 10,167 10,349 Capital employed (average) ...... 951 994 ROCE (excluding special items), %(2) ...... 18.4 9.6 Personnel (as of 31 December) ...... 39 26
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). As of 31 December 2008, the Energy business area’s total electricity generating capacity was approximately 1,626 MW, all of which was located in Finland. This included UPM’s shares in energy companies, mainly in the associated company Pohjolan Voima Oy (‘‘Pohjolan Voima’’), and in Kemijoki Oy (‘‘Kemijoki’’), as well as UPM’s own hydropower plants. UPM’s management believes that the Energy business area’s power generation structure is cost competitive and has low carbon dioxide emissions. Of the total electricity generating capacity, 667 MW (41%) was hydropower, 541 MW (33%) was nuclear power and 418 MW (26%) was thermal condensing power. UPM owns 41.84% of the shares in Pohjolan Voima, the second largest power generator in Finland. Annually, Pohjolan Voima generates and procures approximately 25,000 GWh of electricity and heat for its shareholders on a cost basis. UPM’s share of Pohjolan Voima’s electricity generation covers approximately 35% of UPM’s total electricity requirement. Most of this consists of hydropower and nuclear power. UPM is free to use the electricity itself or sell it to the market. Pohjolan Voima, in turn, owns 58.12% of the shares in Teollisuuden Voima Oy (‘‘Teollisuuden Voima’’). Teollisuuden Voima is a nuclear power producer generating electricity for its shareholders on a cost basis. Pohjolan Voima also owns 25% of the shares in Fingrid Oy, the Finnish electricity transmission system operator, which is responsible for the Finnish national transmission grid. UPM owns 19% of the hydropower shares in Kemijoki, a Finnish hydropower producer. Currently, Teollisuuden Voima is building a new nuclear power plant with a capacity of 1,630 MW in Olkiluoto, Eurajoki in Finland. UPM’s share is 468 MW, or approximately 29% of the power capacity of the new plant through Pohjolan Voima. Once completed, this new nuclear power plant is estimated to increase the Energy business area’s electricity generating capacity by approximately 29%, or UPM’s electricity generating capacity by approximately 18%. UPM has made a A40 million equity investment in the project in the form of shares in Pohjolan Voima. The start-up of the nuclear power plant is currently scheduled to take place in 2012. In December 2008, Teollisuuden Voima informed UPM that the supplier of the nuclear power plant in Olkiluoto had filed a request for arbitration concerning the delay of the completion of the project and
BP-73 related costs. UPM is currently not in a position to estimate the impact of the contemplated arbitration proceedings on its business area or its equity investment in the nuclear power plant project. UPM’s Paper business area is UPM’s Energy business area’s largest customer, but the Energy business area also has significant external sales. In 2008, external sales, mainly through the Nordic electricity exchange, represented 29% of the Energy business area’s sales. The following table sets forth the power generation capacity of UPM’s own power plants and the capacity generated through its shareholdings in other companies as of 31 December 2008:
As of 31 December 2008 (Nominal MW) Own hydropower ...... 174 Hydro (through shareholding) ...... 493 Nuclear (through shareholding) ...... 541 Thermal (through shareholding) ...... 418 Total in Energy business area ...... 1,626 CHP in Paper business group ...... 913 Total UPM ...... 2,539
UPM’s Energy Balance UPM’s energy strategy is based on high self-sufficiency in both electricity and fuel supply. Its electricity portfolio is versatile and competitive and its paper mill sites use mainly hydropower, nuclear power and biomass-fired CHP. Effective large-scale utilisation of biomass based fuels is an important aspect of UPM’s energy strategy from both an economic and environmental efficiency point of view. The Energy business area’s electricity generation capacity was 1,626 MW as of 31 December 2008. In addition, UPM has CHP plants operating on its paper mill sites, with a total electricity generating capacity of 913 MW as of 31 December 2008. These CHP plants are included in the Paper business area. Altogether, UPM’s total electricity generation capacity was 2,539 MW as of 31 December 2008. For the year ended 31 December 2008, UPM’s own electricity consumption amounted to 16.7 TWh, as compared to 18.2 TWh for the year ended 31 December 2007. In 2008, UPM generated 14.2 TWh of electricity, as compared to 14.3 TWh in 2007, in its own and partly-owned power plants, and hence, its electric power self-sufficiency increased to 85% in 2008 from 79% in 2007. UPM is a net seller of electricity in Finland and purchases electricity in other markets. Its net electricity purchases amounted to 2.5 TWh in 2008, as compared to 3.9 TWh in 2007. For the year ended December 2008, heat generated from fuels procured by UPM, together with purchased heat and heat generated by thermo mechanical pulping, amounted to 33.3 TWh, as compared to 36.6 TWh for the year ended 31 December 2007. Currently, carbon-neutral energy sources dominate UPM’s energy portfolio and, globally, 62% of fuels used at UPM’s mills are biomass-based and carbon dioxide neutral.
BP-74 The following table sets forth UPM’s electricity procurement and consumption as of 31 December 2008 and 2007:
As of 31 December 2008 2007 (TWh) Procurement Hydropower shares ...... 3.9 3.2 Back-pressure power ...... 4.3 4.7 Nuclear power shares ...... 4.5 4.5 Thermal energy shares ...... 1.5 1.9 Purchased electricity ...... 5.0 5.7 Total ...... 19.2 20.0 Consumption Mills in Finland ...... 10.3 11.2 Mills outside Finland ...... 6.4 7.0 Sales ...... 2.5 1.8 Total ...... 19.2 20.0
The following table sets forth UPM’s sources of thermal energy as of 31 December 2008 and 2007:
As of 31 December 2008 2007 (TWh) Black liquor ...... 11.1 11.3 Bark and other biofuels ...... 8.0 8.0 Heat received from TMP production ...... 2.1 2.6 Peat...... 1.3 1.7 Purchased heat ...... 0.3 0.3 Natural gas ...... 7.1 7.9 Oil...... 0.3 1.0 Coal ...... 3.1 3.7 Total ...... 33.3 36.6
BP-75 Pulp Business Area General The Pulp business area is a chemical pulp producer with three modern pulp mills in Finland. In addition, the Pulp business area also operates through its associated company, Oy Metsa-Botnia¨ Ab (‘‘Metsa-Botnia’’)¨ in Finland and in Uruguay. The Pulp business area’s products range from northern softwood pulp and northern hardwood pulp to eucalyptus pulp made from fast growing plantation wood in the southern hemisphere. The following table sets forth certain financial and statistical data regarding the Pulp business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Pulp Sales ...... 944 808 EBITDA(1) ...... 139 188 % of sales ...... 14.7 23.3 Share of results of associated companies and joint ventures ...... 86 58 Depreciation, amortisation and impairment charges ...... (128) (101) Operating profit ...... 89 145 % of sales ...... 9.4 17.9 Special items(2) ...... (59) (43) Operating profit excluding special items ...... 148 188 % of sales ...... 15.7 23.3 Pulp deliveries, 1,000 t ...... 1,982 1,927 Capital employed (average) ...... 1,674 1,423 ROCE (excluding special items), %(3) ...... 8.8 13.2 Personnel (as of 31 December) ...... 1,159 1,186
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, special items of A59 million related to the closure of the Tervasaari pulp mill in Finland. The only special item in 2007 related to a goodwill impairment charge of A43 million. (3) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). As of 31 December 2008, UPM had three modern pulp mills in Finland, with a total pulp production capacity of 2.1 million tonnes. In December 2008, UPM closed its least competitive Tervasaari pulp mill in Valkeakoski in Finland, which had an annual pulp production capacity of 210,000 tonnes. UPM owns 47% of the shares in Metsa-Botnia.¨ Following the closure of the Kaskinen pulp mill in March 2009, Metsa-Botnia¨ has four pulp mills in Finland and a new eucalyptus pulp mill in Uruguay. Following the closure of the Kaskinen pulp mill, UPM’s ownership in Metsa-Botnia¨ entitles it to 1.5 million tonnes of capacity annually. The Pulp business area’s total annual pulp production capacity is 3.6 million tonnes, which makes UPM the sixth largest pulp producer in the world. In June 2008, UPM completed rebuilding its chemical recovery plant at the Kymi pulp mill, in Finland which improved UPM’s energy self-sufficiency, while reducing its carbon dioxide emissions. The total investment for the rebuild amounted to A360 million. In April 2008, UPM signed a shareholders’ agreement to form a 50/50-owned joint venture company with the Russian Sveza Group to build a forest industry facility in the Vologda region of Northwest Russia. The related letter of intent was signed in December 2007. The planned industrial complex is planned to include a modern pulp mill, a sawmill and an OSB building panels mill. The final investment decision
BP-76 regarding this investment is subject to the satisfactory outcome of a feasibility study in respect of the project and obtaining the necessary approvals from the relevant authorities. Most of the Pulp business area’s sales are internal sales to the Paper business area. In 2008, internal sales represented 93% of the Pulp business area’s sales, as compared to 96% in 2007. The following chart sets forth the world’s biggest producers of bleached chemical pulp as of January 2009: World’s biggest producers of bleached chemical pulp
Capacity 1,000 t/a 7,500
6,000
4,500
3,000
1,500
0
Domtar UPM*) Aracruz Arauco nal Paper Stora Enso tio aper Group RGM/APRIL APP/Sinar Mas Georgia-Pacific Interna Nippon P Softwood Hardwood
*) incl. share of Metsä-Botnia 20MAR200907420897
Source: Poyry.¨
The following table sets forth UPM’s pulp production capacity as of January 2009:
As of January 2009 (1,000 tonnes per annum) Kaukas ...... 740 Pietarsaari ...... 800 Kymi...... 540 Own production capacity, total ...... 2,080 Entitlement to associated company’s capacity corresponding to UPM’s shareholding(1) . . . 1,540 Total UPM ...... 3,620
(1) Excluding the Kaskinen pulp mill.
UPM’s Fibre Balance There are three principal types of pulp: chemical pulp, mechanical pulp and recycled fibre pulp. Chemical pulp is produced by cooking wood chips in solutions of caustic chemicals to separate the cellulose fibres used for pulping. Mechanical pulp is produced by grinding logs or wood chips. Recycled fibre, which is produced by de-inking recovered paper, is used as a source for recycled fibre pulp. UPM’s mechanical and recycled fibre pulp production is fully integrated with its paper production with no external sales and is therefore, included in the Paper business area.
BP-77 In chemical pulp, UPM is self-sufficient through its own pulp mills and through its ownership in Metsa-Botnia.¨ UPM also aims to maintain self-sufficiency in its chemical pulp production with increasing focus on competitive production. For commercial and logistics reasons, UPM purchases pulp on the open market from selected pulp producers under long-term contracts. On the group level, UPM is a net seller of softwood pulp and a net purchaser of hardwood pulp. In 2008, the total consumption of chemical pulp was 3.1 million tonnes, as compared to 3.6 million tonnes in 2007. In 2008, UPM’s recycled fibre consumption was 3.0 million tonnes in newsprint and magazine paper production, the same level as in 2007. This yielded approximately 2.4 million tonnes of recycled fibre pulp, as compared to 2.3 million tonnes in 2007. The goal of UPM’s recovered paper procurement is to be involved in the value chain and seek to secure long-term cost competitive supplies for its relevant newsprint and magazine paper mills in Europe. Mechanical pulp represents the third major source of wood fibres for UPM and is used mainly in the production of magazine papers. In 2008, UPM’s total consumption of mechanical pulp was 2.6 million tonnes, as compared to 3.0 million tonnes in 2007. The following table sets forth UPM’s annual pulp production volumes for the two most recent years:
Year ended 31 December 2008 2007 (1,000 tonnes) Production(1) Chemical pulp Own production ...... 2,007 2,149 From associated companies ...... 561 448 Mechanical pulp ...... 2,602 2,942 Recycled fibre pulp ...... 2,400 2,305 Total ...... 7,570 7,844
(1) Includes the production of all of UPM’s pulp mills. The following table sets forth UPM’s annual pulp consumption volumes for the two most recent years:
Year ended 31 December 2008 2007 (1,000 tonnes) Consumption Chemical pulp ...... 3,117 3,561 Mechanical pulp ...... 2,648 2,983 Recycled fibre pulp ...... 2,400 2,305 Total ...... 8,165 8,849
Forest and Timber Business Area The Forest and timber business area is responsible for the forest biomass sourcing for UPM’s mills and biomass-fired power plants worldwide. The Forest and timber business area includes UPM’s own forests, wood procurement operations, service offering for private forest owners and sawmills.
BP-78 The following table sets forth certain financial and statistical data regarding the Forest and timber business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Forest and timber Sales ...... 1,920 2,039 EBITDA(1) ...... (48) 159 % of sales ...... (2.5) 7.8 Change in fair value of biological assets and wood harvested ...... 50 79 Share of results of associated companies and joint ventures ...... — 1 Depreciation, amortisation and impairment charges ...... (56) (44) Operating profit ...... (59) 201 % of sales ...... (3.1) 9.9 Special items(2) ...... (36) (13) Operating profit excluding special items ...... (23) 214 % of sales ...... (1.2) 10.5 Sawn timber deliveries total, 1,000 m3 ...... 2,132 2,325 Capital employed (average) ...... 1,878 1,679 ROCE (excluding special items), %(3) ...... (1.2) 12.7 Personnel (as of 31 December) ...... 3,278 3,510
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, special items included an impairment charge of A31 million related to fixed assets of the Finnish sawmills and other restructuring charges of A5 million. In 2007, special items consisted of impairment charges of A19 million related mainly to Miramichi’s forestry and sawmilling operations, a gain of A6 million on the sale of real estate assets. (3) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). UPM owns approximately one million hectares of forestland and manages approximately 0.7 million hectares of forestland in Finland, Russia, the United Kingdom and the United States. The planned level of sustainable felling is approximately 2.1 million cubic meters per year, covering on average approximately 10% of UPM’s annual wood consumption. Sawmills play an important role in UPM’s wood sourcing. UPM’s timber products are sold under the registered WISA trademark and the products range from standard sawn timber to value added components, mainly for the building and other industries. Currently, UPM’s annual capacity for sawn timber is 2.4 million cubic metres, which makes UPM the third largest sawn timber producer in Europe. UPM has six sawmills in Finland, one in Russia and one in Austria. In June 2008, UPM closed down its Luumaki¨ timber components and planing mill in Finland. In December 2008, the Leivonmaki¨ sawmill (with an annual capacity of 80,000 cubic metres of sawn timber) in Finland was closed down. UPM’s principal competitors in sawn timber production are suppliers based in the Nordic countries, including Stora Enso Corporation (‘‘Stora Enso’’), Finnforest Corporation (‘‘Finnforest’’), SCA Forest Products AB (‘‘SCA Forest Products’’), Iggesund Timber Sales Ltd and Sodra¨ Timber AB. In addition, UPM faces competition from local producers, particularly in Austria and Germany, but also from Russia, Ukraine and elsewhere in Eastern Europe, where producers recently have built new and competitive capacity aimed at serving their local markets as well as the European markets. In 2008, 55% of the Forest and timber business area’s sales were internal sales, comprising mostly wood and forest biomass sales to the Pulp business area and the Paper business area.
BP-79 The following chart sets forth Europe’s biggest sawn timber producers as of January 2009: Europe’s biggest sawn timber producers Capacity 1,000 m³/a 7,500
6,000
4,500
3,000
1,500
0
up dra UPM liitto ö SCA sä S Pfeifer ra Enso Klausner Moelven Klenk Holz Met Sto Setra Gro 20MAR200907430679
Source: Poyry.¨
The following table sets forth the forestland owned by UPM as of 31 December 2008:
As of 31 December 2008 (1,000 hectares) Finland ...... 915 United Kingdom ...... 3 United States ...... 77 Canada ...... 17 Total ...... 1,012
UPM’s Wood Procurement In 2008, UPM consumed 24.8 million cubic metres of wood raw material, as compared to 26.9 million cubic metres in 2007. Over 80% of UPM’s wood raw material is consumed in Finland, and approximately 15% is consumed in Central Europe, Russia and the United States. In 2008, UPM harvested 2.2 million cubic metres of wood from its own forests, as compared to 3.2 million cubic metres in 2007. This represented 9% and 12% of UPM’s wood raw material consumption during 2008 and 2007, respectively. The number of private forests under UPM’s management increased during 2008, as compared to 2007. In 2008, UPM continued to import wood raw materials from Russia to Finland and its imports amounted to 5 million cubic metres, as compared to 4 million cubic metres in 2007. Currently, UPM is reducing dependence on wood raw material imports from Russia by increasing its domestic wood sourcing, decreasing its wood consumption in Finland and importing wood raw materials from other countries. See ‘‘—Market Conditions for Wood Raw Material’’ below. In 2008, UPM procured forest biomass equivalent to 3.4 GWh of energy production, primarily to its own and partly-owned power plants, as compared to 2.8 GWh in 2007. UPM aims to ensure that wood raw material is not wasted, but is used efficiently.
BP-80 The following table sets forth UPM’s wood consumption by country for the two most recent years:
Year ended 31 December 2008 2007 (1,000 m3) Finland ...... 20,676 22,330 Austria ...... 964 1,020 Germany ...... 655 640 France ...... 450 490 Russia ...... 859 860 United Kingdom ...... 303 290 Estonia ...... 108 90 Canada ...... 203 650 United States ...... 539 520 Total ...... 24,757 26,890
Paper Business Area The Paper business area’s product portfolio includes publication papers (coated and uncoated magazine papers, standard and speciality newsprint) and fine and speciality papers (coated and uncoated fine paper reels and sheets, label and packaging papers). Most of UPM’s paper products are sold through UPM’s own sales network. The Paper business area’s customers include mainly magazine and newsprint publishers, printers, merchants and paper converters. Publication paper is used in magazines, newspapers, manuals and booklets, books, catalogues, telephone directories, inserts, flyers, newspaper supplements and advertising materials. Fine paper is used in magazines, catalogues, inserts, advertising materials, copy papers, preprint applications and envelopes. Speciality paper is used for several end-uses of labelling, packaging and mailing industries. The following table sets forth certain financial and statistical data regarding the Paper business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Paper Sales ...... 7,011 7,328 EBITDA(1) ...... 885 939 % of sales ...... 12.6 12.8 Share of results of associated companies and joint ventures ...... 1 — Depreciation, amortisation and impairment charges ...... (967) (995) Operating profit ...... (129) (137) % of sales ...... (1.8) (1.9) Special items(2) ...... (379) (399) Operating profit excluding special items ...... 250 262 % of sales ...... 3.6 3.6 Deliveries, publication papers, 1,000 t ...... 7,090 7,530 Deliveries, fine and speciality papers, 1,000 t ...... 3,551 3,859 Paper deliveries total, 1,000 t ...... 10,641 11,389 Capital employed (average) ...... 6,503 7,317 ROCE (excluding special items), %(3) ...... 3.8 3.6 Personnel (as of 31 December) ...... 13,262 14,538
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, special items consisted of the goodwill impairment charge of A230 million, impairment charges of A101 million and other restructuring costs of A42 million related to the closure of the Kajaani paper mill, and other restructuring costs, net of A6 million.
BP-81 In 2007, special items included personnel expenses of A54 million and other costs of A36 million related to the closure of the Miramichi paper mill, and an income of A9 million related to other restructuring measures. Special items in 2007 also included a goodwill impairment charge of A307 million, an impairment charge of A22 million and income of A11 million related to impairment reversals. (3) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average).
UPM’s paper mills are located in Austria, China, Finland, France, Germany, the United Kingdom and the United States. UPM’s annual paper production capacity is approximately 11.5 million tonnes, with 43% of the capacity located in Finland, 46% in other EU countries, 8% in China and 3% in the United States. Papers produced by UPM are based on a renewable fibre raw material base, including various long and short fibre wood species and recycled fibre, which represented approximately 30% of UPM’s fibre raw material consumption in 2008. In 2008, approximately 71% of paper produced by UPM was sold to Europe and 11% to the United States and Canada. The Paper business area’s main growth market is Asia, which represented 12% of its sales in 2008. With an annual capacity of approximately 4.8 million tonnes, UPM is the world’s leading producer of magazine paper, with approximately one-fifth of the global market in 2008. Currently, UPM’s annual newsprint paper production capacity is approximately 2.5 million tonnes and its annual fine paper production capacity is over 3.4 million tonnes. Additionally, UPM’s annual speciality paper production capacity is approximately 0.8 million tonnes. The Paper business area produces paper on 43 paper machines at 19 paper mills in Austria, China, Finland, France, Germany, the United Kingdom and the United States. In Finland, the business area’s paper mills are located in Jams¨ ankoski,¨ Kaipola, Kuusankoski, Lappeenranta, Pietarsaari, Rauma and Valkeakoski. Other European paper mills are located in Augsburg, Schongau, Schwedt and Nordland in Dorpen¨ in Germany; Caledonian in Irvine in Scotland; Shotton in Wales; Stracel in Strasbourg, Docelles and Chapelle in Grand-Couronne in France as well as Steyrermuhl¨ in Austria. In the United States, UPM’s paper mill is located in Blandin in Grand Rapids, Minnesota. In China, paper is produced at Changshu, near Shanghai. The Paper business area also includes UPM’s CHP plants operating on its paper mill sites. The CHP plants represent one-third of UPM’s total power generation and are mainly fuelled by biomass. The following table sets forth the Paper business area’s sales by geographic market area in 2008:
2008 Percent (E in millions) Europe ...... 4,996 71 The United States and Canada ...... 776 11 Asia ...... 860 12 Rest of the world ...... 379 6 Total ...... 7,011 100
The following table sets forth the annual capacity and industry market position of the main products produced by the Paper business area as of 31 December 2008:
European Global Capacity position position (1,000 tonnes/year) Magazine papers ...... 4,750 1 1 Newsprint ...... 2,460 2 4 Fine papers ...... 3,415 3 5 Speciality papers ...... 850 1–4 – Papers, total ...... 11,475 – –
Source: UPM, Poyry.¨ Capacities following the closure of the Kajaani paper mill in the fourth quarter of 2008. For a discussion of possible changes to the annual capacity of UPM’s paper divisions, see ‘‘—Recent Events’’ below. The Paper business area utilises UPM’s high level of self-sufficiency in energy and pulp production. UPM is self-sufficient in pulp and approximately 85% self-sufficient in electric power. UPM’s most important raw material used in the production of uncoated and coated fine paper is chemical pulp. Chemical pulp represents approximately 40% of UPM’s total fibre consumption. Mechanical pulp
BP-82 represents approximately 30% of the wood fibres UPM uses in its paper production. Mechanical pulping is integrated into paper production and is used mainly in the production of magazine papers. In addition to chemical and mechanical pulp, approximately 30% of all fibre raw material used in UPM’s paper production is recovered paper. Recovered paper is used mainly for the production of newsprint, but also for uncoated and coated fine paper. The UPM mills at Chapelle Darblay in Grand-Couronne in France, Schwedt in Germany and Shotton in Wales produce paper made entirely from recovered paper. UPM is one of the world’s largest users of recovered paper in its printing paper production. On a regular basis, UPM carries out investments to further increase the use of recycled fibre in its paper production. UPM also invests in increasing energy self-sufficiency and is increasing its use of forest energy by investing in new mill site power plants fuelled by biomass. Furthermore, UPM regularly rebuilds paper machinery to improve the efficiency and quality of its paper production. At the end of 2008, UPM permanently shut down its Kajaani paper mill in Finland, with an annual capacity of 640,000 tonnes of newsprint, special newsprint and uncoated magazine papers on three paper machines. At the end of 2007, UPM permanently shut down its Miramichi mill in New Brunswick in Canada, which had an annual production capacity of 450,000 tonnes. Further, paper machine 4 at the Jams¨ ankoski¨ paper mill in Finland with annual production capacity of 120,000 tonnes, ceased the production of LWC at the beginning of 2007, as it was converted to produce label papers. With these measures and other measures carried out during the last five years, UPM has reduced its uncompetitive and unprofitable annual paper capacity by approximately 1.8 million tonnes thereby improving its cost competitiveness. The paper products markets are highly competitive. Although quality considerations are a factor, the market is affected mostly by price. UPM competes with various companies in Europe in the manufacture of graphic papers, including Stora Enso, Norske Skog Industrier ASA, Myllykoski Corporation, Holmen AB, SCA Forest Products, Cartiere Burgo SpA, Sappi Limited, M-real Corporation, Portucel Soporcel Group, International Paper Company and Mondi Limited. In North America, UPM’s principal competitors are AbitibiBowater Inc., NewPage Corporation, Verso Paper Holdings LLC and Catalyst Paper Corporation. In China, UPM’s competitors include Asia Pulp & Paper Co. Ltd, Shandong Chenming Paper Holdings Limited, Sun Paper Group and Stora Enso. In other Asian markets, where fine papers are exported, UPM primarily competes with various local producers. Sales contracts concerning publication papers which UPM enters into with publishers and printers, generally have a term of three months, six months or 12 months, with majority of the contracts entered into in Europe having a term of six months or more. In other markets, the terms of the sales contracts are generally shorter. Typically, European publishers have had a long-term relationship with UPM. UPM negotiates supply contracts with most such publishers annually around the calendar year-end. Sales of fine and speciality papers, mainly sold to merchants and paper converters, are dependent primarily on the underlying market balance and pricing, but also on the tendency of merchants to maintain, increase or reduce inventories of fine paper products that are dependent upon the relevant industry cycle. Therefore, most of the sales are based on short-term contracts.
Label Business Area In label materials, UPM shares the number one market position in Europe and has the number two market position in North America. The Label business area, which consists of UPM Raflatac, manufactures self-adhesive label materials for product and information labelling. UPM’s global market share in pressure sensitive labels is approximately 20%.
BP-83 The following table sets forth certain financial and statistical data regarding the Label business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Label Sales ...... 959 998 EBITDA(1) ...... 34 85 % of sales ...... 3.5 8.5 Depreciation, amortisation and impairment charges ...... (39) (29) Operating profit ...... (26) 60 % of sales ...... (2.7) 6.0 Special items(2) ...... (28) 4 Operating profit excluding special items ...... 2 56 % of sales ...... 0.2 5.6 Capital employed (average) ...... 510 420 ROCE (excluding special items), %(3) ...... 0.4 13.3 Personnel (as of 31 December) ...... 2,851 2,568
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, special items of A28 million related to measures to reduce coating capacity and close two slitting terminals in Europe. The only special item in 2007 was an income of A4 million related to restructuring measures. (3) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). Labels are clearly cyclical products. Their demand growth over the economic cycle has historically exceeded GDP growth in all of UPM’s market areas. Typical customers for labels are small and medium- sized label printers doing roll-to-roll label printing using UV-flexo and letterpress printing methods. Personal care products and beverage businesses with global brand owners and other filmic materials present growth opportunities. The Label business area has production facilities that cover all of its main markets. With the support of slitting and distribution terminals, the business area’s products are sold worldwide. In Europe, self-adhesive label materials are produced at five production facilities, and three slitting terminals, which support logistics and customer service. UPM’s new production plant in Poland commenced production in November 2008. The Tampere production plant in Finland is the centre for the business area’s research and development. There are two production plants in the United States, one located in Fletcher in North Carolina, and one in Dixon in Illinois. The Dixon production plant commenced production in January 2008. With the support of five slitting terminals, UPM Raflatac covers all main local consumer markets in the Americas. In the Asia Pacific region, UPM Raflatac has three production facilities, one in each of China, Malaysia and Australia. The newest production plant in Changshu in China, commenced production in December 2006. The slitting terminal network consists of eight facilities. In South Africa, UPM Raflatac has one production plant. The start-up of its Polish production plant in November 2008 completed the Label business area’s major investment programme of three new production facilities and a series of production facility rebuilds. The other new production facilities are located in Dixon, Illinois in the United States and in Changshu in China. These investments were made in an effort to secure cost-effective production with the emphasis on quality and to grow in new markets and new product segments, such as in certain filmic products. In November 2008, the Label business area announced its plans to restructure its European operations. As a part of the restructuring, UPM Raflatac is scheduled to permanently close a number of self-adhesive labelstock production lines and reduce slitting capacity in Finland, France, Germany, Hungary and the United Kingdom, seeking to cope with a weaker economic environment and secure
BP-84 profitability through streamlined operations. The restructuring of the Label business area is scheduled to be completed by the end of 2009. UPM’s main market for pressure sensitive labelstock are the European countries and the second largest market is North America. Although other markets are smaller, UPM’s management believes that significant future growth potential exists in emerging markets, where strong annual market growth has continued. Currently, the two largest suppliers of pressure sensitive labelstock worldwide, Avery Dennison and UPM together, account for approximately one-half of the global market. In addition, UPM competes with local producers, such as Bemis Company Inc/MACTac in North America and Herma GmbH in Europe.
Plywood Business Area Plywood is used in the building, construction and transportation industries and in a number of special applications. UPM offers a wide range of uncoated and coated plywood for various industry specific solutions, which require both quality plywood and specially treated surfaces. The following table sets forth certain financial and statistical data regarding the Plywood business area for the two most recent years: Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Plywood Sales ...... 530 591 EBITDA(1) ...... 46 71 % of sales ...... 8.7 12.0 Depreciation, amortisation and impairment charges ...... (21) (21) Operating profit ...... 28 50 % of sales ...... 5.3 8.5 Special items(2) ...... 3 — Operating profit excluding special items ...... 25 50 % of sales ...... 4.7 8.5 Deliveries, plywood, 1,000 m3 ...... 806 945 Capital employed (average) ...... 307 300 ROCE (excluding special items), %(3) ...... 8.1 16.7 Personnel (as of 31 December) ...... 3,799 3,945
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, the only special item was a reversal of a A3 million provision related to the disposed Kuopio plywood mill in Finland. (3) ROCE is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average). UPM has nine plywood mills: seven in Finland, one in Russia and one in Estonia. The Plywood business area also includes three veneer mills: two in Finland and one in Russia. UPM is Europe’s largest plywood producer, with total annual capacity of one million cubic metres. UPM’s annual veneer manufacturing capacity is 100,000 cubic metres. Business research and development is an integral part of the Plywood business area’s sales and operations. Business research and development combines UPM’s customers’ needs as well as new technologies creating new solutions. In 2008, its research focus was on new materials and processes. In 2008, UPM expanded its production of coated plywood and renewed the manufacturing process of base plywood at its Chudovo plywood mill in Russia. UPM also completed the expansion of its plywood mill in Otepa¨a¨ in Estonia. Further, new plywood component lines and furniture veneer lines were opened at its mills in Jyvaskyl¨ a¨ and Lohja in Finland. Currently, UPM is building a plywood coating line at its Otepa¨a¨ mill in order to increase the processing value of the plywood products the mill produces. This project is scheduled to be completed by the end of 2009. Due to a rapidly weakening market situation, UPM has temporarily reduced its plywood production at all of its mills beginning in autumn 2008.
BP-85 UPM’s principal competitors in the plywood production industry include Finnforest, various medium- sized producers, such as Latvijas Finieris, and Russian producers, such as the Russian Sveza Group, and some South American producers, which export a part of their plywood production to the European markets. The main buyers of plywood products are the construction and transport industries, which use plywood in the construction of trailers and truck floors. Vehicle manufacturers use plywood because it is one of the strongest conventional light-weight materials available. Through the use of plywood, vehicle manufacturers are able to increase their cargo capacity and reduce fuel consumption. Other uses for plywood include scaffolding, concrete forming and shipbuilding. In shipbuilding, plywood is used to build, among other things, the interiors of liquid natural gas transport tanks because plywood withstands extremely low temperatures without contracting. UPM also manufactures veneer for, for example, the production of furniture and parquet flooring. UPM sells its plywood and veneer products under the registered WISA trademark.
Other Operations In UPM’s financial reporting, the Other operations business area includes development units (RFID tags, wood plastic composites and biofuels), certain logistics services and central administrative functions of the Group. In 2008, logistics services represented approximately one-half of the business area’s sales, of which a major part was internal. According to the new business structure, which entered into force on 1 December 2008, RFID tags and wood plastic composite businesses are included in the Engineered materials business group and biofuels is included in the Energy and pulp business group. In financial reporting, however, these development units continue to be reported under the Other operations business area. The following table sets forth certain financial data regarding the Other operations business area for the two most recent years:
Year ended 31 December 2008 2007 (E in millions, except for percentages and personnel and production data) Other Operations Sales ...... 200 450 EBITDA(1) ...... (57) (14) % of sales ...... (28.5) (3.1) Share of results of associated companies and joint ventures ...... 1 1 Depreciation, amortisation and impairment charges ...... (8) (28) Operating profit ...... (54) 69 % of sales ...... (27.0) 15.3 Special items(2) ...... 10 99 Operating profit excluding special items ...... (64) (30) % of sales ...... (32.0) (6.7) Capital employed (average) ...... 137 217 ROCE (excluding special items), %(3) ...... (46.7) (13.8) Personnel (as of 31 December) ...... 595 579
(1) EBITDA means operating profit before depreciation, amortisation and impairment excluding the change in the value of biological assets, its respective share of results of associated companies and joint ventures and special items. (2) In 2008, special items consisted of an adjustment of A5 million to sales of disposals in 2007 and other net restructuring income of A5 million. In 2007, special items included a capital gain of A58 million on the sale of port operators Rauma Stevedoring and Botnia Shipping, a compensation charge of A12 million related to class action lawsuits in the United States, and other impairment charges and restructuring costs of A18 million. In addition, special items included capital gains of A42 million related to the sale of UPM-Asunnot and A29 million related to the sale of Walki Wisa. (3) ROCE is calculated by multiplying (i) 100 by (ii)(a) the profit before tax plus interest expenses and other financial expenses, divided by (b) total equity plus interest-bearing liabilities (average).
BP-86 RFID UPM manufactures a wide variety of RFID tags and inlays, which are designed for specific market segments. In ten years, UPM has grown to become a leading manufacturer of passive HF and UHF tags as well as inlays designed for high-volume applications, such as supply chain, pharmaceuticals, apparel industry, industrial and brand protection, transportation and ticketing. Currently, UPM has RFID tag manufacturing plants in Finland, the United States and China. In recent years, RFID tag markets have grown strongly, and UPM has been able to introduce new applications continuously. The current economic downturn has, however, slowed the introduction of new infrastructure installations, which affects the usage of RFID tags. Despite the downturn, UPM has continued to develop new applications for RFID tags. In October 2008, UPM’s new RFID tag manufacturing plant commenced operations in Guangzhou in China. The new manufacturing plant is targeted to serve the fast-growing Asian market in all RFID end-use areas, including ticketing and the apparel industry.
Wood Plastic Composites UPM ProFi develops, manufactures, markets and sells high-quality wood plastic composite products produced mainly from surplus paper and plastic left over from the production of self-adhesive label materials. UPM ProFi is a development business. Its goal is to become a major producer of wood plastic composite products in Europe. Currently, wood plastic composite products are manufactured in Finland and Germany. The first wood plastic composite products were sold to the Finnish market in 2007 and, in 2008, the sales were expanded to Central Europe. In 2008, UPM continued to develop new wood plastic composite products at its research and development laboratory in Lahti in Finland. In December 2008, UPM opened a new production plant in Bruchsal in Germany to meet the growing demand in the Central European markets.
Biofuels In the next few years, UPM aims to become a major producer of second generation biodiesel and a significant producer of renewable and high-quality biofuels. Various pilot tests are currently being conducted to assess these biofuel-technologies and, concurrently, UPM is in the process of creating an appropriate business model for its biofuels business. UPM plans to use wood based biomass as its main raw material in its biodiesel production. Locating a biodiesel production plant adjacent to an existing UPM pulp or paper mill would further enhance UPM’s ability to efficiently utilise the plant’s wood raw material. UPM plans to use recovered paper as the main raw material in its bioethanol production. It would also be ideal to locate UPM’s bioethanol production plant adjacent to an existing UPM paper mill in order to optimise UPM’s efficient use of raw materials. Within the next few years, UPM intends to make an investment decision on its first commercial-scale production plant.
Marketing UPM sells its products primarily through its own global sales network. UPM’s management believes that maintaining UPM’s own sales organisation in its significant markets improves its ability to respond to its customers’ needs. UPM sells its products mainly to European and North American customers, but the Group also has an established customer base in Asia, South America, Australia, Middle-East and Africa.
BP-87 The following table sets forth UPM’s sales by market area for the three most recent years:
Year ended 31 December 2008 2007 2006 (E in millions) Germany ...... 1,640 1,707 1,587 United Kingdom ...... 1,040 1,203 1,223 Finland ...... 946 865 920 France ...... 552 607 661 Other EU countries ...... 2,259 2,418 2,247 Other European countries ...... 467 493 661 United States ...... 940 1,140 1,124 Canada ...... 65 115 126 Rest of the world ...... 1,552 1,487 1,473 Total ...... 9,461 10,035 10,022
Legal Proceedings The Group is a defendant or plaintiff in a number of legal proceedings. These legal proceedings primarily involve claims arising out of commercial law issues. UPM’s management does not expect the legal proceedings that UPM currently is involved in to have a material adverse impact on the business, financial condition or results of operations of the Group. Certain competition authorities are continuing investigations into alleged antitrust activities with respect to various products of the Group. The U.S. Department of Justice, the EU authorities and the authorities in several EU countries, Canada and certain other countries have granted UPM conditional full immunity with respect to certain conduct disclosed to them. The U.S. and Canadian investigations have been closed, and the European Commission has tentatively closed its investigation of the European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets whereas in certain EU countries the investigations continue to be open. UPM has made no provisions in relation to these investigations. UPM and its subsidiary, UPM Raflatac, Inc., along with certain other labelstock manufacturers, were named as defendants in a number of class-action lawsuits filed in U.S. district courts and in U.S. state courts by UPM’s customers. These lawsuits allege that the defendants violated federal and/or state antitrust laws by conspiring with one another to fix the prices of, and allocate the markets for, labelstock products. The complaints sought treble or punitive damages for alleged overcharges resulting from this purported conspiracy. UPM and its subsidiary, UPM-Kymmene, Inc., were also named as defendants in class-action lawsuits making similar allegations against manufacturers of magazine papers. The complaints, similarly to the labelstock complaints, sought treble or punitive damages for alleged overcharges resulting from the purported conspiracy. UPM has settled or agreed to settle these class-action lawsuits except for those filed by indirect purchasers of labelstock. These remaining legal actions may last for several years. UPM is currently not in a position to estimate the impact of any judgements and/or settlements in relation to these lawsuits to the business, financial condition or results of operations of the Group.
Research and Development In 2008, UPM spent approximately A49 million on research and development projects, as compared to A50 million and A44 million in 2007 and 2006, respectively, representing 0.5%, 0.5% and 0.4% of UPM’s sales in 2008, 2007 and 2006, respectively. In 2008, UPM emphasised the development of new products and business areas, especially biofuels. In 2008, together with Andritz/Carbona, UPM began the testing of Carbona’s gasification technology at the Gas Technology Institute’s pilot plant located close to Chicago, Illinois in the United States. UPM expects the pilot testing to be completed by the end of 2009. In addition, in September 2008, UPM established a new UPM Biorefinery Development Centre to research biofuels and biochemicals at its Kaukas paper mill site in Lappeenranta in Finland. The first machinery at the development centre commenced operations in December 2008, while the main operations commenced at the beginning of 2009. The new development centre is a part of the UPM Research Centre, which focuses on fibre and fibre raw materials, papers, coating and printing research, as
BP-88 well as customer support, technical services and environmental issues. The research conducted at the UPM Research Centre has been extended to cover UPM’s whole value chain to the customer, including the development of new paper grades and the runnability of printing machines. In recent years, UPM has strengthened the organisation of the Label business area’s research and development by emphasising the development of new technology platforms and product solutions. During 2008, UPM’s Label business area’s research and development completed the development of a new hotmelt adhesive and the mixing process for that adhesive, the implementation of which is scheduled to commence during the first half of 2009. In addition, UPM’s Label business area’s research and development has further developed its capabilities to produce high-quality filmic liners with a cost-efficient process. In UPM’s RFID tag business, its research and development organisation has focused on improving RFID application testing methods for RFID tags. UPM has also significantly enhanced its capacity and capability to design and develop new products for the Label business area. In 2008, in the Plywood business area, UPM reorganised the plywood research and development organisation into three core processes: product management and development, technology development and laboratory. Following the reorganisation, the Plywood business area’s research and development organisation is in a better position to exploit its core competencies more efficiently when providing solutions for the customers of the Plywood business area in the fields of material technology, coatings and adhesion. These improvements also allow the Plywood business area’s research and development organisation to offer better support to the growth strategy of the Plywood business area. By December 2008, the development of the wood plastic composite products had advanced to the level where a new wood plastic composite production plant commenced operations in Bruchsal in Germany. In March 2008, UPM established a Finnish Centre for Nanocellulosic Technologies together with the Technical Research Centre of Finland (‘‘VTT’’) and Helsinki University of Technology. The centre is creating new applications for cellulose as a raw material, substance and end-product. In 2008, UPM and L&T developed a new ethanol and energy production concept that, for the first time, utilises commercial and industrial waste, such as paper, cardboard, wood and plastic. Since 2007, UPM and L&T have studied the concept under laboratory conditions in cooperation with VTT. Extensive testing has been carried out at VTT’s Rajamaki¨ unit in Finland. Based on these test results, the production concept may offer business prospects in the future. In 2008, UPM launched, in partnership with Metso and the University of Oulu, a technology programme in Kajaani in Finland to develop measuring and control solutions for the chemical wood processing industry. The technology programme will focus particularly on developing applications for process waters, energy production and biorefineries. In 2008, UPM’s Research Centre implemented a new innovative method for using pine in mechanical pulping where the harmful pitch will be dispersed by a process using ozone. In January 2008, UPM and Chempolis Oy, a Finnish technology company, signed a licence agreement under which UPM may utilise a novel biorefining technology in its papermaking fibre and biochemicals production. By utilising the biorefining technology, UPM is able to use agro residues and other non-wood feedstocks, such as straw and reed, as raw materials for pulp and biochemicals. The UPM Asia research and development centre plays a key role in research for agro residues as the base for pulp production. Currently, UPM is also investigating the possibility of building a industrial biorefinery utilising agro residues in China. UPM owns 15% of the shares in Forestcluster Ltd (‘‘Forestcluster’’), which is a company established to network top-level research and innovation in the Finnish forest cluster. Forestcluster co-ordinates pre-competitive research and development. Its first research programme focusing on intelligent, resource- efficient production technologies commenced at the beginning of 2008. A second programme focusing on biorefineries commenced at the beginning of 2009. On 4 February 2009, the Finnish Pulp and Paper Research Institute (‘‘FPPRI’’) and VTT signed a letter of intent to integrate the research and laboratory operations of FPPRI with VTT. UPM owns 38.65% of the shares in FPPRI.
BP-89 Environmental and Regulatory Matters UPM’s environmental management is based on internally defined goals, measuring the achievement of those goals, as well as developing and implementing best practices in the whole value chain. UPM continuously measures and assesses both the direct and the indirect environmental loads and impacts of its operations and strives to manage these systematically and to continuously improve them. The environmental loads and impacts predominantly relate to product life-cycle resulting from the sourcing of raw materials, production, distribution of products, product recovery and disposal. UPM regularly assesses its suppliers, including, but not limited to, from the perspective of environmental and social responsibility. UPM has systematically invested capital resources in order to conform to environmental laws and regulations and to monitor and reduce its environmental loads. In 2008, the operating expenses (including depreciation) attributable to environmental protection amounted to A102 million, as compared to A103 million and A108 million in 2007 and 2006, respectively; and the respective capital expenditure on environmental protection amounted to A42 million in 2008, as compared to A59 million and A33 million in 2007 and 2006, respectively. In 2008, the most important environmental investments were the rebuild of the chemical recovery plant at the Kymi mill in Finland and the closing of certain old land fill sites. Currently, all of UPM’s paper and pulp mills; the plywood mills and sawmills in Finland, Austria, Estonia; one plywood mill in Russia; the hydroelectric power plants in Finland and the forestry departments in Finland, France, the United Kingdom, Germany, Austria, the United States and Canada have ISO 14001 certified environmental management systems in place. In addition, four of the Label business area’s production facilities also have certified systems. All of UPM’s pulp and paper mills in Finland and most of the pulp and paper mills elsewhere in Europe have also received approval for their systems under the EU’s Eco-Management and Audit Scheme (‘‘EMAS’’). UPM’s paper mills have published a respective joint EMAS or other externally verified environmental statement. In all of its forestry operations, UPM takes into consideration economic, ecological and social sustainability. UPM requires that its external wood raw material suppliers implement responsible practices, which are consistent with UPM’s policies and rules. UPM aims to use forest biomass efficiently in its production and energy generation. UPM has continued promoting sustainable practices by promoting forest certification and other tools to trace the origin of its wood. UPM has specially focused in the development of forest practices considering biodiversity. In 2008, approximately 66% of UPM’s wood fibres originated from certified forests, as compared to 71% and 65% in 2007 and 2006, respectively. Since June 2006, all of UPM’s pulp and paper mills have a third-party audited chain of custody in place. UPM has continued to improve the efficiency of its production processes and the use of energy for those processes. In 2008, UPM’s paper production decreased by 8%, as compared to an increase of 2% and 9% in 2007 and 2006, respectively. UPM’s total fossil carbon dioxide emissions of its mill power plants decreased by 19% in 2008, as compared to a decrease of 3% in 2007 and an increase of 4% in 2006. UPM’s total amount of solid waste, primarily ash from its mill power plants, to landfills decreased by 7% in 2008, as compared to a decrease of 23% in 2007 and an increase of 25% in 2006. Currently, biofuels account for approximately 57% of all fuels used in UPM’s heat and electricity generation at its mills. In 2008, UPM’s average effluent amount of paper mills per ton of paper produced remained unchanged, as compared to 2007. Further, its corresponding chemical oxygen demand of discharges increased by 6%, as it remained unchanged in 2007. In recent years, UPM has continued to invest in biomass-fired power plants. In 2008, UPM completed the rebuild of the chemical recovery plant at its Kymi pulp mill in Kuusankoski in Finland. The new plant enables increased use of biofuels and doubles UPM’s bio-electricity production capacity. UPM may be responsible for remediating contaminated mill areas. UPM assesses the condition of old mill areas that are no longer in use. In the event that hazardous substances are discovered and remediation is needed, UPM makes a remediation plan together with the authorities. The authorities give their approval after the remediation has been carried out and the area can be used once again. UPM is committed to minimising the Group’s impact on climate change by managing carbon dioxide emissions through its whole value chain, for example, by increasing the use of forest energy, by investing in new mill site power plants using biomass-based fuels, by continuously improving the energy efficiency of its production, and by investing in biofuel production. Additionally, UPM uses renewable and recyclable materials and practises sustainable management of its forests so that they act to sequester carbon dioxide emissions. EU-wide trading of carbon dioxide emissions allowances commenced on 1 January 2005. Carbon dioxide emission permits were granted to all UPM units which are subject to the EMAS. In 2008, 2007 and 2006, UPM did not use all of its granted allowances.
BP-90 In recent years, UPM has also made consistent efforts to increase the share of recycled fibre in its raw material base. UPM is the largest user of recovered paper in its printing paper production in Europe and the second largest user in the world, with a total consumption of approximately 3.0 million tonnes in each of 2008, 2007 and 2006. Currently, approximately 30% of the total fibre usage for paper production comes from recovered paper. In 2008, UPM continued promoting the use of the following third-party certified environmental labels: European Eco-label (‘‘EU Flower’’), PEFC and FSC. The EU Flower label indicates that the paper fulfils certain environmental criteria relating to, for example, selection of raw materials, use of chemicals, use of fibre and energy, emissions from operations and waste management. A total of 15 of UPM’s paper mills have been awarded the EU Flower for copying and graphic papers. The PEFC and FSC labels indicate that wood raw material originates from certified and well-managed forests and that the wood is legally logged and does not come from protected areas. In 2008, three further UPM Raflatac labelstock production facilities received FSC and PEFC Chain of Custody certificates. The new European Union chemical legislation concerning Registration, Evaluation and Authorisation of Chemicals (‘‘REACH’’) came into force in June 2007. UPM’s management believes that the Company meets all the set requirements of REACH. UPM’s management believes that, in 2008, UPM also took all the necessary steps in an effort to ascertain that its chemical suppliers follow the requirements of REACH. The EU is currently working to reduce the effects of climate change. The EU Heads of State agreed in March 2007 on binding targets to increase the share of renewable energy used in Europe to 20% by 2020, to have a 10% share of biofuels in transport fuels and to reduce carbon dioxide emissions by 20% by 2020 (and by 30% if an international agreement is reached), to increase energy efficiency by 20% by 2020 and to accelerate the development towards functioning European energy markets and removal of barriers to competition. On 23 January 2008, the European Commission put forth proposals for the following new directives and amendments to existing directives: (i) Directive on the promotion of the use of energy from renewable sources, (ii) amending the Directive 2003/87/EC to improve and to extend the EU greenhouse gas emission allowance trading system, and (iii) Directive concerning carbon capture and storage. Under the proposals, it is up to each EU member state to decide on the mix of contributions from the electricity, heating and cooling and transport sectors to reach their national targets, choosing the means that best suit their national circumstances. EU member states will also be given the option to achieve their targets by supporting the development of renewable energy in other EU member states and third countries. The proposals also aim to remove unnecessary barriers to the growth of renewable energy, for example, by simplifying the administrative procedures for new renewable energy developments, and encouraging the development of better types of renewable energy. On 17 December 2008, the European Parliament adopted and finalized the proposed legislative package as part of EU’s climate change efforts. The next stage consists of the technical implementation of existing agreements including the establishment of rules for auctions, the determination of benchmarks for free allocations and the preparation of regulations regarding reporting. According to the European Commission’s initial estimate, the Directive on the promotion of the use of energy from renewable sources is expected to come into effect in 2010. Inasmuch as the final decisions on the EU proposals are still subject to further discussions and decision-making both at the EU and the national level, UPM is currently not in a position to estimate whether and how the proposed EU directives may impact the production costs of the wood processing industry and the energy markets in Finland and more broadly. Moreover, there can be no assurance that this policy will not have a material adverse impact on the business, financial condition or results of operations of the Group, including through increased energy costs and increased costs of emission allowances.
Property, Plants and Equipment UPM’s executive offices are located at Etelaesplanadi¨ 2, Helsinki, Finland, in a building which UPM leases. UPM generally owns all of its manufacturing facilities. In addition to manufacturing facilities, UPM owns a number of other facilities, including warehouses, distribution centres and shipping terminals. In addition to the manufacturing facilities listed below, currently, UPM also owns nine hydropower plants, with an aggregate capacity of 197 MW, which are all located in Finland.
BP-91 UPM’s manufacturing facilities include the following:
Pulp and Paper Business Areas
Location of Facility Unit Capacity Principal Products (tonnes) Austria Steyrermuhl...... ¨ Steyrermuhl¨ 510,000 magazine paper and newsprint China Changshu ...... Changshu 900,000 fine paper Finland Jams¨ ankoski¨ ...... Jams¨ ankoski¨ 910,000 magazine and label paper Kaipola ...... Kaipola 730,000 newsprint and magazine paper Kuusankoski ...... Kymi 850,000 fine paper 540,000 chemical pulp Lappeenranta ...... Kaukas 610,000 magazine paper 740,000 chemical pulp Pietarsaari ...... Wisapaper 200,000 packaging paper Wisaforest 800,000 chemical pulp Rauma ...... Rauma 1,280,000 magazine paper Valkeakoski ...... Tervasaari 370,000 label and packaging papers France Docelles ...... Docelles 155,000 fine paper Grand Couronne ...... Chapelle Darblay 380,000 newsprint Strasbourg ...... Stracel 290,000 magazine paper Germany Augsburg ...... Augsburg 530,000 magazine paper Dorpen¨ ...... Nordland 1,510,000 fine paper Schongau ...... Schongau 780,000 newsprint and magazine paper Schwedt ...... Schwedt 300,000 newsprint United Kingdom Irvine ...... Caledonian 290,000 magazine paper Shotton ...... Shotton 520,000 newsprint United States Grand Rapids, MN ...... Blandin 360,000 magazine paper
Forest and Timber Business Area
Location of Facility Unit Capacity Principal Products (tonnes) Austria Steyrermuhl...... ¨ Timber 380,000 sawn timber Finland Heinola ...... Timber 110,000 sawn timber and components Kajaani ...... Timber 210,000 sawn timber Korkeakoski ...... Timber 310,000 sawn timber Lappeenranta ...... Timber 500,000 sawn timber and components Pietarsaari ...... Timber 220,000 sawn timber and components Pori...... Timber 380,000 sawn timber Russia Pestovo ...... Timber 260,000 sawn timber
BP-92 Label Business Area
Location of Facility Unit Capacity Principal Products (tonnes) Australia Braeside(1) ...... UPM Raflatac n/a label materials China Changshu ...... UPM Raflatac n/a label material Guangzhou ...... RFID n/a RFID tags Finland Jyvaskyl¨ a...... ¨ RFID n/a RFID tags Tampere ...... UPM Raflatac n/a label materials France Pompey (Nancy) ...... UPM Raflatac n/a label materials Malaysia Johor ...... UPM Raflatac n/a label materials Poland Wroclaw ...... UPM Raflatac n/a label materials (start-up Q4/2008) South Africa Pinetown(1) ...... UPM Raflatac n/a label materials Spain Polinya´ (Barcelona) ...... UPM Raflatac n/a label materials United Kingdom Scarborough ...... UPM Raflatac n/a label materials United States Dixon, IL ...... UPM Raflatac n/a label materials Fletcher, NC ...... UPM Raflatac n/a label materials Fletcher, NC(1) ...... RFID n/a RFID tags
Plywood Business Area
Location of Facility Unit Capacity Principal Products (tonnes) Estonia Otepa¨a...... ¨ Plywood 30,000 plywood Finland Heinola ...... Plywood 50,000 plywood Joensuu ...... Plywood 65,000 plywood Lahti ...... Plywood n/a plywood processing Lappeenranta ...... Plywood 80,000 plywood Ristiina ...... Plywood 480,000 plywood Savonlinna ...... Plywood 80,000 plywood Jyvaskyl¨ a...... ¨ Plywood 120,000 plywood Vuohijarvi¨ ...... Plywood 80,000 veneer Lohja ...... Plywood 10,000 veneer Russia Chudovo ...... Plywood 110,000 plywood and veneer
(1) Leased facility.
BP-93 Employees As of 31 December 2008, UPM employed 24,983 individuals of whom 12,305, or 49%, were employed in Finland. UPM’s human resources policy is implemented by local units, where the practices can be developed using regional synergies and local strengths. UPM has implemented profit-based bonus plans to provide incentives for all its employees and to help build a corporate culture with increased emphasis on profitability. UPM is extending its global incentive scheme more widely throughout its business groups and business areas. In most cases, employee’s earnings comprise of a fixed basic salary and payments under a short-term incentive scheme that combines performance- and productivity-related and profit-based elements into one incentive scheme. In 2008, payments under the latter are estimated to amount to A33 million. In addition, UPM conducts employee engagement surveys to study working morale, employee satisfaction and working conditions. UPM emphasises appraisal discussions between employees and their superiors and the remuneration and recruitment processes. A large number of UPM’s employees belong to trade unions. In Finland, approximately 90% of UPM’s employees belong to unions, while in other countries where UPM has principal production facilities, the proportion of unionised workers typically varies between 10% and 50%. UPM seeks to observe local practices and legislation its labour relations matters and while it negotiates collective bargaining agreements. In Finland, the paper and wood products industries have typically concluded collective bargaining agreements with a group of trade unions, representing blue-collar workers and white-collar salaried employees in the paper and wood products industries and forestry operations. The two- to three-year collective bargaining agreements currently in force will expire in September 2009 in the wood products industry, in September 2009 and May 2010 for forestry operations and in March 2010 in the paper industry. The nationwide increases in wages and salaries became effective in June/July or October 2008. The following table sets forth the number of UPM’s personnel by country at the end of the three most recent years:
As of 31 December 2008 2007 2006 Finland ...... 12,305 13,086 14,946 Germany ...... 3,759 3,802 4,097 United Kingdom ...... 1,602 1,567 1,622 France ...... 1,392 1,437 1,463 Russia ...... 1,116 1,230 1,361 Austria ...... 642 657 679 Spain ...... 266 273 269 Estonia ...... 181 176 172 Poland ...... 275 89 66 Italy ...... 83 79 86 Hungary ...... 51 52 52 Belgium ...... 32 37 42 Netherlands ...... 30 35 34 Sweden ...... 24 24 46 Denmark ...... 20 20 23 Other Europe ...... 86 87 76 China ...... 1,327 1,312 1,302 United States ...... 1,096 1,067 1,024 Canada ...... 194 843 909 Malaysia ...... 172 158 147 Australia ...... 93 94 95 South Africa ...... 97 94 92 Rest of the world ...... 140 133 101 Total ...... 24,983 26,352 28,704
BP-94 The following table sets forth the number of personnel by business area at the end of the two most recent years:
As of 31 December 2008 2007 Energy ...... 39 26 Pulp ...... 1,159 1,186 Forest and timber ...... 3,278 3,510 Paper ...... 13,262 14,538 Label ...... 2,851 2,568 Plywood ...... 3,799 3,945 Other operations ...... 595 579 Total ...... 24,983 26,352
Stock Option Programmes As authorised by the Annual General Meeting of Shareholders held on 19 March 2002, class E options were issued to UPM’s key personnel. A total of 3,800,000 options were designated as class 2002E options. Each class 2002E option entitles its holder to subscribe for two UPM shares. The subscription period for the class 2002E options was 1 April 2005 to 30 April 2008. The share subscription price was A14.27 per share. The share subscription price has been reduced by the amount of dividend confirmed after the end of the subscription price determination period and before the date of share subscription, in each case, on the record date for dividend distribution. The share subscription period for the class 2002E options ended on 30 April 2008. During the share subscription period, a total of 3,703,834 class 2002E options were used for the subscription of 7,407,668 of the Company’s shares. The Annual General Meeting held on 31 March 2005 approved the Board of Directors’ proposal to issue share options to the Group’s key personnel. The number of share options is 9,000,000 and these can be exercised to subscribe for a maximum of 9,000,000 of the Company’s shares. A total of 3,000,000 of the share options were designated as class 2005F options, 3,000,000 are designated as class 2005G options and 3,000,000 are designated as class 2005H options. The subscription period for the class 2005F options was 1 October 2006 to 31 October 2008, the subscription period for the class 2005G options is 1 October 2007 to 31 October 2009, and the subscription period for the class 2005H options is 1 October 2008 to 31 October 2010. The subscription price for the class 2005F options was the average trade-weighted price for the Company’s share on NASDAQ OMX Helsinki Ltd (‘‘NASDAQ OMX Helsinki’’) between 1 January and 28 February 2005 adding 10%, i.e., A18.23 per share. The subscription price for the class 2005G options is the average trade-weighted share price between 1 January and 28 February 2006 adding 10%, i.e., A18.65 per share, and for the class 2005H options, the average trade-weighted share price between 1 January and 28 February 2007 adding 10%, i.e., A21.65 per share. The share subscription prices will be reduced by the amount of dividend confirmed after the end of the subscription price determination period and before the date of share subscription, in each case, on the record date for dividend distribution. The share subscription period for the class 2005F options ended on 31 October 2008. During the share subscription period, a total of 4,000 class 2005F options were used for the subscription of 4,000 of the Company’s shares. Share subscriptions based on the class 2005G and 2005H options may increase the number of the Company’s shares by a maximum of 6,000,000. The Annual General Meeting of Shareholders held on 27 March 2007 approved the Board of Directors’ proposal to issue share options to the Group’s key personnel. The number of options may not exceed 15,000,000 and these can be exercised to subscribe for a maximum of 15,000,000 of the Company’s shares, 5,000,000 of the share options were designated as class 2007A options, 5,000,000 were designated as class 2007B and 5,000,000 were designated as class 2007C options. The subscription period for the class 2007A options is 1 October 2010 to 31 October 2012; for the class 2007B options, 1 October 2011 to 31 October 2013; and for the class 2007C options, 1 October 2012 to 31 October 2014. The subscription price is the average trade-weighted price of the share on NASDAQ OMX Helsinki, between 1 April and 31 May 2008 for the class 2007A options, between 1 April and 31 May 2009 for the class 2007B options, and between 1 April and 31 May 2010 for the class 2007C options.
BP-95 In January 2009, a total of 4,590,000 2007A options were granted to the Group’s key personnel.
Share-Based Incentive Plan On 12 February 2007, the Board of Directors approved a new share-based incentive plan for the Group’s key personnel. The incentive plan includes three one-year earning periods which are the calendar years 2008, 2009 and 2010. The awards will be paid partly in UPM shares and partly in cash in 2009, 2010 and 2011. The proportion to be paid in cash will cover taxes and tax-related costs arising from the award up to the value of the shares awarded. According to the terms of the share-based incentive plan, it is prohibited to transfer the shares awarded under the incentive plan until two years have elapsed from the award payment. The Board of Directors will decide on the earnings criteria, target group and award levels for each earning period prior to the beginning of the said earnings period. If the targets of the share-based incentive plan are attained in full, the awards to be paid on the basis of the plan will correspond to the gross value (including also the cash payment) of approximately 2,500,000 of the Company’s shares.
Material Contracts Neither UPM-Kymmene Corporation nor any of its consolidated subsidiaries has entered in the last two years into any contracts outside of the ordinary course of business that have had or may reasonably be expected to have a material effect on its business.
BP-96 Selected Financial Information The following table presents selected consolidated financial data as of and for each of the five years ended 31 December 2008, under IFRS. The selected consolidated financial data presented below are derived from UPM’s audited consolidated financial statements for these periods and should be read in conjunction with these consolidated financial statements and the related notes thereto. UPM’s consolidated financial statements have been prepared in accordance with IFRS beginning on 1 January 2002.
As of and for the year ended 31 December 2008 2007 2006 2005 2004 (E in millions, except per share data) INCOME STATEMENT DATA Sales ...... 9,461 10,035 10,022 9,348 9,820 Depreciation, amortisation and impairment charges . (1,225) (1,224) (1,138) (1,130) (1,122) Operating profit ...... 24 483 536 318 685 Operating profit excluding special items ...... 513 835 725 558 470 Profit before tax ...... (201) 292 367 257 556 Net income ...... (180) 81 338 261 920 BALANCE SHEET DATA Total assets ...... 13,781 13,953 14,469 15,541 15,827 Current liabilities ...... 1,828 2,417 2,410 2,348 2,249 Non-current liabilities ...... 5,816 4,753 4,770 5,845 5,966 Minority interest ...... 14 13 18 21 26 Share capital ...... 890 890 890 890 891 Equity attributable to equity holders of the parent company ...... 6,106 6,770 7,271 7,327 7,586 OTHER DATA Net cash provided by operating activities ...... 628 867 1,215 853 997 Net cash used in investing activities ...... (532) (425) (314) (158) (466) Net cash used in financing activities ...... (1) (402) (951) (588) (710) Capital expenditures ...... 551 708 699 749 686 Earnings per share ...... (0.35) 0.16 0.65 0.50 1.76 Diluted earnings per share ...... (0.35) 0.16 0.65 0.50 1.75 Dividends per share(1) ...... 0.40 0.75 0.75 0.75 0.75 Weighted average number of shares Basic number of shares (1,000’s) ...... 517,545 522,867 523,220 522,029 523,641 Diluted number of shares (1,000’s) ...... 517,545 525,729 526,041 523,652 526,247
(1) 2008: Proposal of the Board of Directors.
Operating and Financial Review and Prospects General The information in this section concerning UPM’s financial condition and results of operations refers to the consolidated financial statements included elsewhere in this Base Prospectus, which are prepared in accordance with IFRS.
Overview UPM is the leading producer of graphic papers and among the largest forestry companies in the world, in terms of capacity. It is also the world’s second largest producer of label materials and Europe’s largest producer of plywood, in terms of capacity. UPM consists of three business groups: Energy and pulp, Paper, and Engineered materials. Under this business structure, UPM reports financial information for the following business areas: Energy, Pulp, Forest and timber, Paper, Label, Plywood, and Other operations. The third-party sales of the Energy business area accounted for approximately 1%, the Pulp business area 1%, the Forest and timber business area 9%, the Paper business area 72%, the Label business area 10%,
BP-97 the Plywood business area 5% and the Other operations business area 2%, in each case, of UPM’s sales in 2008, as compared to 1%, 0%, 10%, 71%, 10%, 5% and 3%, respectively, in 2007. UPM is well-integrated in key resources, with a high degree of self-sufficiency in pulp and energy, while its forest holdings serve as a strategic buffer in the Finnish wood market. UPM is still primarily a European company, as its sales to Europe represented 73%, 73% and 73% of UPM’s sales in 2008, 2007 and 2006, respectively. North America represented 11%, 12% and 12% of UPM’s sales in 2008, 2007 and 2006, respectively, and Asia represented 11%, 10% and 10% of UPM’s sales in 2008, 2007 and 2006, respectively. The geographic allocation of its sales has remained similar over the past three years, but the importance of Asia, and China in particular, has been growing. See ‘‘—Corporate Structure’’ above. The main driving forces in the energy, paper and forest products industry include general economic performance, print media advertising, substitution of paper consumption with electronic media, changes in customer strategies, the industry’s capacity build-up through technological advancement and new investment, capacity closures, capacity utilisation, commodity pricing, cost competitiveness and construction activity. The sales prices and capacity utilisation rates for UPM’s main products are strongly affected by general business conditions in the markets in which it operates. Individual suppliers, due to a relatively large number of competitors and low market shares, have very little influence on these factors and the resulting product sales cycles. As a result, the companies in the energy, paper and forest products industry compete primarily on cost effectiveness to offset downturns in the sales cycles. Efficiency of operations, manufacturing costs and the prevailing exchange rates between producer and consumer countries affect profitability in the industry. UPM’s management believes that, in order to be successful in the industry, a company should be positioned at the lower end of a cost curve in its core product areas, have a suitable, high-quality product mix and have production units located in close proximity to its key global and local customers. In order to maintain and improve the Group’s competitive position in the new business environment, UPM’s management has been focused on achieving greater efficiency, cost-control and change readiness. UPM’s continuous cost savings measures in recent years have reduced its unit manufacturing costs and supported its relative profitability. By the end of 2008, UPM’s three-year profitability programme 2006-2008 was completed as planned. The profitability programme resulted in the reduction of approximately 4,300 employees and the annual fixed cost savings achieved through the programme were approximately A190 million, as compared to the cost level of 2006. UPM has reduced its capacity and streamlined its paper, pulp, label and forest and timber operations in order to mitigate the negative effects of demand decline in the mature markets, low paper prices, increasing costs and unfavourable currency rate movements. In December 2007, UPM decided to permanently shut down its Canadian magazine paper operation in Miramichi, New Brunswick in Canada. In December 2008, UPM eliminated uncompetitive paper and pulp capacity in Finland, including the Kajaani paper mill (annual capacity 640,000 tonnes of newsprint, special newsprint and uncoated magazine papers) and the Tervasaari pulp mill (annual capacity 210,000 tonnes of pulp). In June 2008, UPM closed down the Luumaki¨ timber components and planing mill. In December 2008, UPM closed down the Leivonmaki¨ sawmill. In November 2008, the Label business area announced a plan to restructure its European operations. The plan includes reduction of coating capacity, closure of a number of self-adhesive labelstock production lines and reduction of slitting capacity in Finland, France, Germany, Hungary and the United Kingdom. Additionally, in September 2008, UPM announced a plan for measures to improve the efficiency of its business groups and business areas. A preliminary estimate of the number of employees affected by these measures is approximately 950. See ‘‘—Recent Events—Restructuring Activities’’ below.
Trends in UPM’s Business General The year 2008 started with expectations of slower growth globally despite increasing commodity prices and rising inflation. Consumer and business confidence was relatively positive at the beginning of 2008 despite a slight slowdown already during the latter part of 2007. Export-led economies in Asia were still growing strongly supported by good demand for consumer goods in Europe and North America. The picture changed in the early autumn of 2008 with the global financial crisis spreading rapidly first from the United States to other advanced economies and then globally. Thereafter, economic forecasts have been revised downwards several times and, towards the end of 2008, uncertainty about the future continued to grow. In the autumn of 2008, consumer and business confidence changed rapidly and turned negative in all
BP-98 of the world’s major economies. Around the globe, governments announced plans to restore confidence in the global financial markets and launched sizable economic stimulus packages. In 2008, economic growth decelerated also in China, India and Russia in response to declining export demand for consumer goods and commodities and declining investments. Volatility characterised currency markets throughout 2008. The U.S. dollar increased in value against the euro in the early part of the year, then plunged but rebounded again at the very end of the year. The British pound sterling and the Swedish krona decreased in value against the euro particularly during the last couple of months of 2008. Commodities and raw material prices kept increasing in the early part of 2008. However, rapidly deteriorating demand depressed prices from late summer of 2008. In early December, crude oil prices plunged to less than one-third of the record high level reached in July. Wood raw material prices in Finland increased in the early part of 2008 and demand was still at a high level, but from early summer 2008, prices decreased due to lower demand. The threat of higher export duties for wood raw material from Russia disturbed the wood markets in Finland during the year. Demand and prices for pulp deteriorated sharply from April due to lower paper and board demand. Similarly, a sharp drop in demand in China for recycled fibre affected recovered paper prices both in Europe and North America. Despite declines in the latter part of the year, production costs for the forest products industry increased considerably during the year 2008. In 2008, housing markets deteriorated around the world. In Europe, construction activity declined at a very rapid pace towards the end of 2008, fastest in the United Kingdom, Spain and Ireland. In the United States, housing starts dropped more than 70% from the peak levels reached in 2006 and prices declined significantly. The emerging markets were also affected and they suffered from oversupplied housing markets, high prices and rapid declines in construction activity. This decline in construction activity affected the markets for building materials, including wood based materials. However, currently, urbanisation, increasing population, changes in household sizes and energy efficiency requirements are still driving developments in the construction industry implying changes in types of houses and ways to build them. In 2008, consumer confidence in North America and Europe dropped drastically as the global financial crisis unfolded amid increasing insecurity and fears of unemployment. Consumers were delaying or postponing purchases of durable consumer goods ranging from furniture to cars, but continued to buy essential goods, such as household goods. The retail sector continued a polarising trend, with discount stores and high-end stores holding on, but the operators in the middle losing ground. The tight credit market combined with other developments forced retailers to seek efficiencies in the value chain and to focus on offering value for money to customers. These developments had an effect on the packaging needs for consumer goods as well as advertising in the retail sector. In 2008, advertising expenditure declined on an annual basis globally, as compared to 2007, however, with large differences between various parts of the world. Print advertising declined in value, but held its place as the second largest major medium. In value terms, newspapers and magazines suffered particularly in mature markets, but fared better in the emerging markets. Advertisement pages in both newspapers and magazines also declined in the major western economies. During 2008, online advertising continued to grow all over the world.
Market Conditions for Electricity The Nordic electricity market prices are driven by fuel costs, carbon dioxide emission allowance prices and the availability of hydropower. In 2004, electricity market prices declined, as the availability of hydropower improved from the record low levels in the previous year. In 2005, electricity market prices remained close to the previous year’s level. Fuel prices declined, but the first phase of the EU emission trading scheme (‘‘EU ETS’’) started, creating a price for carbon dioxide emissions. In 2006, electricity market prices increased substantially, as the availability of hydropower was low and the Swedish nuclear power plants had production difficulties. In 2007, electricity market prices returned to the level seen in 2005-2006, as nuclear and hydropower supply normalised, and carbon dioxide emission allowance prices approached zero. The first phase of EU ETS turned out to be oversupplied. In 2008, the average price in the Nordic electricity exchange increased by 60% to A44.7/MWh, as compared to A27.9/MWh in 2007. In the early part of 2008, oil and coal prices increased rapidly in the global energy markets. At the same time, carbon dioxide emission allowance prices increased, as compared to 2007, as the second phase of the EU ETS started with lower allocation of emission allowances. The
BP-99 combination of higher fossil fuel and carbon dioxide emission allowance prices drove the increase also in electricity market prices. In the latter part of 2008, however, electricity forward prices started to decline as fossil fuel prices and carbon dioxide emission allowance prices decreased. In December 2008, the spot electricity price in the Nordic electricity exchange was A44.5/MWh and the one-year forward price averaged A39.6/MWh. The following chart sets forth one-year forward prices of electricity in the Nordic countries and in Germany: Electricity one-year forward price /MWh 100
80
60
40
20
0 2005 2006 2007 2008
EEX (Germany) NordPool (Nordic) 20MAR200908124955
Source: NordPool, EEX.
Market Conditions for Pulp Global market pulp demand follows the paper business cycle. In recent years, the driving force has been the growing Asian paper demand, requiring increasing amounts of especially imported hardwood pulp. In the area of softwood pulp, little new capacity has entered the market while major capacity reductions have taken place in North America, driven by an aging mill structure and high costs. During 2004, prices increased due to a strong demand for pulp and a decrease in producer inventories. Led by continuing strong demand from Asia, particularly China, global pulp markets continued to be in balance during 2005 and the average price of softwood pulp did not change much from the previous year. However, hardwood pulp prices increased due to strong demand in Asia for fine paper. In 2006, global pulp markets were characterised by good demand, further closures of capacity in North America and controlled inventory levels. As a result, prices increased. In 2007, pulp shipments especially to Asia kept the markets tight and prices increased. During the first half of 2008, chemical market pulp demand and prices increased from the previous year. Global chemical pulp market prices peaked during the second quarter of 2008 in U.S. dollar and in October 2008 in euro terms. Since then, market pulp prices have decreased rapidly, as the weakening global economy led to decreasing pulp demand and growing pulp inventories. In 2008, the average softwood pulp (‘‘NBSK’’) market price in euro terms remained practically unchanged, as compared to A579 per tonne in 2007. However, at the end of 2008, the NBSK price had decreased to A458 per tonne, or 21% below the average price during 2008. In 2008, the average hardwood pulp (‘‘BHKP’’) market price in euro terms was A536 per tonne, an increase of approximately 4%, as compared to A513 per tonne in 2007. As of 31 December 2008, the BHKP price was at A417 per tonne, or 22% below the average price level in 2008.
BP-100 Industry peers announced several temporary and permanent closures of pulp mills during the second half of 2008. Furthermore, the Latin American hardwood pulp producers announced the delay of several new pulp mill projects. The direct impact of the fluctuation in market pulp prices on UPM’s profitability has been minimal since it uses most of its pulp production internally in its paper production and has a 47% share of associated company Metsa¨ Botnia’s pulp production available for UPM’s paper manufacturing. Following the start-up of Metsa¨ Botnia’s Uruguay pulp mill in late 2007, UPM became (and as of the date of this Base Prospectus remains) self-sufficient in chemical pulp. The following chart sets forth chemical pulp prices in U.S. dollars in the last ten years: Market pulp prices - chemical pulp $/ton 1,000
900
800
700
600
500
400
300
200 99 00 01 02 03 04 0506 07 08
NBSK (Northern Bleached Softwood Kraft) BHKP USD (Northern Bleached Hardwood Kraft) 20MAR200908133454
Source: UPM.
Market Conditions for Sawn Timber Sawn timber demand is closely correlated with construction and rebuilding activity. During 2004, sawn timber markets were oversupplied as production from Scandinavia and Eastern Europe entered the market. As a result, prices remained depressed throughout 2004. In 2005, the underlying demand for sawn timber was healthy in Europe, but the market continued to be oversupplied. Signs of improving sawn timber markets did however emerge late in the year in Europe. In 2006, sawn timber demand in Europe continued at a brisk pace as economic growth picked up. Due to restrictions in log supply and resulting production cutbacks, markets became tighter and prices increased markedly. Prices continued to increase in the first half of 2007. However, the slow-down in construction activity in North America, Japan and, to some degree, Europe, combined with overproduction, deteriorated the pricing conditions especially for spruce sawn timber in the second half of 2007. Also, pine sawn timber markets weakened at the end of 2007 due to oversupply and a full supply chain. The market balance of sawn timber continued to weaken throughout 2008. The high sawn timber supply and simultaneously weakening demand for both redwood and whitewood timber led to a significant reduction in the market price. This development intensified towards the end of 2008.
BP-101 The following chart sets forth export prices for Finnish sawn timber in the last ten years: Export prices for Finnish sawn timber /m³ 300
250
200
150
100
50 99 00 01 02 03 04 0506 07 08
Redwood Whitewood 20MAR200908141393
Source: National Board of Customs.
Market Conditions for Wood Raw Material The average prices for wood raw material remained stable in 2004 and 2005. In 2006, the growth in demand led to an increase of average price. In 2007, wood raw material prices remained at a high level and the markets in Finland were affected by the mild winter that caused supply difficulties. In Finland, wood purchases in 2008 were approximately 25% lower than in 2007. A mild winter and the expectations of higher Russian wood export fees contributed to the slow market activity and persistently high prices. Fibre wood prices remained at the high level that was reached in 2007, and only started declining during the fourth quarter of 2007, as wood demand slowed down. In 2008, log prices declined as compared to 2007, but at a slower pace than sawn timber prices. In 2008, the price of wood imported to Finland remained at a high level and was more expensive than domestic wood. In 2008, wood imports from Russia and other countries were at the same level as in 2007. On 5 February 2007, the Russian Government announced its decision to increase the export fee on wood as a new measure under the Russian Forest Law, which has been in force since 23 December 2006. As of 1 July 2007, the export fee was 20% and the minimum export fee was A10 per cubic meter. On 1 April 2008, the export fee was increased to 25% and the minimum export fee to A15 per cubic meter. According to the original plan, on 1 January 2009, the export fee was supposed to be increased to 80% and the minimum export fee to A50 per cubic meter. However, in November 2008, it was announced that the increase of the export fee on wood was postponed until October-December 2009. In recent years, UPM has increased its efforts to procure wood, in addition to Finland, from Estonia, Latvia and Lithuania as well as from Sweden and elsewhere. The announced Russian export fees on wood may, however, eliminate as much as 20% of the conventional wood supply to the wood processing industry in Finland. In 2008, the Group’s wood imports from Russia were 5 million cubic meters. The increased export fees on wood could gradually make wood imports from Russia to Finland uneconomical and could increase the competition for, and the cost of, wood fibre for the wood processing industry in Finland. Unless UPM is able to find a financially sound replacement for its Russian wood imports, the Russian export fee on wood could lead to a reduction of production and/or an increase in production costs at UPM’s mills in Finland. If this situation were prolonged, it could have a material adverse impact on the business, financial condition or results of operations of the Group in Finland.
BP-102 The following chart sets forth stumpage prices for pulpwood in Finland for the last ten years: Monthly stumpage prices for pulpwood in Finland /m³ 30
25
20
15
10
5 99 00 01 02 03 04 05 06 07 08
Spruce Pine Birch 20MAR200908145002
Source: Finnish Forest Research Institute (‘‘Metla’’).
The following chart sets forth stumpage prices for logs in Finland for the last ten years: Monthly stumpage prices for logs in Finland /m³ 80
70
60
50
40
30 99 00 01 02 03 04 05 06 07 08
Spruce Pine Birch 20MAR200908152630
Source: Metla.
BP-103 Market Conditions for Paper The main driving forces behind the demand for paper are economic growth, advertising in printed media, circulation of magazines and newspapers and other publishing related end-products and office technology development. Changes in readers’ habits and consumers’ media behaviour and information sourcing, with the electronic media gaining popularity, play an increasingly important role in the demand for paper. The following tables set forth total demand and per capita demand for printing papers in 2008:
Publication Papers Fine Papers (Million tonnes per year) Europe ...... 25.1 17.6 North America ...... 18.8 16.2 Rest of the world ...... 24.8 43.7 Total ...... 68.8 77.5
Publication Papers Fine Papers (Kilograms per capita per year) Europe ...... 34.6 24.1 North America ...... 55.5 48.1 World average ...... 4.4 7.8 Total ...... 10.3 11.6
Sources: CEPIPRINT, CEPIFINE and Pulp and Paper Products Council (‘‘PPPC’’).
The following table set forth changes in demand for graphic papers in UPM’s principal markets, Europe and North America, in the last five years:
Changes in Demand for Graphic Papers
Paper Grade 2008 2007 2006 2005 2004 (Percentage change from prior year) Europe Publication papers ...... (2) 2206 Fine Papers ...... (3) 0257 North America Publication Papers ...... (10) (3) (4) (3) 3 Fine Papers ...... (9) (5) 3 (4) 5
Sources: CEPIPRINT, CEPIFINE and PPPC.
BP-104 The following chart sets forth the development of paper capacity and demand in Europe in the last five years:
Paper Capacity and Demand in Europe
'000 tonnes 60000
55000
-5% 50000 -2% 45000 +1% 40000 -3% 35000
30000 2004 2005 2006 2007 2008e W. Eur demand E. Eur demand 19MAR200909000433Capacity
Source: CEPIPRINT, CEPIFINE, Pulp and Paper International. The following chart sets forth the development of paper capacity and demand in North America in the last six years:
Paper Capacity and Demand in North America
'000 tonnes 60000
55000
50000
45000 -7% 40000
35000 -10% 30000 2003 2004 2005 2006 2007 2008e NA demand Capacity 19MAR200908563686
Source: CEPIPRINT, CEPIFINE, Pulp and Paper Products Council.
BP-105 The following chart sets forth the development of paper capacity and demand in Asia in the last five years:
Paper Capacity and Demand in Asia
'000 tonnes 65000
60000 +5%
55000 +4%
50000
45000
40000
35000
30000 2004 2005 2006 2007 2008e Asia dem and Capacity 19MAR200908572105
Source: Pulp and Paper International. In recent years, paper demand has slowed down in the mature markets from the levels of the 1980s and 1990s while European demand figures have been boosted by increasing consumption in Eastern Europe. The demand growth in Western Europe, specifically in Germany, the United Kingdom, France, Italy and Spain, has flattened. Meanwhile, the overall development in graphic paper consumption in North America has been negative for the last four years. In 2004, led by strong economic growth, advertising, direct mail and classified advertisements increased and paper demand overall grew by approximately 6% in Europe and by approximately 2% in North America. In 2005, European paper demand advanced by approximately 1%, but, in North America, paper demand declined by approximately 3%. During 2006, paper demand grew by more than 2% in Europe, but the decline in North America continued, at a pace of more than 1%, with newsprint again leading the decline. In 2007, magazine paper markets grew, but otherwise paper demand growth was subdued resulting in approximately 1% overall growth in Europe and 5% decline in North America. In 2008, paper demand in Europe weakened by 2%, as compared to 2007. In North America, the paper demand continued to decline and demand decreased by 10%, as compared to 2007. In the fast growing Asian markets, such as China, paper demand is estimated to have increased by an annual average of approximately 10% in recent years. In those markets, paper consumption is dominated by fine paper for certain reasons, including availability of wood raw material and energy. More detailed demand analysis of the emerging markets is difficult due to statistical reasons. Speciality paper demand (not included in the table) is generally more stable than that of commodity paper grades. Label paper demand has continued to grow over the past five years. Demand for packaging paper typically grows more slowly following the trends in industrial production in selected process industries.
BP-106 The following table sets forth changes in prices for graphic papers in UPM’s principal markets, Europe and North America, in the last five years:
Changes in Prices for Graphic Papers(1)
Paper Grade 2008 2007 2006 2005 2004 (Percentage change from prior year) Europe Newsprint ...... (8) 5 5 4 (2) SC magazine ...... 0 (2) 0 1 (3) Coated magazine ...... 3 (4) (1) 1 (3) Coated fine paper ...... (3) 1 (1) 0 (4) Uncoated fine paper ...... (2) 7 (2) (3) (6) North America Newsprint ...... 19 (15) 9 10 10 SC magazine ...... 15 (5) 2 8 4 Coated magazine ...... 22 (3) (1) 17 5 Coated fine paper ...... 13 0 4 12 4 Uncoated fine paper ...... 10 (2) 12 8 5
Sources: Pulp and Paper International and Resource Information Systems, Inc., benchmark prices. (1) Price changes in Europe are based on prices in euro and price changes in North America are based on prices in U.S. dollars.
The following chart sets forth the development of prices for the specified paper grades in Europe in the last five years:
Paper Prices in Europe
€ 900
800
700
600
500
400 '04 '05 '06 '07 '08 New s 45 g/m 2 SC rg 56 g/m2 LWC off 60 g/m2 WFCr 100 g/m2 WFUr 80 g/m2 19MAR200909165713
Source: CEPIPRINT, CEPIFINE, Pulp and Paper International.
BP-107 The following chart sets forth the development of prices for the specified paper grades in North America in the last five years:
Paper Prices in North America
USD 1300 1200 1100 1000 900 800 700 600 500 400 ’04 ’05 ’06 ’07 ’08
News 48,8 g/m² SC 51,8 g/m² LWC 59,2 g/m² WFCr 88,8 g/m² WFUr off 74 g/m² 19MAR200919113442
Source: CEPIPRINT, CEPIFINE, Pulp and Paper Products Council, RISI.
The following chart sets forth examples of paper prices for the specified grades in China in the last five years:
Example of Paper Prices in China
USD 1200
1100 imported
1000
900 domestic 800
700 2004 2005 2006 2007 2008 WFU s 80-120 g WFC s 128-15720MAR200908374524 g
Source: Pulp and Paper International. Paper prices generally fluctuate more than end-use demand, driven by demand-supply balance and inventory build-ups. Overall, paper price levels have been well below historical average levels in the last five years, especially in Europe. In 2004, all paper grades in Europe declined sharply and paper prices were at historically low levels. In North America, the industry operating rates were higher and prices continued to increase during 2004. In 2005, European prices were largely similar to those of the previous year. In North America, further price increases were carried out and prices increased to levels that were above their historical average. During 2006, prices for newsprint advanced in Europe, but prices for magazine and fine paper remained largely unchanged, as structural overcapacity continued to affect the market. In North America, price recovery continued due to a better balance in supply and demand. In 2007, newsprint contract prices again increased in Europe and uncoated fine paper prices increased throughout the year. Magazine paper prices, however, were under pressure in Europe predominantly due to a decline in exports from Europe that resulted in oversupply. In Germany, the price development of coated magazine paper remained stable during 2004-2007. In North America, the paper market changed in late 2006 due to market readjustment but average prices were lower in 2007 than in 2006. Prices, including newsprint, were
BP-108 increasing again in the latter half of 2007, however, driven by supply reductions. In 2008, the average market prices in Europe for magazine papers increased, but the average market price for newsprint and fine papers decreased. In North America, the average prices in all paper grades continued to increase as industry continued to manage overcapacity by reducing capacity.
Market Conditions for Label Materials Pressure-sensitive labels are cyclical products. Their demand growth over the economic cycle has historically exceeded GDP growth in all market areas. During 2004, the markets for pressure sensitive labels strengthened particularly in North America, but also in Europe. Asian demand also improved further and selected price increases for pressure sensitive labelstock were carried out in main markets during 2004. In 2005, solid market growth for pressure sensitive labels was again evident in all main markets. In 2006, demand grew by approximately 8% in Europe and by approximately 3 to 4% in North America. In Asia, the market experienced growth in excess of 10%. Some price increases were carried out in North America during 2007. During 2007, demand growth in Europe was approximately one-half of the growth reached in 2006, while in North America the market environment was flat. Prices were somewhat under pressure in both markets. In Asia, the growth was robust. In 2008, demand for self-adhesive label materials decreased both in Europe and in North America by approximately 3%, as compared to 2007 due to slower demand for consumer products and customers’ drive for inventory reductions. In the Asia Pacific region, such as in China, where annual growth over the recent years has been well over 10%, demand in 2008 continued to increase even if at a clearly slower pace towards the end of 2008. Label prices declined during 2007, but marked increases in raw material prices, especially oil related raw material prices, made manufacturers initiate price increases. During 2008, prices for label materials in local currencies increased in all markets.
Market Conditions for Plywood Plywood markets strengthened from 2004 until the summer of 2008. Aided by the high activity level in the construction, renovation and transport equipment industries, demand for plywood has been strong and, as a result, European prices increased until 2008. In 2007, especially the birch plywood market was tight and Finnish producers suffered from shortage of suitable logs, which increased log prices. In the spruce plywood market, some signs of weakening were evidenced towards the end of 2007. However, in 2008, plywood demand in Europe continued to be brisk until the summer after which demand started to decline. Activity in the building and construction industries in Europe deteriorated rapidly and the same development took place also within other industries. Plywood producers responded to the weakening demand and a number of capacity closures and production curtailments were announced. UPM reduced production at its mills. A high level of demand until the summer of 2008 kept market prices stable, despite the first signs of market softening appearing early on the year. Export market prices for Finnish plywood increased. In Finland, shortage of suitable birch logs turned into oversupply due to lower than anticipated production volumes. Log prices remained high throughout 2008.
Cost Structure UPM’s main costs and expenses are personnel expenses and the cost of its fibre raw materials. Chemicals, energy and delivery costs to customers worldwide are also major cost factors. In 2008, costs and expenses amounted to A8.4 billion, as compared to A8.7 billion and A8.5 billion in 2007 and 2006, respectively. The sharp increase in wood prices was the most notable cost increase in both 2008 and 2007.
BP-109 The following table sets forth a breakdown of UPM’s cost structure (excluding depreciation) in the last three years:
As a percentage of total costs 2008 2007 2006 Personnel expenses ...... 17 17 19 Logs and pulpwood ...... 17 17 14 Delivery of own products ...... 10 12 12 Fillers, coating pigments and other chemicals ...... 13 14 14 Energy ...... 11 10 11 Recovered paper ...... 4 4 3 Other raw materials ...... 13 11 12 Other costs(1) ...... 15 15 15 Total ...... 100 100 100
(1) Other costs include, among others, maintenance costs, external services and administrative expenses.
Recent Events Acquisitions and Divestments In January 2009, UPM sold its former paper mill and related assets in Miramichi, New Brunswick in Canada, to Umoe Solar AS of Norway. The sale included the closed mill properties, woodlands operations and two sawmills located nearby in Bathurst and Blackville. In 2008, UPM had no material acquisitions or divestments of its assets or businesses.
Restructuring Activities In January 2009, UPM’s associated company Metsa-Botnia¨ announced the permanent closure of its Kaskinen pulp mill in Finland to take effect in March 2009. The special charges resulting from the closure of the pulp mill are estimated to reduce UPM’s associated company results by approximately 27 million in the first quarter of 2009. As of 27 February 2009, UPM’s shareholding in Metsa-Botnia¨ represented 47% of total shares outstanding. UPM’s three-year profitability programme 2006-2008 was completed by the end of 2008. As of 31 December 2008, the reduction of personnel due to the programme was approximately 4,300 employees and the annual fixed cost savings achieved were approximately A190 million, as compared to the cost level of 2006. In addition to the above programme, UPM has continued with new initiatives and actions to improve its profitability. In December 2008, UPM eliminated uncompetitive capacity by closing down paper and pulp production lines in Finland, including its Kajaani paper mill (annual capacity 640,000 tonnes of newsprint, special newsprint and uncoated magazine papers) and its Tervasaari pulp mill (annual capacity 210,000 tonnes of pulp). The above-mentioned closures are estimated to have resulted in the lay-off of approximately 700 employees throughout the Group. The Kajaani and Tervasaari closures are expected to have a positive impact on UPM’s EBITDA in 2009. In October 2008, UPM announced temporary layoffs at the Heinola plywood mill to take effect in 2009, due to the rapidly declining birch plywood market situation. The employee negotiations that were concluded in December 2008 concerned all employees in all personnel groups at the mill. Currently, the mill employs approximately 230 people. In December 2008, UPM’s Forest and timber business area closed down the Leivonmaki¨ sawmill in Finland (annual capacity of 80,000 cubic metres of sawn timber). Also in December 2008, UPM adopted a new business structure. UPM has three business groups: Energy and pulp, Paper, and Engineered materials. The Energy and pulp business group is further divided into Energy, Pulp, and Forest and timber business areas, and the Engineered materials business group is further divided into Label and Plywood business areas. In September 2008, UPM announced a new plan for measures to improve the efficiency in all of its business groups and business areas. These measures are estimated to affect approximately 950 employees. The streamlining of operations is expected to result in annual savings of approximately A70 million in fixed
BP-110 costs. Negotiations with employee representatives have begun and are expected to be concluded during the first half of 2009. In November 2008, UPM’s Label business area announced plans to restructure its European operations in order to improve the business area’s cost competitiveness and profitability. The plan includes a reduction in coating capacity, closure of a number of self-adhesive labelstock production lines and reduction of slitting capacity in Finland, France, Germany, Hungary and the United Kingdom. This programme is estimated to affect approximately 340 employees. The final decisions will be taken after consultation and negotiation with employees in relevant countries. The aim is to reduce operating costs annually by approximately A25 million, with no material impact on sales. In June 2008, UPM’s Forest and timber business area closed down the Luumaki¨ timber components and planing mill in Finland. Due to the restructuring measures taken during 2008, for the year ended 31 December 2008, UPM booked net charges of A489 million as special items (net charges of A352 million for the year ended 31 December 2007). In the Pulp business area, special items of A59 million included the closure of the Tervasaari pulp mill in Finland in December. This figure included impairment charges of A51 million and other costs of A8 million. In the Forest and timber business area, special items of A36 million included impairment charges of A31 million related to the Finnish sawmilling operations recognised in September 2008, and other restructuring costs of A5 million. In the Paper business area, special items of A379 million included a goodwill impairment charge of A230 million recognised in September 2008. In addition, impairment charges of A101 million and other restructuring costs of A42 million were booked related to the closure of the Kajaani paper mill in Finland in December 2008. Other net restructuring costs amounted to A6 million in 2008. In the Label business area, special items of A28 million recorded in December, relate to restructuring measures in Europe. The costs included impairment charges of A7 million and other restructuring costs of A21 million. In the Plywood business area, special items of A3 million related to income on disposals. In the Other operations business area, special items included an adjustment of A5 million related to disposals in 2007 and other net restructuring income of A5 million. Restructuring costs are estimated to have a negative cash effect of approximately a A70 million mainly for the year 2009.
Results of Operations As a result of the organisational changes discussed above under ‘‘—Structure’’, UPM’s business area structure has changed as of 1 December 2008. UPM consists of three business groups, which are Energy and pulp, consisting of Energy, Pulp, and Forest and timber reportable business areas; Paper as a reportable business area, and Engineered materials, consisting of Label and Plywood reportable business areas. The Other operations reportable business area includes UPM’s development units (RFID tags, wood plastic composites and biofuels), certain logistics services and corporate administration. The comparative business area information for year ended 31 December 2007 has been revised to correspond with the new business structure. Therefore, the below discussion of the operating results of UPM differs from period to period in terms of reportable business areas. The reportable business areas for the discussion of the results of the year ended 31 December 2008, as compared to the year ended 31 December 2007 are Energy, Pulp, Forest and timber, Paper, Label, Plywood and Other operations. For the discussion of the results for the year ended 31 December 2007, as compared to the year ended 31 December 2006, the reportable business areas are Magazine Papers, Newsprint, Fine and Speciality Papers, Label Material, Wood products and Other operations.
BP-111 The following tables set forth the sales, EBITDA and operating profits of UPM’s business areas in accordance with IFRS and the delivery volumes of energy, pulp, timber, paper and plywood products for the two most recent years:
Year ended 31 December 2008 2007 (E in millions) Sales by Business Area Energy ...... 478 379 Pulp ...... 944 808 Forest and timber ...... 1,920 2,039 Paper ...... 7,011 7,328 Label ...... 959 998 Plywood ...... 530 591 Other operations ...... 200 450
Year ended 31 December 2008 2007 (E in millions) EBITDA by Business Area Energy ...... 207 118 Pulp ...... 139 188 Forest and timber ...... (48) 159 Paper ...... 885 939 Label ...... 34 85 Plywood ...... 46 71 Other operations ...... (57) (14)
Year ended 31 December 2008 2007 (E in millions) Operating Profit by Business Area Energy ...... 175 95 Pulp ...... 89 145 Forest and timber ...... (59) 201 Paper ...... (129) (137) Label ...... (26) 60 Plywood ...... 28 50 Other operations ...... (54) 69
Year ended 31 December 2008 2007 Deliveries Energy, MWh ...... 10,167 10,349 Pulp, 1,000 t ...... 1,982 1,927 Timber, 1,000 m3 ...... 2,132 2,325 Paper, 1,000 t ...... 10,641 11,389 Plywood, 1,000 m3 ...... 806 945
The Year ended 31 December 2008 Compared to the Year ended 31 December 2007 Sales General. The Group’s sales were A9,461 million for the year ended 31 December 2008, as compared to A10,035 million for the year ended 31 December 2007. Sales decreased due to lower deliveries in most of UPM’s business areas. The Group’s total energy deliveries for the year ended 31 December 2008 amounted to 10.2 TWh, a decrease of 1.8%, as compared to 10.3 TWh for the year ended 31 December
BP-112 2007. The Group’s total pulp deliveries for the year ended 31 December 2008 amounted to 1,982,000 tonnes, an increase of 2.9%, as compared to 1,927,000 tonnes for the year ended 31 December 2007. The Group’s total timber deliveries for the year ended 31 December 2008 amounted to 2,132,000 cubic meters, a decrease of 8.3%, as compared to 2,325,000 cubic meters for the year ended 31 December 2007. The Group’s total paper deliveries for the year ended 31 December 2008 amounted to 10,641,000 tonnes, a decrease of 6.6%, as compared to 11,389,000 tonnes for the year ended 31 December 2007. The Group’s total plywood deliveries for the year ended 31 December 2008 amounted to 806,000 cubic meters, a decrease of 14.7%, as compared to 945,000 cubic meters for the year ended 31 December 2007.
Energy. Sales in the Energy business area were A478 million (including A341 million internal sales) for the year ended 31 December 2008, an increase of 26.1% from the sales of A379 million (including A320 million internal sales) for the year ended 31 December 2007. The increase was due to an increase in the average price of electricity by 33% to A37.5/MWh for the year ended 31 December 2008, as compared to A28.2/MWh for the year ended 31 December 2007. The increase was partially offset by a decrease in sales volumes.
Pulp. Sales in the Pulp business area were A944 million for the year ended 31 December 2008, an increase of 16.8% from the sales of A808 million for the year ended 31 December 2007. The increase was due to an increase in pulp deliveries from UPM’s own pulp mills.
Forest and Timber. Sales in the Forest and timber business area were A1,920 million for the year ended 31 December 2008, a decrease of 5.8% from the sales of A2,039 million for the year ended 31 December 2007. The decrease was due to a decrease in sawn timber deliveries. In addition, the average price of sawn timber fell by approximately 17% for the year ended 31 December 2008, as compared to the year ended 31 December 2007.
Paper. Sales in the Paper business area were A7,011 million for the year ended 31 December 2008, a decrease of 4.3% from the sales of A7,328 million for the year ended 31 December 2007. The decrease was due to a decrease in paper deliveries. Deliveries of publication papers (magazine papers and newsprint) decreased by 6% for the year ended 31 December 2008, as compared to the year ended 31 December 2007, and the deliveries of fine and speciality papers decreased by 8% for the year ended 31 December 2008, as compared to the year ended 31 December 2007. In euro terms, the average price for all paper deliveries was over 2% higher for the year ended 31 December 2008, as compared to the year ended 31 December 2007. As of 31 December 2008, paper inventory levels were approximately 200,000 tonnes lower than as of 31 December 2007. The production at the Miramichi paper mill in Canada was ceased in August 2007. During 2008, PM4 at the Kajaani paper mill in Finland was temporarily idled from March, and PM2 at the Nordland fine paper mill in Germany production was temporarily shut down since early summer of 2008 until the end of the year. In France, Docelles mill was subject to a one-month production curtailment in August 2008. In China, the Changshu fine paper mill had considerable production downtime during the fourth quarter of 2008 to meet an abrupt decline in market demand.
Label. Sales in the Label business area were A959 million for the year ended 31 December 2008, a decrease of 3.9% from the sales of A998 million for the year ended 31 December 2007. In 2008, the average price of sales in euro terms was approximately the same as in 2007.
Plywood. Sales in the Plywood business area were A530 million for the year ended 31 December 2008, a decrease of 10.3% from the sales of A591 million for the year ended 31 December 2007. The decrease was due to the decrease in plywood deliveries. In the second half of 2008, the decline in new orders resulted in reduced production at all off UPM’s plywood mills. The average price for all plywood deliveries was higher for the year ended 31 December 2008, as compared to the year ended 31 December 2007 although prices started to decline in the latter part of 2008.
Other Operations. Sales in the Other operations business area were A200 million for the year ended 31 December 2008, a decrease of 55.6% from the sales of A450 million for the year ended 31 December 2007. The decrease was due to the following disposals made in 2007: the real estate company UPM-Asunnot Oy in April; Walki Wisa in June and port operators Oy Rauma Stevedoring Ltd and Oy Botnia Shipping Ab in October.
BP-113 Operating Profit (loss) General. The Group’s operating profit was A24 million for the year ended 31 December 2008, a decrease of 95% from an operating profit of A483 million for the year ended 31 December 2007. The operating profit, excluding special items, was A513 million for the year ended 31 December 2008, as compared to A835 million for the year ended 31 December 2007. The decrease was due to higher wood and energy costs. Wood costs were approximately A220 million higher for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The 2008 figure includes a write down of A36 million in wood inventory made in the fourth quarter of the year. Energy costs increased by approximately A100 million for the year ended 31 December 2008, as compared to the year ended 31 December 2007. Fixed costs declined markedly for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The net increase in cost level was over 2% for the year ended 31 December 2008, as compared to the year ended 31 December 2007.
Energy. The operating profit of the Energy business area was A175 million for the year ended 31 December 2008, as compared to an operating profit of A95 million for the year ended 31 December 2007. Profitability improved from the year 2007, mainly due to the higher average electricity sales price. The average electricity sales price increased by 33% to A37.5/MWh for the year ended 31 December 2008, as compared to A28.2/MWh for the year ended 31 December 2007. The hydropower volume increased by 21% to 3.8 TWh for the year ended 31 December 2008, as compared to 3.1 TWh for the year ended 31 December 2007, which had a positive impact on the average cost of procuring electricity. UPM’s associated company, Pohjolan Voima, provides energy to its shareholders at cost and hence its operating profit tends to be close to zero. For the year ended 31 December 2008, UPM’s share of Pohjolan Voima’s results was a negative A26 million, as compared to a negative A14 million for the year ended 31 December 2007.
Pulp. The operating profit of the Pulp business area was A89 million for the year ended 31 December 2008, as compared to an operating profit of A145 million for the year ended 31 December 2007. The operating profit of the Pulp business area, excluding special items, was A148 million for the year ended 31 December 2008, as compared to A188 million for the year ended 31 December 2007. Profitability decreased from the year 2007, mainly due to higher wood costs and lower deliveries. The share of the results of UPM’s associated company, Metsa-Botnia,¨ was A86 million for the year ended 31 December 2008, as compared to A58 million for the year ended 31 December 2007. The increase was due to Metsa-¨ Botnia’s new pulp mill in Uruguay, which started up in November 2007, and more than compensated for the weakened profitability in relation to Metsa-Botnia’s¨ Finnish operations. In December 2008, UPM closed down its Tervasaari pulp mill in Finland. As special items, UPM booked charges of A59 million consisting of impairment charges of A51 million and other costs of A8 million related to the closure of the mill.
Forest and Timber. The operating loss of the Forest and timber business area was A59 million for the year ended 31 December 2008, as compared to an operating profit of A201 million for the year ended 31 December 2007. The operating loss of the Forest and timber business area, excluding special items, was A23 million for the year ended 31 December 2008, as compared to an operating profit of A214 million for the year ended 31 December 2007. Profitability declined for the year ended 31 December 2008, as compared to the year ended 31 December 2007, mainly due to significantly lower prices of sawn timber and higher cost of wood, including a write-down of A36 million in wood inventory booked as of 31 December 2008. The average price of sawn timber fell by approximately 17% for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The increase in the fair value of biological assets net of wood harvested was A50 million for the year ended 31 December 2008, as compared to A79 million for the year ended 31 December 2007, including the increase of A138 million for the year ended 31 December 2008, as compared to A195 million for the year ended 31 December 2007 in the value of growing trees and the cost of A88 million for the year ended 31 December 2008, as compared to A116 million for the year ended 31 December 2007 for wood harvested from own forests. In June 2008, UPM closed down the Luumaki¨ timber components and planing mill in Finland. In December 2008, UPM closed down the Leivonmaki¨ sawmill in Finland.
Paper. The operating loss of the Paper business area for the year ended 31 December 2008 was A129 million, as compared to an operating loss of A137 million for the year ended 31 December 2007. The operating profit of the Paper business area, excluding special items, was A250 million for the year ended
BP-114 31 December 2008, a decrease of 4.6% from an operating profit of A262 million for the year ended 31 December 2007. Profitability decreased from the previous year, due to the markedly higher energy and fibre costs and lower deliveries. Higher paper prices offset most of the negative impact of lower delivery volumes. The stronger euro against both the British pound sterling and the U.S. dollar weakened the profitability of the Paper business area’s exports. In euro terms, the average price for all paper deliveries was over 2% higher for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The fixed costs were lower for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The Kajaani paper mill in Finland was shut down permanently in December 2008. In 2008, UPM booked as a special item an approximately A101 million write-off in fixed assets and made a provision for the layoff and other closure costs of approximately A42 million with a cash impact mainly in 2009. Additionally, the Paper business area recorded a A230 million impairment charge from the business area’s goodwill. The impairment resulted from lower-than-forecast newsprint market demand in Europe and continued overcapacity in Europe combined with increased costs.
Label. The operating loss of the Label business area was A26 million for the year ended 31 December 2008, as compared to an operating profit of A60 million for the year ended 31 December 2007. The operating profit of the Label business area, excluding special items, was A2 million for the year ended 31 December 2008, a decrease of 96.4% from the operating profit of A56 million for the year ended 31 December 2007. Profitability of the Label business area declined due to increased material costs. In addition, the increase in fixed costs related to two new production facilities and decline in sales volume had a negative effect on profitability. Sales prices continued to contract until the first quarter of 2008. The price increases initiated since the first quarter improved the label prices and the average price of sales when translated into euro was approximately the same as the year before. In 2008, UPM Raflatac opened two new pressure sensitive label production facilities, in January in Dixon, Illinois in the United States, and in November, in Wroclaw in Poland. As the market demand for self-adhesive labelstock began to decline, in November 2008, UPM announced a plan to reduce coating capacity and to close two of its slitting terminals in Europe. With this plan, UPM seeks to secure the cost competitiveness of the Label business area in all circumstances.
Plywood. The operating profit of the Plywood business area was A28 million for the year ended 31 December 2008, as compared to A50 million for the year ended 31 December 2007. The operating profit of the Plywood business area, excluding special items, was A25 million for the year ended 31 December 2008, as compared to A50 million for the year ended 31 December 2007. The profitability of the Plywood business area declined during the second half of 2008 due to lower deliveries. The cost of wood logs increased for the year ended 31 December 2008, as compared to the year ended 31 December 2007. The average price for all plywood deliveries was higher for the year ended 31 December 2008, as compared to the year ended 31 December 2007, although prices started to decline in the latter part of 2008. In 2008, the availability of logs improved and returned to normal, as compared to the situation in 2007.
Other Operations. The operating loss of the Other operations business area, excluding special items, was A64 million for the year ended 31 December 2008, as compared to an operating loss of A30 million for the year ended 31 December 2007. This operating loss was affected by the following disposals made in 2007: the real estate company UPM-Asunnot Oy in April, Walki Wisa in June and the port operators Oy Rauma Stevedoring Ltd and Oy Botnia Shipping Ab in October. Development units also made an operating loss. Development units continued to invest in product development. During the year 2008, UPM established a new UPM Biorefinery Development Centre for the research of biofuels and biochemicals in Lappeenranta in Finland, and opened a new state-of-the-art RFID tags and inlays manufacturing plant in Guangzhou in China, and a new wood plastic composite production plant in Bruchsal in Germany.
Financial Items UPM’s interest and other finance expenses, net were A202 million for the year ended 31 December 2008, as compared to A191 million for the year ended 31 December 2007. Exchange rate and fair value gains and losses resulted in a loss of A25 million for the year ended 31 December 2008, as compared to a loss of A2 million for the year ended 31 December 2007. The net gains on available-for-sale investments were A2 million for the years ended 31 December 2008 and 2007. The net interest-bearing liabilities as of 31 December 2008 increased by A348 million to A4,321 million for the year ended 31 December 2008, as compared to A3,973 million for the year ended 31 December 2007.
BP-115 Profit (loss) UPM had a loss before tax of A201 million for the year ended 31 December 2008, as compared to a profit before tax of A292 million for the year ended 31 December 2007. Income taxes were A21 million positive for the year ended 31 December 2008, as compared to A211 million negative for the year ended 31 December 2007. Income taxes for 2008 included a A28 million income from a decrease of deferred tax liabilities relating to an impairment of the Paper business area’s goodwill and a tax expense of A13 million related to change in the UK tax legislation. Income taxes for 2007 included a A25 million income from a decrease of deferred tax liabilities relating to an impairment of goodwill of the Paper and Pulp business areas, a tax expense of A25 million due to a decrease of tax rate in Canada (resulting from a decrease in the value of deferred tax assets), and a tax income from due to a decrease of tax rate changes in Germany and the United Kingdom. In addition, income taxes included a charge of A123 million from a reduction of deferred tax assets in Canada (of which A98 million from book over tax depreciation), relating to the decision to close the Miramichi paper mill. The loss for the year ended 31 December 2008 was A180 million, as compared to a profit of A81 million for the year ended 31 December 2007.
The Year ended 31 December 2007 Compared to the Year ended 31 December 2006 Sales General. The Group’s sales were A10,035 million for the year ended 31 December 2007, as compared to A10,022 million for the year ended 31 December 2006. The Group’s total paper deliveries for the year ended 31 December 2007 amounted to 11,389,000 tonnes, an increase of 3.6%, as compared to 10,988,000 tonnes for the year ended 31 December 2006. Deliveries increased due to the increased production of fine paper, especially in China, and due to the additional label paper deliveries. Although overall paper deliveries increased, sales remained at the previous year’s level due to the sale of industrial wrappings business, Walki Wisa, during the year, depressed paper prices in Europe and also due to the weaker U.S. dollar. The average euro vs. U.S. dollar exchange rate was 1.3705 in 2007 compared to 1.2661 in 2006, thereby having a negative effect on the Group’s U.S. dollar denominated export sales from Europe. Gains of A44 million on foreign currency hedges increased sales in 2007, as compared to losses of A10 million for the year 2006.
Magazine Papers. Sales in the Magazine Papers Division were A3,249 million for the year ended 31 December 2007, a decrease of 3.1% from the sales of A3,354 million for the year ended 31 December 2006. Deliveries of magazine paper increased by 1.8% to 4,848,000 tonnes for the year ended 31 December 2007, as compared to 4,761,000 tonnes for the year ended 31 December 2006. Demand for coated magazine paper increased by 4% in Europe, and the demand for uncoated magazine paper increased by 5% in 2007, in each case, as compared to 2006. In North America, magazine paper demand grew similarly, by 5% in both coated and uncoated grades. In 2007, average magazine paper prices in Europe were 3% lower, as compared to prices in 2006. In the United States, the average U.S. dollar based magazine paper prices were approximately 4% lower than in 2006, but prices were increased in the second half of 2007.
Newsprint. Sales in the Newsprint Division were A1,470 million for the year ended 31 December 2007, an increase of 2.4% from the sales of A1,436 million for the year ended 31 December 2006 primarily due to higher price levels. Deliveries of newsprint increased by 0.2% to 2,682,000 tonnes for the year ended 31 December 2007, as compared to 2,677,000 tonnes for the year ended 31 December 2006. The deliveries for 2007 were negatively impacted by increased competition from North America and downtime carried out late in the year in order to control inventories. Demand for newsprint did not change in Europe for 2007, as compared to 2006, and declined by 1% for speciality newsprint. In North America, demand for newsprint continued to decline. Recovered paper and wood costs increased clearly, but were mainly offset by cost savings from energy investments. On average, European market prices for newsprint increased by 5% for the year ended 31 December 2007, as compared to the year ended 31 December 2006. In the United States, newsprint prices on average were 15% lower in 2007.
Fine and Speciality Papers. Sales in the Fine and Speciality Papers Division were A2,797 million for the year ended 31 December 2007, an increase of 9.3% from the sales of A2,560 million for the year ended
BP-116 31 December 2006. Deliveries of fine and speciality papers increased by 8.7% to 3,859,000 tonnes for the year ended 31 December 2007, from 3,550,000 tonnes for the year ended 31 December 2006. European uncoated fine paper demand decreased by approximately 1% during 2007, but the demand for coated fine paper increased by approximately 2%. Higher fibre costs were reflected in higher prices. In Asia, fine paper demand continued to grow at an estimated pace of 10%. In 2007, there was an increase of 7% in European uncoated fine paper prices. Average prices of coated fine papers, in turn, remained practically unchanged. In China, average prices were somewhat higher in 2007 than in 2006. The average prices for label papers in 2007 were slightly lower, as compared to 2006, but packaging paper prices improved.
Label Materials. Sales in the Label Division were A1,022 million for the year ended 31 December 2007, an increase of 3.5% from the sales of A987 million for the year ended 31 December 2006. Positive volume growth as well as the change in the product and market mix contributed to sales in 2007, but prices were somewhat lower than in 2006. Also, the weaker U.S. dollar negatively affected sales. The demand for pressure sensitive labels grew by approximately 4% in Europe and the growth in North American market was estimated at 2%, as a result of lower economic activity especially in the last quarter of the year. RFID business grew in volume terms by approximately three fold, but the unit prices continued to decrease substantially. As a result, in 2007, sales were still modest representing just over 2% of the division’s sales.
Wood Products. Sales in the Wood Products Division were A1,199 million for the year ended 31 December 2007, a decrease of 9.2% from the sales of A1,321 million for the year ended 31 December 2006. Sales decreased due to the divestment of Puukeskus in 2006 and the closure of Loulay plywood mill in France. Excluding the impact of these dispositions, sales grew by more than 10% mainly as a result of higher prices, but also due to a slight increase in plywood deliveries. The plywood operations had sales of A591 million for the year ended 31 December 2007, an increase of 2.2% from the sales of A578 million for the year ended 31 December 2006. Plywood deliveries increased by 1.5% to 945,000 cubic meters for the year ended 31 December 2007, as compared to plywood deliveries of 931,000 cubic meters for the year ended 31 December 2006. Birch plywood and veneer demand continued to be strong also during 2007, as the investment activities of the European construction, interior and transport equipment industries were lively. Spruce plywood market was mostly favourable but, towards the end of the year, signs of oversupply emerged. Average prices for plywood were approximately 4% higher in 2007 compared to 2006. The sawmilling operations generated sales of A613 million in 2007, an increase of 15.9% from the sales of A529 million for the year ended 31 December 2006. Deliveries of sawn timber decreased by 4.0% to 2,224,000 cubic meters in 2007 compared with 2,317,000 cubic meters in 2006. Sawn timber demand in Europe was good in 2007, but in the second half of 2007 markets, and especially markets for whitewood (i.e., spruce), became weaker. Average prices of sawn timber were 23% higher in 2007 than in 2006, with actual prices depending on the grade, but towards the end of 2007, this positive trend was reversed. Puukeskus was sold in August 2006. Puukeskus sales for the eight months ended 31 August 2006 were A300 million.
Other Operations. Sales to third parties by Other operations amounted to A809 million for the year ended 31 December 2007, a decrease of 1.7% from sales of A823 million for the year ended 31 December 2006. Third party sales of the Group’s forest operations increased due to higher wood prices.
Operating Profit (loss) General. The Group’s operating profit for the year ended 31 December 2007 totalled A483 million, a decrease of 9.9% from an operating profit of A536 million for the year ended 31 December 2006.
Magazine Papers. The Group incurred an operating loss for its Magazine Papers Division of A340 million for the year ended 31 December 2007, as compared to an operating loss of A56 million for the year ended 31 December 2006. In 2007, the operating loss of the Magazine Papers segment included a goodwill impairment charge of A350 million, an impairment charge of A22 million related to paper mill assets, personnel costs of A54 million and other costs of A36 million related to the Miramichi paper mill, an income of A11 million related to impairment reversals, and an income of A3 million related to other restructuring measures. In 2006, the operating loss of the Magazine paper segment included personnel
BP-117 charges of A28 million related to the profitability programme, impairment charges of A116 million related to the closure of the Voikkaa paper mill, impairment charges of A115 million for Miramichi, and other income net of A6 million, primarily including a capital gain of A10 million on the sale of Rauma power plant. In 2007, operating profit excluding special items decreased as compared to 2006. The average paper price was 6% lower, when measured in euro, than in 2006, the cost of wood fibre increased significantly and both the euro and the Canadian dollar strengthened, reducing the profitability of exports. Magazine paper deliveries increased slightly from 2006.
Newsprint. The Group had an operating profit for its Newsprint Division of A177 million for the year ended 31 December 2007, as compared to an operating profit of A148 million for the year ended 31 December 2006. In 2007, operating profit included A5 million of restructuring income. In 2006, the operating profit of the Newsprint segment included restructuring charges of A7 million related to the profitability programme. In 2007, operating profit excluding special items improved as compared to 2006. The average contract price increased by 5% in Europe and the lower cost of energy mainly compensated increases in other costs, such as the cost of wood and recycled fibre. Newsprint deliveries were approximately at the same level as in 2006.
Fine and Speciality Papers. The operating profit for the Fine and Speciality Papers Division was A112 million for the year ended 31 December 2007, an increase of 3.7% from an operating profit of A108 million for the year ended 31 December 2006. In 2007, operating profit did not include any special items. In 2006, the result included A41 million in personnel and impairment charges related to the profit improvement programme. Operating profit excluding special items decreased in 2007, as compared to 2006 mainly as a result of higher costs of fiber. The average price increase for all deliveries when translated into euros was approximately 1%. Deliveries increased as a result of efficiency improvements, especially in China, even though substantial capacity closures took place during 2006 and 2007.
Label Materials. The operating profit for the Label Division was A51 million for the year ended 31 December 2007, a decrease of 16.4% from operating profit of A61 million for the year ended 31 December 2006. In 2007, operating profit included restructuring income of A4 million. In 2006, operating profit did not include any special items. In 2007, operating profit excluding special items decreased as compared to 2006. The cost of raw materials was stable, but operating costs increased as a result of rapid expansion. Prices declined slightly.
Wood Products. The operating profit for the Wood Products Division was A92 million for the year ended 31 December 2007, as compared to an operating profit of A144 million for the year ended 31 December 2006. In 2007, operating profit included a A6 million capital gain resulting from the sale of real estate assets. In 2006, operating profit included a loss of A10 million on the sale of the Loulay plywood mill and a capital gain of A93 million on the sale of Puukeskus. In 2007, operating profit excluding special items of both the plywood and sawn timber operations improved as compared to 2006 as the prices and efficiency of these operations improved. Wood costs started to increase rapidly in the spring of 2007 which, together with the deteriorating market balance, weakened the profitability of saw mills in the second half of the year.
Other Operations. The operating profit from Other operations was A391 million for the year ended 31 December 2007, as compared to an operating profit of A131 million for the year ended 31 December 2006. In 2007, operating profit included a capital gain of A58 million resulting from the sale of port operators Rauma Stevedoring and Botnia Shipping, a capital gain of A29 million from the sale of Walki Wisa, and a capital gain of A42 million from the sale of UPM-Asunnot. In addition, the operating profit in Other Operations includes charges of A12 million related to class action lawsuits in United States, impairment charges of A31 million related mainly to Miramichi paper mill’s forestry and sawmilling operations, and other restructuring costs of A5 million. In 2006, operating profit included a A41 million capital gain from the sale of UPM’s group head office real estate and a A5 million charge related to the donation to Cultural Foundation in Finland, and restructuring charges of A7 million. Also, the 2006 operating profit was reduced by a A126 million charge relating to a lowered assessment of the fair value of biological assets and wood harvested. The forestry operations contributed an operating profit of A166 million in 2007, as compared to an operating loss of A19 million in 2006. The value of wood harvested from the Group’s forests was A116 million in 2007, as compared to A107 million in 2006. The change in the fair value of biological assets
BP-118 (living trees) represented an income of A195 million in 2007, as compared with a charge of A19 million in 2006. The energy operations contributed an operating profit of A112 million in 2007, as compared to an operating profit of A94 million in 2006. This increase was due to higher sales volumes and the larger share of hydropower production. UPM’s share of the results after tax of associated companies and joint ventures contributed A43 million to the operating profit for the year ended 31 December 2007, as compared to A61 million for the year ended 31 December 2006. The share of result after tax of Metsa-Botnia¨ was A58 million in 2007, as compared to A69 million in 2006. Average bleached long-fibre pulp prices in Europe were US$800 per tonne in 2007, as compared to US$675 per tonne in 2006. Meanwhile, hardwood pulp prices increased on average to US$707 per tonne in 2007 from US$638 per tonne in 2006. UPM’s other main associated company, Pohjolan Voima, has a mission to provide energy to its shareholders at cost and hence its operating profit tends to be close to zero. For the year ended 31 December 2007, UPM’s share of Pohjolan Voima’s results was a negative A14 million.
Financial Items UPM’s interest and other finance expenses net for the year ended 31 December 2007, were a negative A191 million, as compared to a negative A185 million for the year ended 31 December 2006. The net gains on available-for-sale investments for the year ended 31 December 2007 were a positive A2 million in 2007, as compared to a negative A2 million in 2006. Exchange rate and fair value gains and losses were a loss of A2 million for the year ended 31 December 2007 and a gain of A18 million for the year ended 31 December 2006. The net interest-bearing liabilities decreased by A75 million during 2007 to A3,973 million as of 31 December 2007 from A4,048 million as of 31 December 2006. Interest rates increased during the year.
Profit (loss) UPM had a profit before tax of A292 million for the year ended 31 December 2007, a decrease of 20.4% from profit before tax of A367 million for the year ended 31 December 2006. UPM had tax charges of A211 million for the year ended 31 December 2007, as compared to tax charges of A29 million for the year ended 31 December 2006. Income taxes for 2007 included a A25 million income from a decrease of deferred tax liabilities relating to an impairment of goodwill of the Magazine Papers business area, a tax expense of A25 million due to a decrease of tax rate in Canada (resulting from a decrease in the value of deferred tax assets), and a tax income from due to a decrease of tax rate changes in Germany and the United Kingdom. In addition, income taxes included a charge of A123 million from a reduction of deferred tax assets in Canada (of which A98 million from book over tax depreciation), relating to the decision to close the Miramichi paper mill. The 2006 taxes included as a negative item, a reduction of A22 million in the deferred tax assets of the Miramichi paper mill due to a decrease in the income taxes rate in Canada, and as positive items A20 million from the increase in deferred tax assets related to the change in the Group’s structure in Canada, and A28 million from a tax receivable arising from a change in German tax legislation. Profit for the period amounted to A81 million for the year ended 31 December 2007, as compared to A338 million for the year ended 31 December 2006.
Capital Expenditure and Investment For the year ended 31 December 2008, UPM’s capital expenditure, excluding acquisitions and share purchases, was A532 million, or 5.6% of sales, as compared to A683 million, or 6.8% of sales, for the year ended 31 December 2007 and A631 million, or 6.3% of sales, for the year ended 31 December 2006. For the year ended 31 December 2008, including acquisitions and share purchases, UPM’s capital expenditure was A551 million, or 5.8% of sales, as compared to A708 million, or 7.1% of sales, for the year ended 31 December 2007 and A699 million, or 7.0% of sales for the year ended 31 December 2006. For the year ended 31 December 2008, UPM’s operational capital expenditure was A235 million, as compared to A268 million for the year ended 31 December 2007. Currently, UPM is building a new renewable energy power plant at the Caledonian mill in Irvine in Scotland. The total investment cost is estimated to amount to A75 million. The new power plant is scheduled to commence operations in the second quarter of 2009.
BP-119 In December 2008, Teollisuuden Voima informed UPM that the supplier of the nuclear power plant Olkiluoto had filed a request for arbitration concerning the delay of the completion of the project and related costs. UPM’s associated company Pohjolan Voima owns 58.12% of the shares in Teollisuuden Voima. In November 2008, the new self-adhesive label materials production plant in Wroclaw in Poland, commenced operations. The total investment cost of the production plant was A94 million. In June 2008, the rebuild of the recovery plant at the Kymi pulp mill was completed. The new plant improves the energy self-sufficiency and efficiency of the mill as well as reduces carbon dioxide and other emissions. The total investment cost of the rebuild was A360 million. In April 2008, UPM signed a shareholders’ agreement to form a 50/50-owned joint venture company with the Russian Sveza Group to build a forest industry facility in the Vologda region of Northwest Russia. The related letter of intent was signed in December 2007. This industrial complex is planned to include a modern pulp mill, a sawmill and an OSB building panels mill. The final investment decision regarding this investment is subject to the satisfactory outcome of a feasibility study in respect of the project and obtaining the necessary approvals from the relevant authorities. In February 2008, the new pressure sensitive label production plant in Dixon, Illinois in the United States commenced production. The total investment cost of the production plant was US$ 100 million.
Cash Flow UPM’s primary source of liquidity comes from its generation of operating cash flow. As of 31 December 2008, UPM had A330 million in cash and cash equivalents. As of 31 December 2008, UPM also had unused credit facilities amounting to A1.8 billion. UPM’s management believes that its existing cash, cash equivalents, current facilities and operating cash flow will be sufficient to satisfy its currently anticipated cash requirements through at least the next 12 months. In order to maintain financial flexibility, UPM has further emphasised the priority of debt reduction. In January 2009, UPM announced a new dividend policy. UPM intends to pay as an annual dividend at least one-third of the net cash flow from its operating activities less operational capital expenditure. To promote stability in dividends, the net cash flow will be calculated as an average over a three year period. Remaining funds are to be allocated between growth capital expenditure and debt reduction. The Group’s liquidity resources are subject to change as the market and general economic conditions evolve. Increases in liquidity could result from an increase in cash flow from operations or a divestment of non-core assets. Decreases in liquidity could result from a weaker than expected cash flow from operations caused by lower demand for or weaker prices of UPM’s products. In addition, any potential acquisitions in which all or a portion of the consideration would be payable in cash, could have a significant effect on the Group’s liquidity resources. The Group seeks to minimise risks relating to the refinancing of its outstanding debt by ensuring that its loan portfolio has a balanced maturity profile and that its loans have sufficiently long maturities. As of 31 December 2008, the average maturity of UPM’s outstanding debt was 5.7 years, as compared to 6.1 years as of 31 December 2007 and to 7.1 years as of 31 December 2006. The following table sets forth UPM’s main cash flows for the most recent three years:
Year ended 31 December 2008 2007 2006 (E in millions) Net cash flow from operating activities ...... 628 867 1,215 Net cash flow used in investing activities ...... (532) (425) (314) Net cash flow used in financing activities ...... (1) (402) (951)
Cash from Operating Activities UPM’s net cash flow from operating activities was A628 million for the year ended 31 December 2008, as compared to A867 million for the year ended 31 December 2007. Changes in cash flows from operating activities are primarily subject to the amounts of paper delivered and the prices at which the paper is sold. Due to a deterioration in its operating result, UPM’s operating cash flow weakened. The decrease was
BP-120 mainly due to a loss for the period of A180 million for the year ended 31 December 2008, as compared to a profit for the period of A81 million for the year ended 31 December 2007. For the year ended 31 December 2006, UPM’s net cash flow from operating activities was A1,215 million. UPM’s operating loss for the year 2008 included net capital gains on disposal of fixed assets of A28 million, and its operating profit included net capital gains on disposal of fixed assets of A157 million for each of 2007 and 2006. These capital gains are not included in UPM’s cash flow from operating activities for these periods. UPM’s management believes that cash available through operations is adequate to fund its current scope of operations and its capital expenditure requirements.
Cash Used in Investing Activities UPM’s cash flows in company acquisitions, purchases of shares and investments in intangible and tangible assets were A577 million, A698 million and A703 million for the years ended 31 December 2008, 2007 and 2006, respectively. UPM’s management believes that the competitiveness of its paper machines is satisfactory, and therefore, during the last three years, the Group has been able to maintain its capital expenditures at a level below depreciation. After sales of businesses, shares and other assets and changes in other long-term investments amounting to A45 million, A273 million and A389 million, UPM’s net cash used in investing activities were A532 million, A425 million and A314 million, in each case, for the years ended 31 December 2008, 2007 and 2006, respectively. In 2008, UPM’s most important capital expenditure was the new pressure sensitive label materials production plant in Dixon, Illinois in the United States, that commenced production in February. The total investment cost was US$100 million. Another major investment was the rebuilding of the recovery plant at the Kymi pulp mill in Finland that was completed in June 2008. The total cost of the project was A360 million. Also in November 2008, UPM’s pressure sensitive label materials production plant commenced operations in Wroclaw in Poland. The total investment cost was A94 million. Currently, UPM is building a new renewable energy power plant at its Caledonian mill in Irvine in Scotland. The total investment cost is estimated to be A75 million and the power plant is scheduled to commence operations in the second quarter of 2009. In 2007, the most important of the Group’s capital expenditures were the construction of self-adhesive label materials production facilities in Wroclaw in Poland and in Dixon, Illinois in the United States, the ongoing rebuild of the recovery plant at its Kymi pulp mill in Finland and the new renewable energy power plant at its Caledonian mill in Irvine in Scotland. In 2006, UPM’s most important capital expenditures were the rebuilding of paper machine 3 at the Nordland mill and the new power plant at its Chapelle Darblay mill in Grand-Couronne in France.
Cash Used in Financing Activities UPM’s net cash used in financing activities was A1 million for the year ended 31 December 2008, as compared to A402 million and A951 million for the years ended 31 December 2007 and 2006, respectively. For the year ended 31 December 2008, the reduction of short-term debt was A153 million, as compared to an increase in short-term debt of A66 million and the reduction of short-term debt of A398 million for the years ended 31 December 2007 and 2006, respectively. Dividend payments of A384 million, A392 million and A392 million for the years ended 31 December 2007, 2006 and 2005, respectively, are included in UPM’s cash flow used in financing activities for the years ended 31 December 2008, 2007 and 2006, respectively. Based on the decisions made at UPM’s Annual General Meeting of Shareholders, UPM repurchased 16.4 million of its own shares for approximately A266 million in 2007. UPM did not repurchase any of its own shares in 2008 or in 2006. As of 31 December 2008, with A4,534 million of long-term interest-bearing debt, mainly consisting of bonds, loans from financial institutions, pension loans and A539 million of short-term interest-bearing debt totalling A5,073 million and offset by a total of A752 million in the form of interest-bearing receivables and cash and cash equivalents, UPM had a total of A4,321 million of net interest-bearing liabilities, which represented an increase of A348 million, as compared to A3,973 million as of 31 December 2007. As of 31 December 2006, net interest-bearing liabilities amounted to A4,048 million. During the last three years, the Group’s net interest-bearing liabilities have not changed significantly because UPM has not made any major company acquisitions or disposed of any significant business lines.
BP-121 Consequently, UPM’s gearing ratio, (i.e., net interest-bearing liabilities divided by equity) was 71%, 59% and 56% as of 31 December 2008, 2007 and 2006, respectively. UPM has launched a number of issues in the capital markets to diversify its funding sources and in an effort to secure a balanced maturity structure and sufficiently long maturities. UPM’s average loan maturity was 5.7 years, 6.1 years and 7.1 years as of 31 December 2008, 2007 and 2006, respectively. In 2008, UPM incurred new loans of A1,083 million to cover its funding needs, primarily for loan repayments. UPM has two major committed revolving credit facilities, which are part of its liquidity resources. One is for a principal amount of A825 million, that is maturing in 2012. The other is for a principal amount of A1.0 billion, that is also maturing in 2012. As of 31 December 2008, a total of A687 million was drawn under the credit facilities. Since 1998, UPM has repurchased an aggregate of (after adjustment for the 2003 bonus issue) approximately 95.6 million of its own shares. This equals approximately 18.6% of the Company’s present share capital. Of the total number of shares repurchased, 93.2 million have been cancelled, 2.3 million shares have been used to finance acquisitions and 0.2 million have been donated to a new cultural foundation. During the year 2007, UPM’s credit ratings remained unchanged but both rating agencies, Standard & Poor’s and Moody’s, added ‘‘negative outlook’’ to their UPM rating. In February 2008, Moody’s downgraded UPM from Baa2 to Baa3 and revised the outlook from negative to stable. Following the review for a possible downgrade in October 2008, Moody’s rating decreased to Ba1 with a stable outlook in February 2009. In February 2009, Standard & Poor’s placed its BBB- credit rating on review for a possible downgrade. Any future downgrades may increase the cost of capital on any new debt the Group may incur. As of 31 December 2008, the ratings for UPM’s rated bonds were BBB- by Standard & Poor’s and Baa3 by Moody’s under review for a possible downgrade.
Related Party Transactions General From time to time, UPM-Kymmene Corporation and its subsidiaries may engage in ordinary course transactions with other companies that are related to UPM-Kymmene Corporation. These transactions include the supply of different paper grades, pulp, wood or other products and the provision of treasury and financing transactions. Along with UPM’s subsidiaries, UPM negotiates the terms of each transaction on an arm’s length basis following management guidelines. UPM’s management believes that the terms of each transaction are generally no less favourable than would be available in transactions with third parties that are not related to UPM. UPM intends to continue to engage in transactions on a similar basis, as set forth below, with such related companies.
Associated Companies and Joint Ventures The Group owns 47% of the shares in Metsa-Botnia,¨ an associated company which the Group owns together with M-real and the Metsaliitto¨ Group. M-real is a Finnish paper and board producer, and the Metsaliitto¨ Group is a co-operative organisation of Finnish forest owners. The Metsaliitto¨ Group is also the controlling shareholder of M-real. Chemical pulp produced by Metsa-Botnia¨ is sold to the Group and to M-real at the market price less certain transportation and other costs. In 2008 and 2007, the Group’s chemical pulp entitlement with respect to the production of Metsa¨ Botnia was 1.8 million tonnes and 1.1 million tonnes per year, respectively. Following the closure of UPM’s Kaskinen pulp mill announced on 14 January 2009, the Group’s annual entitlement is 1.5 million tonnes. Total purchases of chemical pulp from Metsa-Botnia¨ amounted to A287 million in 2008, A231 million in 2007 and A197 million in 2006. In 2007, Metsa-Botnia¨ completed the construction of a new pulp mill in Uruguay. The total cost of the project was approximately US$1.2 billion. The annual capacity of the mill will be approximately one million tonnes of bleached eucalyptus pulp. UPM has invested A98 million in the pulp mill project. In 2006, related to the pulp mill project, UPM sold its shares in the Uruguayan forestry company, Compania˜ Forestal Oriental S.A., to Metsa¨ Botnia for A36 million. The Group obtains most of the energy for its production units in Finland from the Group’s owned and leased power plants, as well as through ownership in power companies which entitles it to receive electricity and heat from those companies. A significant proportion of the Group’s electricity procurement
BP-122 comes from Pohjolan Voima (UPM owns 41.84% of the shares in Pohjolan Voima) and from Kemijoki (UPM owns 4.13% of the shares in Kemijoki). Pohjolan Voima is also a majority shareholder in Teollisuuden Voima, which is one of Finland’s two nuclear power companies. The combined total of these energy purchases was A222 million in 2008, A207 million in 2007 and A194 million in 2006. In accordance with the articles of association of the power companies and with related shareholder agreements, the energy prices paid by the Group to the power companies are based on production costs, which are generally lower than market prices. Internal sales to the Group’s segments are based on the prevailing market price. Approximately 10% of the Group’s research and development work is conducted by FPPRI, in which the Group is one of four corporate owners, and it owns 38.65% of the shares in FPPRI. Ownership of FPPRI provides the Group with fundamental research information regarding the Group’s main raw materials, major manufacturing processes and key product attributes. In addition to joint research at FPPRI, the Group also utilises the institute for contract research in connection with product and process development. These services are provided on an arm’s length basis and upon terms that UPM’s management believes to be customary within the industry and generally no less favourable than would be available from independent third parties. On 4 February 2009, FPPRI and VTT signed a letter of intent to integrate the research and laboratory operations of FPPRI with VTT. The Group purchases raw materials from three associated companies. LCI s.r.l. (‘‘LCI’’) is an Italian recovered paper purchasing company and UPM owns 50% of its shares. The total value of recovered paper purchases from LCI was A25 million and A15 million in 2008 and 2007, respectively. In Finland, UPM owns 22.98% of the shares in Paperinkerays¨ Oy (‘‘Paperinkerays¨ ’’), a company engaged in the procurement, processing and transport of recovered paper. The total value of raw material purchases from Paperinkerays¨ was A12 million in 2008, A13 million in 2007 and A15 million in 2006. Recovered paper is sold to the Group and other shareholders of Paperinkerays¨ at a contract based price that takes into account paper recycling expenses and the world market prices for recovered paper. In Austria, the Group has a similar arrangement concerning recovered paper which is purchased from Austria Papier Recycling G.m.b.H. UPM owns 33.3% of the shares in the company. The total value of recovered paper purchases was A16 million in 2008, A16 million in 2007 and A12 million in 2006.
Pension Foundations and Schemes In Finland, UPM has a pension foundation (Kymin Elakes¨ a¨ati¨ o),¨ which is a separate legal entity. The pensions of approximately 9% of the Group’s Finnish employees are arranged through the foundation. The contributions paid by UPM to the foundation amounted to A47 million in 2008, as compared to A50 million and A17 million for 2007 and 2006, respectively. The foundation manages and invests the contributions paid to the plan. As of 31 December 2008, the fair value of the foundation’s assets was A222 million, of which 45% was in the form of equity instruments, 35% was in the form of debt instruments and 20% invested in the property and money market. The Group participates in two UK pension schemes, which are separate legal entities, one consisting of various defined benefit sections and a defined contribution section and the other a defined benefit section only (together, the ‘‘Defined Benefit Schemes’’). The Defined Benefit Schemes were closed to future accrual as of 31 December 2007 and all active members as of the same date became deferred members and were invited to join the Group’s only UK Defined Contribution Pension Scheme. The contributions paid by the Group to the Defined Benefit Schemes amounted to £44 million in 2008, as compared to £6 million in 2007, respectively, to fully fund both Defined Benefit Schemes to IAS 19 funding levels as of 31 December 2007. As of 31 December 2008, the fair value of the fund assets was £171 million, of which 58% was invested in equity instruments, 33% in bonds and UK government bonds and 9% in property and money market investments. No director or executive officer or 10% shareholder of the Company has outstanding indebtedness to UPM.
Management Pursuant to the provisions of the Finnish Companies Act (624/2006, as amended) and UPM’s Articles of Association, UPM’s control and governance is divided among the shareholders represented at the general meetings of shareholders, the Board of Directors and the President and Chief Executive Officer (the ‘‘President and CEO’’). In addition, UPM has the Group Executive Board and the Group Executive Team, which assist the President and CEO in the daily management of the Company.
BP-123 The business address for each of the members of the Board of Directors, the Group Executive Board and the Group Executive Team is Etelaesplanadi¨ 2, P.O. Box 380, FI-00101 Helsinki, Finland.
Board of Directors Pursuant to UPM’s Articles of Association, the Board of Directors consists of at least five and no more than 12 members. The Board of Directors currently consists of 11 members, elected for a term of one year beginning at the end of the annual general meeting of shareholders at which they have been elected, held on 26 March 2008, and ending at the conclusion of the next annual general meeting of shareholders, scheduled to be held on 25 March 2009. Members of the Board of Directors may be appointed, or removed, only by a resolution of shareholders at a general meeting of shareholders. No benefits are provided to the Board members upon termination of their service as Board members. For the year during which a specific member was elected to the Board of Directors, see the individual biographies of the members of the Board of Directors below. Following the annual general meeting of UPM’s shareholders held on 26 March 2008, the members of the Board of Directors are as follows:
Bjorn¨ Wahlroos ...... Chairman Member since 2008 Chairman of the Nominating and Corporate Governance Committee Independent of the Company and significant shareholders Born 1952 Ph.D. (Econ.) President of Sampo Plc since 2001. Chairman of the Board of Directors of Mandatum Bank Plc 1998-2000, CEO and Vice Chairman of the Board of Directors of Mandatum & Co Ltd 1992-1997 and member of the Executive Committee and Executive Vice President in Union Bank of Finland in 1985-1992. In 1979-1985, Professor of Economics in Swedish School of Economics, Helsinki. Member of the Board of Directors of Nordea Bank AB (publ). Owns 209,077 of UPM shares. Berndt Brunow ...... Vice Chairman Member since 2002, Vice Chairman since 2005 Chairman of the Human Resources Committee Independent of the Company and significant shareholders Born 1950 B.Sc. (Econ.) Chairman of Lemminkainen¨ Corporation. President and CEO of Oy Karl Fazer Ab 2002-2007. President and CEO of Sanitec Corporation 2000-2002. Various managerial positions at Finnpap and at UPM-Kymmene Corporation. Member of the Boards of Directors of Oy Karl Fazer Ab and Oy Nautor Ab. Owns 274,988 of UPM’s shares. Georg Holzhey ...... Vice Chairman Member since 2003, Vice Chairman since 2008 Member of the Human Resources Committee Independent of the Company and significant shareholders Born 1939 Dr. oec. publ. Executive Vice President and co-owner of G. Haindl’sche Papierfabriken KgaA 1970-2001. Executive Vice President of UPM-Kymmene Corporation in 2002. Owns 438,398 of UPM’s shares.
BP-124 Matti Alahuhta ...... Member since 2008 Member of the Nominating and Corporate Governance Committee Independent of the Company and significant shareholders Born 1952 D.Sc. (Eng.) President and CEO of KONE Corporation since 2006 and Member of the Board of Directors of KONE Corporation since 2003. President of KONE Corporation since 2005. Executive Vice President of Nokia Corporation 2004, President of Nokia Mobile Phones 1998-2003, and President of Nokia Telecommunications 1993-1998. Member of the Foundation Board at the International Institute for Management Development (IMD) and member of the Board of Directors of BT Group. Chairman of Aalto University Foundation. Owns 6,641 of UPM shares. Michael C. Bottenheim . . Member since 2001 Chairman of the Audit Committee Independent of the Company and significant shareholders Born 1947 LL.M., MBA Director of Montrose Associates, London, since 2006 and Senior Adviser of Lincoln International. In 1972, joined Pierson, Heldring & Pierson NV, Amsterdam, which he left in 1976 to join Citicorp’s European Investment Bank in London and Zurich. Director of Lazard Brothers & Co. Limited 1985-2000. Member of the Advisory Board of Montrose Associates, London, 2003-2005. Adviser at Compass Advisers Limited 2005-2007. Karl Grotenfelt ...... Member since 2004 Member of the Nominating and Corporate Governance Committee Independent of the Company and significant shareholders Born 1944 LL.M. Chairman of the Board of Directors of Famigro Oy. Served A. Ahlstrom Corporation as lawyer, General Counsel, Administrative Director of Paper Industry and member of the Executive Board with responsibility for the Paper Industry 1970-1986. Member of the Boards of Directors of Fiskars Corporation and Ahlstrom¨ Capital Oy. Owns 29,726 of UPM’s shares. Wendy E. Lane ...... Member since 2005 Member of the Audit Committee Independent of the Company and significant shareholders Born 1951 MBA, Harvard Graduate School of Business Administration. Chairman of the American investment firm Lane Holdings, Inc. since 1992. Investment banker at Goldman, Sachs & Co 1977-1980 and Investment banker at Donaldson, Lufkin & Jenrette Securities Corp. 1981-1992. Member the Boards of Directors of Laboratory Corporation of America and Willis Group Holdings Limited. Owns 8,299 of UPM’s shares.
BP-125 Jussi Pesonen ...... Member since 2007 President and CEO of UPM-Kymmene Corporation Non-independent member of the Board Born 1960 M.Sc. (Eng.) President and CEO of UPM-Kymmene Corporation since January 2004. In 1987, joined UPM and occupied various managerial positions at Jams¨ ankoski,¨ Kajaani, Kaukas and Shotton mills as well as Vice President of Newsprint Product Group.COO of the paper divisions and Senior Executive Vice President and deputy to the President and CEO 2001-2004. Owns 62,814 of UPM’s shares. Ursula Ranin ...... Member since 2006 Member of the Human Resources Committee Independent of the Company and significant shareholders Born 1953 LL.M., B.Sc. (Econ.) Employed by Nokia Corporation within the legal function 1984-2005, holding the position of Vice President and General Counsel 1994-2005 and acting as the secretary of the Board of Directors 1996-2005. Member of the Boards of Directors of Finnair Plc and Nordea Bank AB (publ). Owns 7,361 of UPM’s shares. Veli-Matti Reinikkala . . . Member since 2007 Member of the Audit Committee Independent of the Company and significant shareholders Born 1957 eMBA President of ABB Process Automation Division, member of the Group Executive Committee ABB Inc., Switzerland, since 2006. Held various positions in Rauma-Repola Group’s business control 1979-1989. CFO of Tampella Packaging Division 1989-1991. Managing Director of Stora Enso Group’s Pac Asia Ltd. 1992-1993. Held different business control and executive positions in ABB Ltd. 1993-2005. Owns 6,221 of UPM’s shares.
Proposal of the Nominating and Corporate Governance Committee for the New Composition of UPM’s Board of Directors Based on the recommendation of the Board’s Nominating and Corporate Governance Committee, UPM’s Board of Directors will propose at the annual general meeting of shareholders scheduled to be held on 25 March 2009 that the number of members of the Board of Directors be decreased from ten to nine. Mr. Michael C. Bottenheim will not stand for re-election for the coming term. The Nominating and Corporate Governance Committee proposes that the following current members of the Board of Directors be re-elected for a term ending at the end of the annual general meeting of shareholders to be held in 2010: Mr. Berndt Brunow, Mr. Karl Grotenfelt, Mr. Georg Holzhey, Mr. Matti Alahuhta, Ms. Wendy E. Lane, Mr. Jussi Pesonen, Ms. Ursula Ranin, Mr. Veli-Matti Reinikkala and Mr. Bjorn¨ Wahlroos.
President and CEO The President and CEO is responsible for the day-to-day management of UPM. The President and CEO ensures that UPM’s accounting practices conform to the law and that UPM’s financial administration and management is reliably organised. Measures that are unusual or extensive in view of the scope and nature of UPM’s business may be taken by the President and CEO only if approved by the Board of Directors, unless the time required to obtain such approval would cause the Company to suffer a substantial disadvantage. In the latter case, the Board of Directors must be informed as soon as practicable of the measures taken. The Board of Directors has approved the service contract of UPM’s President and
BP-126 CEO, including financial benefits and other terms of service. The performance of the President and CEO is evaluated annually by the Board’s Human Resources Committee.
Group Executive Board and Group Executive Team The Group Executive Board and the Group Executive Team assist the President and CEO in the operative management of UPM. The main duties of the Group Executive Board are matters relating to the preparation and implementation of the Group strategy and business group strategies, financial forecasting and performance of the Group and its business groups, investments and divestitures while the primary responsibilities of the Group Executive Team are matters pertaining to functional strategies, corporate procedures and co-ordination between the business groups and functions. UPM’s three business groups have their own management teams, the purpose of which is to assist the presidents of the respective business groups. In addition, business areas have their own management groups. UPM also has local management groups in which UPM’s employees are represented. Currently, the members of UPM’s Executive Board and Executive Team are as follows:
Jussi Pesonen ...... President and CEO Member of the Group Executive Team since 2001. Member of the Group Executive Board. Born 1960 M.Sc. (Eng.). In 1987, joined UPM and occupied several posts including Production Manager at Jams¨ ankoski¨ mill, Production Unit Director at Kajaani, Kaukas and Shotton mills and Vice President of Newsprint Product Group. COO of the paper divisions and Senior Executive Vice President and deputy to the President and CEO 2001-2004. Owns 62,814 of UPM’s shares and holds 300,000 class A options, 100,000 class G options and 120,000 class H options. Anu Ahola ...... Executive Vice President, Strategic Planning Member of the Group Executive Team since 2008. Born 1965 M.Sc. (Technology), MBA Several posts at Jaakko Poyry¨ Consulting in Finland and in the United States 1992-2004. Director, Marketing Strategy and Planning, Nokia Corporation 2004-2007. Vice President Strategic Planning, UPM, since 2007. Owns 1,000 of UPM shares and holds 80,000 class A options, 7,000 class G options and 8,000 class H options. Pirkko Harrela ...... Executive Vice President, Corporate Communications Member of the Group Executive Team since 2004. Born 1960 M.A. Several posts in Communications in Finnpap 1985-1996. Several management posts in Communications for Printing Papers Division 1996-2002. Vice President, Corporate Communications, since 2003. Owns 12,368 of UPM’s shares and holds 80,000 class A options, 30,000 class G options and 40,000 class H options.
BP-127 Tapio Korpeinen ...... President, the Energy and pulp business group Member of the Group Executive Team since 2008. Member of the Group Executive Board. Born 1963 M.Sc. (Industrial Engineering), MBA Several management posts at Jaakko Poyry¨ Consulting in Finland and North America 1991-1998 and 1999-2005, A.T. Kearney in Finland 1998-1999 and McKinsey & Company in Sweden 1988-1990. Vice President, Corporate Development, UPM, 2005-2008. Senior Vice President, Strategy, since 2008. Owns 480 of UPM shares and holds 120,000 class A options, 12,000 class G options and 30,000 class H options. Juha Makel¨ a¨ ...... General Counsel Member of the Group Executive Team since 2008. Born 1962 LL.M. University of Turku and Northwestern Law School, Chicago, the United States. Various positions in business law in law firms in Finland and Germany 1991-1996. Several posts at KONE Corporation in business transactions 1997-2004. General Counsel of UPM since 2005. Owns 6,448 of UPM shares and holds 80,000 class A options, 30,000 class G options and 40,000 class H options. Jyrki Ovaska ...... President, the Paper business group Member of the Group Executive Team since 2002. Member of the Group Executive Board. Born 1958 M.Sc. (Eng.) Held several posts with United Paper Mills Ltd., Jams¨ ankoski¨ mill, in production, customer service and business management 1984-1995. Vice President, Business Development, Printing Papers, 1996-1998. Vice President, LWC Product Group, 1998-2000. Senior Vice President, Business Development and Support Functions, Publication Papers, 2000-2001. President, Fine & Speciality Papers Division, 2002-2003. President, Magazine Paper Division, 2004-2008. Owns 13,772 of UPM’s shares and holds 150,000 class A options, 50,000 class G options and 60,000 class H options. Jyrki Salo ...... Executive Vice President and CFO, since February 2006 Member of the Group Executive Team since 2006. Member of the Group Executive Board. Born 1960 M.Sc. (Econ.) Joined IBM Corporation in 1984, various tasks in sales and market development positions in Finland and the United Kingdom. Joined Nokia Corporation in 1990 holding several posts in senior executive positions with business and finance & control responsibilities in Finland, Belgium, Germany, the Netherlands and the USA. Senior Vice President, Finance & Control, for Nokia’s Networks Business Group 2002-2005. Owns 23,000 of UPM’s shares and holds 150,000 class A options, 50,000 class G options and 60,000 class H options.
BP-128 Riitta Savonlahti ...... Executive Vice President, Human Resources Member of the Group Executive Team since 2004. Born 1964 M.Sc. (Econ.) Held HR Specialist posts with ABB 1990-1994. Human Resources Manager with Nokia Mobile Phones, Salo Operations, 1995-2000. Senior Vice President, Human Resources with Raisio Group 2000-2001. Senior Vice President, Human Resources with Elcoteq Network Corporation 2001-2004. Owns 6,598 of UPM’s shares and holds 80,000 class A options, 25,000 class G options and 40,000 class H options. Hans Sohlstrom...... ¨ Executive Vice President, Corporate Relations & Development Member of the Group Executive Team since 2004. Born 1964 M.Sc. (Tech.), M.Sc. (Econ.) Various tasks in business control and development, procurement, planning, production and maintenance at Oy Wilh. Schauman Ab, Nordland Papier GmbH and Kymmene Oy 1984-1989. Marketing Assistant, Finnpap, 1989-1990. Marketing Manager, Stracel S.A., 1990-1994. Mill Director, Jams¨ ankoski¨ MFC and SC mills, 1994-1998. Management posts in sales and marketing, UPM Publication Papers, 1998-2002. Senior Vice President Sales & Marketing, Magazine Papers Division, 2002-2004. Executive Vice President, Marketing, 2004-2007. Executive Vice President, New Businesses and Biofuels, 2007-2008. Owns 15,072 of UPM’s shares and holds 80,000 class A options, 30,000 class G options and 40,000 class H options. Jussi Vanhanen ...... President, the Engineered materials business group Member of the Group Executive Team since 2008. Member of the Group Executive Board. Born 1971 LL.M., MBA Legal Counsel of Finnpap 1995-1996, Assistant Lawyer at a law firm 1996-1997, Sales Manager at Samab Cia in Brazil 1997-1999. Project Manager and Head of New Ventures, UPM, Converting Division 1999-2001. Several management posts at UPM Raflatac in Finland and Spain 2003-2005. Senior Vice President, Asia-Pacific 2005-2008. Senior Vice President, Europe, Label Division, 2008. Owns 480 of UPM shares and holds 120,000 class A options, 11,000 class G options and 9,000 class H options. Hartmut Wurster ...... Executive Vice President, Technology Member of the Group Executive Team since 2002. Born 1955 D.Tech. Several posts with Hamburger AG and Brigl & Bergmeister in Austria 1982-1987, including Head of Technology Department and Production Manager. Joined Haindl Papier GmbH & Co. KG in 1987. Head of Technology Department at Augsburg mill 1987-1989. Mill Director, Augsburg, 1989-1996 and member of the Executive Board responsible for the Magazine Papers Division, 1996-2001. President, Newsprint Division 2002-2008. Owns 10,572 of UPM’s shares and holds 120,000 class A options, 50,000 class G options and 60,000 class H options.
Board Practices Pursuant to the Finnish Companies Act, the Board of Directors is responsible for the administration and proper organisation of the operations of the Company and the appropriate arrangement of the control of the Company’s accounts and finances. In addition, the Board of Directors shall determine the
BP-129 Company’s dividend policy and make a proposal to the annual general meeting of shareholders for the annual payment of dividends. The Board of Directors’ other duties include, among others: (i) establishing and evaluating the strategic direction of UPM; (ii) approving and evaluating UPM’s business and strategic plans; (iii) establishing limits for capital expenditures, investments and divestitures and financial commitments not to be exceeded without the approval of the Board of Directors; (iv) overseeing strategic and operational risks; (v) ensuring that UPM has defined the operating principles of internal control and monitors the function of such control; and (vi) appointing the President and CEO and the members of the Group Executive Team and the Group Executive Board. The Members of the Board of Directors are required to provide the Board of Directors with adequate information for the assessment of their qualifications and independence. Based on the information provided by the Board members, the Board of Directors has determined that all of the Board members are independent with the exception of Mr. Jussi Pesonen who is the President and CEO of the Company. According to the Finnish Corporate Governance Code of 2008 published by the Securities Market Association (the ‘‘Finnish Corporate Governance Code’’), a member of the Board of Directors is not independent of the Company if, among other reasons, he or she has or has had an employment relationship or service contract with the Company. The Board of Directors elects, from among its members annually, a Chairman and two Vice Chairmen. The Board of Directors is deemed to have a quorum when more than one-half of its members are present and one of the members present is either the Chairman or the Vice Chairman. The Board of Directors may consult external experts when considered necessary. In 2008, the Board of Directors met nine times. On average, the members of the Board of Directors attended 99% of the meetings. At the date of this Base Prospectus, UPM is not aware of any conflicts of interest or potential conflicts of interest between any duties of the Company or the members of the Board of Directors, on the one hand, and the private interests of the members of the Board of Directors, on the other hand. The Board’s charter is available on UPM’s website www.upm-kymmene.com.
Committees of the Board of Directors The Board of Directors may set up specific committees composed of its members. The Committees assist the Board of Directors by preparing matters within the competence of the Board of Directors. Pursuant to the Board Charter of the Company, the Board of Directors shall set up three committees at its organisational meeting each year: an Audit Committee, a Human Resources Committee and a Nomination and Corporate Governance Committee. The members of the above-mentioned committees are appointed by the Board of Directors upon the recommendation of the Nomination and Corporate Governance Committee. The Board of Directors also adopts charters for the committees, setting forth the purposes, composition, operations and duties of each of the above-mentioned committees as well as the qualifications for committee membership, procedures for the appointment and removal of committee members and the structure, operations and reporting methods of each of the committees. The committee members shall comply with the independence requirements of the Finnish Corporate Governance Code which entered into force on 1 January 2009. The President and CEO may not be appointed a member of these committees. The charters are available on UPM’s website www.upm-kymmene.com.
Audit Committee. Pursuant to its charter, the Audit Committee shall comprise at least three members. On 26 March 2008, the Board of Directors elected, from among its members, an Audit Committee comprising Mr. Michael C. Bottenheim as Chairman and Ms. Wendy E. Lane and Mr. Veli-Matti Reinikkala as members. According to the Finnish Corporate Governance Code, the committee shall have sufficient expertise in accounting, bookkeeping or auditing which has been taken into account in the composition of the Committee. Desirable qualifications for committee members include an appropriate understanding of accounting practices and financial reporting through education or experience in performing or overseeing related functions. The primary purpose of the Committee is to monitor the financial reporting processes and the statutory audits of the financial statements as well as the efficiency of the Company’s internal control,
BP-130 internal audit and risk management systems. The other duties of the Audit Committee include, among others, evaluating the qualifications and independence of the Company’s statutory auditor and matters pertaining to the preparation of the proposal for the election of the statutory auditor as well as evaluating the performance of the Company’s internal audit. In 2008, the Audit Committee convened four times.
Human Resources Committee. Pursuant to its charter, the Human Resources Committee shall comprise at least three members. The current members of the Committee are: Mr. Berndt Brunow as Chairman and Mr. Georg Holzhey and Ms. Ursula Ranin as members. In addition, desirable qualifications for the Human Resources Committee members include experience in business management, executive compensation, employee benefits and human resources. The primary purposes of the Human Resources Committee are to (i) assist the Board of Directors with its responsibilities relating to the appointment, evaluation and compensation of the President and CEO and members of the Group Executive Team and other employees reporting directly to the President and CEO, (ii) oversee UPM’s human resources policies, compensation plans and programmes and (iii) review procedures for appropriate succession planning for senior management. In 2008, the Human Resources Committee convened six times.
Nominating and Corporate Governance Committee. Pursuant to its charter, the Nominating and Corporate Governance Committee shall comprise at least three members. The current members of the Nominating and Corporate Governance Committee are Mr. Bjorn¨ Wahlroos as Chairman and Mr. Karl Grotenfelt and Mr. Matti Alahuhta as members. Desirable qualifications for the members of the Committee include experience in corporate governance, business management, personnel or human resources management, and organisational behaviour. The Nominating and Corporate Governance Committee handles matters relating to the membership of the Board of Directors and its committees and corporate governance. The primary purposes of the Nominating and Corporate Governance Committee are to (i) identify individuals qualified to serve as directors and recommend nominees for election or re-election to the Board of Directors and their fees and other remuneration to be approved by the shareholders consistently with the criteria approved by the Board of Directors and (ii) develop and recommend to the Board of Directors a set of corporate governance principles (Board Charter) applicable to UPM and review, on a regular basis, the overall corporate governance of the Company. Final decisions on proposals made by the Nominating and Corporate Governance Committee concerning the Board of Directors are made by the shareholders at the annual general meeting of shareholders. In 2008, the Nomination and Corporate Governance Committee convened four times. UPM’s corporate governance practices comply with the applicable recommendations of the Finnish Corporate Governance Code. In addition, UPM’s Board of Directors has adopted a code of conduct applicable to directors, officers, and employees. The code of conduct addresses topics such as conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets, compliance with laws, rules and regulation and encouraging the reporting of any illegal or unethical behaviour. The code of conduct contains compliance standards and procedures to facilitate its effective implementation and to ensure prompt and consistent action against violations of the code. The code of conduct is available at UPM’s website at www.upm-kymmene.com by clicking ‘‘About Us’’—‘‘Corporate Responsibility’’. The Board of Directors has adopted an insider policy for the Group, which sets forth the rules governing the insiders of the Company. UPM’s permanent insiders as of 1 January 2009 included the members of the Board of Directors, the President and CEO, the auditor who has principal responsibility for auditing the Company’s financial statements and other members of the senior management who regularly receive insider information and who have the authority to make decisions affecting the Group’s future development and organisation of its business activities. Pursuant to the Finnish Auditing Act (459/2007, as amended), the auditor is not allowed to own shares of the Company. The holdings of the shares of the Company by the primary insiders are public information and are available at Euroclear Finland Ltd and on UPM’s website www.upm-kymmene.com. The permanent insiders are subject to a number of trading restrictions and rules, including among others, prohibitions on trading in the Company’s securities during the four-week ‘‘closed window’’ periods preceding and including, the disclosure date of the annual or quarterly results. When necessary, insider registers will be drawn up for individual projects
BP-131 and trading restrictions will be imposed. Persons possessing inside information are not allowed to trade in the Company’s securities.
Additional Information UPM’s Shares As of 20 March 2009, UPM’s fully paid-up share capital amounted to A889,572,283 comprising 519,970,088 shares. UPM has only one class of shares and the shares do not have a nominal counter value. Each share entitles its holder to one vote at any general meeting of shareholders of UPM. Pursuant to Article 12 of UPM’s Articles of Association, a shareholder who, alone or jointly with another shareholder, owns 33 1/3% or 50% or more of all of UPM’s shares or their associated voting rights shall, at the request of other shareholders, be liable to redeem their shares and any securities that, under the Finnish Companies Act (624/2006, as amended), carry the right to such shares, as prescribed in more detail in Article 12. A resolution of general meeting of shareholders to amend or delete this redemption clause must be carried by shareholders representing not less than three-quarters of the votes cast and shares represented at the meeting. UPM’s shares are listed on NASDAQ OMX Helsinki. American Depositary Shares representing UPM’s shares are traded in the United States on the over-the-counter market under a Level 1 sponsored American Depositary Receipt program.
Memorandum and Articles of Association Purpose and Object Pursuant to Section 2 of UPM’s Articles of Association, the sphere of operations UPM is to engage, either directly or through its subsidiaries, in the forest, packaging, chemical, engineering, marine technology and energy production industries as well as other business operations related to these. UPM may also own and control real estate, shares and other securities, engage in other investment activities and act as the parent company of the group that it forms.
BP-132 GLOSSARY
The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this Base Prospectus.
Agricultural residues Agricultural residues are biomass residues originating from production, harvesting and processing in farm areas. Agricultural residues or non-wood feedstocks include a number of cultivated and naturally growing plants such as straw and reed. Agro residues can be used as raw materials for pulp and biochemicals. To audit, audit Inspection, or audit, performed by an independent external auditor, for example, the audit of a management system. Biodiesel Diesel fuel produced from biomass. Bioethanol Ethanol produced from biomass. Biofuels Liquid or gaseous fuel for transport produced from biomass. Biomass Organic material generated by the growth of micro-organisms, plants and animals. Biorefinery Facility that integrates biomass conversion processes and equipment to produce fuels, power and value-added chemicals from biomass.
Carbon dioxide, CO2 Combustion product of carbon. Carbon emissions arise from fossil fuels, for instance. Chain of Custody (CoC) A system for monitoring the origin and chain of custody of wood. Coated fine paper (WFC) Also known as coated wood-free paper. Coated fine paper is used for demanding printing. The amount of coating and gloss of the paper is determined by the end-use. Top quality coated fine papers are called art printing papers and due to excellent printability are used for art books, brochures, annual reports and other similar purposes. Other papers, with a lighter coating, are used for brochures, books, magazines, catalogues and other similar purposes. Coated paper Paper that has been coated on one or both sides with a mix of clay or carbonates and latex to create a high quality printing surface. LWC Lightweight coated paper. The main characteristics of LWC paper are its higher gloss, brightness and smoothness relative to uncoated supercalendered paper. These properties are necessary for quality printing and good colour reproduction. The main uses of LWC paper are in the printing of mass circulation magazines, catalogues and direct mail advertising. MFC Machine-finished coated paper. MFC paper has high brightness, opacity, bulk and stiffness and is used in specialized magazines, catalogues, inserts, advertising materials and books. The soft -nip calender gives a matt finish to the paper. EMAS (Eco-Management and Audit A voluntary environmental management scheme for companies Scheme) and organisations in the private and public sectors. EU ETS EU emission trading scheme. To evaluate, evaluation Evaluation, or inspection, performed by UPM’s own personnel, of, for example, the operations of a subcontractor.
BP-133 Face papers Paper on which a label is printed in self-adhesive labelstock. Fibre The basic structural unit of paper. Fibres used in papermaking originate mainly from the stem of softwood and hardwood trees. Fine paper Also known as writing paper, free sheet or wood-free paper. Fine paper generally contains chemical pulp, with no more than 10% of mechanical pulp, and its filler content varies between 5% and 25%. Fine paper is generally highly regarded for its strength, brightness and good archiving characteristics. Fine paper may be coated or uncoated. Filmic liner Filmic backing layer with silicone release coating carrying the adhesive face material of the self-adhesive laminate. Filmic products Self-adhesive laminates with filmic face layer. Fischer-Tropsch Synthesis process in which liquid fuels are produced from synthetic gas. Flexography The flexography printing process is used in three variations. The systems revolve around the type of ink used to create the image and the method of drying the image once printed. The ink may be solvent-based, water-based or ultra-violet curing. Graphic paper Coated and uncoated magazine papers, standard and speciality newsprint as well as coated and uncoated fine paper reels and sheets. Gravure printing A printing process using a thin, quick-drying ink applied from a cylindrical surface that has an engraved design. Rotogravure printing is the opposite of letterpress printing, since the design areas are recessed into the cylinder instead of being in relief. HF High frequency. ISO International Organisation for Standardisation. International Organisation for Standardisation, whose ISO 9000 quality standards and 14000 environmental standards are extensively used in industry. Label paper Face and base papers suitable for self-adhesive labels. Face papers have distinct printing properties and base papers have siliconising and tear-off properties. Letterpress printing Letterpress printing, as in terms of label printing, can come in three forms. Flat-bed, semi-rotary, and rotary. Each of these applies a paste ink to a relatively hard, flat raised relief surface. This inked surface, which may be formed from polymer or metal, is then pressed against the subtrate being printed leaving a sharp edged ink film. Magazine paper Paper used in magazines, catalogues, brochures, direct mail advertising and similar printed material. Newsprint Uncoated paper manufactured mainly from mechanical pulp or recycled paper and used for newspapers and directories. Newsprint has a low basis weight. OSB Oriented Strand Board is an engineered, building panel product made of strands, flakes or wafers sliced from small diameter, round wood logs and bonded with a binder under heat and pressure. PM PM, or paper machine, is a term used when referring to individual paper manufacturing units within a paper mill.
BP-134 Printing paper Papers used in the graphic industry and for photocopying. Printing papers may be coated or uncoated. Preprint applications Business forms and letterheads, financial documents such as invoices, bank statements, cheques, administrative documents, listings, shipping documents etc. Publication paper Coated and uncoated magazine papers, standard and speciality newsprint. Pulp Generic name for wood or plant-based fibre masses used as raw material in papermaking. Chemical pulp Generic name for wood-based fibres separated from each other by ‘‘cooking’’ wood chips or plants in hot alkaline or acidic solutions of various chemicals. Hardwood pulp Pulp obtained from deciduous trees, which have the advantage of shorter fibres, which enhance the printability of the paper. Mechanical pulp Generic name for wood-based fibres separated from each other mechanically. Softwood pulp Pulp obtained from coniferous trees which have the advantage of long fibres which enhance the strength of the paper. REACH (Registration, Evaluation EU legislation on Registration, Evaluation and Authorisation of and Authorisation of Chemicals) Chemicals. Recovered paper Paper and board recovered for secondary use. Recycled fibre Fibre extracted from recovered paper. Renewable energy Renewable non-fossil energy sources: wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases. RFID Radio Frequency Identification, is a technology that incorporates the use of radio waves to uniquely identify an object. A typical RFID system consists of a tag, a reader and a host system. The advantage of RFID is that it does not require direct contact or line-of-sight. Roll-to-roll printing A roll of material is unwound, the unwound web then printed and converted, and the printed material rewound into a roll. SC Supercalendered paper. Supercalendered paper is manufactured from mechanical and chemical pulp with mineral pigments as filler. This paper is used for printing magazines, especially multi- colour magazines with large circulations. Traditional SC paper is made for gravure printing, but other SC paper grades have also been developed to suit offset printing. Second-generation biodiesel / BTL Liquid transportation fuel produced from lignocellulosic (biomass-to-liquid) diesel feedstock. The process producing BTL diesel converts solid biomass into liquid fuel via gasification and Fischer-Tropsch synthesis. Refined BTL diesel can be used in existing diesel engines. Self-adhesive labelstock Face and base materials laminated together for manufacturers of product and information labels. Self-adhesive labelstock is also known as pressure-sensitive labelstock. TRS Reduced sulphur compounds (e.g., sulphuric acid, methyl mercaptan), emission reported as sulphur (S; can be converted to sulphur dioxide by multiplying by 2). UHF Ultra-high frequency.
BP-135 UV-flexo Ultraviolet (UV) flexography, the inks are dried by ultra-violet light. UV Flexo introduces further environmental improvements and better image quality. Dot gain is greatly reduced, which gives sharper and more consistent results with higher gloss and improved contrast. Woodfree, free sheet or fine paper Papers used by the graphic industry for writing, including office papers such as photocopying and laser printing paper. These papers may be coated or uncoated. Wood plastic composite Wood plastic composite is a composite material made of plastic and wood fibre. The technology uses recycled plastic and wood fibre to produce a composite result.
BP-136 TAXATION
The following is a general description of certain Finnish and United Kingdom tax considerations as well as certain Luxembourg withholding considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in those countries or elsewhere. Prospective purchasers of Notes should consult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of those countries. This summary is based upon the law as in effect on the date of this Base Prospectus and is subject to any change in law that may take effect after such date.
Republic of Finland Under present Finnish law payments of the principal of and interest (if any) on the Notes will be exempt from all taxes, duties, fees and imposts of whatever nature, imposed or levied by or within the Republic of Finland or by any province, municipality or other political sub-division or taxing authority thereof and therein, except when the holder of the Note or Coupon to which any such payment relates is subject to such taxation thereon by reason of such holder being connected with the Republic of Finland otherwise than solely by his holding of such Note or Coupon or the receipt of income therefrom. Non-residents of Finland are not liable to pay Finnish capital gains tax on Notes that are not connected with a permanent or a fixed base in Finland. Transfers of Notes by a non-resident by way of a gift or by reason of the death of the holder may be subject to Finnish gift or inheritance tax, respectively.
The United Kingdom Introduction The following is a summary of the United Kingdom withholding taxation treatment at the date hereof in relation to payments of principal and interest in respect of the Notes. The comments are made on the assumption that the Issuer of the Notes is not resident in the United Kingdom for United Kingdom tax purposes and that the interest payments on the Notes do not have a United Kingdom source. The comments do not deal with other United Kingdom tax aspects of acquiring, holding or disposing of Notes. The comments relate only to the position of persons who are absolute beneficial owners of the Notes. Prospective Noteholders should be aware that the particular terms of issue of any series of Notes as specified in the relevant Final Terms may affect the tax treatment of that and other series of Notes. The following is a general guide and should be treated with appropriate caution. Noteholders who are in any doubt as to their tax position should consult their professional advisers. Noteholders who may be liable to taxation in jurisdictions other than the United Kingdom in respect of their acquisition, holding or disposal of the Notes are particularly advised to consult their professional advisers as to whether they are so liable (and if so under the laws of which jurisdictions), since the following comments relate only to certain United Kingdom taxation aspects of payments in respect of the Notes. In particular, Noteholders should be aware that they may be liable to taxation under the laws of other jurisdictions in relation to payments in respect of the Notes even if such payments may be made without withholding or deduction for or on account of taxation under the laws of the United Kingdom.
United Kingdom withholding taxes Interest on the Notes may be paid without withholding or deduction for or on account of United Kingdom income tax.
Provision of information Noteholders and Couponholders should note that where any interest on Notes is paid to them (or to any person acting on their behalf) by any person in the United Kingdom acting on behalf of the Issuer (a ‘‘paying agent’’), or is received by any person in the United Kingdom acting on behalf of the relevant Noteholder or Couponholder (other than solely by clearing or arranging the clearing of a cheque) (a ‘‘collecting agent’’), then the paying agent or the collecting agent (as the case may be) may, in certain cases, be required to supply to H.M. Revenue & Customs (‘‘HRMC’’) details of the payment and certain details relating to the Noteholder or Couponholder (including the Noteholder’s or Couponholder’s name and
BP-137 address). These provisions will apply whether or not the interest has been paid subject to withholding or deduction for or on account of United Kingdom income tax and whether or not the Noteholder or Couponholder is resident in the United Kingdom for United Kingdom taxation purposes. In certain circumstances, the details provided to the HMRC may be passed by the HMRC to the tax authorities of certain other jurisdictions. With effect from 6 April 2009 the provisions referred to above may also apply, in certain circumstances, to payments made on redemption of any Notes where the amount payable on redemption is greater than the issue price of the Notes.
Other rules relating to United Kingdom withholding tax The references to ‘‘interest’’ and ‘‘principal’’, in this description of the United Kingdom withholding tax position, mean ‘‘interest’’ and ‘‘principal’’ as understood in United Kingdom tax law. The statements in this section do not take any account of any different definitions of ‘‘interest’’ or ‘‘principal’’ which may prevail under any other law or which may be created by the terms and conditions of the Notes or any related documentation.
EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each member state of the European Union (for the purpose of this ‘‘Taxation’’ section, an ‘‘EU Member State’’) is required to provide to the tax authorities of another EU Member State details of payments of interest or other similar income (as defined by EC Council Directive 2003/48/EC) paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entities called ‘‘residual entities’’ (as defined by EC Council Directive 2003/48/EC) established in that other EU Member State; however, for a transitional period, Austria, Belgium and Luxembourg may instead apply a withholding tax system in relation to such payments, deducting tax at rates rising over time to 35%. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments. A number of non-EU countries including Switzerland, and certain dependent or associated territories of certain EU Member States have adopted similar measures (either provision of information or transitional withholding tax) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or a ‘‘residual entity’’ established in a EU Member State. In addition, the EU Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a EU Member State to, or collected by such a person for, an individual resident or ‘‘residential entity’’ established in one of those territories. On 13 November 2008 the European Commission published a proposal for amendments to the Directive, which included a number of suggested changes which, if implemented, would broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers.
Luxembourg Withholding Tax (i) Non-resident holders of Notes Under Luxembourg general tax laws currently in force and subject to the laws of 21 June 2005 (the ‘‘Laws’’) mentioned below, there is no withholding tax on payments of principal, premium or interest made to nonresident holders of Notes, nor on accrued but unpaid interest in respect of the Notes, nor is any Luxembourg withholding tax payable upon redemption or repurchase of the Notes held by non-resident holders of Notes. Under the Laws implementing the Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments and ratifying the treaties entered into by Luxembourg and certain dependent and associated territories of EU Member States (the ‘‘Territories’’), payments of interest or similar income (as defined by law) made or ascribed by a paying agent established in Luxembourg to or for the immediate benefit of an individual beneficial owner or a ‘‘residual entity’’, as defined by the Laws, which are resident of, or established in, an EU Member State (other than
BP-138 Luxembourg) or one of the Territories will be subject to a withholding tax unless the relevant recipient has adequately instructed the relevant paying agent to provide details of the relevant payments of interest or similar income to the fiscal authorities of his/her/its country of residence or establishment, or, in the case of an individual beneficial owner, has provided a tax certificate issued by the fiscal authorities of his/her country of residence in the required format to the relevant paying agent. Where withholding tax is applied, it will be levied at a rate of 15% from 1 July 2005 to 30 June 2008, at a rate of 20% from 1 July 2008 to 30 June 2011 for the subsequent three-year period and at a rate of 35% from 1 July 2011 thereafter. Responsibility for the withholding of the tax will be assumed by the Luxembourg paying agent (as defined by law) and not by the Issuer. Payments of interest under the Notes coming within the scope of the Laws would at present be subject to withholding tax of (unless the beneficiary has opted for the disclosure of information described above.
(ii) Resident holders of Notes Under Luxembourg general tax laws currently in force and subject to the law of 23 December 2005 (the ‘‘Law’’) mentioned below, there is no withholding tax on payments of principal, premium or interest made to Luxembourg resident holders of Notes, nor on accrued but unpaid interest in respect of Notes, nor is any Luxembourg withholding tax payable upon redemption or repurchase of Notes held by Luxembourg resident holders of Notes. Under the Law payments of interest or similar income (as defined by law) made or ascribed by a paying agent established in Luxembourg to or for the immediate benefit of an individual beneficial owner (as defined by law) who is resident of Luxembourg will be subject to a withholding tax of 10%. Such withholding tax will be in full discharge of income tax if the beneficial owner is an individual acting in the course of the management of his/her private wealth. The 10% withholding tax applies to interest accrued as from 1 July 2005 and paid as from 1 January 2006. Responsibility for the withholding of the tax will be assumed by the Luxembourg paying agent (as defined by the Law) and not by the Issuer. Payments of interest under the Notes coming within the scope of the Law would be subject to withholding tax of 10%.
BP-139 SUBSCRIPTION AND SALE
Notes may be sold from time to time by the Issuer to any one or more of BNP Paribas, Citigroup Global Markets Limited, Commerzbank Aktiengesellschaft, Deutsche Bank AG, London Branch, Dresdner Bank Aktiengesellschaft, Merrill Lynch International, Nordea Bank Danmark A/S, Nordea Bank Finland Plc and The Royal Bank of Scotland plc (the ‘‘Dealers’’). The arrangements under which Notes may from time to time be agreed to be issued by the Issuer to, and subscribed by, Dealers are set out in an amended and restated dealer agreement dated 23 March 2009 as amended and/or supplemented from time to time (the ‘‘Dealer Agreement’’) and made between the Issuer and the Dealers. Any such agreement will, inter alia, make provision for the form and terms and conditions of the relevant Notes, the price at which such Notes will be subscribed by the Dealers and the commissions or other agreed deductibles (if any) payable or allowable by the Issuer in respect of such subscription. The Dealer Agreement makes provision for the resignation or termination of appointment of existing Dealers and for the appointment of additional or other Dealers either generally in respect of the Programme or in relation to a particular Tranche of Notes.
United States of America The Notes have not been and will not be registered under the Securities Act, the securities laws of any state or other jurisdiction of the United States, and may not be offered or sold directly or indirectly within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. (1) Each Dealer will represent and agree that it has not offered or sold Notes and will not offer and sell or in the case of Bearer Notes, deliver Notes of any Series (i) as part of its distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Notes of such Series, as determined and certified to the Paying Agent or the Issuer by the relevant Dealer (or, in the case of a sale of a Series of Notes to or through more than one Dealer, by each of such Dealers as to the Notes of such Series purchased by or through it, in which case the Paying Agent or the Issuer shall notify each such Dealer when all such Dealers have so certified), within the United States or to, or for the account or benefit of, U.S. persons (other than a sale pursuant to Rule 144A provided in paragraph (2) below). Notes offered and sold outside the United States to non-U.S. persons may be sold in reliance on Regulation S. Each Dealer will represent and agree that neither it, its affiliates (if any) nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to Notes, and it and they have complied and will comply with the offering restrictions requirements of Regulation S under the Securities Act. Each Dealer will agree that, at or prior to confirmation of sale of Notes (other than sale of Notes pursuant to Rule 144A as set forth in paragraph (2) below), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the distribution compliance period a confirmation or notice to substantially the following effect: ‘‘The Notes covered hereby have not been and will not be registered under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Series of Notes of which such Notes are a part, as determined and certified by [Name of Dealer or Dealers, as the case may be], except in either case pursuant to an exemption from, or in a transaction not subject to, the registration requirements of, the Securities Act. Terms used above have the meaning given to them by Regulation S’’. Terms used in this paragraph (1) have the meanings given to them by Regulation S. (2) Each Dealer will represent and agree that it will not, acting either as principal or agent, offer or sell any Notes in the United States or to, or for the account or benefit of, U.S. persons other than Notes in registered form bearing a restrictive legend thereon which are offered or sold in reliance
BP-140 on Rule 144A and it will not, acting either as principal or agent, offer, sell, reoffer or resell any of such Notes (or approve the resale of any of such Notes): (a) except (A) through a U.S. broker dealer that is registered under the Exchange Act to institutional investors, each of which such Dealer reasonably believes (i) is a QIB, or a fiduciary or agent purchasing Notes for the account of one or more QIBs, and (ii) has such knowledge and experience in financial and business matters that it is capable of evaluating and bearing the risks of investing in the Notes or is represented by a fiduciary or agent with sole investment discretion having such knowledge and experience or (B) otherwise in accordance with the restrictions on transfer set forth in such Notes, the Dealer Agreement, the Base Prospectus and the relevant Final Terms; or (b) by means of any form of general solicitation or general advertisement (as those terms are used in Rule 502(c) under the Securities Act), including but not limited to (A) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio and (B) any seminar or meeting whose attendees have been advised by any general solicitation or general advertising; or (c) in any manner involving public offering within the meaning of Section 4(2) of the Securities Act. Prior to the sale of any Notes in registered form bearing a restrictive legend thereon, the selling Dealer shall have provided each offeree that is a U.S. person (as defined in Regulation S) with a copy of the Base Prospectus in the form the Issuer and the Dealers shall have agreed most recently shall be used for offers and sales in the United States (the initial such form being the original Base Prospectus dated 25 August 1999). (3) Each Dealer will represent and agree that in connection with each sale it has taken or will take reasonable steps to ensure that the purchaser is aware that the Notes have not been and will not be registered under the Securities Act and that transfers of Notes are restricted as set forth herein. See ‘‘Transfer Restrictions’’. The Issuer and the Dealers reserve the right to reject any offer to purchase the Notes, in whole or in part, for any reason. This Base Prospectus does not constitute an offer to any person in the United States or to any U.S. person other than a qualified institutional buyer and to whom an offer has been made directly by one of the Dealers or its U.S. broker-dealer affiliate. The Bearer Notes are also subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a U.S. person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the Code and regulations thereunder. Each Dealer (or, in the case of a sale of a Series of Notes to or through more than one Dealer, each of such Dealers, as to Notes of such Series purchased by or through it, in which case the Paying Agent or the Issuer shall notify each such Dealer when all such Dealers have certified as provided in this paragraph) who has purchased Notes of any Series in accordance with the Dealer Agreement will agree to determine and certify to the Paying Agent or the Issuer the completion of the distribution of such Series of Notes as aforesaid. In order to facilitate compliance by each Dealer with the foregoing, the Issuer will agree that, prior to such certification with respect to such Series, it will notify each relevant Dealer in writing of each acceptance by the Issuer of an offer to purchase and of any issue of Notes or other debt obligations of the Issuer which are denominated in the same currency or composite currency and which have substantially the same terms and maturity date as the Notes of such Series. In addition, until 40 days after the commencement of the offering of any Series of Notes, an offer or sale of Notes within the United States by any dealer that is not participating in the offering of such Series of Notes may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.
Public Offer Selling Restriction Under the Prospectus Directive In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a ‘‘Relevant Member State’’), each Dealer has represented, warranted and agreed, and each further Dealer appointed under the Programme will be required to represent, warrant
BP-141 and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the ‘‘Relevant Implementation Date’’) it has not made and will not make an offer of Notes which are the subject of the offering contemplated by the Prospectus as completed by the Final Terms in relation thereto (or are the subject of the offering contemplated by a Drawdown Prospectus, as the case may be) to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant Member State: (a) if the Final Terms or Drawdown Prospectus in relation to the Notes specify that an offer of those Notes may be made other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a ‘‘Non-exempt Offer’’), following the date of publication of a prospectus in relation to such Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, provided that any such prospectus which is not a Drawdown Prospectus has subsequently been completed by the Final Terms contemplating such Non-exempt Offer, in accordance with the Prospectus Directive, in the period beginning and ending on the dates specified in such prospectus or Final Terms, as applicable; (b) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (c) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than A43,000,000 and (3) an annual net turnover of more than A50,000,000, all as shown in its last annual or consolidated accounts; or (d) at any time to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or (e) at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes referred to in (b) to (e) above shall require the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. For the purposes of this provision, the expression an ‘‘offer of Notes to the public’’ in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression ‘‘Prospectus Directive’’ means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Selling Restrictions Addressing Additional United Kingdom Securities Laws Each Dealer has represented, warranted and agreed that: (a) No deposit-taking: in relation to any Notes having a maturity of less than one year: (i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business; and (ii) it has not offered or sold and will not offer or sell any Notes other than to persons: (A) whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses; or (B) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses, where the issue of the Notes would otherwise constitute a contravention of section 19 of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’) by the Issuer;
BP-142 (b) Financial promotion: it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and (c) General compliance: it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to such Notes in, from or otherwise involving the United Kingdom.
Selling Restrictions Addressing Additional Netherlands Securities Laws Each Dealer has represented and agreed that in respect of any Series of Notes to be issued under the Programme any one of the following selling restrictions shall apply (as specified in the Final Terms): (A) For Notes having denominations of less than EUR 50,000 (or the equivalent in any other currency) this Base Prospectus may not be distributed and the relevant Notes (including rights representing an interest in a Note in global form) may not be offered, sold, transferred or delivered, directly or indirectly, on their issue date or at any time thereafter to individuals or legal entities who are established, domiciled or have their residence in The Netherlands (‘‘Dutch Residents’’) other than to qualified investors (gekwalificeerde beleggers) within the meaning of the Netherlands Financial Markets Supervision Act (Wet op het financieel toezicht, the ‘‘Wft’’), (hereinafter referred to as ‘‘Qualified Investors’’) provided that such Notes bear a legend to the following effect: ‘‘This Note (or any interest therein) may not be sold, transferred or delivered to individuals or legal entities who are established, domiciled or have their residence in The Netherlands other than qualified investors (gekwalifi ceerde beleggers) within the meaning of the Netherlands Financial Markets Supervision Act (Wet op het financieel toezicht, the ‘‘Wft’’). Each Dutch Resident by subscribing for or purchasing this Note (or any interest therein), will be deemed to have represented and agreed for the benefit of the Issuer that it is a Qualified Investor. Each holder of this Note (or any interest therein), by subscribing for or purchasing such Note (or any interest therein), will be deemed to have represented and agreed for the benefit of the Issuer that (1) such Note (or any interest therein) may not be offered, sold, pledged or otherwise transferred to Dutch Residents other than Qualified Investors acquiring such Notes for their own account or for the account of a Qualified Investor and that (2) the holder will provide notice of the transfer restrictions described herein to any subsequent transferee’’. (B) Such Notes having a denomination of less than A50,000 (or the equivalent in any other currency and including rights representing an interest in a Note in global form) may not be offered, sold, transferred or delivered, directly or indirectly, on their issue date or at any time thereafter, to Dutch Residents. Such Notes bear a legend to the following effect: ‘‘This Note (or any interest therein) may not be sold, transferred or delivered to individuals or legal entities who are established, domiciled or have their residence in The Netherlands (‘‘Dutch Residents’’). Each holder of this Note (or any interest therein), by subscribing for or purchasing such Note (or any interest therein), will be deemed to have represented and agreed for the benefit of the Issuer that (1) such Note (or any interest therein) may not be offered, sold, pledged or otherwise transferred to Dutch Residents and (2) the holder will provide notice of the transfer restrictions described herein to any subsequent transferee’’. (C) In addition and without prejudice to the relevant restrictions set out under (A) to (B) above, Zero Coupon Notes (as defined below) in definitive form may only be transferred and accepted, directly or indirectly, within, from or into The Netherlands through the mediation of either the Issuer or an authorised admitted institution of Euronext Amsterdam N.V., admitted in a function on one or more exchanges or systems held by Euronext Amsterdam N.V. (toegelaten instelling), in accordance with the Dutch Savings Certificates Act (Wet inzake spaarbewijzen) of 21 May 1985 (as amended). No such mediation is required (a) in respect of the transfer and acceptance of Zero Coupon Notes while in the form of rights representing an interest in a Zero Coupon Note in
BP-143 global form, or (b) in respect of the initial issue of Zero Coupon Notes in definitive form to the first holders thereof, or (c) in respect of the transfer and acceptance of Zero Coupon Notes in definitive form between individuals not acting in the conduct of a business or profession, or (d) in respect of the transfer and acceptance of such Zero Coupon Notes within, from or into The Netherlands if all Zero Coupon Notes (either in definitive form or as rights representing an interest in a Zero Coupon Note in global form) of any particular Series/Tranche which are issued outside The Netherlands and are not distributed into The Netherlands in the course of initial distribution or immediately thereafter. In the event that the Savings Certificates Act applies, certain identification requirements in relation to the issue and transfer of, and payments on, Zero Coupon Notes have to be complied with and, in addition thereto, if such Zero Coupon Notes in definitive form do not qualify as commercial paper traded between professional borrowers and lenders within the meaning of the agreement of 2 February 1987 attached to the Royal Decree of 11 March 1987 (Staatscourant 129) (as amended), each transfer and acceptance should be recorded in a transaction note, including the name and address of each party to the transaction, the nature of the transaction and the details and serial numbers of such Notes. As used herein ‘‘Zero Coupon Notes’’ are Notes that are in bearer form and that constitute a claim for a fixed sum against the Issuer and on which interest does not become due during their tenor or on which no interest is due whatsoever.
Japan The Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, each Dealer has undertaken that it will not offer or sell any Notes directly or indirectly, in Japan or to, or for the benefit of, any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person except under circumstances which will result in compliance with all applicable laws, regulations and guidelines promulgated by the relevant Japanese governmental and regulatory authorities and in effect at the relevant time. For the purposes of this paragraph, ‘‘Japanese Person’’ shall mean any person resident in Japan, including any corporation or other entity organised under the laws of Japan.
General Each Dealer has represented, warranted and agreed that it has and will comply with all applicable laws and regulations in each country or jurisdiction in or from which it purchases, offers, sells or delivers Notes or possesses, distributes or publishes this Base Prospectus or any Final Terms or any related offering material, in all cases at its own expense. Other persons into whose hands the Base Prospectus or any Final Terms come are required by the Issuer and the Dealers to comply with all applicable laws and regulations in each country or jurisdiction in or from which they subscribe for, purchase, offer, sell or deliver Notes or have in their possession or distribute such offering material, in all cases at their own expense. The Dealer Agreement provides that the Dealers shall not be bound by any of the restrictions relating to any specific jurisdiction (set out above) to the extent that such restrictions shall, as a result of change(s) or change(s) in official interpretation, after the date hereof, of applicable laws and regulations, no longer be applicable but without prejudice to the obligations of the Dealers described in the paragraph headed ‘‘General’’ above. Selling restrictions may be supplemented or modified with the agreement of the Issuer. Any such supplement or modification will be set out in the relevant Final Terms (in the case of a supplement or modification relevant only to a particular Tranche of Notes) or (in any other case) in a supplement to this document.
BP-144 TRANSFER RESTRICTIONS
Each prospective purchaser of Notes offered in reliance on Rule 144A by accepting delivery of this Base Prospectus will be deemed to have represented and agreed that such offeree acknowledges that this Base Prospectus is personal to such offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Notes other than pursuant to Rule 144A or in offshore transactions in accordance with Regulation S. Distribution of this Base Prospectus, or disclosure of any of its contents to any person other than such offeree and those persons, if any, retained to advise such offeree with respect thereto is unauthorized, and any disclosure of any of its contents, without the prior written consent of the Issuer, is prohibited. Each purchaser of Notes offered and sold in reliance on Rule 144A will be deemed to have represented, acknowledged and agreed as follows (terms used in this paragraph that are defined in Rule 144A or in Regulation S are used herein as defined therein): (1) The purchaser (A) is a QIB, (B) is aware that the sale to it is being made in reliance on Rule 144A, (C) is acquiring such Notes for its own account or for the account of a QIB and (D) not formed for the purpose of investing in the Notes or the Issuer. If it is acquiring any Notes for the account of one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the herein acknowledgments, representations and agreements on behalf of each such account; (2) The Notes are being offered only in a transaction not involving any public offering in the United States within the meaning of the Securities Act, the Notes have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdiction of the United States, the purchaser acknowledges that the Notes are ‘‘restricted securities’’ (as defined in Rule 144(a)(3) under the Securities Act), and, if in the future the purchaser decides to offer, resell, pledge or otherwise transfer such Notes, such Notes may be offered, sold, pledged, or otherwise transferred only (A) in the United States to a person who the seller reasonably believes is a QIB purchasing for its own account, or for the account of one or more QIBs in a transaction meeting the requirements of Rule 144A, (B) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, (C) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), or (D) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. No representation can be made as to the availability at any time of the exemption provided by Rule 144 for the resale of the Notes; (3) The purchaser understands that Notes of a Series offered in reliance on Rule 144A will be represented by a Restricted Global Note Certificate. Before any interest in such Restricted Global Note Certificate may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in an Unrestricted Global Note Certificate, the seller will be required to provide the Trustee and the Registrar with a written certification (in the form provided in the Trust Deed) as to compliance with the transfer restrictions referred to in clause (2)(B) or (2)(C) above. (4) The purchaser agrees that it will deliver to each person to whom it transfers Notes notice of any restriction on transfer of such Notes; (5) The purchaser understands that the Restricted Global Note Certificates and any definitive note certificate issued in exchange thereof, if any, offered hereby will bear a legend to the following effect, unless the Issuer determines otherwise in accordance with applicable law: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS
BP-145 BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) BUT ONLY UPON DELIVERY TO THE ISSUER OF AN OPINION OF COUNSEL IN FORM AND SCOPE SATISFACTORY TO THE ISSUER, (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (5) TO THE ISSUER, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALE OF THIS NOTE. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS NOTE TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFERS OF RESTRICTED SECURITIES GENERALLY. BY ACCEPTANCE OF THIS NOTE, THE HOLDER HEREOF SHALL BE DEEMED TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. (5) The purchaser understands that the Issuer, the Registrar and the Dealers and their affiliates and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. The Paying Agency Agreement provides that such legends will not be removed unless the Registrar is advised that the relevant Note is being transferred pursuant to Regulation S or unless there is delivered to the Issuer and the Registrar satisfactory evidence, which may include an opinion of U.S. counsel, to the effect that neither such legends nor the restrictions on transfer set forth therein are required to ensure that transfers of such Note comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or that such Note is not a ‘‘restricted security’’ within the meaning of Rule 144 under the Securities Act. Each purchaser of Notes outside the United States pursuant to Regulation S by accepting delivery of this Base Prospectus and the Notes, will be deemed to have represented, agreed and acknowledged that: (a) It is, or at the time Notes are purchased will be, the beneficial owner of such Notes and (i) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (ii) it is not an affiliate of the Issuer or a person acting on behalf of such an affiliate. (b) It understands that such Notes have not been and will not be registered under the Securities Act and it will not offer, sell, pledge or otherwise transfer such Notes except (i) to the Issuer, (ii) in accordance with Rule 144A under the Securities Act to a person that it reasonably believes is a QIB purchasing for its own account or the account of a QIB whom it has notified, in each case, that the offer, resale, pledge or other transfer is being made in reliance on Rule 144A, (iii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, or (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) but only upon delivery to the Issuer of an opinion of counsel in form and scope satisfactory to the Issuer in each case in accordance with any applicable securities laws of any state of the United States. (c) It understands that the Issuer, the Registrar, the Dealers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements. (d) It understands that the Notes offered in reliance on Regulation S will be represented by the Unrestricted Global Note Certificate. Prior to the expiration of the distribution compliance period (within the meaning of Regulation S), before any interest in the Unrestricted Global Note Certificate may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Restricted Global Note Certificate, it will be required to provide
BP-146 the Registrar with a written certification (in the form provided in the Paying Agency Agreement) as to compliance with applicable securities laws. (e) None of the Issuer, the Dealers or any person representing any such entity has made any representation to it with respect to any such entity or the offering or sale of any Notes, other than the information in this Base Prospectus.
BP-147 GENERAL INFORMATION
Admission to Listing and Trading Application has been made for the Notes issued under the Programme to be listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the regulated market of the Luxembourg Stock Exchange. However, Notes may be issued pursuant to the Programme which will not be admitted to listing, trading and/or quotation by the regulated market of the Luxembourg Stock Exchange or any other listing authority, stock exchange and/or quotation system or which will be admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system as the Issuer and the relevant Dealer(s) may agree.
Authorisations The Programme has been authorised by resolutions of the Board of Directors of the Issuer held on 17 June 1999, 13 June 2000, 22 March 2001, 19 March 2002, 19 March 2003, 24 March 2004, 31 March 2005, 21 March 2006, 1 February 2007, 5 February 2008 and 5 February 2009. The Issuer has obtained or will obtain from time to time all necessary consents, approvals and authorisations in connection with the issue and performance of the Notes.
Clearing of the Notes The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg, clearance systems. The appropriate common code, the International Securities Identification Number and the CUSIP number (if applicable) in relation to the Notes of each Series will be specified in the Final Terms relating thereto. In addition, the Issuer will (or, in relation to Notes denominated in a currency other than U.S. dollars, may) make an application with respect to each Series of Notes sold pursuant to Rule 144A for such Notes to be accepted for trading in book-entry form by DTC. All payments of principal and interest with respect to Notes denominated in any currency other than U.S. dollars and registered in the name of the nominee for DTC will be converted to U.S. dollars unless the relevant participants in DTC elect to receive such payment of principal or interest in that other currency. Acceptance of each Series of Notes for trading through DTC will be confirmed in the Final Terms relating thereto. Application will be made for trading of Notes to be issued under the Programme in PORTAL. The relevant Final Terms shall specify any other clearing system as shall have accepted the relevant Notes for clearance together with any further appropriate information. If the Put Option is specified in the applicable Final Terms as being applicable to a Series of Notes, whilst such Notes are in global form the Put Option shall be exercisable through the clearance system through which such Notes shall then be clearing.
Use of Proceeds The net proceeds of the issue of each Tranche of Notes will be applied by the Issuer to meet part of their general financing requirements.
Litigation Save as disclosed in this Base Prospectus, the Issuer is not or has not been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) during the 12 months before the date of this Base Prospectus which may have, or have had in the recent past, significant effects on the financial position or profitability of the Issuer and its subsidiaries taken as a whole.
No Material Change/No Significant Change Save as disclosed in this Base Prospectus, there has been no material adverse change in the prospects of the Issuer, nor has there been any significant change in the financial or trading position of the Issuer and its subsidiaries, taken as a whole, which has occurred since 31 December 2008. The Issuer has undertaken, in connection with the admission to trading of the Notes on the regulated market of the Luxembourg Stock Exchange, that if there shall occur any significant new factor which is not reflected in the Base Prospectus and any supplements thereto or any change in the information set out under ‘‘Terms and Conditions of the Notes’’, and/or there shall be any material mistake or inaccuracy
BP-148 relating to the information included in the Base Prospectus or any supplements thereto, in each case, which is capable of affecting the assessment of the Notes, the Issuer will prepare or procure the preparation of a supplement to this Base Prospectus or, as the case may be, publish a new Base Prospectus, for use in connection with any subsequent issue by the Issuer of Notes to be admitted to trading on the regulated market of the Luxembourg Stock Exchange.
Documents available for inspection For so long as the Programme remains in effect or any Notes shall be outstanding, copies and, where appropriate, English translations of the following documents may be inspected during normal business hours at the specified office of the Principal Paying Agent and are obtainable at the specified office of the Paying Agent in Luxembourg, namely: (a) the Articles of Association of the Issuer; (b) the Paying Agency Agreement; (c) the Trust Deed (which contains the forms of the Notes in global and definitive form); (d) the Dealer Agreement; (e) the Programme Manual; (f) reports, letters, balance sheets, valuations and statements of experts included or referred to in this Base Prospectus (other than consent letters); (g) any Final Terms, the Base Prospectus (which will also be available on the website of the Luxembourg Stock Exchange, as mentioned below) as well as any Base Prospectus Supplements relating to Notes which are admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system. (In the case of any Notes which are not admitted to listing, trading and/or quotation by any other stock exchange, listing authority and/or quotation system, copies of the relevant Final Terms will only be available for inspection by the relevant Noteholders); and (h) the financial statements referred to under the heading below. The Issuer will, at its registered office and at the specified offices of the Paying Agents, provide, free of charge, upon oral or written request, a copy of this Base Prospectus. Written or oral requests should be directed to the specified office of any Paying Agent. In addition, this Base Prospectus will be available in electronic form on the website of the regulated market of the Luxembourg Stock Exchange (www.bourse.lu).
Financial statements available For so long as the Programme remains in effect or any Notes shall be outstanding, copies and, where appropriate, English translations of the following documents may be obtained during normal business hours at the specified office of the Principal Paying Agent and the Paying Agent in Luxembourg, namely, the most recent publicly available audited consolidated and unconsolidated financial statements of the Company beginning with such financial statements for the years ended 31 December 2008, 2007 and 2006. The Issuer does not produce interim accounts on an unconsolidated basis. The financial statements for the Company have not been reconciled to U.S. GAAP.
Statutory Auditors PricewaterhouseCoopers Oy whose regulated address is Itamerentori¨ 2, P.O. Box 1015, 00101, Helsinki and who are supervised by the Auditing Board of the Central Chamber of Commerce of Finland are the Issuer’s auditors for the period covered by the historical financial information.
Post-issuance information The Issuer does not intend to provide any post-issuance information in relation to any assets underlying issues of Notes constituting derivative securities.
BP-149 (This page has been left blank intentionally.)
BP-150 INDEX TO FINANCIAL STATEMENTS
Audited Historical Consolidated Financial Information in respect of the Financial Year Ended 31 December 2008 under IFRS ...... F-2 Consolidated Income Statement for the Years Ended 31 December 2008 and 2007 ...... F-3 Consolidated Balance Sheet for the Years Ended 31 December 2008 and 2007 ...... F-4 Consolidated Statement of Changes in Equity ...... F-5 Consolidated Cash Flow Statement for the Years Ended 31 December 2008 and 2007 ...... F-6 Notes to the Consolidated Financial Statements ...... F-7 Parent Company Accounts under Finnish Accounting Standards ...... F-45 Notes to the Parent Company Financial Statements ...... F-47 Information on Shares ...... F-51 Key Figures 1999-2008 ...... F-55 Quarterly Figures 2007-2008 ...... F-57 Calculation of Key Indicators ...... F-58 The Auditor’s Report for the Financial Year Ended 31 December 2008 ...... F-59
Audited Historical Consolidated Financial Information in respect of the Financial Year Ended 31 December 2007 under IFRS ...... F-60 Consolidated Income Statement for the Years Ended 31 December 2007 and 2006 ...... F-61 Consolidated Balance Sheet for the Years Ended 31 December 2007 and 2006 ...... F-62 Consolidated Statement of Changes in Equity ...... F-63 Consolidated Cash Flow Statement for the Years Ended 31 December 2007 and 2006 ...... F-64 Notes to the Consolidated Financial Statements ...... F-65 Parent Company Accounts under Finnish Accounting Standards ...... F-102 Notes to the Parent Company Financial Statements ...... F-104 Information on Shares ...... F-108 Key Figures 1998-2007 ...... F-112 Quarterly Figures 2006-2007 ...... F-114 Calculation of Key Indicators ...... F-115 The Auditor’s Report for the Financial Year Ended 31 December 2007 ...... F-116
Audited Historical Consolidated Financial Information in respect of the Financial Year Ended 31 December 2006 under IFRS ...... F-117 Consolidated Income Statement for the Years Ended 31 December 2006, 2005 and 2004 ..... F-118 Consolidated Balance Sheet for the Years Ended 31 December 2006 and 2005 ...... F-119 Consolidated Statement of Changes in Equity ...... F-120 Consolidated Cash Flow Statement for the Years Ended 31 December 2006, 2005 and 2004 . . . F-121 Notes to the Consolidated Financial Statements ...... F-122 Parent Company Accounts under Finnish Accounting Standards ...... F-156 Notes to the Parent Company Financial Statements ...... F-158 Information on Shares ...... F-162 Key Figures 1997-2006 ...... F-166 Quarterly Figures 2005-2006 ...... F-168 Calculation of Key Indicators ...... F-169 The Auditor’s Report for the Financial Year Ended 31 December 2006 ...... F-170
F-1 UPM-KYMMENE CORPORATION
AUDITED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION IN RESPECT OF THE FINANCIAL YEAR ENDED 31 DECEMBER 2008 UNDER IFRS
F-2 Group ■ ACCOUNTS FOR 2008
Consolidated income statement
Year ended 31 December €m Note 2008 2007
Sales 4 9,461 10,035 Other operating income 6 83 200 Costs and expenses 7 –8,407 –8,650 Change in fair value of biological assets and wood harvested 8 50 79 Share of results of associated companies and joint ventures 9 62 43 Depreciation, amortisation and impairment charges 10 –1,225 –1,224 Operating profi t 4 24 483
Gains on available-for-sale investments, net 11 2 2 Exchange rate and fair value gains and losses 12 –25 –2 Interest and other fi nance costs, net 12 –202 –191 Profi t (loss) before tax –201 292
Income taxes 13 21 –211 Profi t (loss) for the period –180 81
Attributable to: Equity holders of the parent company –179 85 Minority interest –1 –4 –180 81
Earnings per share for profi t (loss) attributable to the equity holders of the parent company Basic earnings per share, € 14 –0.35 0.16 Diluted earnings per share, € 14 –0.35 0.16
The notes are an integral part of these fi nancial statements.
F-3 ACCOUNTS FOR 2008 ■ Group
Consolidated balance sheet
As at 31 December €m Note 2008 2007
ASSETS Non-current assets Goodwill 16 933 1,163 Other intangible assets 17 403 392 Property, plant and equipment 18 5,688 6,179 Investment property 19 19 14 Biological assets 20 1,133 1,095 Investments in associated companies and joint ventures 21 1,263 1,193 Available-for-sale investments 22 116 116 Non-current fi nancial assets 23 361 82 Deferred tax assets 28 258 284 Other non-current assets 24 201 121 10,375 10,639 Current assets Inventories 25 1,354 1,342 Trade and other receivables 26 1,686 1,717 Income tax receivables 24 18 Cash and cash equivalents 330 237 3,394 3,314 Assets classifi ed as held for sale 18 12 – Total assets 13,781 13,953
As at 31 December €m Note 2008 2007
EQUITY AND LIABILITIES Equity attributable to equity holders of the parent company Share capital 27 890 890 Translation differences –295 –158 Fair value and other reserves 27 130 193 Reserve for invested non-restricted equity 1,145 1,067 Retained earnings 4,236 4,778 6,106 6,770 Minority interest 14 13 Total equity 6,120 6,783
Non-current liabilities Deferred tax liabilities 28 658 745 Retirement benefi t obligations 29 408 441 Provisions 30 191 171 Interest-bearing liabilities 31 4,534 3,384 Other liabilities 32 25 12 5,816 4,753 Current liabilities Current interest-bearing liabilities 31 537 931 Trade and other payables 33 1,258 1,443 Income tax payables 33 43 1,828 2,417 Liabilities related to assets classifi ed as held for sale 18 17 – Total liabilities 7,661 7,170 Total equity and liabilities 13,781 13,953
The notes are an integral part of these fi nancial statements.
F-4 Group ■ ACCOUNTS FOR 2008
Consolidated statement of changes in equity
Attributable to equity holders of the parent company Reserve for invested Share Translation Fair value non- Share premium Treasury differ- and other restricted Retained Minority Total €m capital reserve shares ences reserves equity earnings Total interest equity
Balance at 1 January 2007 890 826 – –89 278 – 5,366 7,271 18 7,289
Translation differences – – – –69 – – – –69 – –69 Net investment hedge, net of tax – – – – – – – – – – Cash fl ow hedges fair value gains/losses, net of tax – – – – 68 – – 68 – 68 transfers from equity, net of tax – – – – –41 – – –41 – –41 Available-for-sale investments fair value gains/losses, net of tax – – – – – – – – – – transfers to income statement, net of tax – – – – –1 – – –1 – –1 Profi t for the period – – – – – – 85 85 –4 81 Total recognised income and expense for the period ––––6926–8542–438
Share options exercised – – – – – 104 – 104 – 104 Acquisition of treasury shares – – –266 – – – – –266 – –266 Cancellation of treasury shares – – 266 – – – –266 – – – Share-based compensation, net of tax – – – – 13 – – 13 – 13 Dividend paid – – – – – – –392 –392 – –392 Business combinations –––––––––1–1 Transfers and others – –826 – – –124 963 –15 –2 – –2 Total of other changes in equity – –826 – – –111 1,067 –673 –543 –1 –544 Balance at 31 December 2007 890 – – –158 193 1,067 4,778 6,770 13 6,783
Translation differences – – – –193 – – – –193 – –193 Net investment hedge, net of tax – – – 56 – – – 56 – 56 Cash fl ow hedges fair value gains/losses, net of tax – – – – 29 – – 29 – 29 transfers from equity, net of tax – – – – –62 – – –62 – –62 Available-for-sale investments fair value gains/losses, net of tax – – – – – – – – – – transfers to income statement, net of tax – – – – – – – – – – Other items1) – – – – – – –12 –12 – –12 Loss for the period – – – – – – –179 –179 –1 –180 Total recognised income and expense for the period – – – –137 –33 – –191 –361 –1 –362
Share options exercised – – – – – 78 – 78 – 78 Acquisition of treasury shares – – – – – – – – – – Cancellation of treasury shares –––– – ––––– Share-based compensation, net of tax – – – – –29 – 33 4 – 4 Dividend paid – – – – – – –384 –384 – –384 Business combinations ––––––––22 Other items – – – – –1 – – –1 – –1 Total of other changes in equity – – – – –30 78 –351 –303 2 –301 Balance at 31 December 2008 890 – – –295 130 1,145 4,236 6,106 14 6,120
1) The Group’s share of changes recognised directly in the associates’ equity. The notes are an integral part of these fi nancial statements.
F-5 ACCOUNTS FOR 2008 ■ Group
Consolidated cash fl ow statement
Year ended 31 December €m 2008 2007
Cash fl ow from operating activities Profi t (loss) for the period –180 81 Adjustments to profi t (loss) for the period (Note 5) 1,232 1,390 Interest received 94 Interest paid –202 –191 Dividends received 18 23 Other fi nancial items, net –41 –72 Income taxes paid –76 –164 Change in working capital (Note 5) –132 –204 Net cash generated from operating activities 628 867
Cash fl ow from investing activities Acquisition of shares in associated companies –19 –25 Capital expenditure –558 –673 Proceeds from disposal of subsidiary shares, net of cash (Note 5) 6 205 Proceeds from disposal of shares in associated companies 42 Proceeds from disposal of available-for-sale investments 23 Proceeds from sale of tangible and intangible assets 33 71 Proceeds from non-current receivables –1 Increase in non-current receivables ––9 Net cash used in investing activities –532 –425
Cash fl ow from fi nancing activities Proceeds from non-current liabilities 1,083 965 Payments of non-current liabilities –624 –879 Proceeds from (payment of) current liabilities, net –153 66 Share options exercised 78 104 Dividends paid –384 –392 Purchase of treasury shares ––266 Other fi nancing cash fl ow –1 – Net cash used in fi nancing activities –1 –402
Change in cash and cash equivalents 95 40
Cash and cash equivalents at the beginning of year 237 199 Foreign exchange effect on cash –2 –2 Change in cash and cash equivalents 95 40 Cash and cash equivalents at year-end 330 237
The notes are an integral part of these fi nancial statements.
F-6 Group ■ ACCOUNTS FOR 2008
Notes to the Consolidated Financial Statements
(In the notes all amounts are shown in millions of euros unless otherwise stated.)
1 ACCOUNTING POLICIES subsidiaries. Subsidiaries are those entities in which UPM-Kymmene Corporation either owns, directly or indirectly, over fi fty percent of the The principal accounting policies to be adopted in the preparation of voting rights, or otherwise has the power to govern their operating and the consolidated fi nancial statements are set out below: fi nancial policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Principal activities Acquisitions of subsidiaries are accounted for using the purchase UPM-Kymmene Corporation (“the parent company” or “the com- method of accounting. The cost of an acquisition is measured as the pany”) together with its consolidated subsidiaries (“UPM” or “the fair value of the assets given, equity instruments issued and liabilities Group”) is a global paper and forest products group engaged in the incurred or assumed at the date of exchange, plus costs directly attrib- production of paper, with an emphasis on the manufacture and sale of utable to the acquisition. Identifi able assets acquired and liabilities and printing and writing papers. The Group consists of three Business contingent liabilities assumed in a business combination are measured Groups, which are Energy and pulp, Paper, and Engineered materials. initially at their fair values at the acquisition date, irrespective of the UPM reports fi nancial information for the following segments: Energy, extent of any minority interest. The excess of the cost of acquisition Pulp, Forest and timber, Paper, Label, Plywood, and Other operations. over the fair value of the Group’s share of the identifi able net assets of The Group’s activities are centred in the European Union countries and the subsidiary acquired is recorded as goodwill. If the cost of acquisi- North America, and Asia with production facilities in 14 countries. tion is less than the fair value of the Group’s share of the net assets of UPM-Kymmene Corporation is a Finnish limited liability com- the subsidiary acquired, the difference is recognised directly in the pany, domiciled in Helsinki in the Republic of Finland. The address of income statement (see “Intangible Assets” for the accounting policy on the company’s registered offi ce is Eteläesplanadi 2, 00101 Helsinki, goodwill). Subsidiaries acquired during the year are included in the where the copy of the consolidated fi nancial statement can be obtained. consolidated fi nancial statements from the date on which control is The parent company is listed on NASDAQ OMX Helsinki Ltd. transferred to the Group, and subsidiaries sold are included up to the These Group consolidated fi nancial statements were authorised for date that control is relinquished. Where necessary, the accounting issue by the Board of Directors on 5 February 2009. policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Basis of preparation All intercompany transactions, receivables, liabilities and unreal- These consolidated fi nancial statements of UPM are prepared in ised profi ts, as well as intragroup profi t distributions, are eliminated. accordance with International Financial Reporting Standards as Unrealised losses are also eliminated unless the transaction provides adopted by the EU (IFRS). evidence of an impairment of the asset transferred. The fi nancial statements have been prepared under the historical cost convention as modifi ed by the revaluation of biological assets, Associated companies and joint ventures available-for-sale fi nancial assets and certain other fi nancial assets and Associated companies are entities over which the Group has signifi cant fi nancial liabilities. Share-based payments are recognised at fair value infl uence but no control, generally accompanying a shareholding of on the grant date. between 20% and 50% of the voting rights. Joint ventures are entities The preparation of fi nancial statements requires the use of account- over which the Group has contractually agreed to share the power to ing estimates and assumptions that affect the reported amounts of govern the fi nancial and operating policies of that entity with another assets and liabilities, the disclosure of contingent assets and liabilities venturer or venturers. at the date of the fi nancial statements, and the reported amounts of Interests in associated companies and joint ventures are accounted revenues and expenses during the reporting periods. Accounting esti- for using the equity method of accounting and are initially recorded at mates are employed in the fi nancial statements to determine reported cost. Under this method the Group’s share of the associated company’s amounts, including the realisability of certain assets, the useful lives of and joint venture’s profi t or loss for the year is recognised on the tangible and intangible assets, income taxes and others. Although these income statement and its share of movements in reserves is recognised estimates are based on management’s best knowledge of current events in reserves. The Group’s interest in an associated company and joint and actions, actual results may ultimately differ from those estimates. venture is carried on the balance sheet at an amount that refl ects its The preparation of fi nancial statements also requires management to share of the net assets of the associated company and joint venture exercise its judgement in the process of applying the Group’s account- together with goodwill on acquisition (net of any accumulated impair- ing policies. The critical judgements are summarised in Note 2. ment loss), less any impairment in the value of individual investments. Unrealised gains and losses on transactions between the Group and its Consolidation principles associates and joint ventures are eliminated to the extent of the Group’s interest in the associated company and joint venture, unless the loss Subsidiaries provides evidence of an impairment of the asset transferred Associated The consolidated fi nancial statements of UPM include the fi nancial company and joint venture accounting policies have been changed statements of the parent company, UPM-Kymmene Corporation, and its where necessary to ensure consistency with the policies adopted by the
F-7 ACCOUNTS FOR 2008 ■ Group
Group. Equity accounting is discontinued when the carrying amount of months, and as a current asset or liability when the remaining maturity the investment in an associated company or interest in a joint venture is less than 12 months. reaches zero, unless the Group has incurred or guaranteed obligations The Group applies fair value hedge accounting for hedging fi xed in respect of the associated company or joint venture. interest risk on borrowings. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly Minority interests effective both prospectively and retrospectively are recorded in the The profi t or loss attributable to the parent shareholders and minority income statement under fi nancial items, along with any changes in the interests is presented on the face of the income statement. Minority fair value of the hedged asset or liability that are attributable to the interests are presented in the consolidated balance sheet within equity, hedged risk. The carrying amounts of the hedged items and the fair separately from the parent shareholders’ equity. values of the hedging instruments are included in the interest-bearing Transactions with minority interests are treated as transaction with assets or liabilities. Derivatives that are designated and qualify as fair parties external to the Group. Disposals of minority interests result in value hedges mature at the same time as hedged items. If the hedge no gains or losses for the Group and are recorded in the income statement. longer meets the criteria for hedge accounting, the adjustment to the Purchases of minority interests result in goodwill, being the difference carrying amount of a hedged item for which the effective interest between any consideration paid and the relevant share acquired of the method is used is amortised to profi t or loss over the period to maturity. carrying value of net assets of the subsidiary. Changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges and that are highly effective both prospec- Foreign currency transactions tively and retrospectively are recognised in equity (at the spot rate Items included in the fi nancial statements of each subsidiary in the difference). The accumulated profi t or loss of the hedging instruments Group are measured using the currency of the primary economic envi- is recognised in equity approximately during the period of 12 months. ronment in which the subsidiary operates (“the functional currency”). Amounts deferred in equity are transferred to the income statement and The consolidated fi nancial statements are presented in euros, which is classifi ed as income or an expense in the same period during which the the functional and presentation currency of the parent company. hedged fi rm commitment or forecasted transaction affects the income Foreign currency transactions are translated into the functional statement (for example, when the forecasted external sale to the Group currency using the exchange rates prevailing at the dates of the transac- that is hedged takes place). The period when the hedging reserve is tions. Foreign exchange gains and losses resulting from the settlement released to sales after each derivative has matured is approximately 1 of such transactions and from the translation at year-end exchange rates month. However, when the forecast transaction that is hedged results in of monetary assets and liabilities denominated in foreign currencies are the recognition of a non-fi nancial asset (for example, fi xed assets) the recognised in the income statement, except when deferred in equity as gains and losses previously deferred in equity are transferred from qualifying cash fl ow hedges and qualifying net investment hedges. equity and included in the initial measurement of the cost of the asset. Foreign exchange differences relating to ordinary business operations The deferred amounts are ultimately recognised in depreciation of fi xed of the Group are included in the appropriate line items above operating assets. profi t, and those relating to fi nancial items are included in a separate When a hedging instrument expires or is sold, or when a hedge no line item in the income statement and as a net amount in total fi nance longer meets the criteria for hedge accounting under IAS 39, any costs. cumulative gain or loss existing in equity at that time remains in equity Income and expenses for each income statement of subsidiaries and is recognised when the committed or forecasted transaction is that have a functional currency different from the Group’s presentation ultimately recognised in the income statement. However, if a commit- currency are translated into euros at quarterly average exchange rates. ted or forecasted transaction is no longer expected to occur, the cumu- Assets and liabilities of subsidiaries for each balance sheet presented lative gain or loss that was reported in equity is immediately trans- are translated at the closing rate at the date of that balance sheet. All ferred to the income statement. resulting translation differences are recognised as a separate component Hedges of net investments in foreign operations are accounted for of equity. On consolidation, exchange differences arising from the similarly to cash fl ow hedges. The fair value changes of the forward translation of the net investment in foreign operations and other cur- exchange contracts that refl ect the change in spot exchange rates are rency instruments designated as hedges of such investments, are taken deferred in equity and included in cumulative translation differences. into shareholders’ equity. When a foreign entity is partially disposed of, Any gain or loss relating to the interest portion of the forward exchange sold or liquidated, translation differences recorded in equity are recog- contracts is recognised immediately in the income statement under nised in the income statement as part of the gain or loss on sale. fi nancial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed Derivative fi nancial instruments and hedging activities of or sold. Derivatives are initially recognised on the balance sheet at fair value Certain derivative transactions, while providing effective hedges and thereafter remeasured at their fair value. The method of recognis- under the Group Treasury Policy, do not qualify for hedge accounting ing the resulting gain or loss is dependent on whether the derivative is under the specifi c rules in IAS 39. Such derivatives are classifi ed held designated as a hedging instrument, and on the nature of the item being for trading, and changes in the fair value of any derivative instruments hedged. On the date a derivative contract is entered into, the Group des- that do not qualify for hedge accounting under IAS 39 are recognised ignates certain derivatives as either hedges of the fair value of a recog- immediately in the income statement as other operating income or nised asset or liability (fair value hedge), a hedge of a highly probable under fi nancial items. forecasted transaction or of a fi rm commitment (cash fl ow hedge), or At the inception of the transaction the Group documents the rela- hedges of net investments in foreign operations (net investment hedge). tionship between hedging instruments and hedged items, as well as its The fair value of derivative fi nancial instrument is classifi ed as a non- risk management objective and strategy for undertaking various hedge current asset or liability when the remaining maturity is more than 12 transactions. This process includes linking all derivatives designated as
F-8 Group ■ ACCOUNTS FOR 2008
hedges to specifi c assets and liabilities or to specifi c fi rm commitments involvement with the goods, nor a continuing right to dispose of the or forecast transactions. The Group also documents its assessment, both goods, nor effective control of those goods. The timing of revenue at the hedge inception and on an ongoing basis, as to whether the recognition is largely dependent on delivery terms. Group terms of derivatives that are used in hedging transactions are highly effective in delivery are based on Incoterms 2000, the offi cial rules for interpreta- offsetting changes in fair values or cash fl ows of hedged items. tion of trade terms issued by International Chamber of Commerce. Fair values of derivative fi nancial instruments have been estimated Revenue is recorded when the product is delivered to the destination as follows: Interest forward rate agreements and futures contracts are point for terms designated Delivered Duty Paid (“DDP”). For sales fair valued based on quoted market rates on the balance sheet date; transactions designated Free on Board (“FOB”) or Cost, Insurance and forward foreign exchange contracts are fair valued based on the con- Freight (“CIF”), revenue is recorded at the time of shipment. tract forward rates in effect on the balance sheet date; foreign currency Revenues from services are recorded when the service has been options are fair valued based on quoted market rates on the balance performed. Sales are recognised net of indirect sales taxes, discounts, sheet date; interest and currency swap agreements are fair valued based rebates and exchange differences on sales in foreign currency. The on discounted cash fl ow analyses; and commodity derivatives are fair costs of distributing products sold are included in costs and expenses. valued based on quoted market rates on the balance sheet date. Dividend income is recognised when the right to receive a payment In assessing the fair value of non-traded derivatives such as embed- is established. ded derivatives the Group uses valuation methods and assumptions that Interest income is recognised by applying the effective interest rate are based on market quotations existing at each balance sheet date. method. Embedded derivatives that are identifi ed and are monitored by the Group and the fair value changes are reported in other operating Income taxes income in the income statement. The Group’s income taxes include income taxes of Group companies based on taxable profi t for the fi nancial period, together with tax adjust- Segment reporting ments for previous periods and the change of deferred income taxes. Business segments provide products or services that are subject to risks Deferred income tax is provided in full, using the liability method, and returns that are different from those of other business segments. on temporary differences arising between the tax bases of assets and The accounting policies used in segment reporting are the same as liabilities and their carrying amounts in the consolidated fi nancial state- those used in the consolidated accounts. The costs and revenues as well ments. However, the deferred income tax is not accounted for if it as assets and liabilities are allocated to the segments on a consistent arises from initial recognition of an asset or liability in a transaction basis. All inter-segment sales are based on market prices, and they are other than a business combination that at the time of the transaction eliminated on consolidation. affects neither accounting nor taxable profi t or loss. Deferred income Operating segments are reported in a manner consistent with the tax is determined using tax rates (and laws) that have been enacted or internal reporting provided to the chief operating decision maker. The substantially enacted by the balance sheet date and are expected to chief operating decision maker, who is responsible for allocating apply when the related deferred income tax asset is realised or the resources and assessing performance of the operating segments, has deferred income tax liability is settled. Deferred income tax is provided been identifi ed as the President and CEO. on temporary differences arising on investments in subsidiaries, associ- ated companies and joint ventures, except where the timing of the Non-current assets held for sale and discontinued operations reversal of the temporary difference is controlled by the Group and it is Non-current assets (or disposal groups) are classifi ed as assets held for probable that the temporary difference will not reverse in the foreseea- sale and stated at the lower of carrying amount and fair value less costs ble future. Deferred income tax assets are recognised to the extent that to sell if their carrying amount is recovered principally through a sale it is probable that future taxable profi t will be available against which transaction rather than through a continuing use. Non-current assets the temporary differences can be utilised. classifi ed as held for sale, or included within a disposal group that is classifi ed as held for sale, are not depreciated. Intangible assets A discontinued operation is a component of an entity that either Intangible assets with fi nite lives are carried at historical cost less amorti- has been disposed of, or that is classifi ed as held for sale, and repre- sation. Amortisation is based on the following estimated useful lives: sents a separate major line of business or geographical area of opera- tions, is a part of a single co-ordinated plan to dispose of a separate Computer software 3–5 years major line of business or geographical area of operations, or is a sub- Other intangible assets 5–10 years sidiary acquired exclusively with a view to resale. The post-tax profi t or loss from discontinued operations is shown separately in the consoli- Goodwill and other intangible assets that are deemed to have an indefi - dated income statement. nite life are not amortised, but are tested annually for impairment.
Revenue recognition Goodwill Sales are recognised when it is probable that future economic benefi ts Goodwill represents the excess of the cost of acquisition over the fair will fl ow to the entity, the associated costs and the amount of revenue value of the Group’s share of the net identifi able assets of the acquired can be measured reliably and the following criteria are met: persuasive subsidiary, associated company or joint venture at the date of acquisi- evidence of an arrangement exists, delivery has occurred or services tion. Goodwill on acquisitions of subsidiaries is included in intangible have been rendered, our price to the buyer is fi xed or determinable, and assets. Goodwill on acquisitions of associated companies and joint collectibility is reasonably assured. Delivery is not considered to have ventures is included in investments in associated companies and joint occurred until the customer takes title and assumes the risks and ventures and is tested for impairment as part of the overall balance. rewards of ownership and the Group has neither continuing managerial Goodwill is initially recognised as an asset at cost and is subsequently
F-9 ACCOUNTS FOR 2008 ■ Group
measured at cost less any accumulated impairment losses. sheet represents the cost less accumulated depreciation and any impair- Cash-generating units to which goodwill has been allocated are ment charges. tested for impairment annually, or more frequently when there is an Borrowing costs incurred for the construction of any qualifying indication that the unit may be impaired. If the recoverable amount of assets are capitalised during the period of time that is required to com- the cash-generating unit is less than the carrying amount of the unit, the plete and prepare the asset for its intended use. Other borrowing costs difference is an impairment loss, which is allocated fi rst to reduce the are expensed. carrying amount of any goodwill allocated to the unit and then to other Land is not depreciated. Depreciation of other assets is based on assets of the unit pro-rata on the basis of the carrying amount of each the following estimated useful lives: asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Buildings 25–40 years Heavy machinery 15–20 years Research and development Light machinery and equipment 5–15 years Research and development costs are expensed as incurred, except for certain development costs, which are capitalised when it is probable Expected useful lives of assets are reviewed at each balance sheet date that a development project will generate future economic benefi ts, and and, where they differ signifi cantly from previous estimates, deprecia- the cost can be measured reliably. Capitalised development costs are tion periods are changed prospectively. amortised on a systematic basis over their expected useful future lives, Subsequent costs are included in the asset’s carrying amount or usually not exceeding fi ve years. recognised as a separate asset, as appropriate, only when it is probable that the future economic benefi t associated with the item will fl ow to Computer software the Group and the cost of the item can be measured reliably. The carry- Costs associated with maintaining computer software programs and ing amount of the replaced part is derecognised. All other repairs and costs related to the preliminary project phase of internally developed maintenance are charged to the income statement during the fi nancial software are recognised as an expense as incurred. Development costs period in which they are incurred. Major renovations are depreciated relating to the application development phase of internally developed over the remaining useful life of the related asset or to the date of the software are capitalised as intangible assets. Capitalised costs include next major renovation, whichever is sooner. external direct costs of material and services and appropriate portion of Gains and losses on disposals are determined by comparing the relevant overheads of the software development team. Computer soft- disposal proceeds with the carrying amount and are included in operat- ware development costs recognised as assets are amortized using the ing profi t. Assets accounted under IFRS 5 that are to be disposed of are straight-line method over their useful lives. reported at the lower of the carrying amount and the fair value less selling costs. Other intangible assets Acquired patents, trademarks and licences with a fi nite useful life are Government grants recognised at cost less accumulated amortisation and impairment. Government grants relating to the purchase of property, plant and Amortisation is calculated using the straight-line method to allocate the equipment are deducted from the acquisition cost of the asset and cost over their estimated useful lives. Other intangible assets that are recognised as a reduction to the depreciation charge of the related asset deemed to have an indefi nite life are not amortised and are tested annu- when it is practicable to determine that the eligibility conditions ally for impairment. attached to the grant will be met and the grant will be received. Other government grants are recognised in the income statement in the period Emission allowances necessary to match them with the costs they are intended to compen- The Group participates in government schemes aimed at reducing sate when the reimbursement is received or when it is practicable to greenhouse gas emissions. Allowances received from the governments determine the amount and eligibility for the grant. free of charge are initially recognised as intangible assets based on market value at the date of initial recognition. Allowances are not Investment property amortised but are recognised at amount not exceeding the market value Investment property includes real estate investments such as fl ats and at the balance sheet date. Government grants are recognised as deferred other premises occupied by third parties. income in the balance sheet at the same time as the allowances and Investment property is treated as a long-term investment and is recognised in other operating income in the income statement system- stated at historical cost. Depreciation is calculated on a straight-line atically over the compliance period to which the corresponding emis- basis and the carrying value is adjusted for impairment charges, if any. sion rights relate. The emissions made are expensed under other operat- Useful lives are the same as for property, plant and equipment. The ing costs and expenses in the income statement and presented as provi- balance sheet value of investment property refl ects the cost less accu- sio in the balance sheet. Emission rights and associated provisions are mulated depreciation and any impairment charges. derecognised when delivered or sold. Any profi t or loss on disposal is taken to the income statement. Biological assets Biological assets (i.e. living trees) are measured at their fair value less Property, plant and equipment estimated point-of-sale costs. The fair value of biological assets other Property, plant and equipment acquired by Group companies are stated than young seedling stands is based on discounted cash fl ows from con- at historical cost. Assets of acquired subsidiaries are stated at fair value tinuous operations. The fair value of young seedling stands is the actual at the date of acquisition. Depreciation is calculated on a straight-line reforestation cost of those stands. Continuous operations, the mainte- basis and the carrying value is adjusted for impairment charges, if any. nance of currently existing seedling stands and the felling of forests The carrying value of the property, plant and equipment on the balance during one rotation, are based on the Group’s forest management
F-10 Group ■ ACCOUNTS FOR 2008
guidelines. The calculation takes into account the growth potential and The Group assesses at each balance sheet date whether there is environmental restrictions and other reservations of the forests. Felling objective evidence that a fi nancial asset or a group of fi nancial assets is revenues and maintenance costs are calculated on the basis of actual impaired. In the case of equity securities classifi ed as available for sale, costs and prices, taking into account the Group’s projection of future a signifi cant or prolonged decline in the fair value of the security below price development. its cost is considered in determining whether the securities are Periodic changes resulting from growth, felling, prices, discount impaired. If any such evidence exists for available-for-sale fi nancial rate, costs and other premise changes are included in operating profi t assets, the cumulative loss – measured as the difference between the on the income statement. acquisition cost and the current fair value, less any impairment loss on that fi nancial asset previously recognised in profi t or loss – is removed Financial assets from equity and recognised in the income statement. Impairment losses Financial assets have been classifi ed into the following categories: recognised in the income statement on equity instruments are not sub- fi nancial assets at fair value through profi t or loss, loans and receivables sequently reversed through the income statement. and available-for-sale investments. The classifi cation depends on pur- pose for which the fi nancial assets were acquired. Management deter- Impairment of non-fi nancial assets mines the classifi cation of the fi nancial assets at initial recognition. Assets that have an indefi nite useful life are not subject to amortisation Financial assets are derecognised when the rights to receive cash and are tested annually for impairment. Assets that are subject to depre- fl ows from the investments have expired or have been transferred and ciation (or amortisation) are reviewed for impairment whenever events the Group has transferred substantially all the risks and rewards of or changes in circumstances indicate that the carrying amount may not ownership. be recoverable. An impairment loss is recognised for the amount by Financial assets at fair value through profi t or loss are fi nancial which the asset’s carrying amount exceeds its recoverable amount. The assets held for trading. Derivatives are categorised as held for trading, recoverable amount is the higher of an asset’s fair value less costs to unless they are designated as hedges. These are measured at fair value sell and value in use. The value in use is determined by reference to and any gains or losses from subsequent measurement are recognised discounted future cash fl ows expected to be generated by the asset. For in the income statement. The Group has not used the option of desig- the purposes of assessing impairment, assets are grouped at the lowest nating fi nancial assets upon initial recognition as fi nancial assets at fair levels for which there are separately identifi able cash fl ows (cash- value through profi t or loss. generating units). Loans and receivables are non-derivative fi nancial assets with fi xed Non-fi nancial assets other than goodwill that suffered an impair- or determinable payments that are not quoted in an active market. They ment are reviewed for possible reversal of the impairment at each are included in non-current assets unless they mature within 12 months reporting date. Where an impairment loss subsequently reverses, the of the balance sheet date. Loan receivables that have a fi xed maturity carrying amount of the asset is increased to the revised estimate of its are measured at amortised cost using the effective interest method. recoverable amount, but so that the increased carrying amount does not Loan receivables are impaired if the carrying amount is greater than the exceed the carrying amount that would have been determined had no estimated recoverable amount. impairment loss been recognised for the asset in prior years. Trade receivables are non-derivatives that are recognised initially at fair value and subsequently measured at amortised cost less provisions Leases for impairment for doubtful accounts. Provisions for impairment for Leases of property, plant and equipment where the Group, as a lessee, doubtful accounts are charged to the income statement when there is has substantially all the risks and rewards of ownership are classifi ed as objective evidence that the Group will not be able to collect all amounts fi nance leases. Finance leases are recognised as assets and liabilities in due according to the original terms of receivables. Signifi cant fi nancial the balance sheet at the commencement of lease term at the lower of diffi culties of the debtor, probability that the debtor will enter bank- the fair value of the leased property and the present value of the mini- ruptcy or default of delinquency in payments more than 90 days over- mum lease payments. Each lease payment is apportioned between the due are considered indicators that the trade receivable may be irrecov- liability and fi nance charges. The corresponding rental obligations, net erable. Subsequent recoveries of amounts previously written off are of fi nance charges, are included in other long-term interest-bearing credited in the income statement. liabilities. The interest element of the fi nance cost is charged to the Available-for-sale investments are non-derivatives that are either income statement over the lease period so as to produce a constant designated in this category or not classifi ed in any of the other catego- periodic rate of interest on the remaining balance of the liability for ries. They are included in non-current assets unless they are intended to each period. Property, plant and equipment acquired under fi nance be disposed of within 12 months of the balance sheet date. Purchases leases are depreciated over the shorter of the asset’s useful life and the and sales of fi nancial investments are recognised on the settlement date, lease term. which is the date that the asset is delivered to or by the Group. Invest- Leases where the lessor retains substantially all the risks and ments are initially recognised at cost, including transaction costs, and rewards of ownership are classifi ed as operating leases. Payments made subsequently carried at fair value. under operating leases as a lessee are charged to the income statement The fair values of listed investments are based on quoted prices. on a straight-line basis over the period of the lease. Unlisted equity securities, for which fair values cannot be measured reliably, are recognised at cost. Inventories Unrealised gains and losses arising from changes in the fair value Inventories are stated at the lower of cost and net realisable value. Cost of securities classifi ed as available-for-sale are recognised in equity. is determined by the method most appropriate to the particular nature When securities classifi ed as available-for-sale are sold or impaired, the of inventory, the fi rst in, fi rst out (FIFO) or weighted average cost. The accumulated fair value adjustments in equity are included in the in- cost of fi nished goods and work in progress comprises raw materials, come statement as gains and losses from available-for-sale investments. direct labour, other direct costs and related production overheads
F-11 ACCOUNTS FOR 2008 ■ Group
(based on normal operating capacity) but excludes borrowing costs. The liability recognised in the balance sheet in respect of defi ned Net realisable value is the estimated selling price in the ordinary course benefi t pension plans is the present value of the defi ned benefi t obliga- of business, less the costs of completion and selling expenses. tion at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past Cash and cash equivalents service cost. The defi ned benefi t obligation is calculated annually by Cash and cash equivalents comprise cash in hand, deposits held at call independent actuaries using the projected unit credit method. The with banks and other short-term highly liquid investments with original present value of the defi ned benefi t obligation is determined by dis- maturities of three months or less. Bank overdrafts are included within counting the estimated future cash outfl ows using interest rates of high- current interest-bearing liabilities on the balance sheet. quality corporate bonds that are denominated in the currency in which the benefi ts will be paid, and that have terms to maturity approximating Treasury shares to the terms of the related pension liability. The cost of providing pen- Where any Group company purchases the parent company’s equity sions is charged to the income statement so as to spread the cost over share capital (treasury shares), the consideration paid, including any the service lives of the employees. Actuarial gains and losses arising directly attributable incremental costs (net of income taxes), is from experience adjustments and changes in actuarial assumptions in deducted from equity attributable to the parent company’s equity hold- excess of the greater of 10% of the value of plan assets or 10% of the ers until the shares are cancelled or reissued. Where such shares are defi ned benefi t obligation are charged or credited to income over the subsequently reissued, any consideration received, net of any directly expected average remaining service lives of the employees concerned. attributable incremental transaction costs and the related income tax Past service costs are recognised immediately in income, unless the effects, is included in equity attributable to the parent company’s equity changes to the pension plan are conditional on the employees remain- holders. ing in service for a specifi ed period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over Interest-bearing liabilities the vesting period. Interest-bearing liabilities are recognised initially at fair value, net of Gains or losses on the curtailments or settlements of a defi ned transaction costs incurred. In subsequent periods, interest-bearing benefi t plan are recognised when the curtailment or settlement occurs. liabilities are stated at amortised cost using the effective interest The gain or loss on a curtailment or settlement includes possible method; any difference between proceeds (net of transaction costs) and changes in the present value of defi ned benefi t obligation, change in the redemption value is recognised in the income statement over the fair value of plan assets and any impact of actuarial gains and losses period of the interest-bearing liabilities. The Group has not used the and past service costs not previously recognised. option of designating fi nancial liabilities upon initial recognition as For defi ned contribution plans, contributions are paid to pension fi nancial liabilities at fair value through profi t or loss. insurance companies. Once the contributions have been paid, there are Most long-term interest-bearing liabilities are designated as hedged no further payment obligations. Contributions to defi ned contribution items in a fair value hedge relationship. Fair value variations resulting plans are charged to the income statement in the period to which the from the hedged interest rate risk are recorded to adjust the carrying contributions relate. amount of the hedged item and reported on the income statement under fi nance income and expenses. If the hedge accounting is discontinued, Other post-employment obligations the carrying amount of the hedged item is no longer adjusted for fair Some Group companies provide post-employment healthcare benefi ts value changes attributable to the hedged risk and the cumulative fair to their retirees. The entitlement to these benefi ts is usually conditional value adjustment recorded during the hedge relationship is amortised on the employee remaining in service up to retirement age and the based on a new effective interest recalculation through the income completion of a minimum service period. The expected costs of these statement under fi nance income and expenses. benefi ts are accrued over the period of employment, using an account- Interest-bearing liabilities are classifi ed as non-current liabilities ing methodology similar to that for defi ned benefi t pension plans. unless they are due to be settled within 12 months after the balance Valuations of these obligations are carried out by independent qualifi ed sheet date. actuaries.
Employee benefi ts Share-based compensation The Group has granted share options to top management and key Pension obligations personnel. In addition, the Group has established a share ownership The Group operates a mixture of pension schemes in accordance with programme for its executive management. These compensation plans the local conditions and practices in the countries in which it operates. are recognised as equity-settled or cash-settled share-based payment Such benefi t plans vary according to the customary benefi t plans pre- transactions depending on the settlement. The fair value of the granted vailing in the country concerned. These programmes include defi ned options and shares are recognised as indirect employee costs over the benefi t pension schemes with retirement, disability and termination vesting period. The fair values of the options granted are determined benefi ts. The retirement benefi ts are generally a function of years of using the Black- Scholes valuation model on the grant date. Non- employment and fi nal salary with the Company. Generally, the schemes market vesting conditions are included in assumptions about the are either funded through payments to insurance companies or to trus- number of options that are expected to vest. The estimates of the tee-administered funds as determined by periodic actuarial calcula- number of the exercisable options are revised quarterly and the impact tions. In addition, the Group also operates defi ned contribution pension of the revision of original estimates, if any, is recognised in the income arrangements. Most of Finnish pension arrangements are defi ned con- statement and equity. tribution plans.
F-12 Group ■ ACCOUNTS FOR 2008
The proceeds received net of any directly attributable transaction Adoption of new and revised International Financial Reporting costs are credited to equity when the options are exercised. Standards interpretations and amendments to existing standards Based on the share ownership programme, the executive manage- ment is compensated with shares depending on the Group’s fi nancial Amendments and interpretations effective in 2008 performance. Shares are valued using the market rate on the grant date. In 2008, the Group has adopted the following amendments and inter- The settlement is a combination of shares and cash. The Group can pretations: obtain the necessary shares by using its treasury shares or purchase Amendments to IAS 39 Financial Instruments: Recognition and shares from the market. Measurement and IFRS 7 Financial Instruments: Disclosures – Reclas- sifi cation of Financial Assets are effective from 1 July 2008. As respond Provisions to the credit crisis the amendments introduce a possibility of reclassifi - Provisions are recognised when the Group has a present legal or con- cation of some fi nancial instruments. Amendments do not have an structive obligation as a result of past events, and it is probable that an impact on the Group’s fi nancial statements. outfl ow of resources will be required to settle the obligation, and a IFRIC 11 IFRS 2 – Group and Treasury Share Transactions pro- reliable estimate of the amount can be made. Where the Group expects vides guidance on whether share-based transactions involving treasury a provision to be reimbursed, for example under an insurance contract, shares or involving group entities (for example, options over a parent’s the reimbursement is recognised as a separate asset but only when the shares) should be accounted for as equity-settled or cash-settled share- reimbursement is virtually certain. based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on Restructuring provisions the Group’s fi nancial statements. Restructuring provisions are recognised in the period in which the IFRIC 14 IAS 19 – The Limit on a Defi ned Benefi t Asset, Minimum Group becomes legally or constructively committed to payment. Funding Requirements and their Interaction provides general guidance Employee termination benefi ts are recognised only after either an on how to assess the limit in IAS 19 on the amount of the surplus that agreement has been made with the appropriate employee representa- can be recognised as an asset. It also explains how the pension asset or tives on the terms of redundancy and the numbers of employees liability may be affected by a statutory or contractual minimum funding affected, or after employees have been advised of the specifi c terms. requirement. This interpretation does not have an impact on the Group’s Costs related to the ongoing activities of the Group are not provisioned fi nancial statements, as the Group is not subject to any minimum fund- in advance. ing requirements.
Environmental remediation provisions Standards early adopted Expenditures that result from remediation of an existing condition IFRS 8 Operating Segments was early adopted from 1 January 2008. caused by past operations and do not contribute to current or future IFRS 8 replaces IAS 14 Segment Reporting and aligns segment report- revenues are expensed. The recognition of environmental remediation ing with the requirements of the US GAAP standard SFAS 131. The provisions is based on current interpretations of environmental laws new standard requires the ‘management approach’ to reporting on the and regulations. Such provisions are recognised when it is likely that fi nancial performance of operating segments. The information to be the liability has been incurred and the amount of such liability can be reported for each segment is to be the measure what chief operating reasonably estimated. Amounts provisioned do not include third-party decision maker uses internally for evaluating segment performance and recoveries. deciding how to allocate resources to operating segments. The adoption of IFRS 8 does not have a material impact on the Group’s fi nancial Emission allowances statements, since the Group has already reported segment information Emission obligations are recognised in provisions when the liability to in a manner consistent with the internal reporting. deliver emission allowances is incurred based on emissions made. The liability to deliver allowances is recognised based on the carrying New and revised standards, interpretations and amendments to amount of allowances on hand, if the liability is expected to be settled existing standards that are not yet effective and have not been by those allowances, or if excess emissions are incurred, at the market early adopted by the Group value of the allowances at the balance sheet date. The following standards, interpretations and amendments to existing standards have been published and are mandatory for accounting peri- Dividends ods beginning on 1 January 2009. The Group has not early adopted any Dividend distribution to the parent company’s shareholders is recog- of the standards: nised as a liability in the Group’s fi nancial statements in the period in Revised IAS 23 Borrowing Costs is effective for annual periods which the dividends are approved by the parent company’s shareholders. beginning on or after 1 January 2009. The revised standard requires that all borrowing costs relating to the acquisition, construction or Earnings per share production of a qualifying asset are capitalised as part of the cost of The basic earnings per share are computed using the weighted average that asset. The Group’s current accounting policy is already in accord- number of shares outstanding during the period. Diluted earnings per ance with revised IAS 23 so there will be no change for the future share are computed using the weighted average number of shares out- fi nancial statements. standing during the period plus the dilutive effect of convertible bonds IFRIC 12 Service Concession Arrangements is effective for annual and share options. periods beginning on or after 1 January 2010. The interpretation addresses the accounting by private sector operators involved in the
F-13 ACCOUNTS FOR 2008 ■ Group
provision of public sector infrastructure assets and services. This inter- obligation to deliver to another party a pro rata share of the net assets pretation is not relevant for the Group, since it has not had any such of the entity only on liquidation as equity, provided the fi nancial instru- arrangements in current or previous periods. This interpretation is not ments have particular features and meet specifi c conditions. It is not yet endorsed by the EU. expected that amendments will have an impact on the Group’s fi nancial IFRIC 13 Customer Loyalty Programmes is effective for annual statements. periods beginning on or after 1 July 2008. The interpretation addresses Amendments related to Improvements to IFRSs, (Annual Improve- the accounting by entities that grant loyalty award credits to customers ments 2007), are mainly effective for annual periods beginning on or who buy other goods or services. This interpretation is not relevant for after 1 January 2009. Through annual improvement projects minor the Group. changes to wordings to clarify the meaning and removals of unintended Revised IAS 1 Presentation of Financial Statements is effective for inconsistencies between standards are combined and implemented annual periods beginning on or after 1 January 2009. The revised stand- annually. Annual improvements 2007 related to 34 different standards. ard requires items of income and expense and components of other These amendments are not expected to have a material impact on the comprehensive income to be presented either in a single statement of Group’s fi nancial statements. comprehensive income with subtotals, or in two separate statements (a Amendments to IFRS 1 First Time Adoption of IFRS and IAS 27 separate income statement followed by a statement of comprehensive Consolidated and Separate Financial Statements – Cost of an Invest- income). The revised standard will change the presentation of Group’s ment in a Subsidiary, Jointly Controlled Entity or Associate are effec- fi nancial statements. tive for annual periods beginning on or after 1 January 2009. These Revised IFRS 3 Business Combinations is effective for annual amendments relate to fi rst time adoption of IFRS and therefore are not periods beginning on or after 1 July 2009. The revised standard contin- relevant for the Group. ues to apply the acquisition method to business combinations, with IFRIC 15 Agreements for Construction of Real Estates is effective some signifi cant changes. For example, all payments to purchase a for annual periods beginning on or after 1 January 2009. The interpre- business are to be recorded at fair value at the acquisition date, with tation clarifi es whether IAS 18 Revenue or IAS 11 Construction con- contingent payments classifi ed as debt subsequently re-measured tracts should be applied to particular transactions. It is likely to result in through the income statement. There is a choice on an acquisition-by- IAS 18 being applied to a wider range of transactions. IFRIC 15 is not acquisition basis to measure the non-controlling interest in the acquiree relevant to the Group’s operations. This interpretation is not yet either at fair vale or at the non-controlling interest’s proportionate share endorsed by the EU. of the acquiree’s net assets. All acquisition-related costs should be IFRIC 16 Hedges of a Net Investment in a Foreign Operation is expensed. The revised standard will have an impact on the accounting effective for annual periods beginning on or after 1 October 2008. for the Group’s future business combinations. This amendment is not IFRIC 16 clarifi es the accounting treatment in respect of net investment yet endorsed by the EU. hedging. This includes the fact that net investment hedging relates to Amendment to IAS 27 Consolidated and Separate Financial State- differences in functional currency not presentation currency, and hedg- ments is effective for annual periods beginning on or after 1 July 2009. ing instruments may be held anywhere in the group. The requirements The amendment requires the effects of all transactions with non-con- of IAS 21 do apply to the hedged item. The interpretation is not trolling interests to be recorded in equity if there is no change in con- expected to have a material impact on the Group’s fi nancial statements. trol and these transactions will no longer result in goodwill or gains This interpretation is not yet endorsed by the EU. and losses. The standard also specifi es the accounting when control is Amendment to IAS 39 Financial Instruments: Recognition and lost. Any remaining interest in the entity is re-measured to fair value, Measurement: Eligible Hedged Items is effective for annual periods and a gain or loss is recognised in profi t or loss. This amendment is not beginning on or after 1 July 2009. The amendment clarifi es how the yet endorsed by the EU. existing principles underlying hedge accounting should be applied in Amendment to IFRS 2 Share-Based Payment: Vesting Conditions the designation of: a one-sided risk in a hedged item, and infl ation in a and Cancellations is effective for annual periods beginning on or after fi nancial hedged item. The amendment is not expected to have an 1 January 2009. The amended standard deals with vesting conditions impact on the Group’s fi nancial statements. This amendment is not yet and cancellations. It clarifi es that vesting conditions are service condi- endorsed by the EU. tions and performance conditions only. Other features of a share-based IFRIC 17 Distribution of Non-Cash Assets to Owners is effective payment are not vesting conditions. Amendment also specifi es that all for annual periods beginning on or after 1 July 2009. The interpretation cancellations, whether by the entity or by other parties, should receive clarifi es how an entity should measure the distribution of assets when it the same accounting treatment. The amendment is not expected to have distributes other assets than cash. It is not expected that the interpreta- a material impact on the Group’s fi nancial statements. tion will have a material impact on the Group’s fi nancial statements. Amendments to IAS 32 Financial Instruments: Presentation, and This interpretation is not yet endorsed by the EU. IAS 1 Presentation of Financial Statements – Puttable Financial Instru- Revised IFRS 1 First Time Adoption of IFRS is effective for entities ments and Obligations Arising on Liquidation are effective for annual applying IFRS for the fi rst time for annual periods beginning on or periods beginning on or after 1 January 2009. The amended standards after 1 July 2009. The revised standard relates to fi rst time adoption of require entities to classify puttable fi nancial instruments and instru- IFRS and therefore is not relevant for the Group. The revised standard ments, or components of instruments that impose on the entity an is not yet endorsed by the EU.
F-14 Group ■ ACCOUNTS FOR 2008
2 CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING unused tax credits can be utilised. The factors used in estimates may POLICIES AND KEY SOURCES OF ESTIMATION UNCERTAINTY differ from actual outcome which could lead to signifi cant adjustment to deferred tax assets recognised in the income statement. Impairment of non-current assets Goodwill, intangible assets not yet available for use and intangible Legal contingencies assets with indefi nite useful lives are tested at least annually for impair- Management judgement is required in measurement and recognition of ment. Other long-lived assets are reviewed when there is an indication provisions related to pending litigation. Provisions are recorded when that impairment may have occurred. Estimates are made of the future the Group has a present legal or constructive obligation as a result of cash fl ows expected to result from the use of the asset and its eventual past event, an unfavourable outcome is probable and the amount of loss disposal. If the balance sheet carrying amount of the asset exceeds its can be reasonably estimated. Due to inherent uncertain nature of litiga- recoverable amount, an impairment loss is recognised. Actual cash tion, the actual losses may differ signifi cantly from the originally esti- fl ows could vary from estimated discounted future cash fl ows. The long mated provision. useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to signifi cant impairment charges. Details of the 3 FINANCIAL RISK MANAGEMENT impairment tests are provided in Note 16. FINANCIAL RISKS Biological assets The Group’s activities expose it to a variety of fi nancial risks: market The Group owns about 1 million hectare of forest land. Biological risk (including foreign exchange risk, fair value interest rate risk, cash assets (i.e. living trees) are measured at their fair value at each balance fl ow interest risk and other price risk), credit risk and liquidity risk. sheet date. The fair value of biological assets is determined based The objective of fi nancial risk management is to protect the Group among other estimates on growth potential, harvesting, price develop- from unfavourable changes in fi nancial markets and thus help to secure ment and discount rate. Changes in any estimates could lead to recogni- profi tability. The objectives and limits for fi nancing activities are tion of signifi cant fair value changes in income statement. defi ned in the Group Treasury Policy approved by the company’s Board of Directors. Employee benefi ts In fi nancial risk management various fi nancial instruments are used The Group operates a mixture of pension and other post-employment within the limits specifi ed in the Group Treasury Policy. Only such benefi t schemes. Several statistical and other actuarial assumptions are instruments whose market value and risk profi le can be continuously used in calculating the expense and liability related to the plans. These and reliably monitored are used for this purpose. factors include, among others, assumptions about the discount rate, Financial services are provided and fi nancial risk management expected return on plan assets and changes in future compensation. carried out by a central treasury department, Treasury and Risk Man- Statistical information used may differ materially from actual results agement (TRM). The centralization of Treasury functions enables due to changing market and economic conditions, changes in service effi cient fi nancial risk management, cost-effi ciency and effi cient cash period of plan participants or changes in other factors. Actual results management. that differ from assumptions and the effects of changes in assumptions are accumulated and charged or credited to income over the expected Foreign exchange risk average remaining service lives of the employees to the extent that The Group is exposed to foreign exchange risk arising from various these exceed 10% of the higher of the pension plan assets or defi ned currency exposures, primarily with respect to the USD and the GBP. benefi t obligation. Signifi cant differences in actual experience or signif- Foreign exchange risk arises from future commercial transactions and icant changes in assumptions may materially affect the future amounts from recognised assets and liabilities. of the defi ned benefi t obligation and future expense. The objective of foreign exchange risk management is to limit the uncertainty created by changes in foreign exchange rates on the future Environmental provisions value of cash fl ows and earnings as well as in the Group’s balance sheet Operations of the Group are based on heavy process industry which by hedging foreign exchange risk in forecasted cash fl ows and balance requires large production facilities. In addition to basic raw materials, sheet exposures. considerable amount of chemicals, water and energy is used in proc- esses. The Group’s operations are subject to several environmental laws Transaction exposure and regulations. The Group aims to operate in compliance with regula- The Group hedges transaction exposure related to highly probable tions related to the treatment of waste water, air emissions and landfi ll future commercial foreign currency cash fl ows on a rolling basis over sites. The Group has provisions for normal environmental remediation the next 12-month period based on the units’ forecasts. According to costs. Unexpected events occurred during production processes and the Group’s Treasury Policy 50% hedging is considered risk neutral. waste treatment could cause material losses and additional costs in the Some confi rmed and committed transactions have been hedged for Group’s operations. longer than 12 months ahead while deviating from the risk neutral hedging level at the same time. Forward contracts are used in transac- Income taxes tion exposure management. Most of the derivatives entered into to Management judgement is required for the calculation of provision for hedge foreign currency cash fl ows meet the hedge accounting require- income taxes and deferred tax assets and liabilities. The Group reviews ments set by the IFRS. 52% of the forecasted 12-month currency fl ow at each balance sheet date the carrying amount of deferred tax assets. was hedged on 31 December 2008 (31.12.2007: 53%). The table below The Group considers whether it is probable that the subsidiaries will shows the nominal values of the hedging instruments at 31 December have suffi cient taxable profi ts against which the unused tax losses or 2008 and 2007.
F-15 ACCOUNTS FOR 2008 ■ Group
Nominal values of hedging instruments • The variation in exchange rates is 10%. 2008 2007 • Major part of non-derivative fi nancial instruments (such as cash Currency €m €m and cash equivalents, trade receivables, interest bearing-liabilities USD 294 342 and trade payables) are either directly denominated in the func- GBP 219 315 tional currency or are transferred to the functional currency JPY 77 36 through the use of derivatives i.e. the balance sheet position is close AUD 79 168 to zero. Exchange rate fl uctuations have therefore minor or no CHF 32 26 effects on profi t or loss. DKK 32 44 • The position includes foreign currency forward contracts that are Others 21 128 part of the effective cash fl ow hedge having an effect on equity. Total 754 1,059 • The position includes also foreign currency forward contracts that are not part of the effective cash fl ow hedge having an effect on For segment reporting purposes, the hedges made by TRM on behalf profi t. of UPM’s subsidiaries and business units are allocated to appropriate • The position excludes foreign currency denominated future cash segments. External forwards are designated at group level as hedges of fl ows. foreign exchange risk of specifi c future foreign currency sales on gross basis. Interest rate risk The Group has several currency denominated assets and liabilities The interest-bearing debt exposes the Group to interest rate risk, namely in its balance sheet such as foreign currency loans and deposits, repricing and fair value interest rate risk caused by interest rate movements. accounts payable and receivable and cash in other currencies than The objective of interest rate risk management is to reduce the fl uctuation functional currency. The aim is to hedge this balance sheet exposure of the interest expenses caused by the interest rate movements. fully using fi nancial instruments. The Group might, however, within the The management of interest rate risk is based on the 6-month limits set in the Group Treasury Policy have unhedged balance sheet average duration of the net debt portfolio as defi ned in the Group exposures. At 31 December 2008 unhedged balance sheet exposures in Treasury Policy. This relatively short duration is based on the assump- interest bearing assets and liabilities amounted to 45 million tion that on average yield curves will be positive. Thus this approach (31.12.2007: 17 million). In addition to this the Group has non interest reduces interest cost in the long term. The duration may deviate bearing accounts receivable and payable balances denominated in between 3 and 12 months. At 31 December 2008 the average duration foreign currencies. The nominal values of the hedging instruments used was 6 months (2007: 6 months). The Group uses interest rate deriva- in accounts payable and receivable hedging were 277 million tives to change the duration of the net debt. (31.12.2007: 327 million). The Group’s net debt per currency corresponds to the parent company’s and subsidiaries’ loan portfolios in their functional curren- Translation exposure cies. The nominal values of the Group’s interest-bearing net debts Translation exposure consists of net investments in foreign subsidiar- including derivatives by currency at 31 December 2008 and 2007 were ies. The exchange risks associated with the shareholders’ equity of as follows: foreign subsidiaries are only hedged in Canada. The net investments of all other foreign operations remain unhedged. 2008 2007 Currency €bn €bn Foreign exchange risk sensitivity EUR 4.3 3.8 At 31 December 2008, if Euro had weakened/strengthened by 10% CNY 0.3 0.4 against the USD with all other variables held constant, pre-tax profi t for USD 0.3 0.3 the year would have been € 4 million (2007: € 2 million) higher/lower CAD –0.6 –0.3 due to balance sheet foreign exchange exposure. The effect in equity Others 0.1 –0.1 would have been € 39 million (2007: € 34 million) lower/higher, arising Total 4.4 4.1 mainly from foreign currency forwards used to hedge forecasted for- eign currency fl ows. Most of the long-term loans and the interest rate derivatives related to As of 31 December 2008, if Euro had weakened/strengthened by them meet the IFRS hedge accounting requirements. 10% against the GBP with all other variables held constant, pre-tax profi t for the year would have been € 0 (2007: € 0) higher/lower due to Interest rate risk sensitivity balance sheet foreign exchange exposure. The effect in equity would At 31 December 2008, if the interest rate of net debt had been 1% have been € 22 million (2007: € 31 million) lower/higher, arising higher/lower with all other variables held constant, pre-tax profi t for the mainly from foreign currency forwards used to hedge forecasted for- year would have been € 9 million (2007: € 7 million) lower/ higher, eign currency fl ows. mainly as a result of higher/lower interest expense on fl oating rate As of 31 December 2008, if Euro had weakened/strengthened by interest-bearing liabilities. There would be no effect on equity. 10% against the AUD with all other variables held constant, pre-tax profi t for the year would have been € 7 million (2007: € 16 million) The following assumptions were made when calculating the sensitivity higher/lower. The effect in equity would have been € 1 million (2007: to changes in interest rates: € 0 million) lower/higher. • The variation of interest rate is assumed to be 1% parallel shift in applicable interest rate curves. The following assumptions were made when calculating the sensitivity • In the case of fair value hedges designated for hedging interest rate to changes in the foreign exchange risk: risk, the changes in the fair values of the hedged items and the
F-16 Group ■ ACCOUNTS FOR 2008
hedging instruments attributable to the interest rate movements Credit risk balance out almost completely in the income statement in the same With regard to operating activities, the Group has a credit policy in period. However, the possible ineffectiveness has an effect on the place and the exposure to credit risk is monitored on an ongoing basis. profi t of the year. Open trade receivables, days of sales outstanding (DSO) and overdue • Fixed rate interest-bearing liabilities that are measured at amortised trade receivables are followed on monthly basis. cost and which are not designated to fair value hedge relationship Potential concentrations of credit risk with respect to trade and are not subject to interest rate risk sensitivity. other receivables are limited due to the large number and geographic • Variable rate interest-bearing liabilities that are measured at amor- dispersion of companies that comprise the Group’s customer base. tised cost and which are not designated as hedged items are Customer credit limits are established and monitored, and ongoing included in interest rate sensitivity analysis. evaluations of customers’ fi nancial condition are performed. Most of • Changes in the market interest rate of interest rate derivatives the receivables are covered by credit risk insurances. In certain market (interest rate futures, swaps and cross currency swaps) that are not areas, measures to reduce credit risks include letters of credit, prepay- designated as hedging instruments under IAS 39 affect the fi nan- ments and bank guarantees. The ageing analysis of trade receivables is cial income or expenses (net gains or losses from remeasurement presented in Note 26. The Group considers that no signifi cant concen- of the fi nancial assets and liabilities to fair value) and are therefore tration of customer credit risk exists. The ten largest customers included in the income-related sensitivity analysis. accounted for approximately 15% (11%) of the Group’s trade receiva- bles as at 31 December 2008 – i.e., approximately € 190 million (150 Liquidity and refi nancing risk million). The credit risk relating to the commitments is discussed in The Group seeks to maintain adequate liquidity under all circumstances Note 39. by means of effi cient cash management and restricting investments to those that can be readily converted into cash. The Group utilises com- Derivatives related to commodity price risk management mercial paper programmes for short term fi nancing purposes. Commit- The Group’s manufacturing process requires a signifi cant amount of ted credit facilities are used to secure fi nancing under all circumstances electricity. The procurement and sales of electricity are managed and and as a backup for commercial paper programmes. optimised by the Group. The Group manages the price risk of its elec- Refi nancing risks are minimised by ensuring balanced loan port- tricity exposure with electricity forward contracts. folio maturing schedule and suffi cient long maturities. The average If all electricity prices quoted on 31 December 2008 at Nord Pool loan maturity at 31 December 2008 was 5.7 years (2007: 6.1 years). electricity exchange would have been 25% higher/lower with all other variables constant, pre-tax profi t for the year would have been € 19 Cash funds and committed credit facilities million (2007: € 0.3 million based on 15% higher/lower) higher/lower. Profi t was more sensitive to electricity price movements in 2008 than in €m 2008 2007 2007 because of the increased amount of the electricity derivatives and Cash funds 330 237 increased volatility. Committed facilities 2,500 2,500 • The sensitivity analysis assumes a 25% parallel move in electricity of which used –687 –538 Used uncommitted credit lines –74 –416 prices for all maturities. Long-term loan repayment –344 –389 • The sensitivity analysis includes only outstanding electricity Available liquidity 1,725 1,394 derivatives.
Capital risk management The most important fi nancial programmes in use are: • Domestic commercial paper programme, € 1.0 billion The Group’s objective in managing its capital is to ensure maintenance • Belgian commercial paper programme, € 400 million of fl exible capital structure to enable the Group to operate in capital • Medium Term Note programme, € 5.0 billion markets. • Revolving Credit Facility, € 1.5 billion (matures 2010) To measure a satisfactory capital balance between equity investors • Revolving Credit Facility, € 1.0 billion (matures 2012) and fi nancial institutions the Group has set a target for the ratio of net interest-bearing liabilities and equity (gearing). To ensure suffi cient The contractual maturity analysis for fi nancial liabilities is presented in fl exibility, the aim is to keep the gearing ratio well below the maximum Note 31. acceptable level of 90%. The following capitalisation table sets out the Group’s equity and Financial counterparty risk interest-bearing liabilities and gearing ratios: The fi nancial instruments the Group has agreed with banks and fi nan- cial institutions contain an element of risk of the counterparties being unable to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash funds may be made only with counterparties meeting certain creditworthiness crite- ria. The Group minimises counterparty risk also by using a number of major banks and fi nancial institutions. Creditworthiness of counter- parties is constantly monitored by TRM.
F-17 ACCOUNTS FOR 2008 ■ Group
As at 31 December Forest and timber €m 2008 2007 The Forest and timber segment includes forests, wood procurement, Equity attributable to the equity holders of and sawmills with an annual production capacity of 2.4 million cubic the parent company 6,106 6,770 metres. Minority interest 14 13 Total equity 6,120 6,783 Paper Long-term interest-bearing liabilities 4,534 3,384 The Paper segment includes the Group’s paper mills, producing maga- Short-term interest-bearing liabilities 537 931 zine papers, newsprint, fi ne papers, and speciality papers. The annual Liabilities related to assets classifi ed as held production capacity is approximately 11 million tonnes. This segment for sale, interest-bearing 2 – also includes the CHP plants at paper mill sites. Interest-bearing liabilities, total 5,073 4,315 Total capitalisation 11,193 11,098 Interest-bearing liabilities, total 5,073 4,315 Label Less: Interest-bearing receivables, total –752 –342 The Label segment includes labelstock factories and slitting and distri- Net interest-bearing liabilities 4,321 3,973 bution terminals. Gearing ratio, % 71 59 Plywood The Plywood segment includes plywood mills. The segment’s annual 4 SEGMENT INFORMATION production capacity is 1.1 million cubic metres.
As of 1 December 2008, UPM has been applying a new business struc- Other operations ture. The company consists of three Business Groups, which are Other operations include development units (the wood plastic compos- Energy and pulp comprising Energy, Pulp, and Forest and timber ite unit ProFi, RFID tags, and biofuels) logistic services and corporate reportable segments; Paper as a reportable segment; and Engineered administration. materials comprising Label and Plywood reportable segments. Other operations include development units (the wood plastic composite unit The Group has not aggregated any operating segments in determi- ProFi, RFID tags, biofuels), logistic services and corporate administra- nation of the above reportable segments. tion. The Group’s management has determined the operating segments UPM has early adopted IFRS 8 Operating Segments at 1 January based on management reporting regularly reviewed by the Group’s 2008. The adoption of IFRS 8 does not have a material impact on the chief operating decision maker. The chief operating decision maker has Group’s fi nancial statements, since the Group has already reported been identifi ed as the Group’s President and CEO. segment information in a manner consistent with the internal reporting. The information reported for each segment is the measure of what The comparative segment information for year 2007 has been the Group’s President and CEO uses internally for evaluating segment revised to correspond with the new business structure and IFRS 8 performance and deciding on how to allocate resources to operating presentation requirements. segments. The operating segments are organised on a basis of products. The performance of operating segment is evaluated primarily based Reportable segments on segment’s Operating profi t, which is measured on a basis consistent with consolidated fi nancial statements. Sales between the segments are Energy based on market prices. The Energy segment includes UPM’s hydropower plants and shares in The amounts provided to the President and CEO in respect of energy companies, mainly in the associated company Pohjolan Voima segments assets and liabilities are measured on a basis consistent with Oy, and in Kemijoki Oy. Combined heat and power (CHP) plants oper- consolidated fi nancial statements. The assets and liabilities are allo- ating on paper mill sites are included in the Paper segment. cated to the segments based on the segments operations. Unallocated assets and liabilities comprises of other than energy shares under avail- Pulp able-for-sale investments, non-current fi nancial assets, deferred tax The Pulp segment includes the Group’s pulp mills and shares in the assets and liabilities, other non-current assets, income tax receivables associated company Oy Metsä-Botnia Ab. and payables, cash and cash equivalents, assets classifi ed as held for sale and related liabilities, retirement benefi t obligations, provisions, interest-bearing liabilities and other liabilities and payables.
F-18 Group ■ ACCOUNTS FOR 2008
Segment information for the year ended 31 December 2008
Eliminations Forest and Ply- Other and re- €m Energy Pulp timber Paper Label wood operations conciliations Group
External sales 137 63 869 6,761 956 491 184 – 9,461 Internal sales 341 881 1,051 250 3 39 16 –2,581 – Total sales 478 944 1,920 7,011 959 530 200 –2,581 9,461
Share of results of associates and joint ventures –26 86 – 1 – – 1 – 62
Operating profi t 175 89 –59 –129 –26 28 –54 – 24 Gains on available-for-sale investments, net 2 Finance costs, net –227 Income taxes 21 Profi t (loss) for the period –180
Special items in operating profi t 1) ––59–36–379–283 10––489 Operating profi t excluding special items 175 148 –23 250 2 25 –64 – 513
Assets 2) 480 1,040 1,976 6,378 661 313 161 –139 10,870 Associates and joint ventures 2) 498 745 1 15 – – 4 – 1,263 Unallocated assets 1,648 Total assets 13,781
Liabilities 3) 23 67 135 377 132 18 32 –141 643 Unallocated liabilities 7, 018 Total liabilities 7, 6 61
Other items Depreciation and amortisation 5 77 24 639 32 21 8 – 806 Impairment charge 1 51 32 328 7 – – – 419 Capital expenditure 4) 815124219962231–551 Capital employed, 31 December 5) 955 1,718 1,843 6,016 529 295 134 –297 11,193 Capital employed, average 951 1,674 1,878 6,503 510 307 137 –814 11,146 Return on capital employed, excluding special items % 6) 18.4 8.8 –1.2 3.8 0.4 8.1 –46.7 – 4.6 Personnel at year end 39 1,159 3,278 13,262 2,851 3,799 595 – 24,983 Personnel, average 27 1,379 3,445 13,777 2,824 3,950 615 – 26,017
1) In 2008, special items of the Pulp segment of € 59 million relate to the closure of the Tervasaari pulp mill. In Forest and timber segment special items include an impairment charge of € 31 million related to fi xed assets of the Finnish sawmills. Special items of the Paper segment include the goodwill impairment charge of € 230 million, impairment charges of € 101 million and other restructuring costs of € 42 million related to the closure of the Kajaani paper mill, and other restructuring costs, net of € 6 million. In Label segment special items of € 28 million relate to measures to reduce coating capacity and close two slitting terminals in Europe. In Plywood segment special items include revers- als of provisions related to the disposed Kuopio plywood mill. In Other operations special items include an adjustment of € 5 million to sales of disposals of 2007 and other restructuring income net of € 5 million. 2) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 3) Segment liabilities include trade payables and advances received. 4) Capital expenditure include goodwill arisen in business combinations, other intangible assets, property, plant and equipment, investment property, biological assets and invest- ments in associated companies and joint ventures. 5) Capital employed is segment assets less segment liabilities. Eliminations include unallocated assets and unallocated non-interest bearing-liabilities. 6) The formula for calculation of the return on capital employed; segments: Operating profi t excluding special items/Capital employed (average) x 100, the Group: (Profi t before tax + interest expenses and other fi nancial expenses–special items)/(Total equity+interest bearing liabilities (average)) x 100.
F-19 ACCOUNTS FOR 2008 ■ Group
Segment information for the year ended 31 December 2007
Eliminations Forest and Ply- Other and re- €m Energy Pulp timber Paper Label wood operations conciliations Group
External sales 59 35 1,021 7,081 997 555 287 – 10,035 Internal sales 320 773 1,018 247 1 36 163 –2,558 – Total sales 379 808 2,039 7,328 998 591 450 –2,558 10,035
Share of results of associates and joint ventures –17 58 1 – – – 1 – 43
Operating profi t95145201–137605069–483 Gains on available-for-sale investments, net 2 Finance costs, net –193 Income taxes –211 Profi t for the period 81
Special items in operating profi t 1) ––43–13–3994 – 99––352 Operating profi t excluding special items 95 188 214 262 56 50 –30 – 835
Assets 2) 475 910 1,968 7,344 597 327 152 –123 11,650 Associates and joint ventures 2) 523 652 2 12 – – 4 – 1,193 Unallocated assets 1,110 Total assets 13,953
Liabilities 3) 23 91 195 491 149 29 23 –179 822 Unallocated liabilities 6,348 Total liabilities 7,17 0
Other items Depreciation and amortisation 5 58 25 678 29 21 15 – 831 Impairment charge 1 43 19 317 – – 13 – 393 Capital expenditure 4) 3239252961061722–708 Capital employed, 31 December 5) 975 1,472 1,774 6,865 448 299 133 –868 11,098 Capital employed, average 994 1,423 1,679 7,317 420 300 217 –984 11,366 Return on capital employed, excluding special items %6) 9.6 13.2 12.7 3.6 13.3 16.7 –13.8 – 7.4 Personnel at year end 26 1,186 3,510 14,538 2,568 3,945 579 – 26,352 Personnel, average 28 1,309 3,628 15,145 2,569 4,063 1,504 – 28,246
1) In 2007, special items of the Pulp segment comprise of a goodwill impairment charge of € 43 million. In Forest and timber segment special items include impairment charges of € 19 million related mainly to Miramichi’s forestry and sawmilling operations and a gain of € 6 million on sale of estate assets. In Paper segment special items include impair- ment charge of € 22 million, personnel expenses of € 54 million and other costs of € 36 million related to the closure of the Miramichi paper mill, and an income of € 8 million related to other restructuring measures. Special items also include a goodwill impairment charge of € 307 million, and income of € 11 million related to impairment reversals. In Label segment special items include an income of € 4 million related to restructuring measures. In Other operations special items include capital gains of € 58 million on the sale of port operators Rauma Stevedoring and Botnia Shipping, € 42 million related to the sale of UPM-Asunnot and € 29 million related to the sale of Walki Wisa. In addition special items include a compensation charge of € 12 million related to classaction lawsuits in the US, and other impairment charges and restructuring costs of € 18 million. 2) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 3) Segment liabilities include trade payables and advances received. 4) Capital expenditure include goodwill arisen in business combinations, other intangible assets, property, plant and equipment, investment property, biological assets and invest- ments in associated companies and joint ventures. 5) Capital employed is segment assets less segment liabilities. Eliminations include unallocated assets and unallocated non-interest bearing-liabilities. 6) The formula for calculation of the return on capital employed; segments: Operating profi t excluding special items/Capital employed (average) x 100, the Group: (Profi t before tax + interest expenses and other fi nancial expenses-special items)/(Total equity+interest bearing liabilities (average)) x 100.
F-20 Group ■ ACCOUNTS FOR 2008
Geographical information capital gain of € 58 million was recognised on the sale. None of these disposals are classifi ed as discontinued operations. External sales by destination Year ended 31 December €m 2008 2007 Net assets and liabilities of disposals Germany 1,640 1,707 Year ended 31 December € United Kingdom 1,040 1,203 m 2008 2007 Finland 946 865 Cash and cash equivalents 1 2 France 552 607 Other intangible assets – 7 Other EU countries 2,259 2,418 Property, plant and equipment – 68 Other European countries 467 493 Investment property – 17 United States 940 1,140 Inventories – 44 Canada 65 115 Receivables 2 52 China 397 382 Accounts payable and other liabilities –3 –47 Rest of world 1,155 1,105 Interest-bearing liabilities –1 –65 Total 9,461 10,035 –1 78 Gain/loss on disposal 8 129 Total consideration 7 207 Total assets by country As at 31 December Settled in cash and cash equivalents 7 207 € m 2008 2007 Cash and cash equivalents in subsidiary disposed –1 –2 Germany 2,514 2,830 Net cash infl ow arising from disposals 6 205 United Kingdom 565 642 Finland 7,547 7,197 France 521 568 Adjustments to profi t (loss) for the period Other EU countries 592 646 Year ended 31 December Other European countries 132 145 €m 2008 2007 United States 592 620 Canada 186 233 Taxes –21 211 China 832 801 Depreciation, amortisation and impairment charges 1,225 1,224 Rest of world 300 271 Share of results in associated companies and Total 13,781 13,953 joint ventures –62 –43 Profi ts and losses on sale of non-current assets –28 –157 Gains on available-for-sale investments, net –2 –2 Capital expenditure by country Finance costs, net 227 193 Settlement of restructuring charges –56 – Year ended 31 December €m 2008 2007 One-time contributions to pension funds –85 –30 Other adjustments 34 –6 Germany 33 23 Total 1,232 1,390 United Kingdom 56 28 Finland 280 439 France 13 31 Change in working capital Poland 68 23 Year ended 31 December Other European countries 17 31 €m 2008 2007 North America 23 62 Inventories –55 –152 China 9 17 Current receivables 138 –129 Rest of world 52 54 Current non-interest bearing liabilities –215 77 Total 551 708 Total –132 –204
5 NOTES TO THE CASH FLOW STATEMENT 6 OTHER OPERATING INCOME Acquisitions and disposals Year ended 31 December In 2008 and 2007, no acquisitions were made. €m 2008 2007 In 2008 disposals relate to the sale of UPM’s RFID antenna manu- Gains on sale of non-current assets 1) 28 160 facturing company Inture Circuits Ltd in July and adjustments to dis- Rental income, investment property 6 6 posals in 2007. Rental income, other 7 7 In April 2007, UPM sold the real estate company UPM-Asunnot Emission allowances received (Note 7) 37 – Oy for € 73 million, which generated a pre-tax capital gain of € 42 Derivatives held for trading 2 22 million. In June 2007, UPM sold Walki Wisa group, a producer of Other 3 5 wrappings and composite materials for industrial applications, for € 79 Total 83 200 million. A tax exempt capital gain of € 29 million was recognised on 1) Year 2007 includes a capital gain of € 42 million on the sale of UPM-Asunnot Oy, the sale. In October 2007, UPM sold its Finnish port operators Oy a capital gain of € 29 million on the sale of Walki Wisa group and a capital gain of Rauma Stevedoring Ltd and Oy Botnia Shipping Ab. A tax exempt € 58 million on the sale of Oy Rauma Stevedoring Ltd and Oy Botnia Shpping Ab.
F-21 ACCOUNTS FOR 2008 ■ Group
7 COSTS AND EXPENSES Shareholdings (no. of shares) and fees of the Board of Directors Year ended 31 December Shareholding Year ended 31 Dec. €m 2008 2007 € 1,000 31 Dec. 2008 2008 2007 Change in inventories of fi nished goods and Board members work in progress 93 –41 Björn Wahlroos, Chairman 109,077 175 – Production for own use –17 –34 Berndt Brunow, Vice Chairman 274,988 120 120 76 –75 Georg Holzhey, Vice Chairman 438,398 120 95 Matti Alahuhta 6,641 95 – Materials and services Michael C. Bottenheim 16,260 120 120 Raw materials, consumables and goods Karl Grotenfelt 29,726 95 95 Purchased during the period 5,244 5,360 Wendy E. Lane 8,299 95 95 Change in inventories –84 –52 Ursula Ranin 7,361 95 95 External services 1) 720 744 Veli-Matti Reinikkala 6,221 95 95 5,880 6,052 Jussi Pesonen, President and CEO 62,814 – –
Personnel expenses Former Board members Salaries and fees 1,079 1,163 Vesa Vainio – – 175 Jorma Ollila – – 120 Share-based payments (Note 37) 5 15 Françoise Sampermans – – 95 Total 959,785 1,010 1,105 Indirect employee costs Pension costs-defi ned benefi t plans (Note 29) 31 44 Pension costs-defi ned contribution plans 146 125 Executive Team remuneration Post-employment medical benefi ts (Note 29) 2 3 Year ended 31 December 2) Other indirect employee costs 143 159 € 1,000 2008 2007 322 331 President and CEO Jussi Pesonen Remuneration Other operating costs and expenses Salaries 1,024 984 Rents and lease expenses 53 50 Incentives 90 210 Emission expenses (Note 6) 26 –1 Share rewards 443 555 Losses on sale of non-current assets 1 4 Benefi ts 23 20 Other operating expenses 3) 965 1,111 Total 1,580 1,769 1,045 1,164 Pension costs Finnish TyEL scheme 196 206 Costs and expenses, total 8,407 8,650 Voluntary pension plan 165 123 1) External services comprise mainly distribution costs of products sold. Total 361 329 2) Other indirect employee expenses include primarily other statutory social expenses, excluding pension expenses. The 12 (2007: 13) members of the Executive Team, including President 3) Other operating expenses include, among others, energy and mainte- and CEO, were paid salaries and fringe benefi ts totalling € 7.0 (2007: nance expenses as well as expenses relating to services and the company’s € 6.2) million, of which € 1.5 (2007: € 0.7) million were paid as administration. bonuses. The remunerations paid are based on the performance of the Executive Team members in the previous year. In 2008, bonuses include The research and development costs included in costs and expenses share rewards of € 1.3 million paid under the terms and conditions of € € were 49 (2007: 50) million. the Group’s share ownership plan (2007: share rewards € 2.8 million). According to the company’s pay scheme, CEO can be paid an 18 months’ maximum reward, and the other executives can be paid a REMUNERATION PAID TO THE MEMBERS OF THE BOARD OF performance-related reward amounting to not more than twelve DIRECTORS AND THE EXECUTIVE TEAM months’ salary. In addition, the members of the Executive Team are also entitled to participate in the company’s stock option plans. The In accordance with the decision made by the 2008 Annual General expenses recognised in income statement in respect of share-based Meeting, the fees of the Board members who do not belong to the payments were € 1.1 million (2007: € 4.6 million) including share operative management were: the Chairman of the Board of Directors options of € 0.5 million (2007: € 2.6 million) and share rewards of received a fee of € 175,000 for the year (2007: € 175,000), the Vice € 0.6 million (2007: € 2.0 million). Chairmen of the Board of Directors and the Chairman of the Audit The retirement age of President and CEO Jussi Pesonen is 60 years. Committee a fee of € 120,000 (2007: € 120,000), and the members of Depending on the service contracts, the retirement age of the other the Board of Directors a fee of € 95,000 (2007: € 95,000). Of this fee members of the Executive Team is 62–63 years. The target pension is in 2008 and 2007 60% was paid in cash and 40% in the form of the 60% of the average indexed earnings from the last ten years. The costs company shares purchased on the members’ behalf. In 2008, 7,077 of lowering the retirement age or supplementing statutory pension company shares were paid to the Chairman, 4,852 shares to the Vice security are generally covered by voluntary pension insurance. The Chairmen of the Board of Directors and the Chairman of the Audit expenses of the Executive Team members’ defi ned benefi t pension Committee, respectively and a total of 19,205 shares to the other mem- plans in 2008 were € 0.5 (2007: € 1.1) million, and the expenses of bers of the Board of Directors. their defi ned contribution plans were € 0.8 (2007: € 0.9) million.
F-22 Group ■ ACCOUNTS FOR 2008
Members of the Executive Team have certain benefi ts in the event Year ended 31 December of their service contracts being terminated prior to the expiration date €m 2008 2007 stated in them. If UPM-Kymmene Corporation gives notice of termina- Impairment charges on property, tion to Jussi Pesonen, the President and CEO, a severance compensa- plant and equipment tion of 24 months’ basic salary will be paid, in addition to the six Land areas – 1 months’ salary for the notice period. For other members of the Execu- Buildings 58 6 Machinery and equipment 120 21 tive team, the period for additional severance compensation is 12 Other tangible assets 4 15 months in addition to the six months’ salary for the notice period. 182 43 The President and CEO is appointed by the Board of Directors. Impairment of intangible assets If there is a change of control in UPM-Kymmene Corporation as Goodwill 230 350 defi ned in the service contracts, each member of the Executive Team Intangible rights – 8 may terminate such service contract within one month or, in the case of Emission allowances 2 2 Jussi Pesonen within three months, from the date of the event that Other intangible assets 5 2 triggered the change of control, and shall receive compensation equiva- 237 362 lent to 24 months’ basic salary. Impairment reversal Machinery and equipment – –12
Audit fees Depreciation, amortisation and Year ended 31 December impairment charges, total 1,225 1,224 €m 2008 2007 Audit fees 2.3 3.4 In 2008, impairments include in Paper segment an impairment of Audit related fees 0.1 0.5 goodwill of € 230 million. In 2007, impairments include in Paper Other non-audit services 0.4 – segment, an impairment of goodwill of € 307 million and in Pulp Tax consulting fees 1.5 1.0 segment an impairment of goodwill of € 43 million. For goodwill test Total 4.3 4.9 see Note 16. In September 2008, UPM recognised an impairment charge of € 31 million in assets of Finnish sawmills within the Forest and timber 8 CHANGE IN FAIR VALUE OF BIOLOGICAL ASSETS segment, due to weakened profi tability of sawmilling. AND WOOD HARVESTED In November 2008, UPM’s Label segment announced plans to Year ended 31 December restructure its European operations, resulting into impairment charges €m 2008 2007 of € 7 million. Wood harvested –88 –116 In December 2008, UPM closed down uncompetitive paper and Change in fair value 138 195 pulp capacity in Finland, including the Kajaani paper mill and the Total 50 79 Tervasaari pulp mill. This resulted into impairment charges of € 101 million in Paper segment related to the closure of the Kajaani paper 9 SHARE OF RESULTS OF ASSOCIATED COMPANIES mill and impairment charges of € 51 million in Pulp segment related to AND JOINT VENTURES the closure of the Tervasaari pulp mill. Year ended 31 December In June 2007, UPM decided to close the Miramichi magazine paper €m 2008 2007 mill temporarily for nine to twelve months. Due to continued poor Oy Metsä-Botnia Ab 86 58 fi nancial prospects, primarily due to the strengthened Canadian dollar Pohjolan Voima Oy –26 –14 in relation to the US dollar, and the increased cost of essential raw Others 2 –1 materials such as wood and chemicals, UPM decided in December Total 62 43 2007 to close the mill permanently. These decisions resulted in impair- ment charges of € 22 million related to Miramichi’s paper mill, and € 19 million related to Miramichi’s sawmilling and forestry operations 10 DEPRECIATION, AMORTISATION AND reported in Forest and timber segment. In addition, other impairment IMPAIRMENT CHARGES charges of € 12 million were recorded in Other operations. Year ended 31 December Impairment reversals in 2007 relate to machinery and equipment in €m 2008 2007 Paper segment which have been written off in prior years, and which Depreciation on property, plant and equipment UPM is planning to reuse. Buildings 98 97 Machinery and equipment 613 628 Other tangible assets 33 33 11 GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET 74 4 758 Year ended 31 December Depreciation on investment property €m 2008 2007 Buildings 1 1 Fair value gains and losses on disposals 2 2 Total 2 2 Amortisation of intangible assets Intangible rights 16 17 Other intangible assets 45 55 61 72
F-23 ACCOUNTS FOR 2008 ■ Group
12 FINANCE COSTS Income taxes for 2008 include an € 28 million income from a decrease Year ended 31 December of deferred tax liabilities relating to an impairment of Paper segments €m 2008 2007 goodwill. Change in tax legislation includes a tax expense of € 13 Exchange rate and fair value gains and losses million related to change in the UK tax legislation. Derivatives held for trading 223 –131 Income taxes for 2007 include an € 25 million income from a Fair value gains on derivatives designated decrease of deferred tax liabilities relating to an impairment of good- as fair value hedges 337 7 will of Paper and Pulp segments. Change in tax legislation includes a Fair value adjustment of borrowings attributable tax expense of € 25 million due to a decrease of tax rate in Canada and to interest rate risk –358 –7 Foreign exchange gain/loss on fi nancial liabilities a tax income from tax rate changes in Germany and the UK. Other € measured at amortised cost) –248 187 items include a charge of 123 million from a reduction of deferred Foreign exchange gain/loss on loans and receivables 21 –58 tax assets in Canada (of which € 98 million from book over tax depre- –25 –2 ciation), relating to the closing decision of the Miramichi paper mill.
Interest and other fi nance costs, net Interest expense on fi nancial liabilities measured 14 EARNINGS PER SHARE at amortised cost –213 –221 Year ended 31 December Interest income on derivative fi nancial instruments 3 31 2008 2007 Interest income on loans and receivables 5 5 Profi t (loss) attributable to the equity holders of Gains and losses on sale of associated companies the parent company, €m–17985 and joint ventures shares 4 2 Other fi nancial expenses –1 –8 Average weighted number of shares (1,000) 517,545 522,867 –202 –191 Basic earnings per share, € –0.35 0.16 Total –227 –193 For the diluted earnings per share the number of shares is adjusted by the effect of the share options. Net gains and losses on derivative fi nancial instruments included in the operating profi t Profi t (loss) attributable to the equity holders of € Year ended 31 December the parent company, m–17985 €m 2008 2007 Profi t (loss) used to determine diluted earnings per share, €m –179 85 Derivatives designated as cash fl ow hedges 82 44 Derivatives held for trading 2 22 Average weighted number of shares (1,000) 517,545 522,867 Total 84 66 Effect of options 1) –2,862 Average weighted number of shares for diluted earnings per share (1,000) 517,545 525,729 The aggregate foreign exchange gains and losses € included in the consolidated income statement Diluted earnings per share, –0.35 0.16 Year ended 31 December 1) The dilution effect is calculated to determine the number of shares that could €m 2008 2007 have been acquired at fair value (the average price for shares traded) based on the monetary subscription rights of the outstanding options. The number of shares Sales 88 33 calculated as above is compared with the number of shares that would have been Costs and expenses –14 6 issued assuming the exercise of the options. 6.0 million shares exercisable with Net fi nancial items –7 –4 options (2007: 3.0 million) were excluded from the calculation of diluted earnings Total 67 35 per share as they were not dilutive.
13 INCOME TAXES 15 DIVIDEND PER SHARE Year ended 31 December €m 2008 2007 The dividends paid in 2008 were € 384 million (€ 0.75 per share) and € € Major components of tax expenses in 2007 392 million ( 0.75 per share). The Board of Directors pro- € Current tax expense 60 162 poses to the Annual General Meeting that a dividend of 208 million Change in deferred taxes (Note 28) –81 49 (€ 0.40 per share) will be paid in respect of 2008. Income taxes, total –21 211
Income tax reconciliation statement Profi t before tax –201 292 Computed tax at Finnish statutory rate of 26% –52 76 Difference between Finnish and foreign rates –9 –16 Non-deductible expenses and tax exempt income 42 50 Tax loss with no tax benefi t65 Results of associated companies –18 –12 Change in tax legislation 12 4 Other –2 104 Income taxes, total –21 211
Effective tax rate 10.4% 72.3%
F-24 Group ■ ACCOUNTS FOR 2008
16 GOODWILL tions on which recoverable amount is based would not cause the aggre- As at 31 December gate carrying amount to exceed the aggregate recoverable amount. €m 2008 2007 In Pulp segment, the recoverable amount, in addition to the pulp sales price, is most sensitive to cost of wood raw material. As at 31 Acquisition cost at 1 Jan. 1,513 1,514 December 2008, a decrease of 1% in pulp prices, an increase of 1% in Disposals – –1 wood costs, or an increase of 0.50% in the pre-tax discount rate would Acquisition cost at 31 Dec. 1,513 1,513 result to a recognition of impairment loss against goodwill. In September 2008, an impairment charge of € 230 million, recog- Accumulated impairment at 1 Jan. –350 – nised in Newsprint segment, is allocated to Paper segment. The main Impairment charges –230 –350 factors for the impairment were lower-than-forecast realised newsprint Accumulated impairment at 31 Dec. –580 –350 market demand in Europe and increased costs. The impairment test for Carrying value at 1 Jan. 1,163 1,514 goodwill was performed on the level of cash generating unit. To iden- Carrying value at 31 Dec. 933 1,163 tify the recoverable amount which is the value in use, the impairment test was conducted using the discounted cash-fl ow method. Based on forecasts and projections of pre-tax cash-fl ows, the value in use was On 1 December 2008, UPM adopted a new business structure. The determined applying a pre-tax discount rate of 7.75%. organisational change resulted to a reallocation of goodwill of the In June 2007, mostly because of the continuing low magazine previous Magazine Paper, Newsprint, Fine and Speciality Papers seg- paper prices and the unfavourable developments of exchange rates, ments to Paper and Pulp reportable segments. The allocation was based especially that of the US dollar, there was an indication of impairments on the proportionate value in use calculations of the new segments. of goodwill. Of the € 350 million goodwill impairment charge, € 307 million has been allocated to Paper segment and € 43 million to Pulp As at 31 December segment. €m 2008 2007 Pulp 113 113 Forest and timber 2 2 17 OTHER INTANGIBLE ASSETS Paper 798 1,028 As at 31 December Label 7 7 €m 2008 2007 Plywood 13 13 Intangible rights Total 933 1,163 Acquisition cost at 1 Jan. 412 411 Additions 4 5 Disposals –14 –2 Impairment tests Reclassifi cations 1 –1 The company prepares impairment test calculations annually. The key Translation differences 3 –1 assumptions for calculations are those regarding the business growth Acquisition cost at 31 Dec. 406 412 outlooks, product prices, cost development, and the discount rate. Business growth outlooks are based on general forecasts for the Accumulated amortisation and impairment at 1 Jan. –147 –124 businesses in question. Ten-year forecasts are used in the calculations Amortisation –16 –17 as the nature of the company’s business is long-term due to its capital Disposals 13 1 intensity, and exposed to cyclical changes. In estimates of product Impairment charges – –8 prices and cost development, the budgets prepared by management for Reclassifi cations – 1 the next year and estimates made for the following nine years are taken Translation differences –1 – into consideration. In the largest segment, in Paper, a negative growth Accumulated amortisation and impairment at 31 Dec. –151 –147 rate of approximately 1 % in real terms has been applied beyond the period covered by the most recent management’s forecasts. The compa- Carrying value at 1 Jan. 265 287 ny’s recent profi tability trend is taken into account in the forecasts. In Carrying value at 31 Dec. 255 265 addition, when preparing estimates, consideration is given to the invest- ment decisions made by the company as well as the profi tability pro- Other intangible assets 1) grammes that the Group has implemented and the views of knowledge- Acquisition cost at 1 Jan. 525 511 able experts of the industry on the long-term development of demand Additions 19 16 and prices. Discount rate is estimated using the weighted average cost Disposals –34 –20 of capital on the calculation date adjusted for risks specifi c to busi- Reclassifi cations 3 22 nesses in question. The pre-tax discount rate used in 2008 for Paper Translation differences –3 –4 segment was 9.00% and for Pulp segment 9.90%. In the previous busi- Acquisition cost at 31 Dec. 510 525 ness structure, the pre-tax discount rates used in 2007 impairment tests were for Magazine Papers, Newsprint and Fine Papers segments 8.40%, Accumulated amortisation and impairment at 1 Jan. –407 –364 8.26% and 8.55%, respectively. Amortisation –44 –55 The recoverable amount of groups of cash generating units is Impairment charges –5 –2 determined based on value in use calculations. Disposals 34 15 The estimated product prices are the most important assumptions Reclassifi cations – –3 in impairment tests. As at 31 December 2008, in Paper segment, a Translation differences 2 2 hypothetic 2% decrease in product prices used in impairment tests Accumulated amortisation and impairment at 31 Dec. –420 –407 would lead to a recognition of impairment loss against goodwill approximately by € 100 million. Other essential assumptions in Paper Carrying value at 1 Jan. 118 147 are costs for chemical pulp, delivery services and personnel. Group Carrying value at 31 Dec. 90 118 believes that any reasonably possible change in these other key assump-
F-25 ACCOUNTS FOR 2008 ■ Group
As at 31 December As at 31 December €m 2008 2007 €m 2008 2007 Advance payments and construction in progress Accumulated depreciation and impairment at 1 Jan. –1,499 –1,447 Acquisition cost at 1 Jan. 9 11 Depreciation –98 –96 Additions 22 18 Impairment charges –58 –6 Disposals – –3 Disposals 136 32 Reclassifi cations –4 –17 Reclassifi cations 12 11 Acquisition cost at 31 Dec. 27 9 Translation differences 24 7 Accumulated depreciation and impairment at 31 Dec. –1,483 –1,499 Carrying value at 1 Jan. 9 11 Carrying value at 31 Dec. 27 9 Carrying value at 1 Jan. 1,443 1,494 Carrying value at 31 Dec. 1,385 1,443 Emission allowances Acquisition cost 1 Jan. – 16 Machinery and equipment Additions 2) 56 1 Acquisition cost at 1 Jan. 12,550 12,545 Disposals and settlements –23 –15 Additions 267 209 Impairment charges –2 –2 Disposals –775 –239 Acquisition cost 31 Dec. 31 – Reclassifi cations 254 174 Translation differences –134 –139 Carrying value at 1 Jan. – 16 Acquisition cost at 31 Dec. 12,162 12,550 Carrying value at 31 Dec. 31 – Accumulated depreciation and impairment at 1 Jan. –8,721 –8,377 Other intangible assets, total 403 392 Depreciation –617 –623 Impairment charges –120 –21 1) Other intangible assests consist primarily of capitalised software assets. Impairment reversal – 12 2) Additions include allowances received free of charge. Disposals 765 203 Reclassifi cations – 1 Translation differences 152 84 Water rights Accumulated depreciation and impairment at 31 Dec. –8,541 –8,721 Intangible rights include € 189 million (2007: € 189 million) in respect of the water rights of hydropower plants belonging to the Energy seg- Carrying value at 1 Jan. 3,829 4,168 ment. The water rights of power plants are deemed to have an indefi nite Carrying value at 31 Dec. 3,621 3,829 useful life as the company has a contractual right to exploit water resources in the energy production of power plants. The values of water Other tangible assets rights are tested annually for impairment. Acquisition cost at 1 Jan. 899 879 Additions 29 29 Disposals –68 –17 18 PROPERTY, PLANT AND EQUIPMENT Reclassifi cations 7 9 As at 31 December Translation differences –2 –1 €m 2008 2007 Acquisition cost at 31 Dec. 865 899 Land and water areas Accumulated depreciation and impairment at 1 Jan. –696 –666 Acquisition cost at 1 Jan. 350 361 Depreciation –33 –33 Additions 4 7 Disposals 66 16 Disposals –3 –16 Reclassifi cations 2 1 Reclassifi cations 5 – Impairment charges –4 –14 Translation differences –1 –2 Translation differences 3 – Acquisition cost at 31 Dec. 355 350 Accumulated depreciation and impairment at 31 Dec. –662 –696
Accumulated depreciation and impairment at 1 Jan. –8 –7 Carrying value at 1 Jan. 203 213 Impairment charges – –1 Carrying value at 31 Dec. 203 203 Accumulated depreciation and impairment at 31 Dec. –8 –8 Advance payments and construction in progress Carrying value at 1 Jan. 342 354 Acquisition cost at 1 Jan. 362 271 Carrying value at 31 Dec. 347 342 Additions 114 333 Disposals –4 –4 Buildings Reclassifi cations –334 –235 Acquisition cost at 1 Jan. 2,942 2,941 Translation differences –6 –3 Additions 57 66 Acquisition cost at 31 Dec. 132 362 Disposals –141 –71 Reclassifi cations 50 33 Carrying value at 1 Jan. 362 271 Translation differences –40 –27 Carrying value at 31 Dec. 132 362 Acquisition cost at 31 Dec. 2,868 2,942 Property, plant and equipment, total 5,688 6,179
F-26 Group ■ ACCOUNTS FOR 2008
Finance lease arrangements 19 INVESTMENT PROPERTY Property, plant and equipment includes property that is acquired under As at 31 December fi nance lease and sale and leaseback contracts: €m 2008 2007 Acquisition cost at 1 Jan. 46 74 As at 31 December Additions 1 – € m 2008 2007 Disposals – –47 Machinery and equipment Reclassifi cations 19 19 Acquisition cost 53 53 Acquisition cost at 31 Dec. 66 46 Accumulated depreciation –39 –34 Carrying value at 31 Dec. 14 19 Accumulated depreciation and impairment at 1 Jan. –32 –44 Depreciation –1 –1 Leased assets, total 14 19 Disposals – 28 Reclassifi cations –14 –15 There is no property, plant and equipment leased to third parties under Accumulated depreciation and impairment at 31 Dec. –47 –32 operating lease contracts. Carrying value at 1 Jan. 14 30 Carrying value at 31 Dec. 19 14
Capitalised borrowing costs The fair value of investment property is determined annually on 31 The borrowing costs capitalised as part of non-current assets amounted December by the Group. Fair value is based on active market prices, € € to 11 million in 2008 and 10 million in 2007. Amortisation of adjusted, if necessary, for any difference in the nature of the specifi c € € capitalised borrowing costs was 8 million in 2008 (2007: 8 million) asset. € and impairment charges related to capitalised borrowing costs were 2 The fair value of investment property in Finland at 31 December € million in 2008 (2007: 0 million). In 2008 and 2007 there were no 2008 was € 16 million (2007: € 9 million) and the fair value of invest- capitalised borrowing costs associated with sold assets. ment property in other countries at 31 December 2008 was € 11 million The average interest rate used was 5.52% (2007: 4.63%), which (2007: € 11 million). In April 2007, UPM sold real estate company represents the costs of the loan used to fi nance the projects. UPM-Asunnot Oy.
Assets classifi ed as held for sale On 15 January 2009, UPM sold its former paper mill and related assets The amounts recognised in the income statement in Miramichi, New Brunswick, Canada to Umoe Solar AS of Norway. Year ended 31 December The sale includes also woodlands operations, and two sawmills located €m 2008 2007 nearby in Bathurst and Blackwill. UPM records an income of approxi- Rental income 6 6 mately € 20 million on the sale as a special item in the fi rst quarter of Direct operating expenses arising from invest- 2009. ment properties that generate rental income 3 3 The following assets of Paper segment and Forest and timber seg- ment and related liabilities have been classifi ed as assets held for sale There were no contractual obligations for future repair and mainte- and related liabilities: nance or purchase of investment property. All assets under investment property are leased to third parties As at 31 December under operating leasing contracts. €m 2008 2007 Land and water areas 1 – Buildings 2 – 20 BIOLOGICAL ASSETS Machinery and equipment 6 – As at 31 December Biological assets 2 – €m 2008 2007 Inventories 1 – At 1 Jan. 1,095 1,037 Assets total 12 – Additions 2 1 Disposals –13 –20 Provisions 2 – Wood harvested –88 –116 Other non-current liabilities 3 – Change in fair value 138 195 Trade and other payables 11 – Translation differences –1 –2 Accruals and deferred income 1 – At 31 Dec. 1,133 1,095 Liabilities total 17 – The pre-tax discount rate used in determing the fair value in 2008 was Liabilities related to assets held 7.50% (2007: 7.50%). A 1% decrease (increase) in discount rate would for sale, interest bearing (Note 31) 2 – Liabilities related to assets held increase (decrease) the fair value of biological assets by approximately € for sale, non-interest bearing 15 – 140 million. In addition to the discount rate, the growth of the forest Liabilities total 17 – stock and timber prices are other essential assumptions used in the valuation.
F-27 ACCOUNTS FOR 2008 ■ Group
21 INVESTMENTS IN ASSOCIATED COMPANIES a nuclear incident at the operator’s installation or occurring in the AND JOINT VENTURES course of transporting nuclear fuels. Shareholders of power companies As at 31 December that own and operate nuclear power plants are not subject to liability €m 2008 2007 under the Nuclear Liability Act. In Finland, the future costs of condi- At 1 Jan. 1,193 1,177 tioning, storage and fi nal disposal of spent fuel, management of low Additions 19 27 and intermediate-level radioactive waste and nuclear power plant Disposals –12 –2 decommissioning are the responsibility of the operator. Reimburse- Share of results after tax 62 43 ments of the operators’ costs related to decommissioning and disman- Dividends received –18 –23 tling of the power plant and storage and disposal of spent fuel are Translation differences 19 –29 provided for by state-established funds funded by annual contributions At 31 Dec. 1,263 1,193 from nuclear power plant operators. Pursuant to PVO and TVO share- holders’ agreements, the Group bears its proportionate share of the Investments in associated companies at 31 December 2008 include costs related to decommissioning and dismantling of the nuclear power goodwill of € 51 million which relates to Pohjolan Voima Oy’s shares plant and storage and disposal of spent fuel through the price of elec- (2007: € 51 million). tricity acquired from PVO. The contributions to such funds are intended to be suffi cient to cover estimated future costs. If the actual costs devi- As at 31 December ate from fund provisions, the Group would be affected accordingly. €m 2008 2007 Fund assets are measured at the lower of the decommissioning obliga- Sale and leaseback contracts included in tion and provision for spent fuel recognised and UPM’s share of the net investments in associated companies assets of the fund attributable to the contributors. Acquisition cost 13 13 In December 2008, Teollisuuden Voima Oy informed UPM that the Accumulated increases 1 4 Carrying value at 31 Dec. 14 17 supplier of the nuclear power plant Olkiluoto 3 has fi led a request for arbitration concerning the delay and related costs.
Associated companies and joint ventures The Group’s share of the results of its principal associates and joint Group holding ventures, all of which are unlisted, are accounted for using the equity percentage % Carrying value method. The Group’s share of the assets, liabilities, sales and results are 2008 2007 2008 2007 as follows: Associated companies Austria Papier Recycling 2008 Lia- Profi t/ Ges.m.b.H., AT 33.30 33.30 – – €m Assets bilities Sales Loss Oy Keskuslaboratorio- Associated companies and joint ventures Centrallaboratorium Ab, FI 38.65 38.65 1 1 Oy Metsä-Botnia Ab, FI 1,306 561 798 86 2) Botnia South America S.A., UY 12.40 12.40 108 76 Pohjolan Voima Oy, FI 1,219 742 328 –26 Oy Metsä-Botnia Ab, FI 47.00 47.00 637 576 Others 150 109 291 2 Paperinkeräys Oy, FI 22.98 22.98 3 3 Total 2,675 1,412 1,417 62 Pohjolan Voima Oy, FI 41.84 41.99 477 502 1) Powest Oy, FI 9.98 9.98 15 15 2007 Lia- Profi t/ RETS Timber Oy Ltd, FI 50.00 50.00 1 1 €m Assets bilities Sales Loss Steveco Oy, FI 34.32 34.32 9 9 Associated companies and joint ventures Others 6 4 Oy Metsä-Botnia Ab, FI 1,178 526 655 58 At 31 Dec. 1,257 1,187 Pohjolan Voima Oy, FI 1,189 688 273 –14 Others 183 143 280 –1 Joint ventures Total 2,550 1,357 1,208 43 Kainuun Voima Oy, FI 50.00 50.00 6 6 66 The amounts representing the Group’s share of the assets and liabilities Associated companies and joint ventures at 31 Dec. 1,263 1,193 and sales and results of the joint ventures that have been accounted for using the equity method are presented in the table below. 1) The Group’s share of the voting right in Powest Oy is 0.61% (2007: 0.61%). The Group is entitled to 51.22% (2007: 51.22%) of the respective dividends of Powest Oy. Year ended 31 December €m 2008 2007 2) Botnia South America S.A. is a subsidiary of UPM’s associated company Oy Metsä-Botnia Ab. The amount of assets and liabilities related to investments in joint ventures Pohjolan Voima Oy (“PVO”) holds a 58.12% shareholding in Teollisuu- Non-current assets 29 30 den Voima Oy (“TVO”), which owns and operates nuclear power plants Current assets 5 3 in Olkiluoto, Finland. The operation of a nuclear power plant involves Non-current liabilities –20 –22 potential costs and liabilities related to decommissioning and disman- Current liabilities –7 –4 tling of the nuclear power plant and storage and disposal of spent fuel, Net assets 7 7 and is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility is strictly liable for damage resulting from
F-28 Group ■ ACCOUNTS FOR 2008
Year ended 31 December 23 NON-CURRENT FINANCIAL ASSETS €m 2008 2007 As at 31 December The income and expenses related €m 2008 2007 to investments in joint ventures Other loan receivables 16 15 Sales 18 15 Derivative fi nancial instruments 345 67 Expenses –18 –15 At 31 Dec. 361 82 Profi t–– The maximum exposure to credit risk in regard to other loan receiva- The average number of employees in the joint ventures 47 45 bles is their carrying amount.
Transactions and balances 24 OTHER NON-CURRENT ASSETS with associates and joint ventures As at 31 December Year ended 31 December €m 2008 2007 € m 2008 2007 Defi ned benefi t plans (Note 29) 173 93 Sales to associates and joint ventures 138 130 Other non-current assets 28 28 Purchases from associates and joint ventures 592 500 At 31 Dec. 201 121 Receivables from associates and joint ventures 37 29 Payables to associates and joint ventures 27 42 25 INVENTORIES Loan receivables from associates and As at 31 December 1) joint ventures €m 2008 2007 At 1 Jan. 6 6 Raw materials and consumables 664 522 Loans granted 2 2 Work in progress 54 58 Repayments – –2 Finished products and goods 589 687 At 31 Dec. 8 6 Advance payments 47 75 1) Loans to associated companies and joint ventures include current and non-current At 31 Dec. 1,354 1,342 loan receivables.
26 TRADE AND OTHER RECEIVABLES 22 AVAILABLE-FOR-SALE INVESTMENTS As at 31 December Year ended 31 December €m 2008 2007 €m 2008 2007 Trade receivables 1,235 1,359 At 1 Jan. 116 127 Loan receivables 11 8 Disposals – –9 Other receivables 117 137 Changes in fair values – –2 Derivative fi nancial instruments 269 137 At 31 Dec. 116 116 Prepayments and accrued income 54 76 At 31 Dec. 1,686 1,717 At 31 December 2008, the available-for-sale investments include only investments in unlisted equity shares. Unlisted shares, where the fair value cannot be measured reliably are carried at cost. The range of Ageing analysis of trade receivables reasonable fair value estimates of these shares is signifi cant and the As at 31 December probabilities of the various estimates cannot be reasonably assessed. €m 2008 2007 The fair value of the shares in Kemijoki Oy cannot be reliably meas- Undue 1,067 1,181 ured as the redemption clause in the articles of association of the com- Past due up to 30 days 115 126 pany limits fair market transactions to third parties. Currently the Past due 31–90 days 31 31 Group does not have an intention to dispose of this investment. Past due over 90 days 22 21 At 31 Dec. 1,235 1,359
Principal available-for-sale investments In determining the recoverability of trade receivables the Group con- Group siders any change in the credit quality of the trade receivables. There are Number holding Carrying value no indication that the debtors will not meet their payment obligations in of shares percentage 2008 2007 regard to trade receivables that are neither past due nor impaired at Kemijoki Oy 100,797 4.13 106 106 31 December 2008. Impairment of trade receivables amounted to € 22 Other 10 10 million in 2008 (2007: € 13 million) and is recorded under other costs Carrying value of available-for- and expenses. Impairment is recognised when there is objective evi- sale investments at 31 Dec. 116 116 dence that the Group is not able to collect the amounts due. Income from recoveries of trade receivables written off amounted to € 1 million in 2008 (2007: € 1 million).
F-29 ACCOUNTS FOR 2008 ■ Group
The maximum exposure to credit risk without taking into account Main items included in prepayments and accrued income of any credit enhancements is the carrying amounts of trade and other As at 31 December receivables. Prepayments which are not fi nancial instruments are not €m 2008 2007 subject to credit risk as defi ned in IFRS 7. Personnel expenses 3 3 Indirect taxes 16 20 Other items 35 53 At 31 Dec. 54 76
27 EQUITY AND RESERVES
Share capital and share premium reserve Number of shares Share Share premium €m (1,000) capital reserve Total At 1 Jan. 2007 523,259 890 826 1,716 Exercise of share options 5,710 – – – Cancellation of shares purchased –16,400 – – – Transfer to reserve for invested non-restricted equity – – –776 –776 Transfer to other reserves – – –50 –50 At 31 Dec. 2007 512,569 890 – 890 Exercise of share options 7,401––– At 31 Dec. 2008 519,970 890 – 890
Shares Authorisations to increase the number of shares At 31 December 2008, the number of the company’s shares was The Annual General Meeting of 27 March 2007 has in addition author- 519,970,088. Each share carries one vote. The shares do not have any ised the Board to decide to issue shares and special rights entitling the nominal counter value. The shares are included within the book-entry holder to shares of the company. The number of new shares to be system for securities. issued, including shares to be obtained under special rights, shall be no Due to the change in the Companies’ Act the company’s Articles of more than 250,000,000. Of that, the maximum number that can be Associations was changed. The Annual General Meeting held on 27 issued to the company’s shareholders based on their pre-emptive rights March 2007 decided to delete the mentions concerning the minimum is 250,000,000 shares and the maximum amount that can be issued and maximum share capital and the number of shares. In addition, the deviating from the shareholders’ pre-emptive rights in a directed share meeting decided to transfer the company’s share premium reserve issue is 100,000,000 shares. The maximum number of new shares to be € 776 million to reserve for invested non-restricted equity. Share pre- issued as part of the company’s incentive programmes is 5,000,000. mium reserve of other Group companies has been transferred to other Furthermore, the Board is authorised to decide on the disposal of own reserves. shares. To date, this authorisation has not been used. These authorisa- tions of the 2007 Annual General Meeting will remain valid for no Reserve for invested non-restricted equity more than three years from the date of the decision. Reserve for invested non-restricted equity includes, under the Compa- The meeting 27 March 2007 also decided on granting share options nies’ Act, the exercise value of shareholders’ investments in the com- in connection with the company’s share-based incentive plans. In pany unless otherwise decided by the Company. option programmes 2007A, 2007B and 2007C, the total number of share options is no more than 15,000,000, and they will entitle to sub- Treasury shares scribe for, in total, no more than 15,000,000 new shares of the com- The Annual General Meeting held on 26 March 2008 approved a pro- pany. posal to authorise the Board of Directors to decide to buy back not Apart from the above, the Board of Directors has no current more than 51,000,000 own shares. The authorisation is valid for 18 authorisation to issue shares, convertible bonds, or share options. months from the date of the decision. As at 31 December 2008 the If all the remaining 3,000,000 2005G share options and 3,000,000 company held 15,944 of its own shares, 0.003% of the total number of 2005H share options authorised in 2005 are exercised to subscribe all shares, which have been granted under the Group’s share reward 6,000,000 shares, and all 15,000,000 share options issued in 2007 are scheme in 2008 and 2007. The average acquisition cost of these shares fully exercised, the number of the company’s shares will increase by a is € 16.42 per share. These shares have been returned in connection total of 21,000,000, i.e. by 4.04%. with termination of service contracts. The shares available for subscription under the Board’s share issue On the basis of the decisions of the Annual General Meeting of 27 authorisation and through the exercise of share options may increase March 2007, the Board has the authority to decide on a free issue of the total number of the company’s shares by 52.12%, i.e. by shares to the company itself so that the total number of shares to be 271,000,000 shares, to 790,970,088 shares. issued to the company combined with the number of own shares bought back under the buyback authorisation may not exceed 1/10 of the total number of shares of the company.
F-30 Group ■ ACCOUNTS FOR 2008
Redemption clause Changes in hedging reserve Under § 12 of UPM-Kymmene Corporation’s Articles of Association, a Year ended 31 December shareholder who alone or jointly with another shareholder owns 33 1/3 €m 2008 2007 percent or 50 percent or more of all the company’s shares or their Hedging reserve at 1 Jan. 46 19 associated voting rights shall, at the request of other shareholders, be Gains and losses on cash fl ow hedges 39 91 liable to redeem in the manner prescribed in § 12 their shares and any Transfers to sales –83 –57 securities that, under the Companies Act, carry the right to such shares. Transfers to initial cost of property, plant and A resolution of general meeting of shareholders to amend or delete equipment –1 1 this redemption clause must be carried by shareholders representing Tax on gains and losses on cash fl ow hedges –10 –23 not less than three-quarters of the votes cast and shares represented at Tax on transfers to income statement 22 15 the meeting. Hedging reserve at 31 Dec. 13 46
Fair value and other reserves As at 31 December €m 2008 2007 Hedging reserve 13 46 Legal reserve 53 53 Share premium reserve 50 50 Share-based compensation 14 44 At 31 Dec. 130 193
28 DEFERRED INCOME TAXES
Reconciliation of the movements of deferred tax asset and liability balances during the period
As at Charged to Acquisitions As at 1 Jan. the income Charged to Translation and 31 Dec. €m 2008 statement equity differences disposals 2008 Deferred tax assets Retirement benefi t and other provisions 98 15 – –5 – 108 Intercompany profi t in inventory 9 2 – – – 11 Book over tax depreciation 127 –11 – –14 – 102 Tax losses and tax credits carried forward 195 20 – –9 – 206 Other temporary differences 4 2 – – – 6 Deferred tax assets, total 433 28 – –28 – 433
Deferred tax liabilities Tax over book depreciation 595 –45 – –16 – 534 Fair value adjustments of net assets acquired and biological assets 263 4 – – – 267 Other temporary differences 36 –12 8 – – 32 Deferred tax liabilities, total 894 –53 8 –16 – 833
The amounts recognised in the balance sheet Assets 284 2 – –28 – 258 Liabilities 745 –79 8 –16 – 658 Deferred tax liabilities, less deferred tax assets 461 –81 8 12 – 400
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 taxes relate to the same fi scal authority.
F-31 ACCOUNTS FOR 2008 ■ Group
Reconciliation of the movements of deferred tax asset and liability balances during the period
As at Charged to Acquisitions As at 1 Jan. the income Charged to Translation and 31 Dec. €m 2007 statement equity differences disposals 2007 Deferred tax assets Retirement benefi t and other provisions 111 –14 – 1 – 98 Intercompany profi t in inventory 11 –2 – – – 9 Book over tax depreciation 221 –104 – 10 – 127 Tax losses and tax credits carried forward 227 –38 – 6 – 195 Other temporary differences 3 2 – – –1 4 Deferred tax assets, total 573 –156 – 17 –1 433
Deferred tax liabilities Tax over book depreciation 698 –95 – –2 –6 595 Fair value adjustments of net assets acquired and biological assets 266 –3 – – – 263 Other temporary differences 37 –9 8 – – 36 Deferred tax liabilities, total 1,001 –107 8 –2 –6 894
The amounts recognised in the balance sheet Assets 362 –94 – 17 –1 284 Liabilities 790 –45 8 –2 –6 745 Deferred tax liabilities, less deferred tax assets 428 49 8 –19 –5 461
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 taxes relate to the same fi scal authority.
Deferred income tax charged to equity during the year 29 RETIREMENT BENEFIT OBLIGATIONS €m 2008 2007 Cash fl ow hedges –12 8 The Group operates a number of defi ned benefi t and contribution plans Net investment hedge 20 – in accordance with the local conditions and practises in the countries in Total 8 8 which it operates. The most signifi cant pension plan in Finland is the statutory Finn- ish employee pension scheme (TyEL), according to which benefi ts are At 31 December 2008, the net operating loss carry-forwards for which directly linked to the benefi ciary’s earnings. The TyEL pension scheme the Group has recorded a deferred tax asset amounted to € 689 million is mainly arranged with pension insurance companies. (2007: € 645 million), of which € 372 million (2007: € 274 million) In Finland, the pensions of approximately 10% of employees are was attributable to German subsidiaries, € 203 million (2007: € 239 arranged through Group’s own pension funds. All schemes managed by million) to a Canadian subsidiary and € 78 million (2007: € 86 million) the pension funds are classifi ed as defi ned benefi t plans. to US subsidiaries. In Germany net operating loss carry-forwards do Foreign plans include both defi ned contribution and defi ned benefi t not expire. In other countries net operating loss carry-forwards expire plans. Globally approximately one third of the employees belong to at various dates and in varying amounts. The net operating loss carry- defi ned benefi t arrangements. forwards for which no deferred tax asset is recognised due to uncer- DEFINED BENEFIT PLANS tainty of their utilisation amounted to € 136 million in 2008 (2007: € As at 31 December 155 million). These net operating loss carry-forwards are mainly €m 2008 2007 attributable to Canadian and Chinese subsidiaries. Pension benefi ts 182 291 Upon the decision to close the Miramichi paper mill in December Post-employment medical benefi ts 19 21 € 2007 a write-down of 123 million deferred tax assets was recorded Net liability 201 312 due to unability to utilise them before they expire. On 31 December 2008 the Group had deferred tax assets of € 86 million (2007: € 105 Other long-term employee benefi ts 34 36 million) relating to book over tax depreciation in Canada which do not Overfunded plan shown as asset (Note 24) 173 93 expire. The Group has implemented a prudent and feasible tax planning Total liability in balance sheet 408 441 strategy to utilise deferred tax assets in Canada. No deferred tax liability has been recognised for the undistributed profi ts of Finnish subsidiaries and associated companies as, in most cases, such earnings are transferred to the Group without any tax con- sequences. In addition the Group does not recognise a deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are intended to be permanently reinvested in those operations.
F-32 Group ■ ACCOUNTS FOR 2008
PENSION BENEFITS The major categories of plan assets as a percentage of total plan assets The amounts recognised in the balance sheet As at 31 December 2008 2007 As at 31 December €m 2008 2007 Equity instruments 38% 43% Debt instruments 24% 32% Present value of funded obligations 543 803 Property 7% 6% Present value of unfunded obligations 351 373 Money market 5% 3% 894 1,176 Bonds 26% 16% Total 100% 100% Fair value of plan assets –573 –753 Unrecognised actuarial gains and losses –139 –132 Net liability 182 291 In Finland, the pension plan assets include the company’s ordinary shares with a fair value of € 1 million (2007: € 1 million). In 2007 assets included a loan receivable of € 72 million issued to the company The amounts recognised in the income statement by the company’s own fund. The loan receivable was settled in 2008. Year ended 31 December The interest paid on the loan in 2008 was € 2 million (2007: € 8 mil- €m 2008 2007 lion). Current service cost 14 23 Interest cost 57 55 Expected return on plan assets –49 –46 POST-EMPLOYMENT MEDICAL BENEFITS Actuarial gains and losses 12 8 Past service cost – 1 The Group also funds certain post-employment benefi ts in North Amer- Curtailments –3 –38 ica relating to retirement medical and life insurance programmes. Settlements – 41 Total included in personnel expenses (Note 7) 31 44 The amounts recognised in the balance sheet The actual return on plan assets was € –104 million in 2008 As at 31 December €m 2008 2007 (2007: € 39 million). Present value of unfunded obligations 24 27 Unrecognised actuarial gains and losses –5 –6 The movement in the present value of defi ned benefi t obligations Net liability 19 21 As at 31 December €m 2008 2007 The amounts recognised in the income statement Defi ned benefi t obligation as of beginning of the year 1,176 1,194 Year ended 31 December €m 2008 2007 Current service cost 14 23 Interest cost 57 55 Interest cost 1 2 Contributions by plan participants – 3 Actuarial gains and losses 1 1 Actuarial gains and losses –120 –15 Curtailments – –1 Benefi ts paid –85 –52 Settlements – 1 Curtailments –3 –43 Total included in personnel expenses (Note 7) 2 3 Settlements –59 28 Translation differences –86 –17 Defi ned benefi t obligation as of end of the year 894 1,176 The movement in the present value of defi ned benefi t obligations As at 31 December €m 2008 2007 The movement in the fair value of plan assets Defi ned benefi t obligation as of beginning of the year 27 33 As at 31 December Interest cost 1 2 €m 2008 2007 Contributions by plan participants 2 2 Fair value of plan assets as of beginning of the year 753 681 Actuarial gains and losses – –3 Expected return on plan assets 49 46 Benefi ts paid –4 –4 Actuarial gains and losses –153 8 Settlements –3 – Contributions by plan participants – 3 Translation differences 1 –3 Contributions by the employer 146 81 Defi ned benefi t obligation as of end of the year 24 27 Benefi ts paid –85 –52 Settlements –59 – Translation differences –78 –14 Fair value of plan assets as of end of the year 573 753
The contributions to Group’s defi ned benefi t pension plans are expected to be € 25 million in 2009.
F-33 ACCOUNTS FOR 2008 ■ Group
The movement in the fair value of plan assets As at 31 December €m 2008 2007 Fair value of plan assets as of beginning of the year – – Contributions by plan participants 2 2 Contributions by the employer 2 2 Benefi ts paid –4 –4 Fair value of plan assets as of end of the year – –
The contributions to Group’s post-employment medical benefi t plans are expected to be € 2 million in 2009.
PENSION AND POST-EMPLOYMENT MEDICAL BENEFITS
The principal acturial assumptions used as at 31 December Finland Canada Germany US UK Other 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 Discount rate % 5.50 5.00 4.68 4.62 5.50 5.00 6.25 5.40 6.70 5.80 5.50 5.00 Expected return on plan assets % 7.54 6.32 4.81 7.13 N/A N/A 4.50 4.50 6.96 6.70 4.37 4.41 Future salary increases % 3.75 3.75 N/A 2.04 2.50 2.50 N/A N/A N/A 4.04 2.29 2.63 Future pension increases % N/A N/A N/A – 2.00 2.00 N/A N/A 2.45 3.07 0.89 0.87 Expected average remaining working years of participants 12.1 12.1 – 0.1 13.8 14.2 9.4 11.4 17.3 17.3 12.0 13.1
For domestic plans, the overall expected return on plan assets is based The assumed health care cost trend rate used in measuring the on the weighted average of the expected returns on the different asset accumulated post-employment benefi t obligation for US plans was 11% categories held. For foreign plans, the assumption for the weighted in 2007, 10% in 2008, 8.7% in 2009 and then declining 0.2% per year average expected return on plan assets is based on target asset alloca- until it reaches 4.5% in 2029 and remaining at that level thereafter. tion of each plan, historical market performance, relevant forward- A one-percentage-point increase and decrease in assumed health looking economic analyses, expected returns, variances, and correla- care cost trend rates in the US would effect post-employment benefi t tions for different asset categories held. obligation by € 1 million and € –1 million, correspondingly.
The amounts of pension and post-employment medical benefi t plans recognised in the balance sheet as at 31 December 2008 €m Finland Canada Germany US UK Other Total Present value of funded obligations 227 136 – – 166 14 543 Present value of unfunded obligations – 12 296 24 – 43 375 Fair value of plan assets –256 –127 – – –179 –11 –573 Unrecognised actuarial gains and losses –92 – –6 –5 –38 –3 –144 Net liability –121 21 290 19 –51 43 201
The amounts of pension and post-employment medical benefi t plans recognised in the balance sheet as at 31 December 2007 €m Finland Canada Germany US UK Other Total Present value of funded obligations 249 219 – 28 293 14 803 Present value of unfunded obligations – 21 310 22 – 47 400 Fair value of plan assets –296 –187 – –26 –234 –10 –753 Unrecognised actuarial gains and losses –36 –3 –24 –4 –67 –4 –138 Net liability –83 50 286 20 –8 47 312
F-34 Group ■ ACCOUNTS FOR 2008
Funded status for pension and post-employment medical benefi t plans As at 31 December €m 2008 2007 2006 2005 Present value of defi ned benefi t obligations –918 –1,203 –1,227 –1,182 Fair value of plan assets 573 753 681 625 Defi cit –345 –450 –546 –557
Experience adjustments on plan liabilities 13 –21 –20 13 Experience adjustments on plan assets –153 8 20 21
30 PROVISIONS Closure and Environ- Actual restructuring Termination mental Reforestation Tax emissions, Other €m provisions provisions provisions provisions provisions provision provisions Total At 1 Jan. 2007 14 84 25 9 19 14 22 187 Translation difference – – – – – – –2 –2 Additional provisions and increases to existing provisions 14 38 3 – – – 9 64 Utilised during year –7 –20 –5 – –2 –6 –4 –44 Unused amounts reversed –3 –4 –2 – –17 –8 – –34 At 31 Dec. 2007 18 98 21 9 – – 25 171
At 1 Jan. 2008 18 98 21 9 – – 25 171 Translation difference –2 –6 –1 – – – –3 –12 Additional provisions and increases to existing provisions 32 45 2 – – 30 2 111 Utilised during year –14 –43 –5 –3 – – –10 –75 Unused amounts reversed – –3 –1 – – – – –4 At 31 Dec. 2008 34 91 16 6 – 30 14 191
Provisions 31 INTEREST-BEARING LIABILITIES Closure and restructuring provisions include charges related primarily As at 31 December to dismantling of closed mills. Termination provisions are concerned €m 2008 2007 with operational restructuring as well as unemployment arrangements Non-current interest-bearing liabilities and disability pensions primarily in Finland. The unemployment pen- Bonds 2,043 2,040 sion provisions have been recognised 2–3 years before the grant and Loans from fi nancial institutions 1,078 951 settlement of the pension. Environmental provisions include expenses Pension loans 919 65 relating to old mill sites and the remediation of industrial landfi lls. Trade payables 9 10 In 2008, increases in provisions relate mainly to the closures of the Finance lease liabilities 99 103 Kajaani paper mill and the Tervasaari pulp mill. Derivative fi nancial instruments 147 119 Other liabilities 239 96 In 2007, increases in provisions relate to the closure of the Miram- 4,534 3,384 ichi paper mill. Closure and restructuring provisions mainly relate to the demolition of the paper mill, and termination provisions include Current Interest-bearing liabilities severance and pension charges. Current portion of long-term debt 352 391 The company takes part in government programmes aimed at Short-term loans 50 71 reducing greenhouse gas emissions. In 2008, the Group has recognised Derivative fi nancial instruments 105 123 a provision amounting to € 30 million (2007: € 0 million) to cover the Other liabilities 1) 30 346 obligation to return emission allowances. The company possesses 537 931 emission allowances worth of € 31 million (2007: € 0 million) as intan- Liabilities related to assets classifi ed gible assets. as held for sale (Note 18) 2 – Total interest-bearing liabilities 5,073 4,315
1) € € As at 31 December Includes issued commercial papers of 0 million in 2008 (2007: 318 million). €m 2008 2007 Non-current provisions 100 76 Current provisions 91 95 Total 191 171
F-35 ACCOUNTS FOR 2008 ■ Group
As of 31 December 2008 the contractual maturity of interest-bearing liabilities €m 2009 2010 2011 2012 2013 2014+ Total Bonds Repayments 250 138 – 636 – 1,071 2,095 Interests 127 110 105 105 67 415 929 377 248 105 741 67 1,486 3,024 Loans from fi nancial institutions Repayments 46 29 43 37 72 211 438 Committed facilities – 253 – 434 – – 687 Interests 39 28 26 16 12 22 143 85 310 69 487 84 233 1,268 Pension loans Repayments 39 22 156 148 148 410 923 Interests 38 39 36 30 24 52 219 77 61 192 178 172 462 1,142 Financial leases Repayments 4 4 84 3 3 5 103 Interests 44411115 8888446118 Other loans Repayments 54443208228 Interests 8788893132 13 11 12 12 11 301 360 Interest rate swaps (liabilities) Repayments –––––107107 Interests 7578865100 75788172207 Current loans Repayments 74–––––74 Interests 1–––––1 75–––––75 Forwards and swaps (assets and liabilities) Pay 4,5213––––4,524 Receive –4,569–3–––––4,572 Net –48––––––48 Long term loans repayments excl. committed facilities 344 197 287 828 226 1,905 3,787
As of 31 December 2007 the contractual maturity of interest-bearing liabilities €m 2008 2009 2010 2011 2012 2013+ Total Bonds Repayments 89 250 59 – 636 1,166 2,200 Interests 135 130 114 109 108 487 1,083 224 380 173 109 744 1,653 3,283 Loans from fi nancial institutions Repayments 149 55 24 40 34 259 561 Committed facilities – – 54 – 484 – 538 Interests 49 46 42 37 20 40 234 198 101 120 77 538 299 1,333 Pension loans Repayments 145 40 15 8 – – 208 Interests 7 2 1 – – – 10 152 42 16 8 – – 218 Financial leases Repayments 4 4 4 84 3 8 107 Interests 44341218 88788410125 Other loans Repayments 21221127135 Interests 8555588116 106776215251 Interest rate swaps (liabilities) Repayments –––––7575 Interests 38889157193 38889232268 Current loans Repayments 417–––––417 Interests 3––––– 3 420–––––420 Forwards and swaps (assets and liabilities) Pay 4,10472––––4,176 Receive –4,128–67–––––4,195 Net –245–––––19 Long term loans repayments excl. committed facilities 389 350 104 134 674 1,560 3,211 Figures based on the exchange rates and interests on the reporting date.
F-36 Group ■ ACCOUNTS FOR 2008
Bonds in interest-bearing liabilities Finance lease liabilities Interest Nominal As at 31 Dec. As at 31 December 2008 the Group has one power plant acquired under rate value issued 2008 2007 sale and leaseback agreement. The Group uses the electrical power gen- % m €m €m erated by this plant in its own production. Payments of this power plant Fixed rate are due by the end of 2011. 1997–2027 7.450 USD 375 395 279 In December 2007, the Group exercised its option and redeemed 1999–2009 6.350 EUR 250 250 246 Kaipola power plant, which decreased lease liability by € 8 million. 2000–2030 3.550 JPY 10,000 48 7 In addition the Group leases certain tangible assets under long-term 2002–2012 6.125 EUR 600 619 589 arrangements. 2002–2014 5.625 USD 500 393 326 Other interest-bearing liabilities include a loan of € 50 million 2002–2017 6.625 GBP 250 284 330 based on a sale and leaseback arrangement, which does not involve a 2003–2018 5.500 USD 250 209 166 2,198 1,943 lease in substance, of specifi ed plywood production machinery and equipment in Finland. The lease period is eight years without any Floating-rate 2002–2008 5.631 EUR 39 – 39 restrictions on the manufacturing use of the assets. 2002–2008 5.387 EUR 50 – 50 2002–2010 6.273 EUR 59 59 59 Finance lease liabilities – minimum lease payments 2002–20126.044EUR252525 2002–2012 4.152 EUR 11 11 11 As at 31 December €m 2008 2007 95 184 Bonds, total 2,293 2,127 Not later than 1 year 8 8 – current portion –250 –87 1–2 years 8 8 Bonds, long-term portion 2,043 2,040 2–3 years 88 7 3–4 years 4 88 4–5 years 4 4 Fair value hedge of the long-term interest-bearing liabilities Later than 5 years 6 10 Fair value hedge accounting in accordance with IAS 39 results in a 118 125 Future fi nance charges –15 –18 cumulative fair value adjustment totalling € 275 million (2007: € 83 Finance lease liabilities – the present value million), which has increased (2007 decreased) the carrying amounts of minimum lease payments 103 107 of the liabilities.
Interest rate variation of interest-bearing liabilities and Finance lease liabilities – the present value of minimum interest rate swaps lease payments Loans from fi nancial insitutions, pension loans and fi nance lease liabil- As at 31 December ities bear fi xed or fl oating interest rates varying from 0.70% to 7.50% €m 2008 2007 as at 31 December 2008 (2007: 3.55% to 7.50%). The Group uses Not later than 1 year 8 8 interest rate swap agreements to hedeg the intereste rate risk relating to 1–2 years 7 7 long term loans. At 31 December 2008, the fi xed interest rates varied 2–3 years 77 6 from 3.35% to 7.45% (2007: 3.55% to 7.45%) and the fl oating rates 3–4 years 3 75 varied from 1.86% to 7.37% (2007: 3.51% to 7.65%). 4–5 years 3 3 Later than 5 years 5 8 NET INTEREST-BEARING LIABILITIES Total 103 107 As at 31 December €m 2008 2007 32 OTHER LIABILITIES Interest-bearing liabilities, total 5,073 4,315 As at 31 December €m 2008 2007 Interest-bearing fi nancial assets Non-current Derivative fi nancial instruments 18 – Loan receivables 9 9 Other 7 12 Derivative fi nancial instruments 345 66 Total 25 12 Other receivables 5 6 359 81 Current Loan receivables 8 6 Other receivables 12 9 Derivative fi nancial instruments 43 9 Cash and cash equivalents 330 237 393 261 Interest-bearing fi nancial assets 752 342
Net interest-bearing liabilities 4,321 3,973
F-37 ACCOUNTS FOR 2008 ■ Group
33 TRADE AND OTHER PAYABLES Main items included in accrued expenses As at 31 December and deferred income €m 2008 2007 As at 31 December €m 2008 2007 Advances received 14 47 Trade payables 594 725 Personnel expenses 194 195 Amounts due to associates and joint ventures 25 39 Interest expenses 79 78 Accrued expenses and deferred income 450 498 Indirect taxes 11 16 Derivative fi nancial instruments 83 33 Other items 1) 166 209 Other current liabilities 92 101 Total 450 498 Total 1,258 1,443 1) Consists mainly of customer rebates. Trade and other payables mature within 12 months.
34 CARRYING AMOUNTS OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORIES, AS DEFINED IN IAS 39, AND FAIR VALUES Financial Financial assets/ Available liabilities Carrying liabilities at fair for sale Derivatives measured at amounts 2008 value through Loans and fi nancial used for amortised by balance Balance sheet item profi t or loss receivables assets hedging cost sheet item Fair value Note Non-current fi nancial assets Available-for-sale investments – – 116 – – 116 116 22 Non-current fi nancial assets Loan receivables – 16 – – – 16 16 23 Derivative fi nancial instruments4––341–34534523 361 361 Current fi nancial assets Trade and other receivables Trade and other receivables–1,363–––1,3631,36326 Prepayments and accrued income – 54 – – – 54 54 26 Derivative fi nancial instruments154––115–26926926 1,686 1,686
Carrying amount by category 158 1,433 116 456 – 2,163 2,163
Non-current fi nancial liabilities Non-current interest-bearing liabilities Non-current interest-bearing liabilities – – – – 4,387 4,387 3,867 31 Derivative fi nancial instruments 116 – – 31 – 147 147 31 4,534 4,014 Other liabilities Other liabilities ––––77732 Derivative fi nancial instruments18––––181832 25 25 Current fi nancial liabilities Current interest-bearing liabilities Interest-bearing liabilities – – – – 432 432 432 31 Derivative fi nancial instruments105––––10510531 537 537 Trade and other payables Trade and other payables – – – – 725 725 725 33 Accrued expenses and deferred income – – – – 450 450 450 33 Derivative fi nancial instruments 35 – – 48 – 83 83 33 1,258 1,258
Carrying amount by category 274 – – 79 6,001 6,354 5,834
F-38 Group ■ ACCOUNTS FOR 2008
Financial Financial assets/ Available liabilities Carrying liabilities at fair for sale Derivatives measured at amounts 2007 value through Loans and fi nancial used for amortised by balance Balance sheet item profi t or loss receivables assets hedging cost sheet item Fair value Note Non-current fi nancial assets Available-for-sale investments – – 116 – – 116 116 22 Non-current fi nancial assets Loan receivables – 15 – – – 15 15 23 Derivative fi nancial instruments1– –66–676723 82 82 Current fi nancial assets Trade and other receivables Trade and other receivables–1,504–––1,5041,50426 Prepayments and accrued income–76–––767626 Derivative fi nancial instruments 72 – – 65 – 137 137 26 1,717 1,717
Carrying amount by category 73 1,595 116 131 – 1,915 1,915
Non-current fi nancial liabilities Non-current interest-bearing liabilities Non-current interest-bearing liabilities – – – – 3,265 3,265 3,388 31 Derivative fi nancial instruments 30 – – 89 – 119 119 31 3,384 3,507 Other liabilities Other liabilities – – – – 12 12 12 32 Derivative fi nancial instruments–––––––32 12 12 Current fi nancial liabilities Current interest-bearing liabilities Interest-bearing liabilities – – – – 808 808 808 31 Derivative fi nancial instruments 123 – – – – 123 123 31 931 931 Trade and other payables Trade and other payables – – – – 912 912 912 33 Accrued expenses and deferred income – – – – 498 498 498 33 Derivative fi nancial instruments 17 – – 16 – 33 33 33 1,443 1,443
Carrying amount by category 170 – – 105 5,495 5,770 5,893
Fair values of long-term loans, have been estimated as follows: The fair value of the quoted bonds is based on the quoted market value as of 31 December. The fair value of fi xed rate and market-based fl oating rate loans is estimated using the expected future payments discounted at market interest rates. The carrying amounts of current fi nancial assets and liabilities approximate their fair value.
F-39 ACCOUNTS FOR 2008 ■ Group
35 DERIVATIVE FINANCIAL INSTRUMENTS Group Name of the subsidiary, country of incorporation holding % Net fair values of derivative fi nancial instruments UPM-Kymmene Kagit Urunleri San. ve Tic Ltd. Sti., TR 100.00 As at 31 December UPM-Kymmene Miramichi Inc., CA 100.00 2008 2008 2008 2007 UPM-Kymmene NV/SA, BE 99.60 Positive Negative Net fair Net fair UPM-Kymmene Otepää AS, EE 100.00 €m fair values fair values values values OOO UPM-Kymmene Pestovo, RU 100.00 Interest rate swaps UPM-Kymmene Papier GmbH & Co. KG, DE 100.00 Fair value hedges 323 –1 322 66 UPM-Kymmene Plywood S.A.S., FR 100.00 Held for trading 49–14848UPM-Kymmene Pty. Ltd, AU 100.00 Forward foreign exchange UPM-Kymmene Sales GmbH, DE 100.00 contracts UPM-Kymmene Seven Seas Oy, FI 100.00 Cash fl ow hedges 66 –48 18 49 UPM-Kymmene Sp.z o.o., PL 100.00 Net equity hedges 45 – 45 – UPM-Kymmene S.A., ES 100.00 Held for trading 84 –96 –12 –39 UPM-Kymmene S.r.l., IT 100.00 Currency options UPM-Kymmene Wood AB, SE 100.00 Held for trading – – – 2 UPM-Kymmene Wood A/S, DK 99.93 Cross currency swaps UPM-Kymmene Wood B.V., NL 100.00 Fair value hedges 22 –30 –8 –89 UPM-Kymmene Wood GmbH, DE 100.00 Held for trading – –142 –142 –109 UPM-Kymmene Wood Oy, FI 100.00 Commodity Contracts UPM-Kymmene Wood S.A., ES 100.00 Held for trading 25 –35 –10 1 UPM-Kymmene Wood S.A., FR 99.99 Interest rate forward UPM-Kymmene (Changshu) Paper Industry Co. Ltd, CN 100.00 contracts UPM-Kymmene (UK) Ltd, GB 100.00 Held for trading – – – – UPM Rafl atac Canada Inc., CA 100.00 Total 614 –353 261 –71 UPM Rafl atac CZ s.r.o., CZ 100.00 UPM Rafl atac GmbH, DE 100.00 Notional amounts of derivative fi nancial instruments UPM Rafl atac Iberica S.A., ES 100.00 UPM Rafl atac Inc., US 100.00 As at 31 December €m 2008 2007 PT UPM Rafl atac Indonesia, ID 100.00 UPM Rafl atac Kft., HU 100.00 Interest rate swaps 2,833 2,383 UPM Rafl atac Ltd, GB 100.00 Forward foreign exchange contracts 4,598 4,369 UPM Rafl atac Mexico S.A. de C.V., ME 100.00 Currency options – 110 UPM Rafl atac NZ Limited, NZ 100.00 Cross currency swaps 508 529 UPM Rafl atac Oy, FI 100.00 Commodity contracts 258 15 UPM Rafl atac Polska Sp.z o.o., PL 100.00 Interest rate forward contracts 2,668 3,642 UPM Rafl atac South Africa (Pty) Ltd, ZA 100.00 UPM Rafl atac S.A.S., FR 100.00 UPM Rafl atac Sdn. Bhd., MY 100.00 36 PRINCIPAL SUBSIDIARIES AS AT 31 DECEMBER 2008 UPM Rafl atac Pty Ltd, AU 100.00 Group UPM Rafl atac Co., Ltd, TH 100.00 Name of the subsidiary, country of incorporation holding % UPM Rafl atac (Changshu) Co. Ltd, CN 100.00 Blandin Paper Company, US 100.00 UPM Rafl atac (S) Pte Ltd, SG 100.00 Lignis GmbH & Co. KG, DE 74.90 Werla Insurance Company Ltd, GB 100.00 Nordland Papier GmbH, DE 100.00 € Norfolk House Management Ltd, GB 95.00 The table includes subsidiaries with sales exceeding 2 million. NorService GmbH, DE 100.00 nortrans Speditionsgesellschaft mbH, DE 100.00 37 SHARE-BASED PAYMENTS Silvesta Oy, FI 100.00 Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT 100.00 Share options granted to key personnel ZAO Tikhvinsky Komplexny Lespromkhoz, RU 99.99 Tilhill Forestry Ltd, GB 100.00 As authorised by the Annual General Meeting of 19 March 2002, UPM Sähkönsiirto Oy, FI 100.00 E options have been issued to key personnel. A total of 3,800,000 were OOO UPM-Kymmene, RU 100.00 designated as 2002E. Each option entitles the holder to subscribe two UPM-Kymmene AG, CH 99.80 UPM-Kymmene Corporation shares. The subscription period 2002E UPM-Kymmene Asia Pacifi c Pte Ltd, SG 100.00 options was 1 April 2005 to 30 April 2008. UPM-Kymmene Austria GmbH, AT 100.00 The share subscription price was € 14.27 per share for 2002E UPM-Kymmene B.V., NL 100.00 options. The share subscription price has been be reduced by the OOO UPM-Kymmene Chudovo, RU 100.00 amount of dividend confi rmed after the end of the subscription price UPM-Kymmene Forest AS, EE 100.00 determination period and before the date of share subscription, in each OOO UPM-Kymmene Forest Russia, RU 100.00 case on the record date for dividend distribution. The share subscription UPM-Kymmene France S.A.S., FR 100.00 period for stock options 2002E ended on 30 April 2008. During the UPM-Kymmene Inc., US 100.00 entire share subscription period, a total of 3,703,834 stock options UPM-Kymmene India PVT Ltd, IN 100.00 2002E were used for the subscription of 7,407,668 shares. UPM-Kymmene Japan K.K., JP 100.00
F-40 Group ■ ACCOUNTS FOR 2008
The Annual General Meeting held on 31 March 2005 approved the and they will entitle to subscribe in total no more than 15,000,000 new Board of Directors’ proposal to issue share options to the Group’s key shares of the company. Of the share options, 5,000,000 shall be marked personnel. The number of share options is 9,000,000 and these can be with the symbol 2007A, 5,000,000 shall be marked with the symbol exercised to subscribe a maximum total of 9,000,000 UPM-Kymmene 2007B and 5,000,000 shall be marked with the symbol 2007C. The Corporation shares. A total of 3,000,000 of the share options are desig- subscription periods shall be 1 October 2010 to 31 October 2012 for nated 2005F, 3,000,000 2005G and 3,000,000 2005H. The subscription share options 2007A, 1 October 2011 to 31 October 2013 for share periods are 1 October 2006 to 31 October 2008 for 2005F options, options 2007B, and 1 October 2012 to 31 October 2014 for share 1 October 2007 to 31 October 2009 for 2005G options, and 1 October options 2007C. 2008 to 31 October 2010 for 2005H options. The share subscription price shall be the trade volume weighted The subscription price for 2005F share options was the average average quotation of the share on the NASDAQ OMX Helsinki Ltd, trade-weighted price for the company’s share on the Helsinki stock during 1 April to 31 May 2008 for share option 2007A i.e. € 12.40 per exchange between 1 January and 28 February 2005 plus 10 %, i.e. share, during 1 April to 31 May 2009 for share option 2007B, and € 18.23 per share. The subscription price for 2005G options is the during 1 April to 31 May 2010 for share option 2007C. average trade-weighted share price between 1 January and 28 February In January 2009, a total of 4,590,000 2007A options were granted 2006 plus 10%, i.e. € 18.65 per share, and that for 2005H options the to the Group’s key personnel. average trade-weighted share price between 1 January and 28 February 2007 plus 10%, i.e. € 21.65 per share. The share subscription prices Equity-based rewards scheme will be reduced by the amount of dividend confi rmed after the end of Key personnel of the Group who fall within the scope of the share the subscription price determination period and before the date of share ownership rewards scheme may be rewarded with UPM-Kymmene subscription, in each case on the record date for dividend distribution. shares annually in the calendar years 2005, 2006 and 2007. The reward The share subscription period for stock options 2005F ended on will be paid in the next year as a combination of shares and cash. Alto- 31 October 2008. During the entire share subscription period a total of gether not more than 1,046,400 shares will be given to key personnel 4,000 stock options 2005F were used for the subscription of 4,000 on the basis of the scheme. The amount to be paid in cash may be not shares. more than 1.5 times the value of the shares given. The amount of the Share subscriptions based on 2005G and 2005H options may reward is tied to the achievement of set performance targets. increase the number of shares by a total maximum of 6,000,000. In 2008, a total of 57,400 shares were given to 12 key employees The Annual General Meeting held on 27 March 2007 approved the under the terms and conditions of the share ownership rewards scheme. Board of Directors’ proposal to issues share options to the Group’s key Of this amount, 15,800 shares were given to the President and CEO, personnel. The number of options may not be more than 15,000,000 and a total of 26,800 shares to the other Executive Team members.
Changes in the numbers of share options granted 2008 2007 Weighted average Number of Weighted average Number of exercise price, € share options exercise price, € share options 1 Jan. 15.91 12,285,750 15.80 10,305,550 Share options granted 20.15 254,500 18.98 5,622,000 Share options forfeited 20.15 –124,000 17.93 –12,000 Share options exercised 10.53 –3,691,884 37.15 –2,853,945 Share options expired 15.13 –2,986,366 37.15 –775,855 31 Dec. 18.28 5,738,000 15.91 12,285,750 Exercisable share options 5,738,000 9,544,250
Weighted average remaining contractual life was 16 and 17 months as at 31 December 2008 and 2007, respectively.
Outstanding share option plans as at 31 December 2008
1) Plan/Distribution Exercise price Total number of Number of share Vesting 1) of share options Class at 1 Jan. at 31 Dec. share options options granted Exercise period schedule 2005/2007 H 20.90 20.15 3,000,000 2,872,000 1.10.2008–31.10.2010 Vested 2005/2007 G 17.15 16.40 3,000,000 2,866,000 1.10.2007–31.10.2009 Vested 6,000,000 5,738,000
1) Vesting periods range from 6 to 24 months.
F-41 ACCOUNTS FOR 2008 ■ Group
The Black-Scholes valuation model and the following weighted aver- the power companies are based on production costs, which are gener- age assumptions are used in measuring the fair value of share options ally lower than market prices. Internal sales to the Group’s segments issued in 2008 and 2007: are based on the prevailing market price. 2008 2007 Approximately 10% of the Group’s research and development work Share price, € 13.99 16.79 is conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab Exercise price, € 20.15 19.74 (“KCL”), (the Finnish Pulp and Paper Research Institute or “FPPRI”), Volatility 1) 25% 24% in which the Group is one of four corporate owners with a 38.65% Risk-free interest rate 4% 3.95% interest. Ownership of FPPRI provides the Group with fundamental Assumed annual dividend yield – – research information regarding the Group’s main raw materials, major Expected option life, year 2 3 manufacturing processes and key product attributes. In addition to joint 1) Volatility is a measure of price changes expressed in terms of the standard devia- research at FPPRI, the Group also utilises the institute for contract tion of the price of the security in question over the period of analysis. In the research in connection with product and process development. These calculations the volatility is based on three- and four-year periods. Volatility is services are provided on an arm’s length basis and upon terms that the reported as an annual percentage fi gure. Group believes to be customary within the industry and generally no Assumed forfeiture used in 2008 and 2007 was 5%. less favourable than would be available from independent third parties. On 4 February 2009, FPPRI and Technical Research Centre of Finland 38 RELATED PARTY TRANSACTIONS (“VTT”) signed a letter of intent to integrate the research and labora- tory operations of FPPRI to VTT. The Board of Directors and the Executive Team The Group purchases recovered paper partially from the following There have not been any material transactions between UPM and its three associated companies. LCI s.r.l. is an Italian recovered paper members of the Board of Directors or the Executive Team or close purchasing company in which the Group has a 50% interest. The total members of their families. There are no loans granted to any members value of recovered paper purchases from LCI was € 25 million in 2008 of the Board of Directors or the Executive team at 31 December 2008 and € 15 in 2007. In Finland the Group has a 22,98% interest in and 2007. Shares and options held by the Board of Directors and the Paperinkeräys Oy, a company engaged in the procurement, processing Executive Team are disclosed in page 123. Compensation to the Board and transport of recovered paper. The total value of raw material pur- of Directors and the Executive Team are disclosed in Note 7. chases from Paperinkeräys Oy was € 12 million in 2008 and € 13 million in 2007. Recovered paper is sold to the Group and other share- Associated companies and joint ventures holders of Paperinkeräys Oy at a contract-based price that takes into The Group holds a 47% interest in Oy Metsä-Botnia Ab account paper recycling expenses and the world market prices for (“Metsä-Botnia”), an associated company with M-real Oyj (“M-real”) recovered paper. In Austria, the Group has a similar arrangement con- and Metsäliitto Group. M-real is a Finnish paper and board producer, cerning recovered paper which is purchased from Austria Papier Recy- and Metsäliitto Group is a co-operative organisation of Finnish forest cling G.m.b.H., a company in which the Group owns a 33.3% equity owners. Metsäliitto Group is also the controlling shareholder of M-real. interest. The total value of recovered paper purchases was € 16 million Chemical pulp produced by Metsä-Botnia is sold to the Group and to in 2008 and € 16 million in 2007. M-real at the market price less certain transportation and other costs. In The Group’s associated companies and joint ventures and transac- 2008, the Group’s chemical pulp entitlement with respect to the pro- tions and balances with associated companies and joint ventures are duction of Metsä-Botnia was 1.8 million tonnes per year (2007: 1.1 presented in Note 21. million tonnes). Following the closure of the Kaskinen pulp mill announced on 14 January 2009, UPM’s entitlement will be 1.6 million Pension Funds tonnes. Total purchases of chemical pulp from Metsä-Botnia amounted In Finland, UPM has a pension foundation (Kymin Eläkesäätiö) which to € 287 million in 2008 and € 231 million in 2007. In 2007, is a separate legal entity. The pensions of about 9% of the Group’s Metsä-Botnia completed the construction of a new pulp mill in Uru- Finnish employees are arranged through the foundation. The contribu- guay. The total cost of the project was about USD 1.2 billion. The tions paid by UPM to the foundation amounted to € 47 million in 2008 annual capacity of the mill will be approximately one million tonnes of (€ 50 million in 2007). The foundation manages and invests the contri- bleached eucalyptus pulp. UPM has invested € 98 million in the pulp butions paid to the plan. The fair value of the foundation’s assets at 31 mill project. December 2008 was € 222 million, of which 45% was in the form of The Group obtains most of the energy for its production units in equity instruments, 35% in the form of debt instruments and 20% Finland from the Group’s owned and leased power plants, as well as invested in property and money market. through ownership in power companies which entitles it to receive The Group participates in two UK Pension Schemes which are electricity and heat from those companies. A signifi cant proportion of separate legal entities, one consisting of various defi ned benefi t sec- the Group’s electricity procurement comes from Pohjolan Voima Oy, a tions plus a defi ned contribution section and the other a defi ned benefi t Finnish energy producer in which the Group holds a 41.84% equity section only. Both Defi ned Benefi t Schemes were closed to future interest, and from Kemijoki Oy, a Finnish hydropower producer in accrual as at 31 December 2007 and all active members as at that date which the Group holds a 4.13% equity interest. Pohjolan Voima Oy is became deferred members and were invited to join the Group’s only also a majority shareholder in Teollisuuden Voima Oy, one of Finland’s UK Defi ned Contribution Pension Scheme. The contributions paid by two nuclear power companies. The combined total of these energy the Group to the Defi ned Benefi t Schemes amounted to GBP 44 mil- purchases was € 222 million in 2008 and € 207 million in 2007. In lion in 2008 (GBP 6 million in 2007) to fully fund both Defi ned Benefi t accordance with the articles of association of the power companies and schemes to IAS 19 funding levels as at 31 December 2007. The fair with related shareholder agreements, the prices paid by the Group to value of the funds assets at 31 December 2008 was GBP 171 million,
F-42 Group ■ ACCOUNTS FOR 2008
of which 58% was invested in equity instruments, 33% in bonds and Commitments UK government bonds and 9% in property and money market invest- As at 31 December ments. €m 2008 2007 On own behalf Subsidiaries Mortgages1) 787 90 The Group’s principal subsidiaries are disclosed in Note 36. On behalf of associated companies and joint ventures 39 COMMITMENTS AND CONTINGENCIES Guarantees 10 10
Contingent liabilities On behalf of others Guarantees 2 3 The Group is a defendant or plaintiff in a number of legal proceedings incidental to its operations. These lawsuits primarily involve claims Other commitments, own arising out of commercial law issues. Operating leases, due within 12 months 17 21 Certain competition authorities are continuing investigations into Operating leases, due after 12 months 56 99 alleged antitrust activities with respect to various products of UPM. The Other commitments 62 70 authorities have granted UPM conditional full immunity with respect to Total 934 293 certain conduct disclosed to them. UPM has settled or agreed to settle the class-action lawsuits in the US except for those fi led by indirect purchas- Mortgages 787 90 ers of labelstock. The remaining litigation matters may last several years. Guarantees 12 13 No provisions have been made in relation to these investigations Operating leases 73 120 Other commitments 62 70 Commitments Total 934 293 In the normal course of business, UPM-Kymmene Corporation and 1) The increase in mortgages relates mainly to giving mandatory security for borrow- some of its subsidiaries enter into various agreements providing fi nan- ing from Finnish pension insurance companies. cial or performance assurance to third parties on behalf of those sub- sidiaries. These agreements are entered into primarily to support or Property under mortgages given as collateral for own commitments enhance the creditworthiness of subsidiaries so that they can accom- include property, plant and equipment, industrial estates and forest plish their intended business purposes. The maximum amount of future land. payments for which UPM-Kymmene Corporation is liable on behalf of its subsidiaries are disclosed in the table below under “Other commit- Commitments related to associated companies and joint ventures ments”. The Group has also entered into various agreements to provide As at 31 December €m 2008 2007 fi nancial or performance assurance to third parties on behalf of certain companies in which the Group has a minority interest. These agree- Proportionate interest in joint ventures’ commitments 22 22 ments are entered into primarily to support or enhance the creditworthi- Contingent liabilities relating to the Group’s interest in the joint ventures 8 9 ness of these companies. The Group has no collateral or other recourse Share of associated companies contingent liabilities1) 239 218 provisions related to these guarantees. The maximum amounts of future payments by UPM-Kymmene Corporation on behalf of its associated 1) Includes mortgages of € 32 million (37 million) pledges € 42 million (59 million) € € companies under these guarantees are disclosed in the table below operating leases 156 million (112 million) and other commitments 9 million (10 million). under “Guarantees on behalf of associated companies”. It is the Group’s policy not to give guarantees on behalf third parties, and the Operating lease commitments – commitments included under the caption “Guarantees on behalf of where a Group company is the lessee others” in the table relate mainly to companies that have been sold. The Group leases offi ce, manufacturing warehouse space and vessels In the normal course of business, certain subsidiaries of under time charter agreements under various non-cancellable operating UPM-Kymmene Corporation, especially in Germany, grant commercial leases. Certain contracts contain renewal options for various periods of guarantees to their customers to help them purchase goods from the time. subsidiary. The Group has no liability with respect to these commercial guarantees, but they are covered by its credit risk insurance. These guarantees mature within one year. The maximum potential amount of The future costs for contracts exceeding one year and for future payments under these guarantees amounted to € 13 million at non-cancellable operating lease contracts 31 December 2008 and € 13 million at 31 December 2007 They are As at 31 December €m 2008 2007 included in the amounts disclosed in the table under “Other commit- ments”. Not later than 1 year 17 21 1–2 years 17 28 2–3 years 13 21 3–4 years 11 18 4–5 years 9 14 Later than 5 years 6 18 Total 73 120
F-43 ACCOUNTS FOR 2008 ■ Group
Capital commitments at the balance sheet date but not recognised 40 EVENTS AFTER THE BALANCE SHEET DATE in the fi nancial statements; major commitments under construction listed below On 14 January 2009, UPM’s associated company Oy Metsä-Botnia Ab Commitment announced the permanent closure of the Kaskinen pulp mill in the fi rst as at 31 December quarter of 2009. The special charges resulting from the closure will € m Total cost 2008 2007 reduce UPM’s associated company results by approximately € 27 mil- Rebuild of debarking plant, Wisaforest 30 29 – lion in the fi rst quarter of 2009. UPM’s share in Oy Metsä-Botnia Ab is Waste water treatment plant, Blandin 17 17 – 47%. New Bioboiler, Caledonian 75 16 64 On 15 January 2009, UPM sold its former paper mill and related 9 Effi ciency improvement, Chudovo 9–assets in Miramichi, New Brunswick, Canada, to Umoe Solar AS of Gas usage reduction, Schwedt 9 79 Norway. The sale includes the closed paper mill site, woodlands opera- tions, and two sawmills located nearby in Bathurst and Blackville. UPM records an income of approximately € 20 million on the sale as a special item in the fi rst quarter of 2009. The Group’s management is not aware of any other signifi cant events occurring after 31 December 2008.
F-44 Parent Company ■ ACCOUNTS FOR 2008
Parent company accounts (Finnish Accounting Standards, FAS)
INCOME STATEMENT CASH FLOW STATEMENT Year ended 31 Dec. Year ended 31 Dec. €mNote2008 2007 €m 2008 2007 Turnover 1) 4,738 4,775 Operating activities Change in inventories of fi nished goods and work Profi t (loss) before extraordinary items –21 –528 in progress –54 98 Financial income and expenses 70 70 Production for own use 19 33 Adjustments to operating profi t a) 533 1,174 Other operating income 2) 55 164 Change in working capital b) –167 –219 Materials and services Interest paid –231 –212 Materials and consumables Dividends received 56 24 Purchases during the fi nancial period –2,808 –2,747 Interest received 64 103 Change in inventories 110 52 Other fi nancial items 177 –216 External services –349 –364 Income taxes paid c) –21 –107 –3,047 –3,059 Net cash from operating activities 460 89 Personnel expenses Wages and salaries 3) –479 –459 Investing activities Social security expenses Investments in tangible and intangible assets –303 –429 Pension expenses –125 –112 Proceeds from sale of tangible and intangible assets 49 33 Other social security expenses –45 –46 Investments in shares and holdings –14 –15 –649 –617 Proceeds from sale of shares and holdings 185 190 Depreciation and value adjustments 4) Increase in other investments – –5 Depreciation according to plan –342 –335 Decrease in other investments 25 154 Value adjustments to goods held as Net cash used in investing activities –58 –72 non-current assets –184 9 –526 –326 Financing activities Other operating costs and expenses –487 –1,526 Increase in non-current liabilities 940 932 Operating profi t (loss) 49 –458 Decrease in non-current liabilities –565 –738 Increase or decrease in current liabilities –396 343 Financial income and expenses Dividends paid –384 –392 Income from investments held as non-current assets Group contributions, received and paid 49 37 Income from Group companies 39 17 Purchases of own shares – –266 Income from participating interest companies 18 23 Share options exercised 78 104 Interest income from Group companies 15 42 Net cash used in fi nancing activities –278 20 Other interest and fi nancial income Other interest income from Group companies 38 61 Cash and cash equivalents Other interest income from other companies 7 2 Change in cash and cash equivalents 124 37 Other fi nancial income from Group Cash and cash equivalents at the beginning of the year 153 116 companies 137 – Cash and cash equivalents at year-end 277 153 Other fi nancial income from other companies 11 55 Interest and other fi nancial expenses Interest expenses paid to Group companies –38 –43 Notes to the cash fl ow statement Interest expenses paid to other companies –206 –169 Other fi nancial expenses paid to Group a) Adjustments to operating profi t companies – –53 Depreciation 342 335 Other fi nancial expenses paid to other Gains and losses on sale of non-current assets –30 862 companies –91 –5 Value adjustments on non-current assets 184 –9 –70 –70 Change in provisions 37 –14 Profi t (loss) before extraordinary items –21 –528 Total 533 1,174
Extraordinary items 5) b) Change in working capital Extraordinary income 19 78 Inventories –46 –130 Extraordinary expenses –14 –13 Current receivables –21 –198 565 Current non-interest-bearing liabilities –100 109 Profi t (loss) before appropriations and taxes –16 –463 Total –167 –219
Appropriations c) Taxes stemming from extraordinary items and sales of non-current Increase or decrease in accumulated assets are reported here on a net basis. depreciation difference 195 45 Income taxes 6) –42 –116 Profi t (loss) for the fi nancial period 137 –534
F-45 ACCOUNTS FOR 2008 ■ Parent Company
BALANCE SHEET As at 31 December As at 31 December €mNote2008 2007 €mNote2008 2007
ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders’ equity 11) Intangible assets 7) Share capital 890 890 Intangible rights 8 7 Revaluation reserve 551 551 Other capitalised expenditure 198 219 Reserve for invested non-restricted equity 1,145 1,067 Advance payments 27 7 Retained earnings 1,748 2,667 233 233 Profi t (loss) for the fi nancial period 137 –534 Total equity 4,471 4,641 Tangible assets 8) Land and water areas 1,039 1,037 Appropriations Buildings 565 591 Accumulated depreciation difference 969 1,165 Machinery and equipment 1,576 1,592 Other tangible assets 73 60 Provisions 12) Advance payments and construction Provisions for pensions 52 52 in progress 16 238 Other provisions 59 22 3,269 3,518 111 74
Investments 9) Non-current liabilities 13) Holdings in Group companies 4,184 3,422 B o n d s 1,8 4 5 2,111 Receivables from Group companies 48 635 Loans from fi nancial institutions 967 821 Holdings in participating interest Pension loans 793 62 companies 648 636 Advances received 1 1 Other shares and holdings 173 173 Payables to Group companies 21 – Other receivables 10 10 Other liabilities 166 127 5,063 4,876 Total non-current liabilities 3,793 3,122 Total non-current assets 8,565 8,627 Current liabilities 14) Current assets Bonds 250 89 Inventories Loans from fi nancial institutions 2 55 Raw materials and consumables 357 246 Pension loans 39 143 Finished products and goods 309 363 Advances received 5 8 Advance payments 60 71 Trade payables 231 292 726 680 Payables to Group companies 1,089 1,210 Payables to participating interest Current receivables 10) companies 26 40 Trade receivables 80 95 Other liabilities 54 394 Receivables from Group companies 1,578 1,843 Accruals and deferred income 340 293 Receivables from participating Total current liabilities 2,036 2,524 interest companies 30 25 Other receivables 37 65 Total liabilities 5,829 5,646 Prepayments and accrued income 87 38 1,812 2,066
Cash and cash equivalents 277 153 Total current assets 2,815 2,899
Total assets 11,3 8 0 11, 526 Total equity and liabilities 11,3 8 0 11, 526
F-46 Parent Company ■ ACCOUNTS FOR 2008
Notes to the parent company fi nancial statements
(All amounts in millions of euros unless otherwise stated.)
Accounting policies 5 EXTRAORDINARY ITEMS The fi nancial statements of the parent company are prepared in accord- €m 2008 2007 ance with Finnish Accounting Standards. Main differences in account- Extraordinary income ing policies between the Group and the parent company relate to meas- Group contributions 19 63 urement of derivative fi nancial instruments and biological assets and Gains on mergers – 15 recognition of defi ned benefi t obligations, revaluations and deferred Total 19 78 income taxes. See Notes to the consolidated accounts, Note 1. Extraordinary expenses Group contributions –14 –12 1 TURNOVER Losses on mergers – –1 Owing to the corporate structure of the Group, the turnover of the –14 –13 parent company has not been broken down by division and market. Total 565
2 OTHER OPERATING INCOME 6 INCOME TAXES €m 2008 2007 €m 2008 2007 Gains on sale of non-current assets 35 153 Taxes on operating income for the fi nancial period 44 117 Rental income 14 10 Income taxes from previous periods –2 –1 Gains on sale of emission allowances 1) 5–Total 42 116 Other 1 1 Total 55 164 Deferred tax assets and liabilities 1) Emissions trading rights are accounted for on a net basis. Deferred income tax assets and liabilities of the parent company are not recorded on the balance sheet. Deferred tax liability comprises mainly depreciation differences, 3 PERSONNEL EXPENSES for which the deferred tax liability at 31 December 2008 was € 252 €m 2008 2007 million (€ 303 million). Wages and salaries Deferred tax liability is not stated separately for revaluations. The Managing director and members of potential tax liability arising from the sale of revalued assets is € 184 the Board of Directors 2) 33million (€ 184 million). Other wages and salaries 476 456 Total 479 459 7 INTANGIBLE ASSETS 2) See Notes to the consolidated accounts, Note 7. €m 2008 2007 2008 2007 Intangible rights Average number of personnel 9,420 9,552 Acquisition cost at 1 Jan. 16 14 Increases 25 5 Owing to the corporate structure of the Group, average number of Decreases –23 –1 personnel has not been broken down by segments. Transfers between balance sheet items – –2 Acquisition cost at 31 Dec. 18 16 Accumulated depreciation at 1 Jan. –9 –8 4 DEPRECIATION ACCORDING TO PLAN AND Accumulated depreciation on decreases and transfers 1 – VALUE ADJUSTMENTS Depreciation for the period –2 –1 Accumulated depreciation at 31 Dec. –10 –9 €m 2008 2007 Book value at 31 Dec. 8 7 Depreciation according to plan Intangible rights 2 1 Other capitalised expenditure 30 30 Buildings 43 39 Machinery and equipment 259 258 Other tangible assets 8 7 Total 342 335
Value adjustments Non-current assets 184 –9 Total 526 326
F-47 ACCOUNTS FOR 2008 ■ Parent Company
€m 2008 2007 €m 2008 2007 Other capitalised expenditure Other tangible assets Acquisition cost at 1 Jan. 395 368 Acquisition cost at 1 Jan. 186 167 Increases 8 15 Increases 13 14 Decreases –25 –3 Decreases –8 –1 Transfers between balance sheet items 5 15 Transfers between balance sheet items 11 6 Acquisition cost at 31 Dec. 383 395 Acquisition cost at 31 Dec. 202 186 Accumulated depreciation at 1 Jan. –176 –148 Accumulated depreciation at 1 Jan. –126 –120 Accumulated depreciation on decreases and transfers 25 2 Accumulated depreciation on decreases and transfers 8 1 Depreciation for the period –30 –30 Depreciation for the period –8 –7 Value adjustments and their cancellations –4 – Value adjustments and their cancellations –3 – Accumulated depreciation at 31 Dec. –185 –176 Accumulated depreciation at 31 Dec. –129 –126 Book value at 31 Dec. 198 219 Book value at 31 Dec. 73 60
Advance payments Advance payments and construction in progress Acquisition cost at 1 Jan. 7 8 Acquisition cost at 1 Jan. 238 98 Increases 25 14 Increases 16 220 Transfers between balance sheet items –5 –15 Transfers between balance sheet items –238 –80 Book value at 31 Dec. 27 7 Book value at 31 Dec. 16 238
8 TANGIBLE ASSETS 9 INVESTMENTS €m 2008 2007 €m 2008 2007 Land and water areas Holdings in Group companies Acquisition cost at 1 Jan. 491 495 Acquisition cost at 1 Jan. 3,703 4,585 Increases 4 7 Increases 944 446 Decreases –1 –11 Decreases –182 –1,328 Acquisition cost at 31 Dec. 494 491 Acquisition cost at 31 Dec. 4,465 3,703 Revaluations at 1 Jan. 546 547 Accumulated depreciation at 1 Jan. –281 –507 Reversal of revaluation –1 –1 Accumulated depreciation on decreases and transfers – 1,242 Revaluations at 31 Dec. 545 546 Value adjustments and their cancellations – –1,016 Book value at 31 Dec. 1,039 1,037 Accumulated depreciation at 31 Dec. –281 –281 Revaluations at 31 Dec. – – Buildings Book value at 31 Dec. 4,184 3,422 Acquisition cost at 1 Jan. 1,188 1,068 Increases 27 114 The principal subsidiaries are listed in the Consolidated Financial Decreases –113 –12 Statements (Note 36). Transfers between balance sheet items 48 18 Acquisition cost at 31 Dec. 1,150 1,188 €m 2008 2007 Accumulated depreciation at 1 Jan. –597 –545 Accumulated depreciation on decreases and transfers 113 –10 Receivables from Group companies Depreciation for the period –43 –39 Acquisition cost at 1 Jan. 635 985 Value adjustments and their cancellations –58 –3 Increases – 2 Accumulated depreciation at 31 Dec. –585 –597 Decreases –587 –352 Book value at 31 Dec. 565 591 Acquisition cost at 31 Dec. 48 635 Accumulated depreciation on decreases and transfers 3 – Machinery and equipment Value adjustments and their cancellations –3 – Acquisition cost at 1 Jan. 5,641 5,459 Book value at 31 Dec. 48 635 Increases 184 179 Decreases –557 –55 Holdings in participating interest companies Transfers between balance sheet items 179 58 Acquisition cost at 1 Jan. 533 527 Acquisition cost at 31 Dec. 5,447 5,641 Increases 12 7 Accumulated depreciation at 1 Jan. –4,049 –3,859 Decreases – –1 Accumulated depreciation on decreases and transfers 556 56 Acquisition cost at 31 Dec. 545 533 Depreciation for the period –259 –258 Revaluations at 1 Jan. 103 103 Value adjustments and their cancellations –119 12 Revaluations at 31 Dec. 103 103 Accumulated depreciation at 31 Dec. –3,871 –4,049 Book value at 31 Dec. 648 636 Book value at 31 Dec. 1,576 1,592
F-48 Parent Company ■ ACCOUNTS FOR 2008
€m 2008 2007 10 CURRENT RECEIVABLES €m 2008 2007 Other shares and holdings Acquisition cost at 1 Jan. 112 116 Trade receivables 599 685 Decreases – –4 Loan receivables 953 1,245 Acquisition cost at 31 Dec. 112 112 Other receivables 37 65 Revaluations at 1 Jan. 61 61 Prepayments and accrued income 223 71 Revaluations at 31 Dec. 61 61 Total at 31 Dec. 1,812 2,066 Book value at 31 Dec. 173 173 Main items included in current Other receivables prepayments and accrued income Acquisition cost at 1 Jan. 10 7 Personnel expenses 2 1 Increases – 3 Interest income 11 14 Book value at 31 Dec. 10 10 Currency derivatives 199 32 Income taxes 3 16 Others 8 8 There were no loans granted to the company’s Managing Director and At 31 Dec. 223 71 members of the Board of Directors at 31 December 2008 or 2007. Receivables from Group companies Trade receivables 491 566 Loan receivables 951 1,245 Prepayments and accrued income 136 32 At 31 Dec. 1,578 1,843
Receivables from participating interest companies Trade receivables 28 24 Loans receivables 2 – Prepayments and accrued income – 1 At 31 Dec. 30 25
11 S H A R E H O L D E RS’ EQ U I T Y
Reserve for Share- Share invested non- holders’ Share premium Revaluation Legal restricted Retained equity, €m capital reserve reserve reserve equity earnings total
Balance sheet value, 1 Jan. 2007 890 776 552 187 – 3,325 5,730 Share options – – – –104–104 Treasury shares 1) – – – – – –266 –266 Revaluations – – –1 – – – –1 Dividend paid – – – – – –392 –392 Transfers ––776––187963–– Loss for the fi nancial period – – – – – –534 –534 Balance sheet value, 31 Dec. 2007 890 – 551 – 1,067 2,133 4,641
Share options – – – – 78 – 78 Dividend paid – – – – ––384–384 Profi t for the fi nancial period – – – – – 137 137 Other items – – – – – –1 –1 Balance sheet value, 31 Dec. 2008 890 – 551 – 1,145 1,885 4,471
1) See Notes to the consolidated accounts, Note 27.
€m 2008 2007 12 PROVISIONS € Distributable funds at 31 Dec. m 2008 2007 Reserve for invested non-restricted equity 1,145 1,067 Provisions for pensions 52 52 Retained earnings 1,748 2,667 Closure and restructuring provisions 40 1 Profi t (loss) for the fi nancial period 137 –534 Environmental provisions 16 17 Distributable funds at 31 Dec. 3,030 3,200 Other provisions 3 4 Total at 31 Dec. 111 74
F-49 ACCOUNTS FOR 2008 ■ Parent Company
13 NON-CURRENT LIABILITIES 14 CURRENT LIABILITIES €m 2008 2007 €m 2008 2007 B o n d s 1,8 4 5 2,111 Bonds 250 89 Loans from fi nancial institutions 967 821 Loans from fi nancial institutions 2 55 Pension loans 793 62 Pension loans 39 143 Advances received 1 1 Advances received 5 8 Other liabilities 187 127 Trade payables 301 380 Total at 31 Dec. 3,793 3,122 Other liabilities 1,035 1,482 Accruals and deferred income 404 367 Payables to Group companies Total at 31 Dec. 2,036 2,524 Other liabilities 21 – At 31 Dec. 21 – Main items included in current accruals and deferred income Long-term loans and their repayment schedule Personnel expenses 101 104 Repayment in 2–5 years Interest expenses 29 16 Bonds 695 945 Currency derivatives 248 228 Loans from fi nancial institutions 757 580 Others 26 19 Pension loans 437 62 At 31 Dec. 404 367 Advances received 1 1 Payables to Group companies 21 – Payables to Group companies 1,911 1,588 Trade payables 45 51 Repayment later than 5 years Other liabilities 980 1,085 Bonds 1,150 1,166 Accruals and deferred income 64 74 Loans from fi nancial institutions 210 241 1,089 1,210 Pensions loans 356 – Other liabilities 166 127 Payables to participating interest companies 1,882 1,534 Trade payables 25 37 Other liabilities 1 3 Total at 31 Dec. 3,793 3,122 At 31 Dec. 26 40
Bonds 15 CONTINGENT LIABILITIES Nominal €m 2008 2007 Interest Currency value rate of issued 2008 2007 Mortgages 1) % bond m €m €m As security against own debts 762 60 Fixed-rate Guarantees 1997–2027 7.450 USD 375 269 255 Guarantees for loans 1999–2009 6.350 EUR 250 250 250 On behalf of Group companies 994 974 2000–2030 3.550 JPY 10,000 79 60 On behalf of participating interest companies 10 10 2002–2012 6.125 EUR 600 600 600 Other guarantees 2002–2014 5.625 USD 500 359 340 On behalf of Group companies 67 95 2002–2017 6.625 GBP 250 263 341 2003–2018 5.500 USD 250 180 170 Leasing commitments2) 2,000 2,016 Commitments for next year 18 12 Floating-rate Commitments for subsequent years 159 118 2002–2008 5.631 EUR 39 – 39 2002–2008 5.387 EUR 50 – 50 1) The mortgages given relate mainly to giving mandatory security for borrowing 2002–20106.273EUR595959 from Finnish pension insurance companies. 2) 2002–2012 6.044 EUR 25 25 25 The commitments of long-term lease agreements relate to energy purchases and production machinery. 2002–20124.152EUR111111 95 184 Bonds, total 2,095 2,200 Directors’ pension commitments – current portion –250 –89 Bonds, long-term portion 1,845 2,111 See Notes to the consolidated accounts, Note 7.
Derivate contracts Fair values and notional values are disclosed in the Consolidated Finan- cial Statements (Notes 34 and 35).
F-50 Information on shares ■ UPM
Information on shares
Changes in number of shares 1 January 2004 – 31 December 2008
Number of shares
2003 Number of shares at 31 Dec. 2003 523,578,930
2004 Options exercised 741,322 Number of shares at 31 Dec. 2004 524,320,252
2005 Options exercised 6,934,878 Treasury shares cancelled –8,000,000 Number of shares at 31 Dec. 2005 523,255,130
2006 Options exercised 4,300 Number of shares at 31 Dec. 2006 523,259,430
2007 Options exercised 5,709,890 Treasury shares cancelled –16,400,000 Number of shares at 31 Dec. 2007 512,569,320
2008 Options exercised 7, 4 0 0 , 76 8 Number of shares at 31 Dec. 2008 519,970,088
Stock exchange trading Shares and options held by the Board of Directors and UPM’s shares are listed on NASDAQ OMX Helsinki Ltd. The com- the Executive Team pany’s ADSs are traded on the U.S. over-the-counter (OTC) market At the end of the year, the members of the Board of Directors under a Level 1 sponsored American Depositary Receipt pro- including President and CEO owned a total of 959,785 gramme. UPM-Kymmene Corporation shares (833,398 in 2007), including A total of 932.1 million UPM-Kymmene Corporation shares shares held by persons closely associated with him or her or by were traded on the Helsinki stock exchange in 2008 (952.3 million organisations of which the person has control. These represent in 2007). This represented 180.1% (182.1%) of the total number 0.18% of the shares (0.16%) and 0.18% of the voting rights of shares. The highest quotation was € 13.87 in January and the low- (0.16%). At the end of the year, President and CEO Jussi Pesonen est € 8.15 in December. The total value of shares traded was owned 62,814 shares and 220,000 share options. Exercise of € 10,549 million in 2008 (€ 16,472 million in 2007). During the these options would increase the number of the companys’s year, 0.43 million 2005G share options were traded for € 0.32 mil- shares by 220,000, which at 31 December 2008 would have rep- lion (0.19 million and € 0.40 million) and 0.04 million share options resented 0.04% of the company’s voting rights. 2005H were traded for € 0.02 million as of the beginning of 1 Octo- At the end of the year, the other members of the Executive ber 2008. Team owned a total of 83,562 shares and 687,000 share options. Exercise of these options would increase the number of the com- pany’s shares by 687,000 which at 31 December 2008 would have represented 0.13% of the company’s voting rights.
F-51 UPM ■ Information on shares
Biggest registered shareholders at 31 December 2008
Shares at 31 December 2008 % of shares % of votes
IImarinen Mutual Pension Insurance Company 13,712,901 2.64 2.64
Varma Mutual Pension Insurance Company 11,553,899 2.22 2.22
Gustaf Serlachius (representing 5 shareholders) 6,309,811 1.21 1.21
The State Pension Fund 5,000,000 0.96 0.96
Svenska litteratursällskapet i Finland 3,827,080 0.74 0.74
OP-Delta Investment Fund 3,704,858 0.71 0.71
Etera Mutual Pension Insurance Company 2,210,000 0.43 0.43
Suomi Mutual Life Assurance Company 2,050,000 0.39 0.39
The Local Government Pensions Institution 1,935,637 0.37 0.37
Sellan Inderessenter Ab 1,725,000 0.33 0.33
Nominees & registered foreign owners 334,754,416 64.38 64.38
Others 133,186,486 25.62 25.62
Total 519,970,088 100.00 100.00
The company has received the following notifi cations from share- holders: Norges Bank on 24 October 2008 held 5.01% of the share capital and the voting rights. Franklin Resources, Inc. held 9.94% of the voting rights on 3 November 2008.
F-52 Information on shares ■ UPM
Share price in 2008 Market capitalisation Monthly average share price and shares traded 1–12/2008
€ €m € % of all shares 16 16 10,000 30 30
14 14 8,000 25 25 20 20 12 12 6,000 15 15 10 10 4,000 10 10 2,000 8 8 5 5
6 6 0 0 0 1 2 3 4 5 6 7 8 9 10 11 12 04 05 06 07 08 1 2 3 4 5 6 7 8 9 101112
Monthly average share price, € Shares traded, %
Share price 2004–2008 Earnings and dividend Shareholders’ equity per share per share
€ € € 25 25 2.5 15
20 20 2.0 12
15 15 1.5 9
10 10 1.0 6
5 5 0.5 3
0 0 0.0 0 2004 2005 2006 2007 2008 04 05 06 07 08 04 05 06 07 08
UPM share price at end of month Earnings per share MSCI (Morgan Stanley Capital International) Dividend per share (2008: proposal) Forest Products & Paper World Index
Shares traded on Helsinki stock exchange 2004–2008 Dividend per share (€) and dividend to earnings ratio (%) 468.8% €m % € % 3,500 30 1.25 200
2,800 25 1.00 160
2,100 20 0.75 120
1,400 15 0.50 80
700 10 0.25 40
0 5 0.00 0 2004 2005 2006 2007 2008 04 05 06 07 08
Monthly trading in UPM shares on Helsinki stock exchange, €m Dividend per share (2008: proposal) Trading in UPM shares as % of total number of shares Dividend to earnings ratio, % (2008: neg.)
F-53 UPM ■ Information on shares
Distribution of shareholders at 31 December 2008
Number of % of share- Number of % of Size of shareholding shareholders holders shares, million shares
1 – 100 15,743 21.84 1.0 0.2 101 – 1,000 40,373 56.02 17.0 3.3 1,001 – 10,000 14,496 20.11 40.6 7.8 10,001 – 100,000 1,316 1.83 32.4 6.2 10 0,0 01 – 147 0.20 99.4 19.1 Total 72,075 100.00 190.4 36.6
Nominee-registered 329.4 63.4 Not registered as book entry units 0.2 0.0 Total 520.0 100.0
Shareholder breakdown by sector at 31 December, %
2008 2007 2006 2005 2004
Companies 2.8 2.2 1.8 2.8 3.1 Financial institutions and insurance companies 3.2 2.5 2.1 3.5 2.8 Public bodies 8.1 6.4 5.2 5.8 6.4 Non-profi t organisations 6.0 6.0 6.1 6.7 7.0 Households 14.9 14.1 13.5 15.4 15.6 Non-Finnish nationals 65.0 68.8 71.3 65.8 65.1 Total 100.0 100.0 100.0 100.0 100.0
UPM’s share option programmes
Exercise price per share Number of Number of at date of issue at 31 Dec. 2008 Options exercised Options options shares € € Subscription period 2008
2005 G 3,000,000 3,000,000 18.65 16.40 1.10.2007–31.10.2009 – 2005 H 3,000,000 3,000,000 21.65 20.15 1.10.2008–31.10.2010 –
F-54 Key indicators ■ ACCOUNTS FOR 2008
Key fi gures 1999–2008
Adjusted share-related indicators 1999–2008 1)
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Earnings per share, € (diluted 2008: –0.35) –0.35 0.16 0.65 0.50 1.76 0.60 0.96 1.93 2.38 1.88 Shareholders’ equity per share, € 11.74 13.21 13.90 14.01 14.46 13.36 13.85 13.09 11.72 10.23 Dividend per share, € 3) 2) 0.40 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 1.08 Dividend to earnings ratio, % 3) neg. 468.8 115.4 150.0 42.6 125.0 78.1 39.0 31.4 57.0 Effective dividend yield, % 3) 4.4 5.4 3.9 4.5 4.6 5.0 4.9 4.0 4.1 5.4 P/E ratio neg. 86.4 29.4 33.1 8.9 24.8 15.9 9.7 7.7 10.6 Cash fl ow from operations per share, € 1.21 1.66 2.32 1.63 1.90 2.40 2.73 3.32 3.19 2.39 Dividend distribution, €m 3) 2) 208 384 392 392 393 393 390 388 371 557 Share price at 31 Dec., € 9.00 13.82 19.12 16.56 16.36 15.12 15.30 18.63 18.28 20.00 Market capitalisation, €m 4,680 7,084 10,005 8,665 8,578 7,917 7,960 9,681 9,502 10,663 Shares traded, €m 4) 10,549 16,472 16,021 11,358 9,731 9,117 10,827 7,645 6,157 4,834 Shares traded (1,000s) 932,136 952,300 876,023 697,227 625,950 645,988 597,078 443,240 400,822 316,874 Shares traded, % of all shares 180.1 182.1 167.4 133.6 119.5 123.4 115.1 88.1 77.2 59.0 Lowest quotation, € 8.15 13.01 15.36 15.05 14.44 11.05 12.61 14.00 12.46 11.00 Highest quotation, € 13.87 20.59 20.91 18.15 17.13 17.10 22.25 19.93 22.45 21.25 Average quotation for the period, € 11.32 17.30 18.29 16.29 15.55 14.11 18.13 17.24 15.36 15.25 Number of shares, average (1,000s) 517,545 522,867 523,220 522,029 523,641 523,130 518,935 495,784 513,634 528,035 Number of shares at end of period (1,000s) 519,970 512,569 523,259 523,093 524,450 523,579 520,232 517,436 501,295 518,062
Share prices and shares traded are based on trading on the NASDAQ OMX Helsinki stock exchange.
Notes to the tables on pages 127–128 1) Figures for 2002–2008 are reported in accordance with International Financial Reporting Standards (IFRS) and for 1999–2001 in accordance with Finnish Accounting Standards (FAS). More information on the effects of the transition on the balance sheet and income statement is given in the bulletin released on 24.3.2004. The bulletin is available on UPM’s Internet pages at www.upm-kymmene.com. 2) Proposal. 3) The 1999 fi gure includes an extra dividend payment of € 0.45. 4) Trading on the NASDAQ OMX Helsinki stock exchange. Treasury shares bought by the company are included in shares traded.
F-55 ACCOUNTS FOR 2008 ■ Key indicators
Financial indicators 1999–2008 1)
€m 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
S a l e s 9, 4 61 10,035 10,022 9,348 9,820 9,787 10, 417 9,918 9, 583 8,261 EBITDA 1,206 1,546 1,678 1,428 1,435 1,442 1,957 2,055 2,081 1,576 % of sales 12.7 15.4 16.7 15.3 14.6 14.7 18.8 20.7 21.7 19.1 Operating profi t, excluding special items 513 835 725 558 470 429 963 1,394 1,560 976 % of sales 5.4 8.3 7.2 6.0 4.8 4.4 9.2 14.1 16.3 11.8 Operating profi t 24 483 536 318 685 368 861 1,614 1,860 1,573 % of sales 0.3 4.8 5.3 3.4 7.0 3.8 8.3 16.3 19.4 19.0 Profi t (loss) before tax –201 292 367 257 556 425 710 1,333 1,859 1,398 % of sales –2.1 2.9 3.7 2.7 5.7 4.3 6.8 13.4 19.4 16.9 Profi t (loss) for the period –180 81 338 261 920 312 500 955 1,366 994 % of sales –1.9 0.8 3.4 2.8 9.4 3.2 4.8 9.6 14.3 12.0 Exports from Finland and foreign operations 8,515 9,170 9,102 8,397 8,791 8,697 9,475 8,948 8,563 7,165 Exports from Finland 4,371 4,546 4,644 4,006 4,301 4,539 4,759 4,635 5,216 4,873
Non-current assets 10,375 10,639 11,355 12,321 12,802 13,509 14,336 12,874 10,163 8,741 Inventories 1,354 1,342 1,255 1,256 1,138 1,144 1,224 1,289 1,184 1,008 Other current assets 2,040 1,972 1,859 1,964 1,887 1,938 2,064 2,368 1,766 1,831 Assets, total 13,781 13,953 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580
T o t a l e q u i t y 6 ,12 0 6 , 7 8 3 7, 2 8 9 7, 3 4 8 7, 612 7, 0 2 9 7, 2 3 7 6 , 8 3 8 6 ,175 5 , 5 5 8 Non-current liabilities 5,816 4,753 4,770 5,845 5,966 7,322 8,104 5,992 4,564 3,830 Current liabilities 1,828 2,417 2,410 2,348 2,249 2,240 2,283 3,601 2,374 2,192 Total equit y and liabilities 13,781 13,953 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580
Capital employed at year end 11,193 11,098 11,634 12,650 12,953 12,811 13,689 13,519 10,448 9,004 Return on equity, % neg. 1.2 4.6 3.5 12.6 4.4 6.8 15.5 21.9 19.2 Return on capital employed, % 0.2 4.3 4.7 3.4 6.0 5.1 7.4 15.6 20.2 17.6 Equity to assets ratio, % 44.5 48.8 50.4 47.3 48.2 42.5 41.1 41.5 46.0 47.0 Gearing ratio, % 71595666616971896955 Net interest-bearing liabilities 4,321 3,973 4,048 4,836 4,617 4,874 5,135 6,041 4,071 2,940 Gross capital expenditure 551 708 699 749 686 720 620 3,850 2,175 609 % of sales 5.8 7.1 7.0 8.0 7.0 7.4 6.0 38.8 22.7 7.4 Gross capital expenditure excluding acquisitions 532 683 631 705 645 703 568 827 571 548 % of sales 5.6 6.8 6.3 7.5 6.6 7.2 5.5 8.3 6.0 6.6 Personnel at year end 24,983 26,352 28,704 31,522 33,433 34,482 35,579 36,298 32,755 30,963
Formulae for calculating indicators are given on page 130.
Deliveries and production Deliveries Production (1999 – 2004) 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Electricity (MWh) 10,167 10,349 Pulp (1,000 t) 1,982 1,927 Papers, total (1,000 t) 10,641 11,389 10,988 10,172 10,886 10,232 10,046 8,298 8,285 7,494 Sawn timber (1,000 m3) 2,132 2,325 2,457 2,016 2,409 2,408 2,201 2,035 2,117 1,911 Plywood (1,000 m3) 806 945 931 827 969 936 905 786 793 729
F-56 Key indicators ■ ACCOUNTS FOR 2008
Quarterly fi gures 2007–2008
€m Q4/08 Q3/08 Q2/08 Q1/08 Q4/07 Q3/07 Q2/07 Q1/07 Q1–Q4 /08 Q1–Q4 /07 Sales 2,315 2,358 2,378 2,410 2,512 2,467 2,537 2,519 9,461 10,035 Other operating income 92311408715801883200 Costs and expenses –2,227 –1,998 –2,074 –2,108 –2,270 –2,116 –2,145 –2,119 –8,407 –8,650 Change in fair value of biological assets and wood harvested –2 4 20 28 47 21 14 –3 50 79 Share of results of associated companies and joint ventures –16 35 21 22 2 14 6 21 62 43 Depreciation, amortisation and impairment charges –365 –462 –199 –199 –236 –206 –567 –215 –1,225 –1,224 Operating profi t (loss) –286 –40 157 193 142 195 –75 221 24 483 Gains on available-for-sale investments, net – –2––––2 2 2 Exchange rate and fair value gains and losses –14 – –1 –10 –4 –9 8 3 –25 –2 Interest and other fi nance costs, net –60 –50 –43 –49 –46 –42 –54 –49 –202 –191 Profi t (loss) before tax –360 –90 115 134 92 144 –121 177 –201 292 Income taxes 74 3 –25 –31 –63 –25 –77 –46 21 –211 Profi t (loss) for the period –286 –87 90 103 29 119 –198 131 –180 81 Attributable to: Equity holders of the parent company –287 –86 92 102 32 120 –198 131 –179 85 Minority interest 1 –1 –2 1 –3 –1 – – –1 –4 –286 –87 90 103 29 119 –198 131 –180 81 Basic earnings per share, € –0.56 –0.17 0.18 0.20 0.06 0.23 –0.38 0.25 –0.35 0.16 Diluted earnings per share, € –0.56 –0.17 0.18 0.20 0.06 0.23 –0.38 0.25 –0.35 0.16 Earnings per share, excluding special items, € –0.19 0.25 0.17 0.19 0.24 0.23 0.28 0.25 0.42 1.00 Average number of shares basic (1,000) 519,979 519,999 517,622 512,581 514,085 527,012 527,111 523,261 517,545 522,867 Average number of shares diluted (1,000) 519,979 519,999 516,791 513,412 515,322 529,530 530,980 527,086 517,545 525,729 Special items in operating profi t (loss) –240 –256 2 5 –52 – –300 – –489 –352 Operating profi t (loss), excl. special items –46 216 155 188 194 195 225 221 513 835 % of sales –2.0 9.2 6.5 7.8 7.7 7.9 8.9 8.8 5.4 8.3 Special items before tax –240 –250 2 5 –52 – –300 – –483 –352 Profi t (loss) before tax, excl. special items –120 160 113 129 144 144 179 177 282 644 % of sales –5.2 6.8 4.8 5.4 5.7 5.8 7.1 7.0 3.0 6.4 Return on equity, excl. special items, % n e g . 7. 8 5 . 4 5 .9 7.1 6 .9 8 . 5 7. 3 3 . 4 7. 4 Return on capital employed, excl. special items, % neg. 7.7 5.7 6.5 6.9 6.8 8.3 7.9 4.6 7.4 EBITDA 178 378 313 337 351 366 411 418 1,206 1,546 % of sales 7.7 16.0 13.2 14.0 14.0 14.8 16.2 16.6 12.7 15.4
Sales by segment Energy 141 129 103 105 112 89 81 97 478 379 Pulp 200 228 247 269 187 208 208 205 944 808 Forest and timber 419 475 518 508 537 490 514 498 1,920 2,039 Paper 1,750 1,761 1,727 1,773 1,864 1,856 1,815 1,793 7,011 7,328 Label 233 239 245 242 242 245 255 256 959 998 Plywood 102 121 150 157 154 126 150 161 530 591 Other operations 34 52 66 48 80 83 160 127 200 450 Internal sales –564 –647 –678 –692 –664 –630 –646 –618 –2,581 –2,558 Sales, total 2,315 2,358 2,378 2,410 2,512 2,467 2,537 2,519 9,461 10,035
Operating profi t (loss) excl.special items by segment Energy 62 49 31 33 38 17 11 29 175 95 Pulp –17 60 38 67 9 56 54 69 148 188 Forest and timber –61 –5 17 26 73 38 61 42 –23 214 Paper 27 113 60 50 52 73 79 58 250 262 Label –10 1 8 3 8 12 16 20 2 56 Plywood –10 –2 16 21 15 3 15 17 25 50 Other operations –37 – –15 –12 –1 –4 –11 –14 –64 –30 Operating profi t (loss) excl. special items, total –46 216 155 188 194 195 225 221 513 835 % of sales –2.0 9.2 6.5 7.8 7.7 7.9 8.9 8.8 5.4 8.3
F-57 ACCOUNTS FOR 2008 ■ Key indicators
Calculation of key indicators
Formulae for calculation of financial Formulae for calculation of adjusted indicators share-related indicators
Return on equity, %: Earnings per share: Profi t before tax 2) – income taxes Profi t for the period attributable to the equity x 100 3) Total equity (average) holders of the parent company Adjusted average number of shares during the period excluding treasury shares Return on capital employed, %: Profi t before tax 2) + interest expenses and other fi nancial expenses Shareholders’ equity per share: x 100 Total equity + interest-bearing Equity attributable to the equity holders of
liabilities (average) the parent company Adjusted number of shares at end of period Equity to assets ratio, %: Dividend per share: Total equity – treasury shares 1) x 100 Balance sheet total – advances received Dividend distribution – treasury shares 1) Adjusted number of shares at end of period
Net interest-bearing liabilities: Dividend to earnings ratio, %: Dividend per share Interest-bearing liabilities – interest-bearing assets x 100 – listed shares Earnings per share
Gearing ratio, %: Effective dividend yield, %: Net interest-bearing liabilities Adjusted dividend per share x 100 x 100 Total equity – treasury shares 1) Adjusted share price at 31.12.
EBITDA: P/E ratio: Operating profi t + depreciation + amortisation Adjusted share price at 31.12. of goodwill + impairment +/– change in value of Earnings per share biological assets +/– share of results of associated companies +/– special items Market capitalisation: Total number of shares x striking price at end of Return on capital employed (ROCE) for the period segments (operating capital), %: Operating profi t x 100 Adjusted share price at end of period: Non-current assets + stocks + trade Share price at end of period receivables – trade payables (average) Share issue coeffi cient
Adjusted average share price: Total value of shares traded 1) Treasury shares were shown in the balance sheet in Adjusted number of shares traded during period 1999–2001. 2) 1999–2001: Profi t/loss before extraordinary items Cash from operating activities per share: and tax. Cash from operating activities 3) 1999–2001: Profi t/loss before extraordinary items Adjusted average number of shares during the and tax – income tax +/– minority interest. period excluding treasury shares
Key exchange rates for the euro at end of period
31.12.2008 30.9.2008 30.6.2008 31.3.2008 31.12.2007 30.9.2007 30.6.2007 31.3.2007 USD 1.3917 1.4303 1.5764 1.5812 1.4721 1.4179 1.3505 1.3318 CAD 1.6998 1.4961 1.5942 1.6226 1.4449 1.4122 1.4245 1.5366 JPY 126.14 150.47 166.44 157.37 164.93 163.55 166.63 157.32 GBP 0.9525 0.7903 0.7923 0.7958 0.7334 0.6968 0.6740 0.6798 SEK 10.8700 9.7943 9.4703 9.3970 9.4 415 9.2147 9.2525 9.3462
F-58 Auditor’s report ■ ACCOUNTS FOR 2008
Auditor’s report
To the shareholders of UPM-Kymmene Corporation An audit involves performing procedures to obtain audit evi- dence about the amounts and disclosures in the fi nancial statements We have audited the accounting records, the fi nancial statements, and the report of the Board of Directors. The procedures selected the report of the Board of Directors and the administration of depend on the auditor’s judgment, including the assessment of the UPM-Kymmene Corporation for the year ended on 31 December, risks of material misstatement of the fi nancial statements, whether 2008. The fi nancial statements comprise the consolidated balance due to fraud or error. In making those risk assessments, the auditor sheet, income statement, cash fl ow statement, statement of changes considers internal control relevant to the entity’s preparation and fair in equity and notes to the consolidated fi nancial statements, as well presentation of the fi nancial statements in order to design audit as the parent company’s balance sheet, income statement, cash fl ow procedures that are appropriate in the circumstances. An audit also statement and notes to the fi nancial statements. includes evaluating the appropriateness of accounting policies used and the reason-ableness of accounting estimates made by manage- Responsibility of the Board of Directors and ment, as well as evaluating the overall presentation of the fi nancial the Managing Director statements and the report of the Board of Directors. The Board of Directors and the Managing Director are responsible The audit was performed in accordance with good auditing for the preparation of the fi nancial statements and the report of the practice in Finland. We believe that the audit evidence we have Board of Directors and for the fair presentation of the consolidated obtained is suffi cient and appropriate to provide a basis for our audit fi nancial statements in accordance with International Financial opin-ion. Reporting Standards (IFRS) as adopted by the EU, as well as for the fair presentation of the parent company’s fi nancial state-ments and Opinion on the Consolidated Financial Statements the report of the Board of Directors in accordance with laws and In our opinion, the consolidated fi nancial statements give a true and regulations governing the preparation of the fi nancial statements and fair view of the fi nancial posi-tion, fi nancial performance, and cash the report of the Board of Directors in Finland. The Board of fl ows of the group in accordance with International Financial Re- Directors is responsible for the appropriate arrangement of the porting Standards (IFRS) as adopted by the EU. control of the company’s accounts and fi nances, and the Managing Director shall see to it that the accounts of the company are in com- Opinion on the Company’s Financial Statements and pliance with the law and that its fi nancial affairs have been arranged the Report of the Board of Directors in a reliable manner. In our opinion, the fi nancial statements and the report of the Board of Directors give a true and fair view of both the consolidated and Auditor’s Responsibility the parent company’s fi nancial performance and fi nancial position in Our responsibility is to perform an audit in accordance with good accordance with the laws and regulations governing the preparation auditing practice in Finland, and to express an opinion on the parent of the fi nancial state-ments and the report of the Board of Directors company’s fi nancial statements, on the consolidated fi nancial state- in Finland. The information in the report of the Board of Directors ments and on the report of the Board of Directors based on our is consistent with the information in the fi nancial statements. audit. Good auditing practice requires that we comply with ethical We recommend that the fi nancial statements should be adopted. requirements and plan and perform the audit to obtain reasonable The proposal by the Board of Directors regarding the use of the assurance whether the fi nancial statements and the report of the distributable funds is in compliance with the Limited Liability Com- Board of Directors are free from material misstatement and whether panies Act. We recommend that the Members of the Board of the members of the Board of Directors of the parent company and Directors and the Managing Director should be discharged from the Managing Director have complied with the Limited Liability liability for the fi nancial period audited by us. Companies Act.
Helsinki 20 February 2009
PricewaterhouseCoopers Oy Authorised Public Accountants
Juha Wahlroos Authorised Public Accountant
F-59 UPM-KYMMENE CORPORATION
AUDITED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION IN RESPECT OF THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 UNDER IFRS
F-60 ACCOUNTS FOR 2007 Group Consolidated income statement 1.1. – 31.12. `m Note 2007 2006
Sales 4 10,035 10,022 Other operating income 6 200 231 Costs and expenses 7 –8,650 –8,514 Change in fair value of biological assets and wood harvested 8 79 –126 Share of results of associated companies and joint ventures 94361 Depreciation, amortisation and impairment charges 10 –1,224 –1,138 Operating profit 4 483 536
Gains on available-for-sale investments, net 11 2 –2 Exchange rate and fair value gains and losses 12 –2 18 Interest and other finance costs, net 12 –191 –185 Profit before tax 292 367
Income taxes 13 –211 –29 Profit for the period 81 338
Attributable to: Equity holders of parent company 85 340 Minority interest –4 –2 81 338
Earnings per share for profit attributable to the equity holders of the parent company Basic earnings per share, ` 14 0.16 0.65 Diluted earnings per share, ` 14 0.16 0.65
The notes are an integral part of these financial statements.
F-61 Group ACCOUNTS FOR 2007 Consolidated balance sheet 31.12. `m Note 2007 2006
ASSETS Non-current assets Goodwill 16 1,163 1,514 Other intangible assets 17 392 461 Property, plant and equipment 18 6,179 6,500 Investment property 19 14 30 Biological assets 20 1,095 1,037 Investments in associated companies and joint ventures 21 1,193 1,177 Available-for-sale investments 22 116 127 Non-current financial assets 23 82 74 Deferred tax assets 28 284 362 Other non-current assets 24 121 73 10,639 11,355 Current assets Inventories 25 1,342 1,255 Trade and other receivables 26 1,717 1,657 Income tax receivables 18 3 Cash and cash equivalents 237 199 3,314 3,114 Total assets 13,953 14,469
31.12. `m Note 2007 2006
EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 27 890 890 Share premium reserve 27 – 826 Translation differences –158 –89 Fair value and other reserves 27 193 278 Reserve for invested non-restricted equity 1,067 – Retained earnings 4,778 5,366 6,770 7,271 Minority interest 13 18 Total equity 6,783 7,289
Non-current liabilities Deferred tax liabilities 28 745 790 Retirement benefit obligations 29 441 427 Provisions 30 171 187 Interest-bearing liabilities 31 3,384 3,353 Other liabilities 32 12 13 4,753 4,770 Current liabilities Current interest-bearing liabilities 31 931 992 Trade and other payables 33 1,443 1,399 Income tax payables 43 19 2,417 2,410 Total liabilities 7,170 7,180
Total equity and liabilities 13,953 14,469
The notes are an integral part of these financial statements.
F-62 ACCOUNTS FOR 2007 Group Consolidated statement of changes in equity
Attributable to equity holders of the parent
Reserve for invested Share Fair value non- Share premium Treasury Translation and other restricted Retained Minority Total Mm capital reserve shares differences reserves equity earnings Total interest equity Balance at 1 January 2006 890 826 –3 –34 233 – 5,415 7,327 21 7,348 Translation differences – – – –63 – – – –63 – –63 Other items –––––2–2–– – Net investment hedge, net of tax – – – 8–––8– 8 Cash flow hedges fair value gains/losses, net of tax ––––45––45–45 transfers from equity, net of tax –––––5–––5––5 Available-for-sale investments transfers to income statement, net of tax ––––––––– – Profit for the period ––––––340340–2338 Total recognised income and expense for the period – – – –55 38 – 342 325 –2 323
Reissuance of treasury shares – – 3–––14– 4 Share-based compensation ––––7––7– 7 Dividend paid –––––––392 –392 – –392 Business combinations –––––––––1–1 Total of other changes in equity – – 3 – 7 – –391 –381 –1 –382 Balance at 31 December 2006 890 826 – –89 278 – 5,366 7,271 18 7,289 Translation differences – – – –69 – – – –69 – –69 Net investment hedge, net of tax ––––––––– – Cash flow hedges fair value gains/losses, net of tax ––––68––68–68 transfers from equity, net of tax –––––41 –––41––41 Available-for-sale investments transfers to income statement, net of tax –––––1–––1––1 Profit for the period ––––––8585–481 Total recognised income and expense for the period – – – –69 26 – 85 42 –4 38
Share options exercised –––––104–104–104 Acquisition of treasury shares – – –266 –––––266 – –266 Cancellation of treasury shares – – 266 – – – –266 – – – Share-based compensation, net of tax ––––13––13–13 Dividend paid –––––––392 –392 – –392 Business combinations –––––––––1–1 Transfers and others – –826 – – –124 963 –15 –2 – –2 Total of other changes in equity – –826 – – –111 1,067 –673 –543 –1 –544 Balance at 31 December 2007 890 – – –158 193 1,067 4,778 6,770 13 6,783
The notes are an integral part of these financial statements.
F-63 Group ACCOUNTS FOR 2007 Consolidated cash flow statement
1.1. – 31.12.
Mm 2007 2006
Cash flow from operating activities Profit for the period 81 338 Adjustments to profit for the period (Note 5) 1,390 1,195 Interest received 49 Interest paid –191 –187 Dividends received 23 16 Other financial items, net –72 –18 Income taxes paid –164 –159 Change in working capital (Note 5) –204 21 Net cash provided by operating activities 867 1,215
Cash flow from investing activities Acquisition of shares in associated companies –25 –68 Capital expenditure –673 –635 Proceeds from disposal of subsidiary shares, net of cash (Note 5) 205 203 Proceeds from disposal of shares in associated companies 252 Proceeds from disposal of available-for-sale investments 33 Proceeds from sale of fixed assets 71 108 Proceeds from long-term receivables 123 Increase in long-term receivables –9 – Net cash used in investing activities –425 –314
Cash flow from financing activities Proceeds from long-term liabilities 965 415 Payments of long-term liabilities –879 –574 Proceeds from (payment of) short-term borrowings, net 66 –398 Share options exercised 104 – Dividends paid –392 –392 Purchase of own shares –266 – Other financing cash flow ––2 Net cash used in financing activities –402 –951
Change in cash and cash equivalents 40 –50
Cash and cash equivalents at the beginning of the year 199 251 Foreign exchange effect on cash –2 –2 Change in cash and cash equivalents 40 –50 Cash and cash equivalents at year-end 237 199
The notes are an integral part of these financial statements.
F-64 ACCOUNTS FOR 2007 Group Notes to the Consolidated Financial Statements
(In the notes all amounts are shown in millions of euros unless otherwise stated.)
1 ACCOUNTING POLICIES fifty percent of the voting rights, or otherwise has the power to The principal accounting policies to be adopted in the preparation of govern their operating and financial policies. the consolidated financial statements are set out below: Acquisitions of subsidiaries are accounted for using the pur- chase method of accounting. The cost of an acquisition is measured Principal activities as the fair value of the assets given, equity instruments issued and UPM-Kymmene Corporation together with its consolidated subsidi- liabilities incurred or assumed at the date of exchange, plus costs aries (“UPM” or “the Group”) is a global paper and forest products directly attributable to the acquisition. Identifiable assets acquired group engaged in the production of paper, with an emphasis on the and liabilities and contingent liabilities assumed in a business com- manufacture and sale of printing and writing papers. The Group is bination are measured initially at their fair values at the acquisition vertically integrated with operations that are organised through five date, irrespective of the extent of any minority interest. The excess divisions: Magazine Papers, Newsprint, Fine and Speciality Papers, of the cost of acquisition over the fair value of the Group’s share of Label Materials and Wood Products. The biggest units of UPM’s the identifiable net assets of the subsidiary acquired is recorded as Other Operations are forestry departments and energy department in goodwill. If the cost of acquisition is less than the fair value of the Finland. The Group’s activities are centred in the European Union Group’s share of the net assets of the subsidiary acquired, the differ- countries and North America, and Asia with production facilities in ence is recognised directly in the income statement (see ”Intangible 14 countries. Assets” for the accounting policy on goodwill). Subsidiaries UPM-Kymmene Corporation is a Finnish limited liability com- acquired during the year are included in the consolidated financial pany, domiciled in Helsinki in the Republic of Finland. The address statements from the date on which control is transferred to the of the company’s registered office is Eteläesplanadi 2, 00101 Hel- Group, and subsidiaries sold are included up to the date that control sinki, where the copy of the consolidated financial statement can be is relinquished. Where necessary, the accounting policies of subsidi- obtained. aries have been adjusted to ensure consistency with the policies adopted by the Group. Basis of preparation All intercompany transactions, receivables, liabilities and unre- These consolidated financial statements of UPM are prepared in alised profits, as well as intragroup profit distributions, are elimi- accordance with International Financial Reporting Standards as nated. Unrealised losses are also eliminated unless the transaction adopted by the EU (IFRS). These Group consolidated financial provides evidence of an impairment of the asset transferred. statements were authorised for issue by the Board of Directors on 5 February 2008. Associated companies and joint ventures The financial statements have been prepared under the historical Associated companies are entities over which the Group has signifi- cost convention as modified by the revaluation of biological assets, cant influence but no control, generally accompanying a sharehold- available-for-sale financial assets and certain other financial assets ing of between 20% and 50% of the voting rights. Joint ventures are and financial liabilities. Share-based payments are recognised at fair entities over which the Group has contractually agreed to share the value on the grant date. power to govern the financial and operating policies of that entity The preparation of financial statements requires the use of with another venturer or venturers. accounting estimates and assumptions that affect the reported Interests in associated companies and joint ventures are amounts of assets and liabilities, the disclosure of contingent assets accounted for using the equity method of accounting and are ini- and liabilities at the date of the financial statements, and the tially recorded at cost. Under this method the Group’s share of the reported amounts of revenues and expenses during the reporting associated company’s and joint venture’s profit or loss for the year is periods. Accounting estimates are employed in the financial state- recognised on the income statement and its share of movements in ments to determine reported amounts, including the realisability of reserves is recognised in reserves. The Group’s interest in an associ- certain assets, the useful lives of tangible and intangible assets, ated company and joint venture is carried on the balance sheet at an income taxes and others. Although these estimates are based on amount that reflects its share of the net assets of the associated management’s best knowledge of current events and actions, actual company and joint venture together with goodwill on acquisition results may ultimately differ from those estimates. The preparation (net of any accumulated impairment loss), less any impairment in of financial statements also requires management to exercise its the value of individual investments. Gains and losses on transactions judgement in the process of applying the Group’s accounting poli- between the Group and its associated companies and joint ventures cies. The critical judgements are summarised in Note 2. are eliminated to the extent of the Group’s interest in the associated company and joint venture. Associated company and joint venture Consolidation principles accounting policies have been changed where necessary to ensure Subsidiaries consistency with the policies adopted by the Group. Equity account- The consolidated financial statements of UPM include the financial ing is discontinued when the carrying amount of the investment in statements of the parent company, UPM-Kymmene Corporation, an associated company or interest in a joint venture reaches zero, and its subsidiaries. Subsidiaries are those entities in which unless the Group has incurred or guaranteed obligations in respect UPM-Kymmene Corporation either owns, directly or indirectly, over of the associated company or joint venture.
F-65 Group ACCOUNTS FOR 2007
Minority interests accounting, the adjustment to the carrying amount of a hedged item The profit or loss attributable to the parent shareholders and minor- for which the effective interest method is used is amoritised to profit ity interests is presented on the face of the income statement. or loss over the period to maturity. Minority interests are presented in the consolidated balance sheet Changes in the fair value of derivatives that are designated and within equity, separately from the parent shareholders’ equity. qualify as cash flow hedges and that are highly effective both pro- spectively and retrospectively are recognised in equity (at the spot Foreign currency transactions rate difference). The accumulated profit or loss of the hedging Items included in the financial statements of each subsidiary in the instruments is recognised in equity approximately during the period Group are measured using the currency of the primary economic of 12 months. Amounts deferred in equity are transferred to the environment in which the subsidiary operates (”the functional cur- income statement and classified as income or an expense in the rency”). The consolidated financial statements are presented in same period during which the hedged firm commitment or fore- euros, which is the functional and presentation currency of the casted transaction affects the income statement (for example, when parent company. the forecasted external sale to the Group that is hedged takes place). Foreign currency transactions are translated into the functional The period when the hedging reserve is released to sales after each currency using the exchange rates prevailing at the dates of the derivative has matured is approximately 1 month. However, when transactions. Foreign exchange gains and losses resulting from the the forecast transaction that is hedged results in the recognition of a settlement of such transactions and from the translation at year-end non-financial asset (for example, fixed assets) the gains and losses exchange rates of monetary assets and liabilities denominated in previously deferred in equity are transferred from equity and foreign currencies are recognised in the income statement, except included in the initial measurement of the cost of the asset. The when deferred in equity as qualifying cash flow hedges and qualify- deferred amounts are ultimately recognised in depreciation of fixed ing net investment hedges. Foreign exchange differences relating to assets. ordinary business operations of the Group are included in the appro- When a hedging instrument expires or is sold, or when a hedge priate line items above operating profit, and those relating to finan- no longer meets the criteria for hedge accounting under IAS 39, any cial items are included in a separate line item in the income state- cumulative gain or loss existing in equity at that time remains in ment and as a net amount in total finance costs. equity and is recognised when the committed or forecasted transac- Income and expenses for each income statement of subsidiaries tion is ultimately recognised in the income statement. However, if a that have a functional currency different from the Group’s presenta- committed or forecasted transaction is no longer expected to occur, tion currency are translated into euros at quarterly average exchange the cumulative gain or loss that was reported in equity is immedi- rates. Assets and liabilities of subsidiaries for each balance sheet ately transferred to the income statement. presented are translated at the closing rate at the date of that balance Hedges of net investments in foreign operations are accounted sheet. All resulting translation differences are recognised as a sepa- for similarly to cash flow hedges. The fair value changes of the rate component of equity. When a foreign entity is partially disposed forward exchange contracts that reflect the change in spot exchange of, sold or liquidated, such translation differences are recognised in rates are deferred in equity and included in cumulative translation the income statement as part of the gain or loss on sale. differences. Any gain or loss relating to the interest portion of the forward exchange contracts is recognised immediately in the income Derivative financial instruments and hedging activities statement under financial items. Gains and losses accumulated in Derivatives are initially recognised on the balance sheet at fair value equity are included in the income statement when the foreign opera- and thereafter remeasured at their fair value. The method of recog- tion is partially disposed of or sold. nising the resulting gain or loss is dependent on whether the deriva- Certain derivative transactions, while providing effective hedges tive is designated as a hedging instrument, and on the nature of the under the Group Financial Policy, do not qualify for hedge account- item being hedged. On the date a derivative contract is entered into, ing under the specific rules in IAS 39. Such derivatives are classi- the Group designates certain derivatives as either hedges of the fair fied held for trading, and changes in the fair value of any derivative value of a recognised asset or liability (fair value hedge), a hedge of instruments that do not qualify for hedge accounting under IAS 39 a forecasted transaction or of a firm commitment (cash flow hedge), are recognised immediately in the income statement as other operat- or hedges of net investments in foreign operations (net investment ing income or under financial items. hedge). The fair value of derivative financial instrument is classified At the inception of the transaction the Group documents the as a non-current asset or liability when the remaining maturity is relationship between hedging instruments and hedged items, as well more than 12 months, and as a current asset or liability when the as its risk management objective and strategy for undertaking vari- remaining maturity is less than 12 months. ous hedge transactions. This process includes linking all derivatives The Group applies fair value hedge accounting for hedging designated as hedges to specific assets and liabilities or to specific fixed interest risk on borrowings. Changes in the fair value of deriv- firm commitments or forecast transactions. The Group also docu- atives that are designated and qualify as fair value hedges and that ments its assessment, both at the hedge inception and on an ongoing are highly effective both prospectively and retrospectively are basis, as to whether the derivatives that are used in hedging transac- recorded in the income statement under financial items, along with tions are highly effective in offsetting changes in fair values or cash any changes in the fair value of the hedged asset or liability that are flows of hedged items. attributable to the hedged risk. The carrying amounts of the hedged Fair values of derivative financial instruments have been esti- items and the fair values of the hedging instruments are included in mated as follows: Interest forward rate agreements and futures the interest-bearing assets or liabilities. Derivatives that are desig- contracts are fair valued based on quoted market rates on the bal- nated and qualify as fair value hedges mature at the same time as ance sheet date; forward foreign exchange contracts are fair valued hedged items. If the hedge no longer meets the criteria for hedge based on the contract forward rates in effect on the balance sheet
F-66 ACCOUNTS FOR 2007 Group date; foreign currency options are fair valued based on quoted mar- Revenues from services are recorded when the service has been ket rates on the balance sheet date; interest and currency swap performed. Sales are recognised net of indirect sales taxes, dis- agreements are fair valued based on discounted cash flow analyses; counts, rebates and exchange differences on sales in foreign cur- and commodity derivatives are fair valued based on quoted market rency. The costs of distributing products sold are included in costs rates on the balance sheet date. and expenses. In assessing the fair value of non-traded derivatives such as Dividend income is recognised when the right to receive a pay- embedded derivatives the Group uses valuation methods and ment is established. assumptions that are based on market quotations existing at each Interest income is recognised by applying the effective interest balance sheet date. Embedded derivatives that are identified and are rate method. monitored by the Group and the fair value changes are reported in other operating income in the income statement. Income taxes The Group’s income taxes include income taxes of Group compa- Segment reporting nies based on taxable profit for the financial period, together with Business segments provide products or services that are subject to tax adjustments for previous periods and the change of deferred risks and returns that are different from those of other business income taxes. segments. Geographical segments provide products or services Deferred income tax is provided in full, using the liability within a particular economic environment that is subject to risks and method, on temporary differences arising between the tax bases of returns that are different from those of segments operating in other assets and liabilities and their carrying amounts in the consolidated economic environments. financial statements. However, the deferred income tax is not The accounting policies used in segment reporting are the same accounted for if it arises from initial recognition of an asset or lia- as those used in the consolidated accounts. The costs and revenues bility in a transaction other than a business combination that at the as well as assets and liabilities of the segments are allocated on a time of the transaction affects neither accounting nor taxable profit consistent basis. All inter-segment sales are based on market prices, or loss. Deferred income tax is determined using tax rates (and and they are eliminated on consolidation. laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred Non-current assets held for sale and income tax asset is realised or the deferred income tax liability is discontinued operations settled. Deferred income tax is provided on temporary differences Non-current assets (or disposal groups) are classified as assets held arising on investments in subsidiaries, associated companies and for sale and stated at the lower of carrying amount and fair value joint ventures, except where the timing of the reversal of the tempo- less costs to sell if their carrying amount is recovered principally rary difference is controlled by the Group and it is probable that the through a sale transaction rather than through a continuing use. temporary difference will not reverse in the foreseeable future. Non-current assets classified as held for sale, or included within a Deferred income tax assets are recognised to the extent that it is disposal group that is classified as held for sale, are not depreciated. probable that future taxable profit will be available against which the A discontinued operation is a component of an entity that either temporary differences can be utilised. has been disposed of, or that is classified as held for sale, and repre- sents a separate major line of business or geographical area of oper- Intangible assets ations, is a part of a single co-ordinated plan to dispose of a separate Intangible assets with finite lives are carried at historical cost less major line of business or geographical area of operations, or is a amortisation. Amortisation is based on the following estimated subsidiary acquired exclusively with a view to resale. The post-tax useful lives: profit or loss from discontinued operations is shown separately in the consolidated income statement. Computer software 3–5 years Other intangible assets 5–10 years Revenue recognition Sales are recognised when it is probable that future economic bene- Goodwill and other intangible assets that are deemed to have an fits will flow to the entity, the associated costs and the amount of indefinite life are not amortised, but are tested annually for impair- revenue can be measured reliably and the following criteria are met: ment. persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or Goodwill determinable, and collectibility is reasonably assured. Delivery is Goodwill represents the excess of the cost of acquisition over the not considered to have occurred until the customer takes title and fair value of the Group’s share of the net identifiable assets of the assumes the risks and rewards of ownership and the Group has acquired subsidiary, associated company or joint venture at the date neither continuing managerial involvement with the goods, nor a of acquisition. Goodwill on acquisitions of subsidiaries is included continuing right to dispose of the goods, nor effective control of in intangible assets. Goodwill on acquisitions of associated compa- those goods. The timing of revenue recognition is largely dependent nies and joint ventures is included in investments in associated on delivery terms. Group terms of delivery are based on Incoterms companies and joint ventures and is tested for impairment as part of 2000, the official rules for interpretation of trade terms issued by the overall balance. Goodwill is initially recognised as an asset at International Chamber of Commerce. Revenue is recorded when the cost and is subsequently measured at cost less any accumulated product is delivered to the destination point for terms designated impairment losses. Delivered Duty Paid (“DDP”). For sales transactions designated Cash-generating units to which goodwill has been allocated are Free on Board (“FOB”) or Cost, Insurance and Freight (“CIF”), tested for impairment annually, or more frequently when there is an revenue is recorded at the time of shipment. indication that the unit may be impaired. If the recoverable amount
F-67 Group ACCOUNTS FOR 2007 of the cash-generating unit is less than the carrying amount of the depreciation and any impairment charges. unit, the difference is an impairment loss, which is allocated first to Borrowing costs incurred for the construction of any qualifying reduce the carrying amount of any goodwill allocated to the unit assets are capitalised during the period of time that is required to and then to other assets of the unit pro-rata on the basis of the carry- complete and prepare the asset for its intended use. Other borrowing ing amount of each asset in the unit. An impairment loss recognised costs are expensed. for goodwill is not reversed in a subsequent period. Land is not depreciated. Depreciation of other assets is based on The gain or loss on disposal of an entity includes the carrying the following estimated useful lives: amount of goodwill related to the entity sold. Buildings 25–40 years Research and development Heavy machinery 15–20 years Research and development costs are expensed as incurred, except Light machinery and equipment 5–15 years for certain development costs, which are capitalised when it is prob- able that a development project will generate future economic bene- Expected useful lives of assets are reviewed at each balance sheet fits, and the cost can be measured reliably. Capitalised development date and, where they differ significantly from previous estimates, costs are amortised on a systematic basis over their expected useful depreciation periods are changed prospectively. future lives, usually not exceeding five years. Development assets Subsequent costs are included in the asset’s carrying amount or are tested for impairment annually. recognised as a separate asset, as appropriate, only when it is proba- ble that the future economic benefit associated with the item will Computer software flow to the Group and the cost of the item can be measured reliably. Costs associated with maintaining computer software programs and The carrying amount of the replaced part is derecognised. All other costs related to the preliminary project phase of internally devel- repairs and maintenance are charged to the income statement during oped software are recognised as an expense as incurred. Develop- the financial period in which they are incurred. Major renovations ment costs relating to the application development phase of inter- are depreciated over the remaining useful life of the related asset or nally developed software are capitalised as intangible assets. Capi- to the date of the next major renovation, whichever is sooner. talised costs include external direct costs of material and services Gains and losses on disposals are determined by comparing the and appropriate portion of relevant overheads of the software devel- disposal proceeds with the carrying amount and are included in opment team. Computer software development costs recognised as operating profit. Assets accounted under IFRS 5 that are to be dis- assets are amortized using the straight-line method over their useful posed of are reported at the lower of the carrying amount and the lives. fair value less selling costs.
Other intangible assets Government grants Acquired patents, trademarks and licences with a finite useful life Government grants relating to the purchase of property, plant and are recognised at cost less accumulated amortisation and impair- equipment are deducted from the acquisition cost of the asset and ment. Amortisation is calculated using the straight-line method to recognised as a reduction to the depreciation charge of the related allocate the cost over their estimated useful lives. Other intangible asset when it is practicable to determine that the eligibility condi- assets that are deemed to have an indefinite life are not amortised tions attached to the grant will be met and the grant will be received. and are tested annually for impairment. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended Emission allowances to compensate when the reimbursement is received or when it is The Group participates in government schemes aimed at reducing practicable to determine the amount and eligibility for the grant. greenhouse gas emissions. Allowances received from the govern- ments free of charge are initially recognised as intangible assets Investment property based on market value at the date of initial recognition. Allowances Investment property includes real estate investments such as flats are not amortised but are recognised at amount not exceeding the and other premises occupied by third parties. market value at the balance sheet date. Government grants are rec- Investment property is treated as a long-term investment and is ognised as deferred income in the balance sheet at the same time as stated at historical cost. Depreciation is calculated on a straight-line the allowances and recognised in other operating income in the basis and the carrying value is adjusted for impairment charges, if income statement systematically over the compliance period to any. Useful lives are the same as for property, plant and equipment. which the corresponding emission rights relate. The emissions made The balance sheet value of investment property reflects the cost less are expensed under other operating costs and expenses in the accumulated depreciation and any impairment charges. income statement. Emission rights and associated provisions are derecognised when delivered or sold. Any profit or loss on disposal Biological assets is taken to the income statement. Biological assets (i.e. living trees) are measured at their fair value less estimated point-of-sale costs. The fair value of biological assets Property, plant and equipment other than young seedling stands is based on discounted cash flows Property, plant and equipment acquired by Group companies are from continuous operations. The fair value of young seedling stands stated at historical cost. Assets of acquired subsidiaries are stated at is the actual reforestation cost of those stands. Continuous opera- fair value at the date of acquisition. Depreciation is calculated on a tions, the maintenance of currently existing seedling stands and the straight-line basis and the carrying value is adjusted for impairment felling of forests during one rotation, are based on the Company’s charges, if any. The carrying value of the property, plant and equip- forest management guidelines. The calculation takes into account ment on the balance sheet represents the cost less accumulated
F-68 ACCOUNTS FOR 2007 Group the growth potential and environmental restrictions and other reser- able for sale, a significant or prolonged decline in the fair value of vations of the forests. Felling revenues and maintenance costs are the security below its cost is considered in determining whether the calculated on the basis of actual costs and prices, taking into securities are impaired. If any such evidence exists for available-for- account the Company’s projection of future price development. sale financial assets, the cumulative loss – measured as the differ- Periodic changes resulting from growth, felling, prices, discount ence between the acquisition cost and the current fair value, less any rate, costs and other premise changes are included in operating impairment loss on that financial asset previously recognised in profit on the income statement. profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on Financial assets equity instruments are not subsequently reversed through the Financial assets have been classified into the following categories: income statement. financial assets at fair value through profit or loss, loans and receiv- ables, trade receivables and available-for-sale investments. The Impairment of non-financial assets classification depends on purpose for which the financial assets Assets that have an indefinite useful life are not subject to amortisa- were acquired. Management determines the classification of the tion and are tested annually for impairment. Assets that are subject financial assets at initial recognition. to depreciation (or amortisation) are reviewed for impairment when- Financial assets at fair value through profit or loss are financial ever events or changes in circumstances indicate that the carrying assets held for trading. Derivatives are categorised as held for trad- amount may not be recoverable. An impairment loss is recognised ing, unless they are designated as hedges. These are measured at fair for the amount by which the asset’s carrying amount exceeds its value and any gains or losses from subsequent measurement are recoverable amount. The recoverable amount is the higher of an recognised in the income statement. The Group has not used the asset’s fair value less costs to sell and value in use. The value in use option of designating financial assets upon initial recognition as is determined by reference to discounted future cash flows expected financial assets at fair value through profit or loss. to be generated by the asset. For the purposes of assessing impair- Loans and receivables are non-derivative financial assets with ment, assets are grouped at the lowest levels for which there are fixed or determinable payments that are not quoted in an active separately identifiable cash flows (cash-generating units). market. They are included in non-current assets unless they mature Non-financial assets other than goodwill that suffered an impair- within 12 months of the balance sheet date. Loan receivables origi- ment are reviewed for possible reversal of the impairment at each nated by the company that have a fixed maturity are measured at reporting date. Where an impairment loss subsequently reverses, the amortised cost using the effective interest method. Loan receivables carrying amount of the asset is increased to the revised estimate of are impaired if the carrying amount is greater than the estimated its recoverable amount, but so that the increased carrying amount recoverable amount. does not exceed the carrying amount that would have been deter- Trade receivables are non-derivatives that are recognised ini- mined had no impairment loss been recognised for the asset in prior tially at fair value and subsequently measured at amortised cost less years. allowances for doubtful accounts. Allowances for doubtful accounts are made when there is objective evidence that the Group will not be Leases able to collect all amounts due according to the original terms of Leases of property, plant and equipment where the Group, as a receivables. Significant financial difficulties of the debtor, probabil- lessee, has substantially all the risks and rewards of ownership are ity that the debtor will enter bankruptcy or default of delinquency in classified as finance leases. Finance leases are recognised as assets payments more than 90 days overdue are considered indicators that and liabilities in the balance sheet at the commencement of lease the trade receivable may be irrecoverable. Subsequent recoveries of term at the lower of the fair value of the leased property and the amounts previously written off are credited in the income statement. present value of the minimum lease payments. Each lease payment Available-for-sale investments are non-derivatives that are either is apportioned between the liability and finance charges. The corre- designated in this category or not classified in any of the other cate- sponding rental obligations, net of finance charges, are included in gories. They are included in non-current assets unless they are other long-term interest-bearing liabilities. The interest element of intended to be disposed of within 12 months of the balance sheet the finance cost is charged to the income statement over the lease date. Purchases and sales of financial investments are recognised on period so as to produce a constant periodic rate of interest on the the settlement date, which is the date that the asset is delivered to or remaining balance of the liability for each period. Property, plant by the Group. Investments are initially recognised at cost, including and equipment acquired under finance leases are depreciated over transaction costs, and subsequently carried at fair value. the shorter of the asset’s useful life and the lease term. The fair values of listed investments are based on quoted prices. Leases where the lessor retains substantially all the risks and Unlisted equity securities, for which fair values cannot be measured rewards of ownership are classified as operating leases. Payments reliably, are recognised at cost. made under operating leases as a lessee are charged to the income Unrealised gains and losses arising from changes in the fair statement on a straight-line basis over the period of the lease. value of securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or Inventories impaired, the accumulated fair value adjustments in equity are Inventories are stated at the lower of cost and net realisable value. included in the income statement as gains and losses from available- Cost is determined by the method most appropriate to the particular for-sale investments. nature of inventory, the first in, first out (FIFO) or weighted average The Group assesses at each balance sheet date whether there is cost. The cost of finished goods and work in progress comprises raw objective evidence that a financial asset or a group of financial materials, direct labour, other direct costs and related production assets is impaired. In the case of equity securities classified as avail- overheads (based on normal operating capacity) but excludes bor-
F-69 Group ACCOUNTS FOR 2007 rowing costs. Net realisable value is the estimated selling price in The liability recognised in the balance sheet in respect of the ordinary course of business, less the costs of completion and defined benefit pension plans is the present value of the defined selling expenses. benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or Cash and cash equivalents losses and past service cost. The defined benefit obligation is calcu- Cash and cash equivalents comprise cash in hand, deposits held at lated annually by independent actuaries using the projected unit call with banks and other short-term highly liquid investments with credit method. The present value of the defined benefit obligation is original maturities of three months or less. Bank overdrafts are determined by discounting the estimated future cash outflows using included within borrowings in current liabilities on the balance interest rates of high-quality corporate bonds that are denominated sheet. in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension Treasury shares liability. The cost of providing pensions is charged to the income Where any Group company purchases the Company’s equity share statement so as to spread the regular cost over the service lives of capital (treasury shares), the consideration paid, including any the employees. Actuarial gains and losses arising from experience directly attributable incremental costs (net of income taxes), is adjustments and changes in actuarial assumptions in excess of the deducted from equity attributable to the Company’s equity holders greater of 10% of the value of plan assets or 10% of the defined until the shares are cancelled or reissued. Where such shares are benefit obligation are charged or credited to income over the subsequently reissued, any consideration received, net of any expected average remaining service lives of the employees con- directly attributable incremental transaction costs and the related cerned. Past service costs are recognised immediately in income, income tax effects, is included in equity attributable to the Compa- unless the changes to the pension plan are conditional on the ny’s equity holders. employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on Interest-bearing liabilities a straight-line basis over the vesting period. Interest-bearing liabilities are recognised initially at fair value, net For defined contribution plans, contributions are paid to pension of transaction costs incurred. In subsequent periods, interest-bearing insurance companies. Once the contributions have been paid, there liabilities are stated at amortised cost using the effective interest are no further payment obligations. Contributions to defined contri- method; any difference between proceeds (net of transaction costs) bution plans are charged to the income statement in the period to and the redemption value is recognised in the income statement over which the contributions relate. the period of the interest-bearing liabilities. The Group has not used the option of designating financial liabilities upon initial recognition Other post-retirement obligations as financial liabilities at fair value through profit or loss. Some Group companies provide post-retirement healthcare benefits Most long-term interest-bearing liabilities are designated as to their retirees. The entitlement to these benefits is usually condi- hedged items in a fair value hedge relationship. Fair value variations tional on the employee remaining in service up to retirement age resulting from the hedged interest rate risk are recorded to adjust the and the completion of a minimum service period. The expected carrying amount of the hedged item and reported on the income costs of these benefits are accrued over the period of employment, statement under finance income and expenses. If the hedge account- using an accounting methodology similar to that for defined benefit ing is discontinued, the carrying amount of the hedged item is no pension plans. Valuations of these obligations are carried out by longer adjusted for fair value changes attributable to the hedged risk independent qualified actuaries. and the cumulative fair value adjustment recorded during the hedge relationship is amortised based on a new effective interest recalcula- Share-based compensation tion through the income statement under finance income and The Group has granted share options to top management and key expenses. personnel. In addition, the Group has established a share ownership Interest-bearing liabilities are classified as non-current liabilities programme for its executive management. These compensation unless they are due to be settled within 12 months after the balance plans are recognised as equity-settled or cash-settled share-based sheet date. payment transactions depending on the settlement. The fair value of the granted options and shares are recognised as indirect employee costs over the vesting period. The fair values of the options granted Employee benefits are determined using the Black- Scholes valuation model on the Pension obligations grant date. Non-market vesting conditions are included in assump- The Group operates a mixture of pension schemes in accordance tions about the number of options that are expected to vest. The with the local conditions and practices in the countries in which it estimates of the number of the exercisable options are revised quar- operates. Such benefit plans vary according to the customary benefit terly and the impact of the revision of original estimates, if any, is plans prevailing in the country concerned. These programmes recognised in the income statement and equity. include defined benefit pension schemes with retirement, disability Based on the share ownership programme, the executive man- and termination benefits. The retirement benefits are generally a agement is compensated with shares depending on Group’s financial function of years of employment and final salary with the Company. performance. Shares are valued using the market rate on the grant Generally, the schemes are either funded through payments to insur- date. The settlement is a combination of shares and cash. The Group ance companies or to trustee-administered funds as determined by can obtain the necessary shares by using its treasury shares or pur- periodic actuarial calculations. In addition, the Group also operates chase shares from the market. defined contribution pension arrangements. Most of Finnish pension arrangements are defined contribution plans.
F-70 ACCOUNTS FOR 2007 Group
Provisions Adoption of new or revised Provisions are recognised when the Group has a present legal or International Financial Reporting Standards constructive obligation as a result of past events, and it is probable Standards, interpretations and amendments to published standards that an outflow of resources will be required to settle the obligation, In 2007, the Group has adopted all of the standards, interpretations and a reliable estimate of the amount can be made. Where the Group and amendments to published standards issued by the International expects a provision to be reimbursed, for example under an insur- Accounting Standards Board (the IASB) that are relevant to its ance contract, the reimbursement is recognised as a separate asset operations and effective for accounting periods beginning on 1 Jan- but only when the reimbursement is virtually certain. uary 2007. The adoption has resulted in changes to the Group’s accounting policies or the amounts reported for the current or prior Restructuring provisions years in the following areas: Restructuring provisions are recognised in the period in which the IFRS 7 Financial Instruments: Disclosures, and a complemen- Group becomes legally or constructively committed to payment. tary amendment to IAS 1 Presentation of Financial Statements - Employee termination benefits are recognised only after either an Capital Disclosures introduces new disclosures to improve the infor- agreement has been made with the appropriate employee representa- mation about financial instruments. It requires the disclosure of tives on the terms of redundancy and the numbers of employees qualitative and quantitative information about exposure to risks affected, or after employees have been advised of the specific terms. arising from financial instruments, including specified minimum Costs related to the ongoing activities of the Group are not provi- disclosures about credit risk, liquidity risk and market risk, includ- sioned in advance. ing sensitivity analysis to market risk. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how Environmental remediation provisions it manages capital. Expenditures that result from remediation of an existing condition caused by past operations and do not contribute to current or future Standards, interpretations and amendments to published standards revenues are expensed. The recognition of environmental remedia- that are not yet effective tion provisions is based on current interpretations of environmental Certain standards, interpretations and amendments to existing stand- laws and regulations. Such provisions are recognised when it is ards have been published that are mandatory for accounting periods likely that the liability has been incurred and the amount of such beginning on 1 January 2008 or later but which the Group has not liability can be reasonably estimated. Amounts provisioned do not early adopted: include third-party recoveries. Revised IAS 1 Presentation of Financial Statements is effective for annual periods beginning on or after 1 January 2009. The revised Emission allowances standard requires items of income and expense and components of Emission obligations are recognised in provisions when the liability other comprehensive income to be presented either in a single state- to deliver emission allowances is incurred based on emissions made. ment of comprehensive income with subtotals, or in two separate The liability to deliver allowances is recognised based on the carry- statements (a separate income statement followed by a statement of ing amount of allowances on hand, if the liability is expected to be comprehensive income). The revised standard will change the pres- settled by those allowances, or if excess emissions are incurred, at entation of Group’s financial statements. This revised standard is not the market value of the allowances at the balance sheet date. yet endorsed by the EU. Revised IAS 23 Borrowing Costs is effective for annual periods Dividends beginning on or after 1 January 2009. The revised standard requires Dividend distribution to the Company’s shareholders is recognised that all borrowing costs relating to the acquisition, construction or as a liability in the Group’s financial statements in the period in production of a qualifying asset are capitalised as part of the cost of which the dividends are approved by the Company’s shareholders. that asset. The Group’s current accounting policy is already in accordance with revised IAS 23 so there will be no change for the Comparatives future financial statements. This revised standard is not yet endorsed Where necessary, comparative figures have been reclassified to by the EU. conform to changes in presentation in the current year. In addition, IFRS 8 Operating Segments is effective for annual periods comparative figures have been revised, where necessary, to reflect beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 Seg- the impact of the adoption of a number of new and revised IFRS- ment Reporting and requires the ‘management approach’ to report- standards. ing on the financial performance of operating segments. The infor- mation to be reported for each segment is to be the measure what Earnings per share chief operating decision maker uses internally for evaluating seg- The basic earnings per share are computed using the weighted ave- ment performance and deciding how to allocate resources to operat- rage number of shares outstanding during the period. Diluted earn- ing segments. The Group is currently evaluating the effects of ings per share are computed using the weighted average number of implementing this standard. shares outstanding during the period plus the dilutive effect of con- IFRIC 11 IFRS 2 – Group and Treasury Share Transactions is vertible bonds and share options. effective for annual periods beginning on or after 1 March 2007. The Interpretation addresses how to apply IFRS 2 Share-based Payment to share-based payment arrangements involving an entity’s own equity instruments or equity instruments of another entity in the same group (e.g. equity instruments of its parent in the stand- alone accounts of the parent and group companies). This interpreta-
F-71 Group ACCOUNTS FOR 2007 tion does not have an impact on the Group’s financial statements. other factors. Actual results that differ from assumptions and the IFRIC 12 Service Concession Arrangements is effective for effects of changes in assumptions are accumulated and charged or annual periods beginning on or after 1 January 2008. The Interpreta- credited to income over the expected average remaining service tion addresses the accounting by private sector operators involved in lives of the employees to the extent that these exceed 10% of the the provision of public sector infrastructure assets and services. The higher of the pension plan assets and defined benefit obligation. Group does not expect the interpretation to be relevant for the Significant differences in actual experience or significant changes in Group. This interpretation is not yet endorsed by the EU. assumptions may materially affect the future amounts of the defined IFRIC 13 Customer Loyalty Programmes is effective for annual benefit obligation and future expense. periods beginning on or after 1 July 2008. The Interpretation addresses the accounting by entities that grant loyalty award credits Environmental provisions to customers who buy other goods or services. The Group does not Operations of the Group are based on heavy process industry which expect the interpretation to be relevant for the Group. This interpre- requires large production facilities. In addition to basic raw materi- tation is not yet endorsed by the EU. als, considerable amount of chemicals, water and energy is used in IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Mini- processes. The Group’s operations are subject to several environ- mum Funding Requirements and their Interaction is effective for mental laws and regulations. The Group aims to operate in compli- annual periods beginning on or after 1 January 2008. The Interpreta- ance with regulations related to the treatment of waste water, air tion provides general guidance on how to assess the limit in IAS 19 emissions and landfill sites. The Group has provisions for normal Employee Benefits on the amount of a pension fund surplus that can environmental remediation costs. Unexpected events occurred du- be recognised as an asset. It also explains how the pension asset or ring production processes and waste treatment could cause material liability may be affected when there is a statutory or contractual losses and additional costs in the Group’s operations. minimum funding requirement. The Group is currently evaluating the effects of implementing this Interpretation. This interpretation is Income taxes not yet endorsed by the EU. Management judgement is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Group 2 CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING reviews at each balance sheet date the carrying amount of deferred POLICIES AND KEY SOURCES OF ESTIMATION UNCER- tax assets. The Group considers whether it is probable that the sub- TAINTY sidiaries will have sufficient taxable profits against which the unused tax losses or unused tax credits can be utilised. The factors used in estimates may differ from actual outcome which could lead to sig- Impairment of non-current assets nificant adjustment to deferred tax assets recognised in the income Goodwill, intangible assets not yet available for use and intangible statement. assets with indefinite useful lives are tested at least annually for impairment. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. Estimates are made Legal contingencies of the future cash flows expected to result from the use of the asset Management judgement is required in measurement and recognition and its eventual disposal. If the balance sheet carrying amount of of provisions related to pending litigation. Provisions are recorded the asset exceeds its recoverable amount, an impairment loss is when the Group has a present legal or constructive obligation as a recognised. Actual cash flows could vary from estimated discounted result of past event, an unfavourable outcome is probable and the future cash flows. The long useful lives of assets, changes in esti- amount of loss can be reasonably estimated. Due to inherent uncer- mated future sales prices of products, changes in product costs and tain nature of litigation, the actual losses may differ significantly changes in the discount rates used could lead to significant impair- from the originally estimated provision. ment charges. Details of the impairment tests are provided in Note 16. 3 FINANCIAL RISK MANAGEMENT Biological assets The Group owns about 1 million hectare of forest land. Biological Financial risks assets (i.e. living trees) are measured at their fair value at each bal- The Group’s activities expose it to a variety of financial risks: mar- ance sheet date. The fair value of biological assets is determined ket risk (including foreign exchange risk, fair value interest rate based among other estimates on growth potential, harvesting, price risk, cash flow interest risk and price risk), credit risk and liquidity development and discount rate. Changes in any estimates could lead risk. to recognition of significant fair value changes in income statement. The objective of financial risk management is to protect the Group from unfavourable changes in financial markets and thus help Employee benefits to secure profitability. The objectives and limits for financing activi- The Group operates a mixture of pension and other post-employ- ties are defined in the Group Treasury Policy approved by the com- ment benefit schemes. Several statistical and other actuarial assump- pany’s Board of Directors. tions are used in calculating the expense and liability related to the In financial risk management various financial instruments are plans. These factors include, among others, assumptions about the used within the limits specified in the Group Treasury Policy. Only discount rate, expected return on plan assets and changes in future such instruments whose market value and risk profile can be contin- compensation. Statistical information used may differ materially uously and reliably monitored are used for this purpose. from actual results due to changing market and economic condi- Financial services are provided and financial risk management tions, changes in service period of plan participants or changes in carried out by a central treasury department, Treasury and Risk
F-72 ACCOUNTS FOR 2007 Group
Management (TRM). The centralization of Treasury functions ena- Translation exposure bles efficient financial risk management, cost-efficiency and effi- Translation exposure consists of net investments in foreign subsidi- cient cash management. aries. At 31 December 2007, the Group did not hedge the exchange risk associated with the shareholders’ equity of foreign subsidiaries. Foreign exchange risk The Group is exposed to foreign exchange risk arising from various Foreign exchange risk sensitivity currency exposures, primarily with respect to the USD and the GBP. At 31 December 2007, if Euro had weakened/strengthened by 10% Foreign exchange risk arises from future commercial transactions, against the USD with all other variables held constant, pre-tax profit recognised assets and liabilities. for the year would have been ` 2 million (2006: ` 0 million) higher/ The objective of foreign exchange risk management is to limit lower due to balance sheet foreign exchange exposure. The effect in the uncertainty created by changes in foreign exchange rates on the equity would have been ` 34 million (2006: ` 53 million) lower/ future value of cash flows and earnings as well as in the Group’s bal- higher, arising mainly from foreign currency forwards used to hedge ance sheet by hedging foreign exchange risk in forecasted cash forecasted foreign currency flows. Equity was less sensitive to flows and balance sheet exposures. movement in EUR/USD rate in 2007 than in 2006 because of the decreased amount of USD denominated hedging forward contracts. Transaction exposure As of 31 December 2007, if Euro had weakened/strengthened The Group hedges transaction exposure related to highly probable by 10% against the GBP with all other variables held constant, future commercial foreign cash flows on a rolling basis over the next pre-tax profit for the year would have been ` 0 million (2006: 12-month period based on the units’ forecasts. According to the ` 3 million) higher/lower due to balance sheet foreign exchange Group’s Treasury Policy 50% hedging is considered risk neutral. exposure. The effect in equity would have been ` 31 million (2006: Some confirmed and committed transactions have been hedged for ` 37 million) lower/higher, arising mainly from foreign currency longer than 12 months ahead while deviating from the risk neutral forwards used to hedge forecasted foreign currency flows. Equity hedging level at the same time. Forward contracts and swaps are was less sensitive to movement in EUR/GBP rate in 2007 than in used in transaction exposure management. Most of the derivatives 2006 because of the decreased amount of GBP denominated hedg- entered into to hedge foreign currency cash flows meet the hedge ing forward contracts. accounting requirements set by the IFRS. 53% of the forecasted As of 31 December 2007, if Euro had weakened/strengthened 12-month currency flow was hedged on 31 December 2007 by 10% against the AUD with all other variables held constant, (31.12.2006: 52%). The table below shows the nominal values of the pre-tax profit for the year would have been ` 16 million (2006: ` 0 hedging instruments at 31 December 2007 and 2006. million) higher/lower. Profit is more sensitive to movement in EUR/ AUD exchange rates in 2007 than in 2006 because the majority of Nominal values of hedging instruments `m the Group’s AUD denominated hedging forward contracts do not Currency 2007 2006 anymore fulfil the IFRS effective cash flow hedging criteria. The USD 342 543 effect in equity would have been ` 0 million (2006: ` 15 million) GBP 315 384 lower/higher. Equity was less sensitive to movement in EUR/AUD JPY 36 61 rate in 2007 than in 2006 because of the decreased amount of AUD AUD 168 164 denominated hedging forward contracts being part of the effective SEK 51 52 cash flow hedging. CAD –2 –77 The following assumptions were made when calculating the sen- NOK 30 32 sitivity to changes in the foreign exchange risk: DKK 44 40 s The variation in exchange rates is 10%. Others 75 19 s Major part of non-derivative financial instruments (such as cash Total 1,059 1,218 and cash equivalents, trade receivables, interest bearing-liabili- ties and trade payables) are either directly denominated in the For segment reporting purposes, the hedges made by TRM on functional currency or are transferred to the functional currency behalf of UPM’s subsidiaries and business units are allocated to through the use of derivatives i.e. the balance sheet position is appropriate segments. External forwards are designated at group close to zero. Exchange rate fluctuations have therefore minor or level as hedges of foreign exchange risk of specific future foreign no effects on profit or loss. currency sales on gross basis. s The position includes foreign currency forward contracts that The Group has several currency denominated assets and liabili- are part of the effective cash flow hedge having an effect on ties in its balance sheet such as foreign currency loans and deposits, equity. accounts payable and receivable, and cash in other currencies than s The position includes also foreign currency forward contracts home currency. The aim is to hedge this balance sheet exposure that are not part of the effective cash flow hedge having an effect fully using financial instruments. The Group might, however, have on profit. within the limits set in the Group Treasury Policy unhedged balance s The position excludes foreign currency denominated future cash sheet exposures. At 31 December 2007 unhedged balance sheet flows. exposures amounted to ` 17 million (31.12.2006: ` 11 million). The nominal values of the hedging instruments used in accounts payable Interest rate risk and receivable hedging were ` 327 million (31.12.2006: ` 340 mil- The interest-bearing debt exposes the Group to interest rate risk, lion). namely repricing and fair value interest rate risk caused by interest rate movements. The objective of interest rate risk management is to
F-73 Group ACCOUNTS FOR 2007 reduce the fluctuation of the interest expenses caused by the interest Liquidity and refinancing risk rate movements. The Group seeks to maintain adequate liquidity under all circum- The management of interest rate risk is based on the 6-month stances by means of efficient cash management and restricting average duration of the net debt portfolio as defined in the Group investments to those that can be readily converted into cash. The Treasury Policy. This relatively short duration is based on the Group utilises commercial paper programmes for short term financ- assumption that on average yield curves will be positive. Thus this ing purposes. Committed credit facilities are used to secure financ- approach reduces interest cost in the long term. The duration may ing under all circumstances and as a backup for commercial paper deviate between 3 and 12 months. At 31 December 2007 the average programmes. duration was 6 months (31.12.2006: 6 months). The Group uses Refinancing risks are minimised by ensuring balanced loan interest rate derivatives to change the duration of the net debt. portfolio maturing schedule and sufficient long maturities. The The Group’s net debt per currency corresponds to the parent average loan maturity at 31 December 2007 was 6.1 years company’s and subsidiaries’ loan portfolios in their home curren- (31.12.2006: 7.1 years). cies. The nominal values of the Group’s interest-bearing net debts including derivatives by currency at 31 December 2007 and 2006 Cash funds and committed credit facilities were as follows: `m 2007 2006 `bn Cash funds 237 199 Currency 2007 2006 Committed facilities 2,500 2,700 EUR 3.8 3.4 of which used –538 – CNY 0.4 0.5 Used uncommitted credit lines –416 –355 USD 0.3 0.3 Long-term loan repayment –391 –521 CAD –0.3 0.1 Available liquidity 1,392 2,023 GBP –0.1 –0.1 Total 4.1 4.2 The most important financial programmes in use are: s $OMESTIC COMMERCIAL PAPER PROGRAMME ` 1.0 billion Most of the long-term loans and the interest rate derivatives related s "ELGIAN COMMERCIAL PAPER PROGRAMME ` 400 million to them meet the IFRS hedge accounting requirements. s -EDIUM 4ERM .OTE PROGRAMME ` 5.0 billion s 2EVOLVING #REDIT &ACILITY ` 1.5 billion (matures 2010) Interest rate risk sensitivity s 2EVOLVING #REDIT &ACILITY ` 1.0 billion (matures 2012) At 31 December 2007, if the interest rate of net debt had been 1% higher/lower with all other variables held constant, pre-tax profit for Financial counterparty risk the year would have been ` 7 million (2006: ` 5 million) lower/ The financial instruments the Group has agreed with banks and higher, mainly as a result of higher/lower interest expense on float- financial institutions contain an element of risk of the counterparties ing rate borrowings. There would be no effect on equity. being unable to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash The following assumptions were made when calculating the sensi- funds may be made only with counterparties meeting certain credit- tivity to changes in interest rates: worthiness criteria. The Group minimises counterparty risk also by s The variation of interest rate is assumed to be 1% parallel shift using a number of major banks and financial institutions. Creditwor- in applicable interest rate curves. thiness of counterparties is constantly monitored by TRM. Given the s In the case of fair value hedges designated for hedging interest high credit quality of counterparties the possibility of them being rate risk, the changes in the fair values of the hedged items and unable to meet their obligations is considered minimal. the hedging instruments attributable to the interest rate move- ments balance out almost completely in the income statement in Credit risk the same period. However, the possible ineffectiveness has an With regard to operating activities, the Group has a credit policy in effect on the profit of the year. place and the exposure to credit risk is monitored on an ongoing s Fixed rate borrowings that are measured at amortised cost and basis. Open trade receivables, days of sales outstanding (DSO) and which are not designated to fair value hedge relationship are not overdue trade receivables are followed on monthly basis. subject to interest rate risk sensitivity. Potential concentrations of credit risk with respect to trade and s Variable rate borrowings that are measured at amortised cost other receivables are limited due to the large number and geographic and which are not designated as hedged items are included in dispersion of companies that comprise the Group’s customer base. interest rate sensitivity analysis. Customer credit limits are established and monitored, and ongoing s Changes in the market interest rate of interest rate derivatives evaluations of customers’ financial condition are performed. Most (interest rate futures, swaps and cross currency swaps) that are of the receivables are covered by credit risk insurances. In certain not designated as hedging instruments under IAS 39 affect the market areas, measures to reduce credit risks include letters of financial income or expenses (net gains or losses from remeas- credit, prepayments and bank guarantees. The ageing analysis of urement of the financial assets and liabilities to fair value) and trade receivables is presented in Note 26. The Group considers that are therefore included in the income-related sensitivity analysis. no significant concentration of customer credit risk exists. The ten largest customers accounted for approximately 11% of the Group’s trade receivables as at 31 December 2007 - i.e., approximately ` 150 million. The credit risk relating to the commitments is discussed in note 39.
F-74 ACCOUNTS FOR 2007 Group
Derivatives related to commodity price risk management 4 SEGMENT INFORMATION The Group’s manufacturing process requires a significant amount of electricity. The procurement and sales of electricity are managed The Group is organised on a worldwide basis into the following and optimised by the Group. The Group manages the price risk of primary business segments: its electricity exposure with electricity forward contracts. If all electricity prices quoted on 31 December 2007 at Nord s Magazine Papers Division Pool electricity exchange would have been 15% higher/lower with s Newsprint Division all other variables constant, pre-tax profit for the year would have s Fine and Speciality Papers Division been ` 0.3 million (2006: ` 0.2 million) higher/lower. Profit was s Label Division more sensitive to electricity price movements in 2007 than in 2006 s Wood Products Division because of the increased amount of the electricity derivatives. s The sensitivity analysis assumes a 15% parallel move in elec- Activities outside the segments are reported under Other Opera- tricity prices for all maturities. tions. s The sensitivity analysis includes only outstanding electricity As of beginning of 2007, the Converting Division consists only derivatives. of UPM Raflatac and the division has been renamed as the Label Division. Walki Wisa business unit, disposed in June 2007, reported Capital risk management previously in Converting Division, has been regrouped in Other The Group’s objective in managing its capital is to ensure mainte- Operations. Comparative years have been revised accordingly. nance of flexible capital structure to enable the Group to operate in capital markets. Magazine Papers Division To measure a satisfactory capital balance between equity inves- Magazine papers have a high mechanical pulp content and are gen- tors and financial institutions the Group has set a target for the ratio erally used in magazines, newspaper supplements, catalogues and of net interest-bearing liabilities and equity (gearing). To ensure direct mailings. The division manufactures both coated and sufficient flexibility, the aim is to keep the gearing ratio well below uncoated papers. Coated magazine papers are mainly used in the the maximum acceptable level of 100%. manufacture of high-quality, multi-coated printed products, includ- The following capitalisation table sets out the Group’s equity ing magazines, catalogues, brochures, direct mail advertising and and interest-bearing liabilities and gearing ratios: other advertising materials. Uncoated papers are mainly used for magazines, weekend newspaper supplements, catalogues, and flyers. As at 31 December `m 2007 2006 Newsprint Division Shareholders’ equity 6,770 7,271 This division produces standard newsprint and machine-finished Minority interest 13 18 uncoated papers. The end-uses include daily newspapers, direct Equity total 6,783 7,289 mail, telephone catalogues and books. Long-term interest-bearing liabilities 3,384 3,353 Short-term interest-bearing liabilities 931 992 Interest-bearing liabilities, total 4,315 4,345 Fine and Speciality Papers Division Total capitalisation 11,098 11,634 This division produces a complete range of coated and uncoated Interest-bearing liabilities, total 4,315 4,345 wood-free papers for graphic use and office communication. Fine Less: Interest-bearing receivables, total –342 –297 papers are used for copying, non-impact printing, facsimile, direct Net interest-bearing liabilities 3,973 4,048 mail advertising, brochures, and special interest magazines, while Gearing ratio 59 56 speciality papers include label papers and packaging papers.
Label Division This division produces self-adhesive labelstock and RFID tags.
Wood Products Division This division includes plywood manufacturing and sawmilling.
Other Operations This includes forestry departments, and energy department in Fin- land, logistics operations, real estate units and Walki Wisa business unit as well as the new ventures business unit. It also includes the share of net earnings of associated companies (mainly Oy Metsä- Botnia Ab and Pohjolan Voima Oy) and the central administrative functions for the Group. The sales of Other Operations comprise only sales outside the Group.
F-75 Group ACCOUNTS FOR 2007
Primary reporting format – Segment data for the year ended 31 December 2007
Fine and Magazine Speciality Label Wood Other `m Papers Newsprint Papers Materials Products Operations1) Eliminations Group
External sales 3,098 1,462 2,557 1,021 1,088 809 – 10,035 Internal sales 151 8 240 1 111 – –511 – Total sales 3,249 1,470 2,797 1,022 1,199 809 –511 10,035
Share of results of associates and joint ventures – – – – – 43 – 43
Operating profit 2) –340 177 112 51 92 391 – 483 Gains on available-for-sale investments, net 2 Finance costs, net –193 Income taxes 3) –211 Profit for the period 81
Assets 4) 3,276 1,901 3,073 617 665 2,320 –202 11,650 Associates and joint ventures 4) – – – – – 1,193 – 1,193 Unallocated assets – – – – – – – 1,110 Total assets 13,953
Liabilities 5) 224 115 232 151 65 237 –202 822 Unallocated liabilities – – – – – – – 6,348 Total liabilities 7,170
Other items Depreciation and amortisation 333 190 213 33 42 20 – 831 Impairment charge 361 – – – – 32 – 393 Capital expenditure 6) 120 65 322 107 31 63 – 708 Capital employed, 31 December 7) 3,052 1,786 2,841 466 600 3,276 –923 11,098 Capital employed, average 3,403 1,872 2,821 439 577 – – 11,366 Return on capital employed, % 8) –10.0 9.5 4.0 11.6 16.0 – – 4.3
1) Sales include only sales outside the Group. Internal sales to segments amount to ` 1,819 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profit of the Magazine papers segment include a goodwill impairment charge of ` 350 million, an impairment charge of ` 22 million, personnel costs of ` 54 mil- lion and other costs of ` 36 million related to the Miramichi paper mill, an income of ` 11 million related to impairment reversals, and an income of ` 3 million related to other restructuring measures. The operating profit of the Newsprint segment and Label segment includes restructuring income of ` 5 million and restructuring income of ` 4 million, respectively. In Wood Products segment, the operating profit includes a gain of ` 6 million on sale of estate assets. The operating profi t in Other Operations includes capital gains of ` 42 million related to the sale of UPM-Asunnot, ` 29 million related to the sale of Walki Wisa, and ` 58 million on the sale of port operators Rauma Stevedoring and Botnia Shipping, compensation charges of ` 12 million related to class-action lawsuits in US, impairment charges of ` 31 million related mainly to Miramichi’s forestry and sawmilling operations, and other restructuring costs of ` 5 million. 3) Income taxes include a charge of ` 123 million from a reduction in the deferred tax assets of Miramichi due to write-down of tax assets and a decrease in the income tax rate in Canada, an income of ` 25 million from the decrease of deferred tax liabilities relating to the impairment of goodwill of Magazine Papers, and an income of ` 27 million relat- ing mainly to reversal of tax provisions. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital expenditure include goodwill arisen in business combinations, other intangible assets, property, plant and equipment, investment property, biological assets and invest- ments in associated companies and joint venture. 7) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: ` 1,473 million and the Energy Department in Finland: ` 970 million. Eliminations include unallocated assets and unallocated non-interest bearing-liabilities. 8) The formula for calculation of the return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: (Profit before tax + interest expenses and other finance costs) /(Balance sheet total – non-interest-bearing liabilities (average)) x 100.
F-76 ACCOUNTS FOR 2007 Group
Primary reporting format – Segment data for the year ended 31 December 2006
Fine and Magazine Speciality Label Wood Other `m Papers Newsprint Papers Materials Products Operations1) Eliminations Group
External sales 3,237 1,433 2,315 987 1,226 824 – 10,022 Internal sales 117 3 245 – 95 –1 –459 – Total sales 3,354 1,436 2,560 987 1,321 823 –459 10,022
Share of results of associates and joint ventures – – – – – 61 – 61
Operating profit 2) –56 148 108 61 144 131 – 536 Gains on available-for-sale investments, net –2 Finance costs, net –167 Income taxes 3) –29 Profit for the period 338
Assets 4) 3,964 2,033 2,903 546 631 2,383 –209 12,251 Associates and joint ventures 4) – – – – – 1,177 – 1,177 Unallocated assets – – – – – – – 1,041 Total assets 14,469
Liabilities 5) 221 129 237 147 77 174 –209 776 Unallocated liabilities – – – – – – – 6,404 Total liabilities 7,180
Other items Depreciation and amortisation 376 190 218 31 43 32 – 890 Impairment charge 228 – 19 1 – – – 248 Capital expenditure 6) 155 145 189 63 39 108 – 699 Capital employed, 31 December 7) 3,743 1,905 2,666 399 554 3,386 –1,019 11,634 Capital employed, average 4,010 1,921 2,760 388 616 – – 12,142 Return on capital employed, % 8) –1.4 7.7 3.9 15.6 23.4 – – 4.7
1) Sales include only sales outside the Group. Internal sales to segments amount to ` 1,566 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profit of the Magazine paper segment includes personnel charges of ` 28 million related to the profitability programme, impairment charges of ` 116 million related to the closure of the Voikkaa paper mill, impairment charges of ` 115 million for Miramichi, and other income net of ` 6 million, primarily including a capital gain of ` 10 million on the sale of Rauma power plant. Related to the profitability programme, the operating profit of the Newsprint segment and Fine and Speciality Papers segment includes restructuring charges of ` 7 million, and personnel and impairment charges of ` 41 million, respectively. In Wood Products segment, the operating profit includes a loss of ` 10 million from the sale of the Loulay plywood mill and a capital gain of ` 93 million on the sale of Puukeskus. The operating profit in Other Operations includes a capital gain of ` 41 million of the Group head office real estate, a donation of ` 5 million and restructuring charges of ` 7 million. 3) Income taxes comprise a charge of ` 22 million related to the decrease of deferred tax assets due to the reduction of income tax rate in Canada, a ` 20 million income due to an increase in deferred tax assets related to the change in the Group’s structure in Canada, a ` 28 million income due to the change in German tax legislation. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital expenditure include goodwill arisen in business combinations, other intangible assets, property, plant and equipment, investment property, biological assets and invest- ments in associated companies and joint venture. 7) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: ` 1,369 million and the Energy Department in Finland: ` 1,004 million. Eliminations include unallocated assets and unallocated non-interest bearing-liabilities. 8) The formula for calculation of the return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: (Profit before tax + interest expenses and other finance costs) / (Balance sheet total – non-interest-bearing liabilities (average)) x 100.
F-77 Group ACCOUNTS FOR 2007
Personnel (average) by segment 5 NOTES TO THE CASH FLOW STATEMENT Year ended 31 December 2007 2006 Acquisitions and disposals Magazine Papers 6,776 7,869 In 2007 and 2006, no acquisitions were made. Newsprint 3,209 3,361 In April 2007, UPM sold the real estate company UPM-Asunnot Fine and Speciality Papers 6,469 6,680 Oy for ` 73 million, which generated a pre-tax capital gain of ` 42 Label Materials 2,707 2,574 million. In June 2007, UPM sold Walki Wisa group, a producer of Wood Products 5,590 6,158 wrappings and composite materials for industrial applications, for Other Operations 3,495 4,397 ` 79 million. A tax exempt capital gain of ` 29 million was recog- Total 28,246 31,039 nised on the sale. In October 2007, UPM sold its Finnish port opera- tors Oy Rauma Stevedoring Ltd and Oy Botnia Shipping Ab. A tax Personnel at year end 26,352 28,704 exempt capital gain of ` 58 million was recognised on the sale. In June 2006, UPM sold the Group Head Office real estate for Secondary reporting format ` 77 million, which generated a pre-tax capital gain of ` 41 million. In August 2006, UPM sold its Finnish building merchant Puukeskus External sales by destination Oy, part of the Wood Products segment, to the private equity inves- Year ended 31 December tor Triton and Puukeskus’s management. A tax exempt capital gain `m 2007 2006 of ` 93 million was recognised on the sale. Germany 1,707 1,587 None of these disposals are classified as discontinued opera- United Kingdom 1,203 1,223 tions. Finland 865 920 France 607 661 Other EU countries 2,418 2,247 Net assets and liabilities of disposals Other European countries 493 661 Year ended 31 December United States 1,140 1,124 `m 2007 2006 Canada 115 126 Cash and cash equivalents 2 6 China 382 364 Other intangible assets 7 2 Rest of world 1,105 1,109 Property, plant and equipment 68 63 Total 10,035 10,022 Investment property 17 – Shares – 1 Inventories 44 36 Total external assets by country Receivables 52 55 As at 31 December Accounts payable and other liabilities –47 –42 `m 2007 2006 Interest-bearing liabilities –65 –36 78 85 Germany 2,830 3,028 Gain/loss on disposal 129 124 United Kingdom 642 702 Total consideration 207 209 Finland 7,197 6,779 France 568 612 Settled in cash and cash equivalents 207 209 Other EU countries 646 682 Other European countries 145 131 Cash and cash equivalents in subsidiary disposed –2 –6 United States 620 660 Net cash inflow arising from disposals 205 203 Canada 233 735 China 801 909 Adjustments to profit for the period Rest of world 271 231 Year ended 31 December Total 13,953 14,469 `m 2007 2006 Taxes 211 29 Depreciation, amortisation and impairment charges 1,224 1,138 Capital expenditure by country Share of results in associated companies and Year ended 31 December joint ventures –43 –61 `m 2007 2006 Profits and losses on sale of fixed assets and investments –157 –157 Germany 23 123 Gains on available-for-sale investments, net –2 2 United Kingdom 28 52 Finance costs, net 193 167 Finland 439 255 Rosenlew cartel fine – –57 France 31 74 Other adjustments –36 134 Russia 11 4 1,390 1,195 Other European countries 43 11 North America 62 46 Change in working capital China 17 45 Inventories –152 –60 Rest of world 54 89 Current receivables –129 –69 Total 708 699 Current non-interest bearing-liabilities 77 150 –204 21
F-78 ACCOUNTS FOR 2007 Group
6 OTHER OPERATING INCOME Remuneration paid to the members of the Board of Directors and Year ended 31 December the Executive Team `m 2007 2006 Shareholdings (no. of shares) and fees of the Board of Directors Gains on sale of non-current assets 1) 160 172 Shareholding Year ended 31Dec. Rental income, investment property 6 12 % 1,000 31.12.2007 2007 2006 Rental income, other 7 8 Emission allowances received (Note 7) – 18 Board members Derivatives held for trading 22 17 Vesa Vainio, Chairman 18,458 175 160 Other 5 4 Berndt Brunow, Vice Chairman 267,620 120 110 200 231 Jorma Ollila, Vice Chairman 37,200 120 110 Michael C. Bottenheim 11,408 120 110 1) Year 2007 includes a capital gain of ` 42 million on the sale of UPM-Asunnot Oy, a Karl Grotenfelt 13,147 95 85 capital gain of ` 29 milllion on the sale of Walki Wisa group and a capital gain of ` 58 million on the sale of Oy Rauma Stevedoring Ltd and Oy Botnia Shpping Ab. Year 2006 Georg Holzhey 433,546 95 85 includes a capital gain of ` 41 million on the sale of Group Head Office real estate and Wendy E. Lane 4,458 95 85 a capital gain of ` 93 million on the sale of Puukeskus Oy. Ursula Ranin 3,520 95 85 Veli-Matti Reinikkala 2,380 95 – Françoise Sampermans 7,147 95 85 7 COSTS AND EXPENSES Jussi Pesonen, President and CEO 34,514 – – Year ended 31 December `m 2007 2006 Former Board members Martti Ahtisaari – – 85 Change in inventories of finished goods and work in Total 833,398 1,105 1,000 progress –41 –92 of which in company shares 442 – Production for own use –34 –24 –75 –116 In accordance with the decision made by the 2007 Annual General Materials and services Meeting, the fees of the Board members who do not belong to the Raw materials, consumables and goods operative management were: the Chairman of the Board of Direc- Purchased during the period 5,360 4,997 tors received a fee of ` 175,000 for the year (2006: ` 160,000), the Change in inventories –52 42 External services 1) 744 745 Vice Chairmen of the Board of Directors and the Chairman of the 6,052 5,784 Audit Committee a fee of ` 120,000 (2006: ` 110,000), and the members of the Board of Directors a fee of ` 95,000 (2006: Personnel expenses ` 85,000). Of this fee in 2007 60% was paid in cash and 40% in the Salaries and fees 1,163 1,218 form of company shares purchased on the members’ behalf.
Share-based payments (Note 37) 15 7 Executive team remuneration Indirect employee costs Year ended 31 December Pension costs-defined benefit plans (Note 29) 44 42 % 1,000 2007 2006 Pension costs-defined contribution plans 125 170 President and CEO Jussi Pesonen Other post-employment benefits (Note 29) 3 4 Remuneration Other indirect employee costs 2) 159 175 Salaries 984 883 331 391 Incentives 210 – Share rewards 555 – Other operating costs and expenses Benefits 20 16 Rents and lease expenses 50 56 Total 1,769 899 Emission expenses (Note 6) –1 10 Pension costs Losses on sale of non-current assets 4 15 Finnish TyEL scheme 206 161 Other operating expenses 3) 1,111 1,149 Voluntary pension plan 123 154 1,164 1,230 Total 329 315 Costs and expenses, total 8,650 8,514
1) External services comprise mainly distribution costs of products sold. The former President and CEO, Juha Niemelä received termination 2) Other indirect employee expenses include primarily other statutory social benefits amounting to ` 490 thousand, and contributions paid to the expenses, excluding pension expenses. voluntary pension plan amounted to ` 1,883 thousand in 2006. 3) Other operating expenses include, among others, energy and maintenance The 13 (2006: 14) members of the Executive Team, including expenses as well as expenses relating to services and the company’s administra- tion. President and CEO, were paid salaries and fringe benefits totalling The research and development costs included in costs and expenses ` 6.2 (2006: ` 5.5) million, of which ` 0.7 (2006: ` 0.3) million were paid as bonuses. The remunerations paid are based on the were ` 50 (2006: ` 44) million. performance of the Executive Team members in the previous year. In addition, under the Group’s share ownership plan, the Executive Team members were given remuneration in form of shares. The share rewards paid amounted to ` 2.8 million in 2007 (2006: 0). According to the company’s pay scheme, CEO can be paid an
F-79 Group ACCOUNTS FOR 2007
18 months’ maximum reward, and the other executives can be paid a 10 DEPRECIATION, AMORTISATION AND performance-related reward amounting to not more than twelve IMPAIRMENT CHARGES months’ salary. In addition, the members of the Executive Team are Year ended 31 December also entitled to participate in the company’s stock option plans. The `m 2007 2006 expenses recognised in income statement in respect of share-based payments were ` 4.6 million (2006: % 0.8 million) including share Depreciation on property, plant and equipment options of ` 2.6 million (2006: ` 0.8 million) and share rewards of Buildings 97 101 ` 2.0 million (2006: ` 0 million). Machinery and equipment 628 671 The retirement age of President and CEO Jussi Pesonen is 60 Other tangible assets 33 32 years. Depending on the service contracts, the retirement age of the 758 804 other members of the Executive Team is 62-63 years. The target pension is 60% of the average indexed earnings from the last ten Depreciation on investment property years. The costs of lowering the retirement age or supplementing Buildings 1 1 statutory pension security are generally covered by voluntary pen- Amortisation of intangible assets sion insurance. The expenses of the Executive team members’ Intangible rights 17 16 defined benefit pension plans in 2007 were ` 1.1 (2006: ` 0.9) mil- Other intangible assets 55 69 lion, and the expenses of their defined contribution plans were ` 0.9 72 85 (2006: ` 0.8) million. Impairment charges on property, Members of the Executive Team have certain benefits in the plant and equipment event of their service contracts being terminated prior to the expira- Land areas 1 – tion date stated in them. If UPM-Kymmene Corporation gives Buildings 6 62 notice of termination to Jussi Pesonen, the President and CEO, a Machinery and equipment 21 177 severance compensation of 24 months’ basic salary will be paid, in Other tangible assets 15 4 addition to the six months’ salary for the notice period. For other 43 243 members of the Executive team, the period for additional severance Impairment of intangible assets compensation is 12 months in addition to the six months’ salary for Goodwill 350 – Intangible rights 8 – the notice period. Emission allowances 2 – The President and CEO is appointed by the Board of Directors. Other intangible assets 2 5 If there is a change of control in UPM-Kymmene Corporation 362 5 as defined in the service contracts, each member of the Executive Impairment reversal Team may terminate such service contract within one month or, in Machinery and equipment –12 – the case of Jussi Pesonen within three months, from the date of the event that triggered the change of control, and shall receive compen- Depreciation, amortisation and sation equivalent to 24 months’ basic salary. impairment charges, total 1,224 1,138
Audit fees In 2007, impairments include in Magazine Papers segment, an im- pairment of goodwill of 350 million. For goodwill test, see Note Year ended 31 December ` `m 2007 2006 16. In June 2007, UPM decided to close the Miramichi magazine Audit fees 3.4 4.9 Audit related fees 0.5 1.6 paper mill temporarily for nine to twelve months. Due to continued Tax consulting fees 1.0 1.3 poor financial prospects, primarily due to the strenghtened Canadian Total 4.9 7.8 dollar in relation to the US dollar, and the increased cost of essential raw materials such as wood and chemicals, UPM decided in Decem- ber 2007 to close the mill permanently. These decisions resulted in 8 CHANGE IN FAIR VALUE OF BIOLOGICAL ASSETS AND impairment charges of ` 22 million related to Miramichi’s paper WOOD HARVESTED mill, and ` 19 million related to Miramichi’s sawmilling and forestry Year ended 31 December operations reported in Other Operations. In addition, other impair- `m 2007 2006 ment charges of ` 12 million were recorded in Other Operations. Biological assets harvested during the period –116 –107 In 2006, impairments of fixed assets include ` 135 million Fair value change of biological assets 195 –19 impairment charges in respect of production capacity close-downs Total 79 –126 and restructuring measures in Finland, and a ` 115 million impair- ment charge relating to the Miramichi paper mill. Impairment reversals relate to machinery and equipment in 9 SHARE OF RESULTS OF ASSOCIATED COMPANIES Magazine Papers which have been written off in prior years, and AND JOINT VENTURES which UPM is planning to reuse. Year ended 31 December `m 2007 2006 Oy Metsä-Botnia Ab 58 69 Pohjolan Voima Oy –14 –14 Others –1 6 Total 43 61
F-80 ACCOUNTS FOR 2007 Group
11 GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET Year ended 31 December Year ended 31 December `m 2007 2006 `m 2007 2006 Income tax reconciliation statement Fair value gains and losses on disposals 2 2 Profit before tax 292 367 Impairment – –4 Computed tax at Finnish statutory rate of 26 % 76 95 Total 2 –2 Difference between Finnish and foreign rates –16 –2 Non-deductible expenses and tax exempt income 50 –20 In 2006, the impairment loss on available-for-sale investments Tax loss with no tax benefit 5 1 relates to shares for which the fair value has declined permanently Results of associated companies –12 –16 below its cost. Change in tax legislation 4 –5 Other 104 –24 12 FINANCE COSTS Income taxes, total 211 29 Year ended 31 December `m 2007 2006 Effective tax rate 72.3 % 7.8 % Exchange rate and fair value gains and losses Income taxes for 2007 include an ` 25 million income from a Derivatives held for trading –131 –71 decrease of deferred tax liabilities relating to an impairment of Fair value gains on derivatives designated goodwill of Magazine Papers. Change in tax legislation includes a as fair value hedges 7 –130 Fair value adjustment of borrowings attributable tax expense of ` 25 million due to a decrease of tax rate in Canada to interest rate risk –7 149 and a tax income from tax rate changes in Germany and the UK. Foreign exchange gain on financial liabilities Other items include a charge of ` 123 million from a reduction of measured at amortised cost) 187 151 deferred tax assets in Canada (of which ` 98 million from book over Foreign exchange loss on loans and receivables –58 –81 tax depreciation), relating to the closing decision of the Miramichi –2 18 paper mill. Income taxes for 2006 include tax expense of ` 22 million due Interest and other finance costs, net to a decrease in the income tax rate in Canada and a tax income of Interest expense on financial liabilities measured ` 28 million from a tax receivable arising from the change in Ger- at amortised cost –221 –238 Interest income on derivative financial instruments 31 48 man tax legislation. Other items include a tax income of ` 20 mil- Interest income on loans and receivables 5 7 lion due to an increase in deferred tax assets related to the change in Gains and losses on sale of associated companies the Group’s structure in Canada. Profit before taxes for 2006 and joint ventures shares 2 10 includes tax-exempt capital gains totalling ` 93 million. Other financial expenses –8 –12 –191 –185 Total –193 –167 14 EARNINGS PER SHARE Year ended 31 December Net gains and losses on derivative financial 2007 2006 instruments included in the operating profit Profit attributable to the parent company’s Year ended 31 December shareholders, `m 85 340 `m 2007 2006 Average weighted number of shares (1,000) 522,867 523,220 Derivatives designated as cash flow hedges 44 –10 Basic earnings per share, % 0.16 0.65 Derivatives held for trading 22 17 Total 66 7 For the diluted earnings per share the number of shares is adjusted by the effect of the share options The aggregate foreign exchange gains and losses included in the consolidated income statement Profit attributable to the parent company’s Year ended 31 December shareholders, `m 85 340 `m 2007 2006 Profit used to determine diluted earnings per share, `m 85 340 Sales 33 –25 Costs and expenses 6 20 Net financial items –4 –8 Average weighted number of shares (1,000) 522,867 523,220 Total 35 –13 Effect of options 1) 2,862 2,821 Average weighted number of shares for diluted earnings per share (1,000) 525,729 526,041 13 INCOME TAXES Diluted earnings per share, ` 0.16 0.65 Year ended 31 December `m 2007 2006 1) The dilution effect is calculated to determine the number of shares that could have Major components of tax expenses been acquired at fair value (the average price for shares traded) based on the monetary subscription rights of the outstanding options. The number of shares calculated as above Current tax expense 162 187 is compared with the number of shares that would have been issued assuming the exer- Change in deferred taxes (Note 28) 49 –158 cise of the options. 3.0 million shares exercisable with options (2006: 7.3 million) were Income taxes, total 211 29 excluded from the calculation of diluted earnings per share as they were not dilutive.
F-81 Group ACCOUNTS FOR 2007
15 DIVIDEND PER SHARE product prices used in impairment test would lead to an impairment of the entire goodwill of ` 102 million. Group believes that any The dividends paid in 2007 and 2006 were ` 392 million (` 0.75 per reasonably possible change in the other key assumptions on which share) and ` 392 million (` 0.75 per share). The Board of Directors recoverable amount is based would not cause the aggregate carrying proposes to the Annual General Meeting that a dividend of ` 384 amount to exceed the aggregate recoverable amount of cash-gener- million (` 0.75 per share) will be paid in respect of 2007. ating units. In June 2007, mostly because of the continuing low magazine paper prices and the unfavourable developments of exchange rates, 16 GOODWILL especially that of the US dollar, there was an indication of impair- ments of goodwill in Magazine Papers segment. The impairment test As at 31 December `m 2007 2006 for goodwill was performed on the level of cash generating unit, for Magazine Papers segment. To identify the recoverable amount which Acquisition cost at 1 Jan. 1,514 1,514 Disposals –1 – is the value in use, the impairment test was conducted using the Acquisition cost at 31 Dec. 1,513 1,514 discounted cash-flow method. Based on forecasts and projections of pre-tax cash-flows, the value in use was determined applying a pre- Impairment at 1 Jan. – – tax discount rate of 8.60%. Since the recoverable amount had fallen Impairment charges –350 – below the carrying amount of Magazine Papers segment, an impair- Accumulated impairment at 31 Dec. –350 – ment charge of ` 350 million was recognised in the Group’s income statement 2007. Carrying value at 1 Jan. 1,514 1,514 In 2006, no impairments were recognised in goodwill tests. Carrying value at 31 Dec. 1,163 1,514
The carrying value of goodwill is divided among the following groups of cash generating units 17 OTHER INTANGIBLE ASSETS As at 31 December As at 31 December `m 2007 2006 `m 2007 2006 Intangible rights Magazine Papers 565 915 Acquisition cost at 1 Jan. 411 394 Newsprint 475 475 Additions 5 2 Fine Papers 102 102 Disposals –2 –2 Others 21 22 Reclassifications –1 19 1,163 1,514 Translation differences –1 –2 Acquisition cost at 31 Dec. 412 411
Impairment tests Accumulated amortisation and impairment at 1 Jan. –124 –110 The company prepares impairment test calculations annually. The Amortisation –17 –16 key assumptions for calculations are those regarding the business Disposals 1 2 growth outlooks, product prices, cost development, and the discount Impairment charges –8 – rate. Reclassifications 1 – Business growth outlooks are based on general forecasts for the Accumulated amortisation and impairment at 31 Dec. –147 –124 businesses in question. Ten-year forecasts are used in the calcula- tions as the nature of the company’s business is long-term due to its Carrying value at 1 Jan. 287 284 capital intensity, and exposed to cyclical changes. In estimates of Carrying value at 31 Dec. 265 287 product prices and cost development, the budgets prepared by man- agement for the next year and estimates made for the following nine Other intangible assets 1) years are taken into consideration. The company’s recent profitabil- Acquisition cost at 1 Jan. 511 508 ity trend is taken into account in the forecasts. In addition, when Additions 16 6 preparing estimates, consideration is given to the investment deci- Disposals –20 –34 sions made by the company as well as the profitability programmes Reclassifications 22 33 that the Group has implemented and the views of knowledgeable Translation differences –4 –2 experts of the industry on the long-term development of demand Acquisition cost at 31 Dec. 525 511 and prices. Discount rate is estimated using the weighted average cost of capital on the calculation date adjusted for risks specific to Accumulated amortisation and impairment at 1 Jan. –364 –326 businesses in question. The pre-tax discount rates used in 2007 for Amortisation –55 –69 Magazine Papers, Newsprint and Fine Papers were 8.40%, 8.26% Impairment charges –2 –4 and 8.55% (2006: 8.72%, 9.60% and 9.14%), respectively. Disposals 15 30 The recoverable amount of groups of cash generating units is Reclassifications –3 4 determined based on value in use calculations. Translation differences 2 1 The estimated product prices are the most important assump- Accumulated amortisation and impairment at 31 Dec. –407 –364 tions in impairment tests. A hypothetic 2% decrease in product prices used in impairment tests would lead to a recognition of Carrying value at 1 Jan. 147 182 impairment loss against goodwill approximately by ` 300 million in Carrying value at 31 Dec. 118 147 Magazine Papers, and a 4% decrease approximately by ` 100 mil- lion in Newsprint. In Fine Papers, a hypothetic decrease of 3% in
F-82 ACCOUNTS FOR 2007 Group
As at 31 December As at 31 December `m 2007 2006 `m 2007 2006 Advance payments and construction in progress Accumulated depreciation and impairment at 1 Jan. –1,447 –1,382 Acquisition cost at 1 Jan. 11 33 Depreciation –96 –101 Additions 18 16 Impairment charges –6 –59 Disposals –3 – Disposals 32 87 Reclassifications –17 –38 Reclassifications 11 2 Acquisition cost at 31 Dec. 9 11 Translation differences 7 6 Accumulated depreciation and impairment at 31 Dec. –1,499 –1,447 Carrying value at 1 Jan. 11 33 Carrying value at 31 Dec. 9 11 Carrying value at 1 Jan. 1,494 1,680 Carrying value at 31 Dec. 1,443 1,494 Emission allowances Acquisition cost 1 Jan. 16 36 Machinery and equipment Additions 2) 119Acquisition cost at 1 Jan. 12,545 12,911 Disposals and settlements –15 –39 Additions 209 315 Impairment charges –2 – Disposals –239 –732 Acquisition cost 31 Dec. – 16 Reclassifications 174 167 Translation differences –139 –116 Carrying value at 1 Jan. 16 36 Acquisition cost at 31 Dec. 12,550 12,545 Carrying value at 31 Dec. – 16 Accumulated depreciation and impairment at 1 Jan. –8,377 –8,181 Other intangible assets, total 392 461 Depreciation –623 –667 Impairment charges –21 –174 1) Other intangible assests consist primarily of capitalised software assets. Impairment reversal 12 – 2) Additions include allowances received free of charge. Disposals 203 565 Reclassifications 1 26 Water rights Translation differences 84 54 Intangible rights include ` 189 million (2006: ` 189 million) in Accumulated depreciation and impairment at 31 Dec. –8,721 –8,377 respect of the water rights of hydropower plants belonging to the Other Operations segment. The water rights of power plants are Carrying value at 1 Jan. 4,168 4,730 Carrying value at 31 Dec. 3,829 4,168 deemed to have an indefinite useful life as the company has a con- tractual right to exploit water resources in the energy production of Other tangible assets power plants. The values of water rights are tested annually for Acquisition cost at 1 Jan. 879 874 impairment. Additions 29 21 Disposals –17 –9 Reclassifications 9 –1 18 PROPERTY, PLANT AND EQUIPMENT Translation differences –1 –6 As at 31 December Acquisition cost at 31 Dec. 899 879 `m 2007 2006 Land and water areas Accumulated depreciation and impairment at 1 Jan. –666 –649 Acquisition cost at 1 Jan. 361 357 Depreciation –33 –32 Additions 7 14 Disposals 16 16 Disposals –16 –11 Reclassifications 1 –1 Reclassifications – 2 Impairment charges –14 –3 Translation differences –2 –1 Translation differences – 3 Acquisition cost at 31 Dec. 350 361 Accumulated depreciation and impairment at 31 Dec. –696 –666
Accumulated depreciation and impairment at 1 Jan. –7 –4 Carrying value at 1 Jan. 213 225 Impairment charges –1 –3 Carrying value at 31 Dec. 203 213 Accumulated depreciation and impairment at 31 Dec. –8 –7 Advance payments and construction in progress Carrying value at 1 Jan. 354 353 Acquisition cost at 1 Jan. 271 328 Carrying value at 31 Dec. 342 354 Additions 333 209 Disposals –4 –25 Buildings Reclassifications –235 –238 Translation differences –3 –3 Acquisition cost at 1 Jan. 2,941 3,062 Acquisition cost at 31 Dec. 362 271 Additions 66 45 Disposals –71 –182 Carrying value at 1 Jan. 271 328 Reclassifications 33 36 Carrying value at 31 Dec. 362 271 Translation differences –27 –20 Acquisition cost at 31 Dec. 2,942 2,941 Property, plant and equipment, total 6,179 6,500
F-83 Group ACCOUNTS FOR 2007
Finance lease arrangements The amounts recognised in the income statement Property, plant and equipment includes property that is acquired Year ended 31 December under finance lease and sale and leaseback contracts: `m 2007 2006 Rental income 6 12 As at 31 December Direct operating expenses arising `m 2007 2006 from investment properties that generate rental Machinery and equipment income 3 6 Acquisition cost 53 77 Accumulated depreciation –34 –45 There were no contractual obligations for future repair and mainte- Carrying value at 31 Dec. 19 32 nance or purchase of investment property. All assets under investment property are leased to third parties Leased assets, total 19 32 under operating leasing contracts. There is no property, plant and equipment leased to third parties under operating lease contracts. 20 BIOLOGICAL ASSETS Capitalised borrowing costs As at 31 December The borrowing costs capitalised as part of non-current assets `m 2007 2006 amounted to ` 10 million in 2007 and ` 6 million in 2006. Amorti- At 1 Jan. 1,037 1,174 sation of capitalised borrowing costs was ` 8 million in 2007 (2006: Purchases during the period 1 3 ` 10 million). In 2007 and 2006 there were no capitalised borrowing Sales during the period –20 –12 costs associated with sold assets. Harvested during the period –116 –107 The average interest rate used was 4.63% (2006: 3.9%), which Gains and losses arising from changes in fair values 195 –19 Translation differences –2 –2 represents the costs of the loan used to finance the projects. At 31 Dec. 1,095 1,037
The pre-tax discount rate used in determing the fair value in 2007 19 INVESTMENT PROPERTY was 7.50% (2006: 7.50%). A 1% decrease (increase) in discount rate As at 31 December would increase (decrease) the fair value of biological assets by `m 2007 2006 approximately ` 130 million. Acquisition cost at 1 Jan. 74 81 Additions – 3 Disposals –47 –5 21 INVESTMENTS IN ASSOCIATED COMPANIES Reclassifications 19 –5 AND JOINT VENTURES Acquisition cost at 31 Dec. 46 74 As at 31 December `m 2007 2006 Accumulated depreciation and impairment at 1 Jan. –44 –46 Depreciation –1 –1 At 1 Jan. 1,177 1,034 Disposals 28 3 Increases 27 126 Reclassifications –15 – Decreases –2 –8 Accumulated depreciation and impairment at 31 Dec. –32 –44 Share of results after tax 43 61 Dividends received –23 –16 Carrying value at 1 Jan. 30 35 Translation differences –29 –20 Carrying value at 31 Dec. 14 30 At 31 Dec. 1,193 1,177
The fair value of investment property is determined annually on 31 Investments in associated companies at 31 December 2007 include December by the Group. Fair value is based on active market prices, goodwill of ` 51 million which relates to Pohjolan Voima Oy’s adjusted, if necessary, for any difference in the nature of the specific shares (2006: ` 51 million). asset. The fair value of investment property in Finland at 31 December As at 31 December 2007 was 9 million and the fair value of investment property in ` `m 2007 2006 other countries at 31 December 2007 was ` 11 million. In April 2007, UPM sold real estate company UPM-Asunnot Oy. Sale and leaseback contracts included in investments in associated companies In 2006, investment property in Finland included investments in Acquisition cost 13 13 flats and other premises occupied by third parties. The fair value of Accumulated increases 4 5 these flats at 31 December 2006 was ` 55 million and approximately Carrying value at 31 Dec. 17 18 85% of the flats were state-subsidised buildings, for which certain restrictions apply. The fair value of other premises in Finland at 31 December 2006 was ` 5 million. The fair value of investment prop- erty in other countries at 31 December 2006 was ` 13 million.
F-84 ACCOUNTS FOR 2007 Group
Associated companies and joint ventures The Group’s share of the results of its principal associates and Group holding joint ventures, all of which are unlisted, are accounted for using the percentage % Carrying value equity method. The Group’s share of the assets, liabilities, sales and 2007 2006 2007 2006 results are as follows: Associated companies Austria Papier Recycling 2007 Profit/ Ges.m.b.H., AT 33.30 33.30 – – `m Assets Liabilities Sales Loss Oy Keskuslaboratorio- Associated companies and joint ventures Centrallaboratorium Ab, FI 38.65 38.65 1 1 Oy Metsä-Botnia Ab, FI 1,178 526 655 58 Oy Metsä-Botnia Pohjolan Voima Oy, FI 1,189 688 273 –14 2) South America S.A., UY 12.40 12.40 76 70 Others 183 143 280 –1 Oy Metsä-Botnia Ab, FI 47.00 47.00 576 558 Total 2,550 1,357 1,208 43 Paperinkeräys Oy, FI 22.98 22.98 3 3 Pohjolan Voima Oy, FI 41.99 42.19 502 509 2006 Profit/ Powest Oy, FI 1) 9.98 9.98 15 18 `m Assets Liabilities Sales Loss RETS Timber Oy Ltd, FI 50.00 50.00 1 1 Associated companies and joint ventures Steveco Oy, FI 34.32 34.32 9 8 Oy Metsä-Botnia Ab, FI 1,038 410 627 69 Others 4 3 Pohjolan Voima Oy, FI 1,125 618 327 –14 At 31 Dec. 1,187 1,171 Others 248 206 270 6 Total 2,411 1,234 1,224 61 Joint ventures Kainuun Voima Oy, FI 50.00 50.00 6 6 The amounts representing the Group’s share of the assets and liabili- 66ties and sales and results of the joint ventures that have been accounted for using the equity method are presented in the table Associated companies and below. joint ventures at 31 Dec. 1,193 1,177
1) The Group’s share of the voting right in Powest Oy is 0.61% (2006: 0.61%). The Year ended 31 December Group is entitled to 51.22% (2006: 51.22%) of the respective dividends of Powest Oy. `m 2007 2006 2) Oy Metsä-Botnia South America S.A. is a subsidiary of UPM’s associated company The amount of assets and liabilities Oy Metsä-Botnia Ab related to investments in joint ventures Non-current assets 30 32 Pohjolan Voima Oy (“PVO”) holds a 57.94% shareholding in Teol- Current assets 3 2 lisuuden Voima Oy (“TVO”), which owns and operates nuclear Non-current liabilities –22 –23 powers plants in Olkiluoto, Finland. The operation of a nuclear Current liabilities –4 –4 power plant involves potential costs and liabilities related to decom- Net assets 7 7 missioning and dismantling of the nuclear power plant and storage and disposal of spent fuel, and is governed by international, Euro- The income and expenses related pean Union and local nuclear regulatory regimes. Pursuant to the to investments in joint ventures Finnish Nuclear Liability Act, the operator of a nuclear facility is Sales 15 14 strictly liable for damage resulting from a nuclear incident at the Expenses –15 –14 Profit – – operator’s installation or occurring in the course of transporting nuclear fuels. Shareholders of power companies that own and oper- The average number of employees ate nuclear power plants are not subject to liability under the in the joint ventures 45 44 Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate-level radioactive waste and nuclear power plant decommissioning are the responsibility of the operator. Reimburse- ments of the operators’ costs related to decommissioning and dis- mantling of the power plant and storage and disposal of spent fuel are provided for by state-established funds funded by annual contri- butions from nuclear power plant operators. Pursuant to PVO and TVO shareholders’ agreements, the Group bears its proportionate share of the costs related to decommissioning and dismantling of the nuclear power plant and storage and disposal of spent fuel through the price of electricity acquired from PVO. The contribu- tions to such funds are intended to be sufficient to cover estimated future costs. If the actual costs deviate from fund provisions, the Group would be affected accordingly. Fund assets are measured at the lower of the decommissioning obligation and provision for spent fuel recognised and UPM’s share of the net assets of the fund attrib- utable to the contributors.
F-85 Group ACCOUNTS FOR 2007
Transactions and balances 23 NON-CURRENT FINANCIAL ASSETS with associates and joint ventures As at 31 December Year ended 31 December `m 2007 2006 `m 2007 2006 Other loan receivables 15 8 Derivative financial instruments 67 66 Sales to associates and joint ventures 130 136 At 31 Dec. 82 74 Purchases from associates and joint ventures 500 448 Receivables from associates and joint ventures 29 20 There were no loans granted to the Executive Team or managing Payables to associates and joint ventures 42 23 directors at 31 December 2007 or 2006. Loan receivables from associates and The maximum exposure to credit risk in regard to other loan joint ventures 1) receivables is their carrying amount. At 1 Jan. 6 11 Loans granted 2 – Repayments –2 –5 24 OTHER NON-CURRENT ASSETS At 31 Dec. 6 6 1) Loans to associated companies and joint ventures include current and non-current As at 31 December loan receivables. `m 2007 2006 Defined benefit plans (Note 29) 93 45 Other non-current assets 28 28 22 AVAILABLE-FOR-SALE INVESTMENTS At 31 Dec. 121 73
Year ended 31 December `m 2007 2006 25 INVENTORIES As at 31 December At 1 Jan. 127 153 `m 2007 2006 Additions – 5 Disposals –9 –8 Raw materials and consumables 522 485 Changes in fair values –2 1 Work in progress 58 63 Transferred to associated companies – –20 Finished products and goods 687 667 Other changes (impairment) – –4 Advance payments 75 40 At 31 Dec. 116 127 At 31 Dec. 1,342 1,255
At 31 December 2007, the available-for-sale investments include only investments in unlisted equity shares. Unlisted shares, where 26 TRADE AND OTHER RECEIVABLES the fair value cannot be measured reliably are carried at cost. The As at 31 December range of reasonable fair value estimates of these shares is significant `m 2007 2006 and the probabilities of the various estimates cannot be reasonably Trade receivables 1,359 1,349 assessed. The fair value of the shares in Kemijoki Oy cannot be Loan receivables 8 13 reliably measured as the redemption clause in the articles of associ- Other receivables 137 142 ation of the company limits fair market transactions to third parties. Derivative financial instruments 137 73 Currently the Group does not have an intention to dispose of this Prepayments and accrued income 76 80 investment. At 31 Dec. 1,717 1,657 The fair value of equity investments traded in active markets was ` 2 million in 2006. The fair value of equity investments traded Aging analysis of trade receivables in active markets is determined by using quoted prices. As at 31 December `m 2007 2006 Undue 1,181 1,190 Principal available-for-sale investments Past due up to 30 days 126 116 Group Past due 31-90 days 31 26 Number of holding Carrying value Past due over 90 days 21 17 shares percentage 2007 2006 At 31 Dec. 1,359 1,349 Kemijoki Oy 100,797 4.13 106 106 Listed companies – 2 In determining the recoverability of trade receivables the Group Other 10 19 considers any change in the credit quality of the trade receivables. Carrying value of available-for- There are no indication that the debtors will not meet their payment sale investments at 31 Dec. 116 127 obligations in regard to trade receivables that are neither past due nor impaired at 31 December 2007. Impairment of trade receivables amounted to ` 13 million in 2007 (2006: ` 9 million) and is recorded under other costs and expenses. Impairment is recognised when there is objective evidence that the Group is not able to collect the amounts due.
F-86 ACCOUNTS FOR 2007 Group
Income from recoveries of trade receivables written off Main items included in prepayments and accrued income amounted to ` 1 million in 2007 (2006: ` 4 million). As at 31 December The maximum exposure to credit risk without taking into `m 2007 2006 account of any credit enhancements is the carrying amounts of trade Personnel expenses 3 3 and other receivables. Prepayments which are not financial instru- Indirect taxes 20 31 ments are not subject to credit risk as defined in IFRS 7. Other items 53 46 At 31 Dec. 76 80
27 EQUITY AND RESERVES
Share capital and share premium reserve Number of shares Share Share `m (1,000) capital premium reserve Total At 1 Jan. 2006 523,255 890 826 1,716 Exercise of share options 4 – – – At 31 Dec. 2006 523,259 890 826 1,716 Exercise of share options 5,710 – – – Cancellation of shares purchased –16,400 – – – Transfer to reserve for invested non-restricted equity – – –776 –776 Transfer to other reserves – – –50 –50 At 31 Dec. 2007 512,569 890 – 890
Shares Authorisations to increase the number of shares At 31 December 2007, the number of the company’s shares was The Annual General Meeting authorised the Board of Directors to 512,569,320. Each share carries one vote. The shares do not have decide to issue shares and special rights entitling to shares of the any nominal counter value. The shares are included within the book- company. The number of new shares to be issued, including shares entry system for securities. to be obtained under special rights, shall be no more than Due to the change in the Companies’ Act the company’s Articles 250,000,000. Of that amount, the maximum number that can be of Associations was changed. The Annual General Meeting held on issued to the company’s shareholders based on their pre-emptive 27 March 2007 decided to delete the mentions concerning the mini- rights is 250,000,000 shares and the maximum amount that can be mum and maximum share capital and the number of shares. In issued deviating from the shareholders’ pre-emptive rights in a addition, the meeting decided to transfer the company’s share pre- directed share issue is 100,000,000 shares. The maximum number mium reserve ` 776 million to reserve for invested non-restricted of new shares to be issued as part of the company’s incentive pro- equity. Share premium reserve of other Group companies has been grammes is 5,000,000 shares. The authorisation is valid for no more transferred to other reserves. than three years from the date of the decision. In 2007, this authori- sation has not been used. Reserve for invested non-restricted equity The meeting also decided on granting share options in connec- Reserve for invested non-restricted equity includes, under the Com- tion with the company’s share-based incentive plans. In share option panies’ Act, the exercise value of shareholders’ investments in the programmes 2007A, 2007B, and 2007C, the total number of share company unless otherwise decided by the Company. options is no more than 15,000,000, and they will entitle to sub- scribe for, in total, no more than 15,000,000 new shares of the com- Treasury shares pany. In 2007, this authorisation has not been used. The Annual General Meeting approved a proposal by the Board of If all the remaining 3,794,550 2002E share options authorised in Directors to buy back not more than 52,000,000 own shares. The 2002, are exercised to subscribe all 7,589,100 shares, all 3,000,000 authorisation is valid for 18 months. The meeting authorised the 2005F share options, 3,000,000 2005G share options and 3,000,000 board to decide on the disposal of shares so acquired as well as on a 2005H share options authorised in 2005 are exercised to subscribe free issue of shares to the company itself so that the total number of all 9,000,000 shares, and all 15,000,000 share options issued in shares to be issued to the company combined with the number of 2007 are fully exercised, the number of the company’s shares will own shares bought back under the buyback authorisation may not increase by a total of 31,589,100, i.e. by 6.16%. exceed 1/10 of the total number of shares of the company. After the The shares available for subscription under the Board’s share decision of the Board of Directors on 20 August 2007, during the issue authorisation and through the exercise of share options may period from 29 August to 9 November 2007, the company bought increase the total number of the company’s shares by 54.94%, i.e. by back 16,400,000 of its own shares for ` 266.2 million, at an average 281,589,100 shares, to 794,158,420 shares. price of ` 16.23. The cancellation of these shares was entered in the trade register on 21 December 2007.
F-87 Group ACCOUNTS FOR 2007
Redemption clause Changes in hedging reserve Under § 12 of UPM-Kymmene Corporation’s Articles of Associa- `m tion, a shareholder who alone or jointly with another shareholder Hedging reserve at 1 Jan. 2006 –21 owns 33 1/3 percent or 50 percent or more of all the company’s Gains and losses on cash flow hedges 61 shares or their associated voting rights shall, at the request of other Transfers to sales –6 shareholders, be liable to redeem in the manner prescribed in § 12 Transfers to depreciation – their shares and any securities that, under the Companies Act, carry Tax on gains and losses on cash flow hedges –16 the right to such shares. Tax on transfers to income statement 1 A resolution of general meeting of shareholders to amend or Hedging reserve at 31 Dec. 2006 19 delete this redemption clause must be carried by shareholders repre- senting not less than three-quarters of the votes cast and shares Hedging reserve at 1 Jan. 2007 19 represented at the meeting. Gains and losses on cash flow hedges 91 Transfers to sales –57 Transfers to initial cost of property, plant and equipment 1 Fair value and other reserves Tax on gains and losses on cash flow hedges –23 As at 31 December Tax on transfers to income statement 15 `m 2007 2006 Hedging reserve at 31 Dec. 2007 46 Fair value reserve of available-for-sale investments – 1 Hedging reserve 46 19 Legal reserve 53 225 Share premium reserve1) 50 – Share-based compensation 44 33 At 31 Dec. 193 278
1) Included in the share premium reserve in balance sheet as at 31 December, 2006.
28 DEFERRED INCOME TAXES
Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. `m 2007 statement equity differences and disposals 2007 Deferred tax assets Retirement benefit and other provisions 111 –14 – 1 – 98 Intercompany profit in inventory 11 –2 – – – 9 Book over tax depreciation 221 –104 – 10 – 127 Tax losses and tax credits carried forward 227 –38 – 6 – 195 Other temporary differences 3 2 – – –1 4 Deferred tax assets, total 573 –156 – 17 –1 433
Deferred tax liabilities Tax over book depreciation 698 –95 – –2 –6 595 Fair value adjustments of net assets acquired and biological assets 266 –3 – – – 263 Other temporary differences 37 –9 8 – – 36 Deferred tax liabilities, total 1,001 –107 8 –2 –6 894
The amounts recognised in the balance sheet Assets 362 –94 – 17 –1 284 Liabilities 790 –45 8 –2 –6 745 Deferred tax liabilities, less deferred tax assets 428 49 8 –19 –5 461
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 taxes relate to the same fiscal authority.
F-88 ACCOUNTS FOR 2007 Group
Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. `m 2006 statement equity differences and disposals 2006 Deferred tax assets Retirement benefit and other provisions 108 6 – –3 – 111 Intercompany profit in inventory 14 –3 – – – 11 Book over tax depreciation 215 28 – –22 – 221 Tax losses and tax credits carried forward 210 23 – –6 – 227 Other temporary differences 31 –27 – – –1 3 Deferred tax assets, total 578 27 – –31 –1 573
Deferred tax liabilities Tax over book depreciation 772 –75 – 2 –1 698 Fair value adjustments of net assets acquired and biological assets 317 –51 – – – 266 Other temporary differences 24 –5 18 – – 37 Deferred tax liabilities, total 1,113 –131 18 2 –1 1,001
The amounts recognised in the balance sheet Assets 352 42 – –31 –1 362 Liabilities 887 –116 18 2 –1 790 Deferred tax liabilities, less deferred tax assets 535 –158 18 33 – 428
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 taxes relate to the same fiscal authority.
The deferred income tax charged to equity during the year: No deferred tax liability has been recognised for the undistrib- `m 2007 2006 uted profits of Finnish subsidiaries and associated companies as, in Cash flow hedges 8 15 most cases, such earnings are transferred to the Group without any Net investment hedge – 3 tax consequences. Total 8 18 In addition the Group does not recognise a deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are intended to be permanently rein- At 31 December 2007, the net operating loss carry-forwards for vested in those operations. which the Group has recorded a deferred tax asset amounted to ` 645 million (2006: ` 639 million), of which ` 274 million (2006: 29 RETIREMENT BENEFIT OBLIGATIONS ` 274 million) was attributable to German subsidiaries, ` 239 mil- lion (2006: ` 212 million) to a Canadian subsidiary and ` 86 million The Group operates a number of defined benefit and contribution (2006: ` 76 million) to US subsidiaries. In Germany net operating plans all over the world. loss carry-forwards do not expire. In other countries net operating The most significant pension plan in Finland is the statutory loss carry-forwards expire at various dates and in varying amounts. Finnish employee pension scheme (TyEL), according to which benefits are directly linked to the beneficiary’s earnings. The TyEL The net operating loss carry-forwards for which no deferred tax pension scheme is mainly arranged with pension insurance compa- asset is recognised due to uncertainty of their utilisation amounted nies. to 155 million in 2007 (2006: 38 million). These net operating ` ` As a consequence of changes made in the Finnish TyEL scheme, loss carry-forwards are mainly attributable to Canadian and Chinese the disability pensions arranged with insurance companies changed subsidiaries. In 2007, there were no capital loss carry-forwards for from being a defined benefit to a defined contribution plan on which no deferred tax asset is recognised due to uncertainty of their 1 January 2006. utilisation (` 63 million in 2006). In Finland, the pensions of less than 10% of employees are Upon the decision to close the Miramichi paper mill in Decem- arranged through Group’s own pension funds. All schemes managed ber 2007 a write-down of ` 123 million deferred tax assets have by the pension funds are classified as defined benefit plans. been recorded due to unability to utilise them before they expire. On The foreign plans include both defined contribution and defined 31 December 2007 the Group had deferred tax assets of ` 105 mil- benefit plans. lion (2006: ` 203 million) relating to book over tax depreciation in Canada which do not expire. The Group has implemented a prudent and feasible tax planning strategy to utilise deferred tax assets in Canada. In 2006, the Group recorded additional deferred tax assets of ` 20 million relating to the change in Group’s structure in Canada.
F-89 Group ACCOUNTS FOR 2007
Defined benefit plans Changes in the fair value of plan assets As at 31 December As at 31 December `m 2007 2006 `m 2007 2006 Defined benefit pension plans 291 327 Fair value of plan assets as of beginning of the year 681 625 Other post-employment benefits (medical) 21 23 Expected return on plan assets 46 41 Net liability 312 350 Actuarial gains and losses 8 20 Contributions by plan participants 3 4 Other long-term employee benefits 36 32 Contributions by the employer 81 54 Overfunded plan shown as asset (Note 24) 93 45 Other adjustments – 2 Total liability in balance sheet 441 427 Benefits paid –52 –49 Translation differences –14 –16 Fair value of plan assets as of end of the year 753 681 DEFINED BENEFIT PENSION PLANS The amounts recognised in the balance sheet The Group expects to contribute ` 124 million to its defined benefit pension plans in 2008. As at 31 December `m 2007 2006 The major categories of plan assets as a percentage of Present value of funded obligations 803 806 total plan assets Present value of unfunded obligations 373 388 1,176 1,194 As at 31 December 2007 2006 Fair value of plan assets –753 –681 Equity securities 43% 45% Unrecognised actuarial gains and losses –132 –185 Debt securities 32% 35% Unrecognised past service cost – –1 Real estate 6% 6% Net liability 291 327 Money market 3% 3% Bonds 16% 11% Total 100% 100% The amounts recognised in the income statement Year ended 31 December In Finland, the pension plan assets include ordinary shares issued by `m 2007 2006 the company with a fair value of ` 1 million (2006: ` 3 million) and a loan receivable of 72 million issued to the company (2006: Current service cost 23 23 ` Interest cost 55 51 ` 168 million) by the company’s own fund. The interest paid on the Expected return on plan assets –46 –41 loan in 2007 was ` 8 million (2006: ` 7 million). Net actuarial gains and losses recognised during the year 8 7 Past service cost 1 2 Settlements 41 – OTHER POST-EMPLOYMENT BENEFITS (MEDICAL) Curtailments –38 – Total included in personnel expenses (Note 7) 44 42 The Group also funds certain other post-employment benefits in North America relating to retirement medical and life insurance The actual return on plan assets was ` 39 million in 2007 programmes. (2006: ` 61 million).
The amounts recognised in the balance sheet Changes in the present value of defined benefit obligations As at 31 December As at 31 December `m 2007 2006 `m 2007 2006 Present value of unfunded obligations 27 33 Defined benefit obligation as of beginning of the year 1,194 1,145 Unrecognised actuarial gains and losses –6 –10 Current service cost 23 23 Net liability 21 23 Interest cost 55 51 Contributions by plan participants 3 4 The amounts recognised in the income statement Actuarial gains and losses –15 32 Past service cost – 1 Year ended 31 December Curtailments and settlements –15 – `m 2007 2006 Other adjustments – 10 Current service cost – 1 Benefits paid –52 –49 Interest cost 2 2 Translation differences –17 –23 Settlements 1 – Defined benefit obligation as of end of the year 1,176 1,194 Curtailments –1 – Net actuarial gains and losses recognised during the year 1 1 Total included in personnel expenses (Note 7) 3 4
F-90 ACCOUNTS FOR 2007 Group
Changes in the present value of defined benefit obligations Changes in the fair value of plan assets As at 31 December As at 31 December `m 2007 2006 `m 2007 2006 Defined benefit obligation as of beginning of the year 33 37 Fair value of plan assets as of beginning of the year – – Current service cost – 1 Contributions by plan participants 2 2 Interest cost 2 2 Contributions by the employer 2 3 Contributions by plan participants 2 2 Benefits paid –4 –5 Actuarial gains and losses –3 – Fair value of plan assets as of end of the year – – Benefits paid –4 –5 Translation differences –3 –4 The Group expects to contribute ` 2 million to its other post- Defined benefit obligation as of end of the year 27 33 employment benefit plans in 2008.
POST-EMPLOYMENT BENEFITS (PENSION AND MEDICAL)
Post-employment benefits: the principal actuarial assumptions used as at 31 December Finland Canada Germany US UK Other `m 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Discount rate % 5.00 4.25 4.62 5.20 5.00 4.25 5.40 5.19 5.80 5.13 5.00 4.30 Expected return on plan assets % 6.32 6.15 7.13 7.50 N/A N/A 4.50 4.50 6.70 7.07 4.41 3.87 Future salary increases % 3.75 3.75 2.04 2.05 2.50 2.50 N/A N/A 4.04 4.14 2.63 2.55 Future pension increases % N/A N/A – 1.22 2.00 1.50 N/A N/A 3.07 3.06 0.87 0.86 Expected average remaining working years of participants 12.1 12.3 0.1 11.3 14.2 14.5 11.4 10.2 17.3 17.0 13.1 13.0
For foreign plans, the assumption for the weighted average expected The assumed health care cost trend rate used in measuring the return on plan assets is based on target asset allocation of each plan, accumulated post-retirement benefit obligation for US plans was historical market performance, relevant forward-looking economic 11% in 2007, 10% in 2006, declining to 5% by the year 2013 and analyses, expected returns, variances, and correlations for different remaining at that level thereafter. A one-percentage-point increase asset categories held. For domestic plans, the overall expected return and decrease in assumed health care cost trend rates in the US on plan assets is based on the weighted average of the expected would effect post-employment benefit obligation by ` 1 million and returns on the different asset categories held. ` –1 million, correspondingly.
The amounts of pension and other post-employment benefit plans recognised in the balance sheet as at 31 December 2007 `m Finland Canada Germany US UK Other Total Present value of funded obligations 249 219 – 28 293 14 803 Present value of unfunded obligations – 21 310 22 – 47 400 Fair value of plan assets –296 –187 – –26 –234 –10 –753 Unrecognised actuarial gains and losses –36 –3 –24 –4 –67 –4 –138 Net liability –83 50 286 20 –8 47 312
The amounts of pension and other post-employment benefit plans recognised in the balance sheet as at 31 December 2006 `m Finland Canada Germany US UK Other Total Present value of funded obligations 233 208 – 31 322 12 806 Present value of unfunded obligations – 21 322 29 – 49 421 Fair value of plan assets –235 –172 – –30 –234 –10 –681 Unrecognised actuarial gains and losses –42 –14 –40 –9 –85 –5 –195 Unrecognised past service cost – –1 – – – – –1 Net liability –44 42 282 21 3 46 350
F-91 Group ACCOUNTS FOR 2007
Amounts for the current and previous periods As at 31 December `m 2007 2006 2005 Present value of defined benefit obligations –1,203 –1,227 –1,182 Fair value of plan assets 753 681 625 Funded status –450 –546 –557
Experience adjustments on plan liabilities –21 –20 13 Experience adjustments on plan assets 8 20 21
30 PROVISIONS Closure and Environ- Reforesta- Actual restructuring Termination mental tion Tax emissions, Other `m provisions provisions provisions provisions provisions provision provisions Total At 1 Jan. 2006 25 54 28 3 18 31 31 190 Translation difference –1 – –1 – – – – –2 Additional provisions and increases to existing provisions 7 56 1 8 1 8 3 84 Utilised during year –17 –21 –3 –2 – –25 –12 –80 Unused amounts reversed – –5 – – – – – –5 At 31 Dec. 2006 14 84 25 9 19 14 22 187
At 1 Jan. 2007 14 84 25 9 19 14 22 187 Translation difference – – – – – – –2 –2 Additional provisions and increases to existing provisions 14 38 3 – – – 9 64 Utilised during year –7 –20 –5 – –2 –6 –4 –44 Unused amounts reversed –3 –4 –2 – –17 –8 – –34 At 31 Dec. 2007 18 98 21 9 – – 25 171
Provisions As at 31 December Closure and restructuring provisions include charges related prima- `m 2007 2006 rily to dismantling of closed mills. Termination provisions are con- Non-current provisions 76 125 cerned with operational restructuring as well as unemployment Current provisions 95 62 arrangements and disability pensions primarily in Finland. The Total 171 187 unemployment pension provisions have been recognised 2-3 years before the grant and settlement of the pension. Environmental provi- sions include expenses relating to old mill sites and the remediation 31 INTEREST-BEARING LIABILITIES of industrial landfills. As at 31 December In 2007, increases in provisions relate to the closure of the `m 2007 2006 Miramichi paper mill. Closure and restructuring provisions mainly Non-current Interest-bearing liabilities relate to the demolition of the paper mill, and termination provisions Bonds 2,040 2,244 include severance and pension charges. Loans from financial institutions 951 550 In 2006, UPM started programme to restore its profitability. The Pension loans 65 213 programme covers all of the company’s operations and includes both Trade payables 10 10 streamlining of operations and closures of uncompetitive production Finance lease liabilities 103 115 Derivative financial instruments 119 98 capacity. The programme seeks to achieve a reduction of approxi- Other liabilities 96 123 mately 3,600 employees. A provision amounting to ` 35 million 3,384 3,353 relating to unemployment, early retirement and termination arrange- ments was recognised in 2006. Current Interest-bearing liabilities The company takes part in government programmes aimed at Current portion of long-term debt 391 521 reducing greenhouse gas emissions. In 2007, the Group has recog- Short-term loans 71 105 nised a provision amounting to ` 0 million (2006: ` 14 million) to Derivative financial instruments 123 117 1) cover the obligation to return emission allowances. The company Other liabilities 346 249 possesses emission allowances worth of ` 0 million (2006: ` 16 931 992 million) as intangible assets. Total interest-bearing liabilities 4,315 4,345 1) Includes issued commercial papers of ` 318 million in 2007 (2006: ` 203 million).
F-92 ACCOUNTS FOR 2007 Group
As of 31 December 2007 the contractual maturity of interest-bearing liabilities `m 2008 2009 2010 2011 2012 2013+ Total Bonds repayments 89 250 59 – 636 1,166 2,200 interests 135 130 114 109 108 487 1,083 224 380 173 109 744 1,653 3,283 Loans from financial institutions repayments 149 56 78 40 517 259 1,099 interests 24 19 17 16 15 40 131 173 75 95 56 532 299 1,230 Pension loans repayments 145 40 15 8 – – 208 interests 7 2 1–––10 152 42 16 8 – – 218 Financial leases repayments 4 4 4 84 3 8 107 interests 44341218 8 8 7 88 4 10 125 Other loans repayments 21221127135 interests 8555588116 106776215251 Interest rate swaps (liabilities) repayments –––––7575 interests 38889157193 38889232268 Current loans repayments 417–––––417 interests 3–––––3 420–––––420 Forwards and swaps (assets and liabilities) pay 4,104 72––––4,176 receive –4,128 –67–––––4,195 Net –245–––––19
Figures based on the exchange rates and interests on the reporting date.
As of 31 December 2006 the contractual maturity of interest-bearing liabilities `m 2007 2008 2009 2010 2011 2012+ Total Bonds repayments 286 89 250 123 – 1,863 2,611 interests 160 142 137 121 116 657 1,333 446 231 387 244 116 2,520 3,944 Loans from financial institutions repayments 59 144 42 28 42 294 609 interests 27 23 18 16 15 50 149 86 167 60 44 57 344 758 Pension loans repayments 169 145 40 15 8 – 377 interests 15 7 2 1 – – 25 184 152 42 16 8 – 402 Financial leases repayments 5 5 11 4 84 11 120 interests 7 7 6 6 5 – 31 12 12 17 10 89 11 151 Other loans repayments 3 7 3 4 2 134 153 interests 3 9 6 6 6 104 134 6 16 9 10 8 238 287 Interest rate swaps (liabilities) repayments 31 – – – – 44 75 interests 11 5 7 7 8 120 158 42 5 7 7 8 164 233 Current loans repayments 355 – – – – – 355 interests 3–––––3 358 – – – – – 358 Forwards and swaps (assets and liabilities) pay 3,029 112 – – – – 3,141 receive –3,034 –109 – – – – –3,143 Net –5 3 – – – – –2
Figures based on the exchange rates and interests on the reporting date.
F-93 Group ACCOUNTS FOR 2007
Bonds in interest-bearing liabilities As at 31 December Interest Currency Nominal As at 31 Dec. `m 2007 2006 rate of value issued 2007 2006 Current % bond m `m `m Loan receivables 6 6 Fixed rate Other receivables 9 6 1997–2007 6.875 USD 215 – 159 Derivative financial instruments 9 6 1997–2007 6.625 EUR 102 – 105 Cash and cash equivalents 237 199 1997–2027 7.450 USD 375 279 300 261 217 1999–2009 6.350 EUR 250 246 250 Interest-bearing financial assets 342 297 2000–2030 3.550 JPY 10,000 7 14 2001–2007 6.875 USD 10 – 7 Net interest-bearing liabilities 3,973 4,048 2002–2007 0.869 JPY 2,000 – 12 2002–2012 6.125 EUR 600 589 603 2002–2014 5.625 USD 500 326 350 Finance lease liabilities 2002–2017 6.625 GBP 250 330 361 In December 2007, the Group exercised its option and redeemed 2003–2018 5.500 USD 250 166 179 Kaipola power plant, which decreased lease liability by ` 8 million. 1,943 2,340 In December 2006, the Group exercised its option and redeemed Floating-rate Kymi River power plants which resulted in a decrease of lease lia- 2002–2008 5.631 EUR 39 39 39 bility by ` 126 million. As at 31 December 2007 the Group has one 2002–2008 5.387 EUR 50 50 50 power plant acquired under sale and leaseback agreement. The 2002–2010 5.634 EUR 59 59 59 Group uses the electrical power generated by this plant in its own 2002–2012 5.237 EUR 25 25 25 production. Payments of this power plant are due by the end of 2002–2012 5.787 EUR 11 11 11 2011. 184 184 In April 2006, the control over Wisapower Oy was transferred Bonds, total 2,127 2,524 - current portion –87 –280 from UPM to Pohjolan Voima Oy, decreasing the lease liability by Bonds, long-term portion 2,040 2,244 ` 85 million. In addition the Group leases certain tangible assets under long- term arrangements. The interest rate ranges of interest-bearing liabilities As at 31 December Finance lease liabilities – minimum lease payments % 2007 2006 As at 31 December Loans from financial institutions 3.55–5.70 3.55–5.77 `m 2007 2006 Pension loans 3.65–7.50 3.65–7.50 Not later than 1 year 8 12 Finance lease liabilities 4.10–4.30 2.70–6.90 1–2 years 8 12 2–3 years 7 17 3–4 years 88 10 Fair value hedge of the long-term interest-bearing liabilities 4–5 years 4 89 Fair value hedge accounting in accordance with IAS 39 results in a Later than 5 years 10 11 cumulative fair value adjustment totalling ` 83 million (2006: ` 90 125 151 million), which has decreased the carrying amounts of the liabili- Future finance charges –18 –31 ties. Finance lease liabilities – the present value of minimum lease payments 107 120
Interest rate swaps The Group uses interest rate swap agreements to hedge the interest Finance lease liabilities – the present value of minimum rate risk relating to long-term loans. lease payments At 31 December, 2007 the fixed interest rates varied from 3.55% As at 31 December to 7.45% (0.87% to 7.45% in 2006) and the floating rates varied `m 2007 2006 from 3.51% to 7.65% (2.48% to 7.09% in 2006). Not later than 1 year 8 11 1–2 years 7 11 2–3 years 6 14 NET INTEREST-BEARING LIABILITIES 3–4 years 75 8 As at 31 December 4–5 years 3 68 `m 2007 2006 Later than 5 years 8 8 107 120 Interest-bearing liabilities, total 4,315 4,345
Interest-bearing financial assets Non-current Loan receivables 9 5 Available-for-sale investments (listed shares) – 2 Derivative financial instruments 66 66 Other receivables 6 7 81 80
F-94 ACCOUNTS FOR 2007 Group
32 OTHER LIABILITIES Main items included in accrued expenses As at 31 December and deferred income `m 2007 2006 As at 31 December Derivative financial instruments – 2 `m 2007 2006 Other 12 11 Personnel expenses 195 193 12 13 Interest expenses 78 28 Indirect taxes 16 21 Other items 1) 209 209 33 TRADE AND OTHER PAYABLES 498 451 1) Consists mainly of customer rebates. As at 31 December `m 2007 2006 Advances received 47 15 Trade payables 725 727 Amounts due to associates and joint ventures 39 23 Accrued expenses and deferred income 498 451 Derivative financial instruments 33 53 Other current liabilities 101 130 1,443 1,399 Trade and other payables mature within 12 months.
34 CARRYING AMOUNTS OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORIES, AS DEFINED IN IAS 39, AND FAIR VALUES Financial Financial assets/ Available liabilities Carrying liabilities at fair for sale Derivatives measured at amounts 2007 value through Loans and financial used for amortised by balance Balance sheet item profit or loss receivables assets hedging cost sheet item Fair value Note Non-current financial assets Available for sale investments – – 116 – – 116 116 22 Non-current financial assets Loan receivables – 15–––151523 Derivative financial instruments 1 – – 66 – 67 67 23 82 82 Current financial assets Trade and other receivables Trade and other receivables – 1,504 – – – 1,504 1,504 26 Prepayments and accrued income – 76–––767626 Derivative financial instruments 72 – – 65 – 137 137 26 1,717 1,717
Carrying amount by category 73 1,595 116 131 – 1,915 1,915
Non-current financial liabilities Non-current interest-bearing liabilities Non-current interest-bearing liabilities – – – – 3,265 3,265 3,388 31 Derivative financial instruments 30 – – 89 – 119 119 31 3,384 3,507 Other liabilities Other liabilities – – – – 12 12 12 32 Derivative financial instruments – ––––––32 12 12 Current financial liabilities Current interest-bearing liabilities Interest-bearing liabilities – – – 808 808 808 31 Derivative financial instruments 123 ––––12312331 931 931 Trade and other payables Trade and other payables 912 912 912 33 Accrued expenses and deferred income – – – – 498 498 498 33 Derivative financial instruments 17 – – 16 – 33 33 33 1,443 1,443
Carrying amount by category 170 – – 105 5,495 5,770 5,893
F-95 Group ACCOUNTS FOR 2007
Financial Financial assets/ Available liabilities Carrying liabilities at fair for sale Derivatives measured at amounts 2006 value through Loans and financial used for amortised by balance Balance sheet item profit or loss receivables assets hedging cost sheet item Fair value Note Non-current financial assets Available for sale investments – – 127 – – 127 127 22 Non-current financial assets Loan receivables – 8–––8823 Derivative financial instruments – – – 66 – 66 66 23 74 74 Current financial assets Trade and other receivables Trade and other receivables – 1,504 – – – 1,504 1,504 26 Prepayments and accrued income – 80–––808026 Derivative financial instruments 43 – – 30 – 73 73 26 1,657 1,657
Carrying amount by category 43 1,592 127 96 – 1,858 1,858
Non-current financial liabilities Non-current interest-bearing liabilities Non-current interest-bearing liabilities – – – – 3,255 3,255 3,572 31 Derivative financial instruments – – – 98 – 98 98 31 3,353 3,670 Other liabilities Other liabilities – – – – 11 11 11 32 Derivative financial instruments 2 ––––2232 13 13 Current financial liabilities Current interest-bearing liabilities Interest-bearing liabilities – – – – 875 875 875 31 Derivative financial instruments 117 ––––11711731 992 992 Trade and other payables Trade and other payables – – – – 895 895 895 33 Accrued expenses and deferred income *) –52 – – – 503 451 451 33 Derivative financial instruments 39 – – 14 – 53 53 1,399 1,399
Carrying amount by category 106 – – 112 5,539 5,757 6,074
*) In 2006 Accrued expenses and deferred income included accrued interest of derivative financial instruments % 52 million.
Fair values of long-term loans, have been estimated as follows: The fair value of the quoted bonds is based on the quoted mar- ket value as of 31 December. The fair value of fixed rate and mar- ket-based floating rate loans is estimated using the expected future payments discounted at market interest rates. The carrying amounts of current financial assets and liabilities approximate their fair value.
F-96 ACCOUNTS FOR 2007 Group
35 DERIVATIVE FINANCIAL INSTRUMENTS Group Name of the subsidiary, country of incorporation holding % Net fair values of derivative financial instruments UPM-Kymmene France S.A.S., FR 100.00 UPM-Kymmene Inc., US 100.00 As at 31 December `m 2007 2007 2007 2006 UPM-Kymmene India PVT Ltd, IN 100.00 UPM-Kymmene Japan K.K., JP 100.00 Positive Negative Net fair Net fair fair values fair values values values UPM-Kymmene Miramichi Inc., CA 100.00 UPM-Kymmene NV/SA, BE 99.60 Interest rate swaps UPM-Kymmene Otepää AS, EE 100.00 Fair value hedges 66 – 66 102 OOO UPM-Kymmene Pestovo, RU 100.00 Held for trading 48 – 48 – UPM-Kymmene Papier GmbH & Co. KG, DE 100.00 Forward foreign exchange UPM-Kymmene Plywood S.A.S., FR 100.00 contracts UPM-Kymmene Pty.Ltd, AU 100.00 Cash flow hedges 65 –16 49 13 UPM-Kymmene Sales GmbH, DE 100.00 Held for trading 17 –56 –39 –13 UPM-Kymmene Seven Seas Oy, FI 100.00 Currency options UPM-Kymmene Sp.z o.o., PL 100.00 Held for trading 3 –1 2 – UPM-Kymmene S.A., ES 100.00 Cross currency swaps UPM-Kymmene S.r.l., IT 100.00 Fair value hedges – –89 –89 –157 UPM-Kymmene Wood AB, SE 100.00 Held for trading 4 –113 –109 –27 UPM-Kymmene Wood A/S, DK 99.93 Commodity Contracts UPM-Kymmene Wood B.V., NL 100.00 Held for trading 1 – 1 3 UPM-Kymmene Wood GmbH, DE 100.00 Interest rate forward contracts UPM-Kymmene Wood Ltd, GB 100.00 Held for trading – – – – UPM-Kymmene Wood Oy, FI 100.00 204 –275 –71 –79 UPM-Kymmene Wood S.A., ES 100.00 UPM-Kymmene Wood S.A., FR 99.99 Notional amounts of derivative financial instruments UPM-Kymmene (Changshu) Paper Industry Co. Ltd, CN 100.00 As at 31 December UPM-Kymmene (UK) Ltd, GB 100.00 `m 2007 2006 UPM Raflatac Canada Inc., CA 100.00 Interest rate swaps 2,383 2,566 UPM Raflatac CZ s.r.o., CZ 100.00 Forward foreign exchange contracts 4,369 4,293 UPM Raflatac GmbH, DE 100.00 Currency options 110 30 UPM Raflatac Iberica S.A., ES 100.00 Cross currency swaps 529 570 UPM Raflatac Inc., US 100.00 Commodity contracts 15 29 UPM Raflatac Kft., HU 100.00 Interest rate forward contracts 3,642 2,500 UPM Raflatac Ltd, GB 100.00 UPM Raflatac Mexico S.A. de C.V., ME 100.00 UPM Raflatac NZ Limited, NZ 100.00 36 PRINCIPAL SUBSIDIARIES AS AT 31 DECEMBER 2007 UPM Raflatac Oy, FI 100.00 UPM Raflatac Polska Sp.z o.o., PL 100.00 Group Name of the subsidiary, country of incorporation holding % UPM Raflatac South Africa (Pty) Ltd, ZA 100.00 UPM Raflatac S.A.S., FR 100.00 UPM Raflatac Sdn. Bhd., MY 100.00 Blandin Paper Company, US 100.00 UPM Raflatac Pty Ltd, AU 100.00 Intune Circuits Oy, FI 62.39 UPM Raflatac Co., Ltd, TH 100.00 Lignis GmbH & Co. KG, DE 74.90 UPM Raflatac (S) Pte Ltd, SG 100.00 Nordland Papier GmbH, DE 100.00 Werla Insurance Company Ltd, GB 100.00 NorService GmbH, DE 100.00 nortrans Speditionsgesellschaft mbH, DE 100.00 PT. Raflatac Indonesia, ID 100.00 The table includes subsidiaries with sales exceeding ` 2 million. Raflatac (Changshu) Co. Ltd, CN 100.00 Silvesta Oy, FI 100.00 37 SHARE-BASED PAYMENTS Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT 100.00 ZAO Tikhvinsky Komplexny Lespromkhoz, RU 99.82 Tilhill Forestry Ltd, GB 100.00 Share options granted to key personnel UPM Sähkönsiirto Oy, FI 100.00 As authorised by the Annual General Meeting of 19 March 2002, D OOO UPM-Kymmene, RU 100.00 and E options have been issued to key personnel. Of these, UPM-Kymmene AB, SE 100.00 3,800,000 are designated 2002D and 3,800,000 are designated UPM-Kymmene AG, CH 99.80 2002E. Each option entitles the holder to subscribe two UPM- UPM-Kymmene AS, NO 100.00 Kymmene Corporation shares. The subscription period for 2002D UPM-Kymmene Asia Pacific Pte Ltd, SG 100.00 options is 1 April 2004 to 30 April 2007 and that for 2002E options UPM-Kymmene Austria GmbH, AT 100.00 UPM-Kymmene A/S, DK 100.00 1 April 2005 to 30 April 2008. UPM-Kymmene B.V., NL 100.00 The share subscription price is ` 43.90 per two shares for 2002D OOO UPM-Kymmene Chudovo, RU 100.00 options and ` 14.27 per share for 2002E options. The share sub- UPM-Kymmene Forest AS, EE 100.00 scription prices will be reduced by the amount of dividend con- OOO UPM-Kymmene Forest Russia, RU 100.00 firmed after the end of the subscription price determination period
F-97 Group ACCOUNTS FOR 2007 and before the date of share subscription, in each case on the record the Board of Directors’ proposal to issues share options to the date for dividend distribution. Share subscriptions based on these Group’s key personnel. The number of options may not be more options may increase the number of shares by a maximum of than 15,000,000 and they will entitle to subscribe in total no more 15,200,000. than 15,000,000 new shares of the company. Of the share options, The Annual General Meeting held on 31 March 2005 approved 5,000,000 shall be marked with the symbol 2007A, 5,000,000 shall the Board of Directors’ proposal to issue share options to the be marked with the symbol 2007B and 5,000,000 shall be marked Group’s key personnel. The number of share options is 9,000,000 with the symbol 2007C. The subscription periods shall be 1 October and these can be exercised to subscribe a maximum total of 2010 to 31 October 2012 for share options 2007A, 1 October 2011 9,000,000 UPM-Kymmene Corporation shares. A total of to 31 October 2013 for share options 2007B, and 1 October 2012 to 3,000,000 of the share options are designated 2005F, 3,000,000 31 October 2014 for share options 2007C. 2005G and 3,000,000 2005H. The subscription periods are 1 Octo- The share subscription price shall be the trade volume weighted ber 2006 to 31 October 2008 for 2005F options, 1 October 2007 to average quotation of the share on the OMX Nordic Exchange Hel- 31 October 2009 for 2005G options, and 1 October 2008 to 31 sinki, during 1 April to 31 May 2008 for share option 2007A, during October 2010 for 2005H options. 1 April to 31 May 2009 for share option 2007B, and during 1 April The subscription price for 2005F share options is the average to 31 May 2010 for share option 2007C trade-weighted price for the company’s share on the Helsinki stock exchange between 1 January and 28 February 2005 plus 10 %, i.e. Equity-based rewards scheme ` 18.23 per share. The subscription price for 2005G options is the Key personnel of the Group who fall within the scope of the share average trade-weighted share price between 1 January and 28 Febru- ownership rewards scheme may be rewarded with UPM-Kymmene ary 2006 plus 10 %, i.e. ` 18.65 per share, and that for 2005H shares annually in the calendar years 2005, 2006 and 2007. The options the average trade-weighted share price between 1 January reward will be paid in the next year as a combination of shares and and 28 February 2007 plus 10 %, i.e. ` 21.65 per share. The share cash. Altogether not more than 1,046,400 shares will be given to key subscription prices will be reduced by the amount of dividend con- personnel on the basis of the scheme. The amount to be paid in cash firmed after the end of the subscription price determination period may be not more than 1.5 times the value of the shares given. The and before the date of share subscription, in each case on the record amount of the reward is tied to the achievement of set performance date for dividend distribution. Share subscriptions based on 2005F, targets. 2005G and 2005H options may increase the number of shares by a In 2007, a total of 103,652 shares were given to 65 key employ- total maximum of 9,000,000. ees under the share ownership rewards scheme. Of this amount, The Annual General Meeting held on 27 March 2007 approved 14,500 shares were given to the President and CEO, and a total of 58,368 shares to the other Executive Team members.
Changes in the numbers of share options granted 2007 2006 Weighted average Number of share Weighted average Number of share exercise price, % options exercise price, % options 1 Jan. 15.80 10,305,550 16.55 10,348,700 Share options granted 18.98 5,622,000 16.73 6,500 Share options forfeited 17.93 –12,000 16.73 –47,500 Share options exercised 37.15 –2,853,945 12.02 –2,150 Share options expired 37.15 –775,855 – – 31 Dec. 15.91 12,285,750 15.80 10,305,550 Exercisable share options 9,544,250 10,305,550
Weighted average remaining contractual life was 17 and 13 months as at 31 December 2007 and 2006, respectively.
Outstanding share option plans as at 31 December 2007
Plan/Distribution Exercise price Total number of Number of share Vesting1) of share options Class at 1 Jan. at 31 Dec. share options options granted Exercise period schedule 2005/2007 H 21.65 20.90 3,000,000 2,741,500 1.10.2008–31.10.2010 1.10.2008 2005/2007 G 17.90 17.15 3,000,000 2,866,000 1.10.2007–31.10.2009 Vested 2005/2007 F 16.73 15.98 3,000,000 2,924,500 1.10.2006–31.10.2008 Vested 2002/2003 E 12.02 11.27 3,800,000 3,753,750 1.4.2005–30.4.2008 Vested 12,800,000 12,285,750 1) Vesting periods range from 6 to 24 months.
F-98 ACCOUNTS FOR 2007 Group
The Black-Scholes valuation model and the following weighted fundamental research information regarding the Group’s main raw average assumptions are used in measuring the fair value of share materials, major manufacturing processes and key product options issued in 2007 and 2006. attributes. In addition to joint research at FPPRI, the Group also utilises the institute for contract research in connection with product 2007 2006 and process development. These services are provided on an arm’s Share price, % 16.79 16.81 length basis and upon terms that the Group believes to be customary Exercise price, % 19.74 16.73 within the industry and generally no less favourable than would be Volatility 1) 24% 28% Risk-free interest rate 3.95% 3.03% available from independent third parties. Assumed annual dividend yield – – The Group purchases raw materials from certain associated Expected option life, year 3 3 companies, the most significant of which is Paperinkeräys Oy, a Finnish company engaged in the procurement, processing and trans- 1) Volatility is a measure of price changes expressed in terms of the standard devia- port of recovered paper in which the Group has a 22.98% interest. tion of the price of the security in question over the period of analysis. In the calculations the volatility is based on three- and four-year periods. Volatility is The total value of raw material purchases from Paperinkeräys Oy reported as an annual percentage figure. was ` 13 million in 2007 and ` 15 million in 2006. Recovered paper is sold to the Group and other shareholders of Paperinkeräys Oy at a Assumed forfeiture used in 2007 was 5%, 2006 0%. contract-based price that takes into account paper recycling expenses and the world market prices for recovered paper. In Aus- 38 RELATED PARTY TRANSACTIONS tria, the Group has a similar arrangement concerning recovered paper which is purchased from Austria Papier Recycling G.m.b.H., a The Group holds a 47% interest in Oy Metsä-Botnia Ab (“Metsä- company in which the Group owns a 33.3% equity interest. The Botnia”), a joint venture between M-real Oyj (“M-real”) and Met- total value of recovered paper purchases was ` 16 million in 2007 säliitto Group. M-real is a Finnish paper producer, and Metsäliitto and ` 12 million in 2006. Group is a co-operative organisation of Finnish forest owners. Met- In Finland, UPM has a pension foundation (Kymin Eläkesäätiö) säliitto Group is also the controlling shareholder of M-real. Chemi- which is a separate legal entity. The pensions of about 9% of the cal pulp produced by Metsä-Botnia is sold to the Group and to Group’s Finnish employees are arranged through the foundation. M-real at the market price less certain transportation and other The contributions paid by UPM to the foundation amounted to ` 50 costs. In 2007 and 2006, the Group’s chemical pulp entitlement with million in 2007 (` 17 million in 2006). The foundation manages and respect to the production of Metsä-Botnia was 1.1 million tonnes invests the contributions paid to the plan. The fair value of the foun- per year, and after November 2007, following the completion of the dation’s assets at 31 December 2007 was ` 251 million, of which pulp mill in Uruguay, the entitlement will be 1.7 million tonnes per 61% was in the form of debt securities and 39% was invested in year. Total purchases of chemical pulp from Metsä-Botnia amounted equities, property and money market investments. to ` 231 million in 2007 and ` 197 million in 2006. In 2007, Metsä- The pensions of about 66% of the Group’s employees in the Botnia completed the construction of a new pulp mill in Uruguay. United Kingdom are arranged through the Pension Funds, which are The total cost of the project was about USD 1.2 billion. The annual separate legal entities. The contributions paid by the Group to this capacity of the mill will be approximately one million tonnes of fund amounted to GBP 6 million in 2007 (GBP 6 million in 2006). bleached eucalyptus pulp. UPM has invested ` 93 million in the The fair value of the fund’s assets at 31 December 2007 was GBP pulp mill project. In 2006, related to the pulp mill project, UPM 172 million, of which 62% was invested in equities and 38% in debt sold its shares in the Uruguayan forestry company, Compañia Fore- instruments and property. stal Oriental S.A. to Metsä-Botnia for ` 36 million. The Group obtains most of the energy for its production units in Finland from the Group’s owned and leased power plants, as well as 39 COMMITMENTS AND CONTINGENCIES through ownership in power companies which entitles it to receive electricity and heat from those companies. A significant proportion Contingent liabilities of the Group’s electricity procurement comes from Pohjolan Voima The Group is a defendant or plaintiff in a number of legal proceed- Oy, a Finnish energy producer in which the Group holds a 41.99% ings incidental to its operations. These lawsuits primarily involve equity interest, and from Kemijoki Oy, a Finnish hydropower pro- claims arising out of commercial law issues. ducer in which the Group holds a 4.13% equity interest. Pohjolan Certain competition authorities are continuing investigations Voima Oy is also a majority shareholder in Teollisuuden Voima Oy, into alleged antitrust activities with respect to various products of one of Finland’s two nuclear power companies. The combined total the company. of these energy purchases was ` 207 million in 2007 and ` 194 The US Department of Justice, the EU authorities and the million in 2006. In accordance with the articles of association of the authorities in several EU Member States, Canada and certain other power companies and with related shareholder agreements, the countries have granted UPM conditional full immunity with respect prices paid by the Group to the power companies are based on pro- to certain conduct disclosed to them. The US and Canadian investi- duction costs, which are generally lower than market prices. Internal gations are now closed, and the European Commission has tenta- sales to the Group’s segments are based on the prevailing market tively closed its investigation of the European fine paper, newsprint, price. magazine paper, label paper and self-adhesive labelstock markets. Approximately 10 to 15% of the Group’s research and develop- UPM has been named as a defendant in multiple class-action ment work is conducted by Oy Keskuslaboratorio-Centrallaborato- lawsuits against labelstock and magazine paper manufacturers in the rium Ab (the Finnish Pulp and Paper Research Institute or United States. During 2007, UPM agreed to settle the class-action “FPPRI”), in which the Group is one of four corporate owners with lawsuits raised by direct purchasers of labelstock and magazine a 38.65% interest. Ownership of FPPRI provides the Group with paper for a total amount of approximately ` 12 million. Certain
F-99 Group ACCOUNTS FOR 2007 class action lawsuits filed by indirect purchasers of labelstock and Commitments magazine paper continue to be pending. As at 31 December The remaining litigation matters may last several years. No mate- `m 2007 2006 rial provision have been made in relation to these investigations. On own behalf Mortgages 90 92 Commitments In the normal course of business, UPM-Kymmene Corporation and On behalf of associated companies and some of its subsidiaries enter into various agreements providing joint ventures Guarantees 10 12 financial or performance assurance to third parties on behalf of those subsidiaries. These agreements are entered into primarily to On behalf of others support or enhance the creditworthiness of subsidiaries so that they Guarantees 3 6 can accomplish their intended business purposes. The maximum amount of future payments for which UPM-Kymmene Corporation Other commitments, own is liable on behalf of its subsidiaries are disclosed in the table below Operating leases, due within 12 months 21 23 under “Other commitments”. Operating leases, due after 12 months 99 94 The Group has also entered into various agreements to provide Other commitments 70 69 financial or performance assurance to third parties on behalf of Total 293 296 certain companies in which the Group has a minority interest. These agreements are entered into primarily to support or enhance the Mortgages 90 92 creditworthiness of these companies. The Group has no collateral or Guarantees 13 18 other recourse provisions related to these guarantees. The maximum Operating leases 120 117 amounts of future payments by UPM-Kymmene Corporation on Other commitments 70 69 Total 293 296 behalf of its associated companies under these guarantees are dis- closed in the table below under “Guarantees on behalf of associated Property under mortgages given as collateral for own commitments companies”. It is the Group’s policy not to give guarantees on behalf include industrial estates and forest land. third parties, and the commitments included under the caption “Guarantees on behalf of others” in the table relate mainly to com- panies that have been sold. Commitments related to associated companies and In the normal course of business, certain subsidiaries of UPM joint ventures Kymmene Corporation, especially in Germany, grant commercial As at 31 December guarantees to their customers to help them purchase goods from the `m 2007 2006 subsidiary. The Group has no liability with respect to these commer- cial guarantees, but they are covered by its credit risk insurance. Proportionate interest in joint ventures’ commitments 22 22 These guarantees mature within one year. The maximum potential Contingent liabilities relating to the Group’s interest amount of future payments under these guarantees amounted to ` 13 in the joint ventures 9 10 Share of associated companies contingent liabilities 218 141 million at 31 December 2007 and ` 10 million at 31 December 2006 They are included in the amounts disclosed in the table under Operating lease commitments “Other commitments”. – where a Group company is the lessee The Group leases office, manufacturing warehouse space and ves- sels under time charter agreements under various non-cancellable operating leases. Certain contracts contain renewal options for various periods of time.
The future costs for contracts exceeding one year and for non-cancellable operating lease contracts As at 31 December `m 2007 2006 less than 1 year 21 23 1–2 years 28 25 2–3 years 21 17 3–4 years 18 15 4–5 years 14 14 over 5 years 18 23 120 117
F-100 ACCOUNTS FOR 2007 Group
Capital commitments at the balance sheet date but not recognised in the financial statements; major commitments under construction listed below Commitment as at 31 December `m Total cost 2007 2006 Pulp mill rebuild, Kymi 325 99 300 New mill in Poland, Raflatac 90 67 – New mill in USA, Raflatac 75 16 80 New bioboiler, Caledonian 84 73 72 PM5 quality upgrade, Jämsänkoski 38 24 38
40 EVENTS AFTER THE BALANCE SHEET DATE
The Group’s management is not aware of any significant events occurring after 31 December 2007 which would have had an impact on the financial statements.
F-101 Parent Company ACCOUNTS FOR 2007
Parent company accounts (Finnish Accounting Standards, FAS)
PROFIT AND LOSS ACCOUNT CASH FLOW STATEMENT 1.1.–31.12., `m Note 2007 2006 `m 2007 2006
Turnover (1) 4,775 4,499 Operating activities Change in inventories of finished goods and work Profit/loss before extraordinary items –528 284 in progress 98 36 Financial income and expenses 70 –20 Production for own use 33 18 Adjustments to operating profit a) 1,174 540 Other operating income (2) 164 226 Change in working capital b) –219 40 Raw materials and services Interest paid –212 –187 Raw materials and consumables Dividends received 24 115 Purchases during the financial period –2,747 –2,204 Interest received 103 95 Change in inventories 52 –49 Other financial items –216 –172 External services –364 –333 Income taxes paid c) –107 –96 –3,059 –2,586 Net cash from operating activities 89 599 Personnel expenses Wages and salaries (3) –459 –475 Social security expenses Investing activities Pension expenses –112 –117 Investments in tangible and intangible assets –429 –314 Other social security expenses –46 –50 Proceeds from sale of tangible and intangible assets 33 68 –617 –642 Investments in shares and holdings –15 –24 Depreciation and value adjustments (4) Proceeds from sale of shares and holdings 190 352 Depreciation according to plan –335 –353 Increase in other investments –5 –15 Value adjustments to goods held as Decrease in other investments 154 39 non-current assets 9 –133 Net cash used in investing activities –72 106 –326 –486 Other operating costs and expenses –1,526 –801 Financing activities Operating profit/loss –458 264 Increase in non-current liabilities 932 350 Decrease in non-current liabilities –738 –366 Financial income and expenses Increase or decrease in current liabilities 343 –354 Income from investments held as non-current assets Share options exercised 104 – Income from Group companies 17 100 Dividends paid –392 –392 Income from participating interest companies 23 15 Purchases of own shares –266 – Interest income from Group companies 42 39 Group contributions, received and paid 37 13 Interest income from other companies – 1 Other interest and financial income Net cash used in financing activities 20 –749 Other interest income from Group companies 61 51 Other interest income from other companies 2 4 Cash and cash equivalents Other financial income from Group companies – – Change in cash and cash equivalents 37 –44 Other financial income from other companies 55 85 Cash flow from merged companies – 2 Interest and other financial expenses Cash and cash equivalents at the beginning of the year 116 158 Interest expenses paid to Group companies –43 –38 Cash and cash equivalents at year-end 153 116 Interest expenses paid to other companies –169 –152 Other financial expenses paid Notes to the cash flow statement to Group companies –53 –79 a) Adjustments to operating profit Other financial expenses paid Depreciation 335 353 to other companies –5 –6 Gains and losses on sale of non-current assets 862 18 –70 20 Value adjustments on non-current assets –9 133 Profit/loss before extraordinary items –528 284 Change in provisions –14 36 Total 1,174 540 Extraordinary items (5) Extraordinary income 78 52 b) Change in working capital Extraordinary expenses –13 –14 Inventories –130 8 65 38 Profit/loss before appropriations and taxes –463 322 Current receivables –198 51 Current non-interest-bearing liabilities 109 –19 Appropriations Total –219 40 Increase or decrease in accumulated depreciation difference 45 217 c) Taxes stemming from extraordinary items and sales of non-current assets are Income taxes (6) –116 –151 reported here on a net basis. Profit/loss for the financial period –534 388
F-102 ACCOUNTS FOR 2007 Parent Company
BALANCE SHEET `m Note 31.12.2007 31.12.2006 `m Note 31.12.2007 31.12.2006
ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders’ equity (11) Intangible assets (7) Share capital 890 890 Intangible rights 7 6 Share premium reserve – 776 Other capitalised expenditure 219 220 Revaluation reserve 551 552 Advance payments 78Legal reserve – 187 233 234 Reserve for invested non-restricted equity 1,067 – Retained earnings 2,667 2,937 Tangible assets (8) Profit/loss for the financial period –534 388 Land and water areas 1,037 1,042 4,641 5,730 Buildings 591 523 Machinery and equipment 1,592 1,600 Appropriations Other tangible assets 60 47 Accumulated depreciation difference 1,165 1,211 Advance payments and construction in progress 238 98 Provisions (12) 3,518 3,310 Provisions for pensions 52 60 Other provisions 22 28 Investments (9) 74 88 Holdings in Group companies 3,422 4,078 Receivables from Group companies 635 985 Non-current liabilities (13) Holdings in participating interest companies 636 630 Bonds 2,111 2,324 Other shares and holdings 173 177 Loans from financial institutions 821 338 Other receivables 10 7 Pension loans 62 205 4,876 5,877 Advances received 1 – 8,627 9,421 Payables to Group companies – 31 Other liabilities 127 134 Current assets 3,122 3,032 Inventories Raw materials and consumables 246 194 Current liabilities (14) Finished products and goods 363 266 Bonds 89 184 Advance payments 71 40 Loans from financial institutions 55 2 680 500 Pension loans 143 167 Advances received 8 4 Current receivables (10) Trade payables 292 218 Trade receivables 95 54 Payables to Group companies 1,210 804 Receivables from Group companies 1,843 1,827 Payables to participating interest Receivables from participating companies 40 22 interest companies 25 9 Other liabilities 394 287 Other receivables 65 44 Accruals and deferred income 293 243 Prepayments and accrued income 38 21 2,524 1,931 2,066 1,955 5,646 4,963 Cash and cash equivalents 153 116 2,899 2,571
Total assets 11,526 11,992 Total equity and liabilities 11,526 11,992
F-103 Parent Company ACCOUNTS FOR 2007 Notes to the parent company financial statements (All amounts in millions of euros unless otherwise stated.)
ACCOUNTING POLICIES `m 2007 2006 The financial statements of the parent company are prepared in Extraordinary expenses accordance with Finnish Accounting Standards. Main differences in Group contributions –12 – accounting policies between the Group and the parent company Losses on mergers –1 –14 relate to measurement of derivative financial instruments and bio- –13 –14 logical assets and recognition of defined benefit obligations, revalua- Total 65 38 tions and deferred income taxes. See notes to the consolidated During the financial period, Kiinteistö Oy Karhunkierros 5, Kiinteistö Oy Kotkan accounts, note 1. Runeberginkatu 25, Draco Oy, FY-Industries Oy, Lappeenrannan Yhteisterminaali Oy, Manttilg Oy, UPM-Kymmene Consulting Oy and UPM Tehdasmittaus Oy have been 1 TURNOVER merged to the parent company. Owing to the corporate structure of the Group, the turnover of the parent company has not been broken down by division and market. 6 INCOME TAXES `m 2007 2006 2 OTHER OPERATING INCOME Taxes on business income for the financial period 117 151 `m 2007 2006 Income taxes from previous periods –1 – Gains on sale of non-current assets 153 207 116 151 Rental income 10 10 1) Gains on sale of emission allowances –8Deferred tax assets and liabilities Other 1 1 Deferred income tax assets and liabilities of the parent company are 164 226 not recorded on the balance sheet. 1) Emissions trading rights are accounted for on a net basis. Deferred tax liability comprises mainly depreciation differences, for which the deferred tax liability at 31 December 2007 was ` 303 3 PERSONNEL EXPENSES million (` 315 million). `m 2007 2006 Deferred tax liability is not stated separately for revaluations. Wages and salaries The potential tax liability arising from the sale of revalued assets is Managing director and members of ` 184 million (` 185 million). the Board of Directors 2) 32 Other wages and salaries 456 473 459 475 7 INTANGIBLE ASSETS `m 2007 2006 2) See notes to the consolidated accounts, note 7. 2007 2006 Intangible rights Average number of personnel 9,552 10,939 Acquisition cost at 1 Jan. 14 11 Increases 5 9 Owing to the corporate structure of the Group, average number of Decreases –1 –6 personnel has not been broken down by segments. Transfers between balance sheet items –2 – Acquisition cost at 31 Dec. 16 14 Accumulated depreciation at 1 Jan. –8 –7 4 DEPRECIATION ACCORDING TO PLAN AND VALUE ADJUSTMENTS Depreciation for the period –1 –1 `m 2007 2006 Accumulated depreciation at 31 Dec. –9 –8 Depreciation according to plan Book value at 31 Dec. 7 6 Intangible rights 1 1 Other capitalised expenditure 30 31 Other capitalised expenditure Buildings 39 38 Acquisition cost at 1 Jan. 368 275 Machinery and equipment 258 276 Other tangible assets 7 7 Increases 15 112 335 353 Decreases –3 –24 Transfers between balance sheet items 15 5 Value adjustments Acquisition cost at 31 Dec. 395 368 Non-current assets –9 133 Accumulated depreciation at 1 Jan. –148 –136 326 486 Accumulated depreciation on decreases and transfers 2 23 Depreciation for the period –30 –31 Value adjustments and their cancellations – –4 5 EXTRAORDINARY ITEMS Accumulated depreciation at 31 Dec. –176 –148 `m 2007 2006 Book value at 31 Dec. 219 220 Extraordinary income Group contributions 63 51 Gains on mergers 15 1 78 52
F-104 ACCOUNTS FOR 2007 Parent Company
`m 2007 2006 9 INVESTMENTS Advance payments `m 2007 2006 Acquisition cost at 1 Jan. 8 32 Holdings in Group companies Increases 14 – Acquisition cost at 1 Jan. 4,585 4,744 Decreases – –20 Increases 446 27 Transfers between balance sheet items –15 –4 Decreases –1,328 –186 Book value at 31 Dec. 7 8 Acquisition cost at 31 Dec. 3,703 4,585 Accumulated depreciation at 1 Jan. –507 –281 Accumulated depreciation on decreases and transfers 1,242 – 8 TANGIBLE ASSETS Value adjustments and their cancellations –1,016 –226 `m 2007 2006 Accumulated depreciation at 31 Dec. –281 –507 Revaluations at 1 Jan. – 2 Land and water areas Reversal of revaluation – –2 Acquisition cost at 1 Jan. 495 492 Revaluations at 31 Dec. – – Increases 7 5 Book value at 31 Dec. 3,422 4,078 Decreases –11 –2 Acquisition cost at 31 Dec. 491 495 The value adjustment of shares in UPM-Kymmene Miramichi Inc. Revaluations at 1 Jan. 547 547 was ` -1,015 million. In December 2007 UPM decided to close Reversal of revaluation –1 – down Miramichi paper mill. Revaluations at 31 Dec. 546 547 Book value at 31 Dec. 1,037 1,042 The principal subsidiaries are listed in the Consolidated Finan- cial Statements (Note 36). Buildings Receivables from Group Acquisition cost at 1 Jan. 1,068 1,104 companies Increases 114 27 Acquisition cost at 1 Jan. 985 1,054 Decreases –12 –75 Increases 2 16 Transfers between balance sheet items 18 12 Decreases –352 –85 Acquisition cost at 31 Dec. 1,188 1,068 Book value at 31 Dec. 635 985 Accumulated depreciation at 1 Jan. –545 –538 Accumulated depreciation on decreases and transfers –10 63 Holdings in participating interest companies Depreciation for the period –39 –38 Acquisition cost at 1 Jan. 527 551 Value adjustments and their cancellations –3 –32 Increases 7 12 Accumulated depreciation at 31 Dec. –597 –545 Decreases –1 –36 Book value at 31 Dec. 591 523 Acquisition cost at 31 Dec. 533 527 Revaluations at 1 Jan. 103 103 Machinery and equipment Revaluations at 31 Dec. 103 103 Acquisition cost at 1 Jan. 5,459 5,660 Book value at 31 Dec. 636 630 Increases 179 175 Decreases –55 –448 Transfers between balance sheet items 58 72 Other shares and holdings Acquisition cost at 31 Dec. 5,641 5,459 Acquisition cost at 1 Jan. 116 120 Accumulated depreciation at 1 Jan. –3,859 –3,903 Decreases –4 –4 Accumulated depreciation on decreases and transfers 56 414 Acquisition cost at 31 Dec. 112 116 Depreciation for the period –258 –276 Revaluations at 1 Jan. 61 61 Revaluations at 31 Dec. 61 61 Value adjustments and their cancellations 12 –94 Accumulated depreciation at 31 Dec. –4,049 –3,859 Book value at 31 Dec. 173 177 Book value at 31 Dec. 1,592 1,600 Other receivables Other tangible assets Acquisition cost at 1 Jan. 7 24 Acquisition cost at 1 Jan. 167 172 Increases 3 – Increases 14 2 Decreases – –21 Decreases –1 –10 Transfers between balance sheet items – 4 Transfers between balance sheet items 6 3 Book value at 31 Dec. 10 7 Acquisition cost at 31 Dec. 186 167 Accumulated depreciation at 1 Jan. –120 –120 There were no loans granted to the company’s Managing Direc- Accumulated depreciation on decreases and transfers 1 10 tor and members of the Board of Directors at 31 December 2007 or Depreciation for the period –7 –7 2006. Value adjustments and their cancellations – –3 Accumulated depreciation at 31 Dec. –126 –120 Book value at 31 Dec. 60 47
Advance payments and construction in progress Acquisition cost at 1 Jan. 98 102 Increases 220 84 Transfers between balance sheet items –80 –88 Book value at 31 Dec. 238 98
F-105 Parent Company ACCOUNTS FOR 2007
10 CURRENT RECEIVABLES `m 2007 2006 `m 2007 2006 Trade receivables 685 539 Receivables from Group companies Loan receivables 1,245 1,278 Trade receivables 566 478 Other receivables 65 44 Loan receivables 1,245 1,276 Prepayments and accrued income 71 94 Prepayments and accrued income 32 73 2,066 1,955 1,843 1,827
Main items included in current Receivables from participating interest companies prepayments and accrued income Trade receivables 24 7 Personnel expenses 1 2 Loans receivables – 2 Interest income 14 17 Prepayments and accrued income 1 – Currency derivatives 32 66 25 9 Income taxes 16 – Others 8 9 71 94
11 SHAREHOLDERS’ EQUITY Reserve for invested Share- Share non- holders’ Share premium Revaluation Legal restricted Retained equity, `m capital Share issue reserve reserve reserve equity earnings total
Balance sheet value, 1 Jan. 2006 890 – 776 554 187 – 3,329 5,736 Revaluations – – – –2 – – – –2 Dividends paid – – – – – – –392 –392 Profit for the financial period – – – – – – 388 388 Balance sheet value, 31 Dec. 2006 890 – 776 552 187 – 3,325 5,730
Share options – – – – – 104 – 104 Treasury shares 1) – – – – – – –266 –266 Revaluations – – – –1 – – – –1 Dividends paid – – – – – – –392 –392 Transfers – – –776 – –187 963 – – Loss for the financial period – – – – – – –534 –534 Balance sheet value, 31 Dec. 2007 890 – – 551 – 1,067 2,133 4,641 1) See notes to the consolidated accounts, note 27.
`m 2007 2006 13 NON-CURRENT LIABILITIES `m 2007 2006 Distributable funds at 31 Dec. Reserve for invested non-restricted equity 1,067 – Bonds 2,111 2,324 Loans from financial institutions 821 338 Retained earnings 2,667 2,937 Pension loans 62 205 Profit/loss for the financial period –534 388 Advances received 1 – Distributable funds at 31 Dec. 3,200 3,325 Other liabilities 127 165 3,122 3,032 12 PROVISIONS `m 2007 2006 Payables to Group companies Provisions for pensions 52 60 Other liabilities – 31 Closure and restructuring provisions 1 12 –31 Environmental provisions 17 12 Long-term loans and their repayment schedule Other provisions 4 4 Repayment in 2-5 years 74 88 Bonds 945 398 Loans from financial institutions 580 80 Pension loans 62 205 Advances received 1 – Payables to Group companies – 31 1,588 714 Repayment later than 5 years Bonds 1,166 1,926 Loans from financial institutions 241 258 Other liabilities 127 134 1,534 2,318
Total at 31 Dec. 3,122 3,032
F-106 ACCOUNTS FOR 2007 Parent Company
Bonds 15 CONTINGENT LIABILITIES Initial amount `m 2007 2006 Interest, % million 2007 2006 Mortgages 1) Fixed-rate As security against own debts 60 60 1997–2007 6.875 USD 215 – 163 1997–2027 7.450 USD 375 255 285 Guarantees 1999–2009 6.350 EUR 250 250 250 Guarantees for loans 2000–2030 3.550 JPY 10,000 60 64 On behalf of Group companies 974 1,049 2001–2007 6.875 USD 10 – 7 On behalf of participating interest companies 10 12 2002–2007 0.869 JPY 2,000 – 13 Other guarantees 2002–2012 6.125 EUR 600 600 600 On behalf of Group companies 95 87 2002–2014 5.625 USD 500 340 380 On behalf of others – 2 2002–2017 6.625 GBP 250 341 372 2003–2018 5.500 USD 250 170 190 Leasing commitments 2,016 2,324 Commitments for next year 1 2 Commitments for subsequent years 1 9 Floating-rate 2002–2008 5.631 EUR 39 39 39 2002–2008 5.387 EUR 50 50 50 1) The mortgages given relate mainly to reborrowing of statutory employment 2002–2010 5.634 EUR 59 59 59 pension contributions. 2002–2012 5.237 EUR 25 25 25 2002–2012 5.787 EUR 11 11 11 Directors’ pension commitments 184 184 See notes to the consolidated accounts, note 7. Bonds, total 2,200 2,508 – current portion –89 –184 Bonds, long-term portion 2,111 2,324 Derivate contracts Fair values and notional values are disclosed in the Consolidated Financial Statements (Notes 34 and 35). 14 CURRENT LIABILITIES `m 2007 2006 Bonds 89 184 Loans from financial institutions 55 2 Pension loans 143 167 Advances received 8 7 Trade payables 380 292 Other liabilities 1,482 917 Accruals and deferred income 367 362 2,524 1,931
Main items included in current accruals and deferred income Personnel expenses 104 86 Interest expenses 16 17 Income tax – 5 Currency derivatives 228 244 Others 19 10 367 362
Payables to Group companies Advances received – 3 Trade payables 51 52 Other liabilities 1,085 630 Accruals and deferred income 74 119 1,210 804
Payables to participating interest companies Trade payables 37 22 Other liabilities 3 – 40 22
F-107 Information on shares UPM Information on shares
Changes in number of shares 1 January 2003 – 31 December 2007
Number of shares
2002 Number of shares at 31 Dec. 2002 260,115,975
2003 Exchanged under convertible bond issue (1994) 1,673,490 Bonus share issue (1:1) 261,789,465 Number of shares at 31 Dec. 2003 523,578,930
2004 Options exercised 741,322 Number of shares at 31 Dec. 2004 524,320,252
2005 Options exercised 6,934,878 Own shares declared void –8,000,000 Number of shares at 31 Dec. 2005 523,255,130
2006 Options exercised 4,300 Number of shares at 31 Dec. 2006 523,259,430
2007 Options exercised 5,709,890 Own shares declared void –16,400,000 Number of shares at 31 Dec. 2007 512,569,320
Stock exchange trading poration’s listing of its ADSs on the New York Stock Exchange UPM’s shares are listed on OMX Nordic Exchange Helsinki. The (NYSE) ceased on 5 December 2007. Starting from December 6, Company’s ADSs are traded on the U.S. over-the-counter (OTC) 2007, the Company’s ADSs will be traded on the US over-the-coun- market under a Level 1 sponsored American Depositary Receipt ter (OTC) market under a Level 1 sponsored American Depositary program. Receipt program. A total of 952.3 million UPM-Kymmene Corporation shares were traded on the Helsinki stock exchange in 2007 (876.0 million in Directors’ interest at 31 December 2007 2006). This represented 182.1% (167.4%) of the total number of At the end of the year, the members of the Board of Directors includ- shares. The highest quotation was ` 20.59 in February and the lowest ing President and CEO owned a total of 833,398 UPM-Kymmene ` 13.01 in November. The total value of shares traded was ` 16,472 Corporation shares (801,382 in 2006), including those held by un- million in 2007 (` 16,021 million in 2006). During the year, 3.2 mil- derage children or by organisations or foundations of which the lion 2002E share options were traded for ` 34.3 million (3.8 million holder has control. These represent 0.16% of the shares (0.15%) and and ` 51.9 million) and 1.2 million share options 2005F were traded 0.16% of the voting rights (0.15%). At the end of the year, President for ` 3.8 million (0.2 million for ` 0.9 million). A total of 0.2 million and CEO Jussi Pesonen owned 340,000 share options. Exercise of share options 2005G were traded for ` 0.4 million as of the begin- these options would increase the number of the companys’s shares by ning of 1 October 2007. 410,000, which at 31 December 2007 would have represented 0.08% Upon UPM’s decision of 30 October 2007 and application to of the company’s voting rights. withdraw from the New York Stock Exchange, UPM-Kymmene Cor-
F-108 UPM Information on shares
Biggest registered shareholders at 31 December 2007
Shares at % of % of 31 Dec. 2007 shares votes
Varma Mutual Pension Insurance Company 10,861,033 2.12 2.12
Gustaf Serlachius (representing 5 shareholders) 6,309,811 1.23 1.23
IImarinen Mutual Pension Insurance Company 5,980,993 1.17 1.17
Svenska litteratursällskapet i Finland 3,701,380 0.72 0.72
The State Pension Fund 3,650,000 0.71 0.71
OP-Delta Investment Fund 3,551,100 0.69 0.69
Etera Mutual Pension Insurance Company 2,736,600 0.53 0.53
Mutual Insurance Company Pension Fennia 2,322,316 0.45 0.45
Kymin Osakeyhtiön 100-vuotissäätiö 1,695,788 0.33 0.33
The Social Insurance Institution of Finland 1,603,690 0.31 0.31
Nominees & registered foreign owners 350,674,184 68.42 68.42
Others 119,482,425 23.32 23.32
Total 512,569,320 100.00 100.00
On 7 March 2005, the Franklin Templeton Group and its affiliated investment advisers of Franklin Resources held 10.11% of the voting rights of UPM-Kymmene Corporation.
F-109 Information on shares UPM
Share price in 2007 Market capitalisation Monthly average share price and shares traded 1–12/2007
` M% % % of all shares 22 22 10,000 30 30
20 20 8,000 25 25 20 20 18 18 6,000 15 15 16 16 4,000 10 10 14 2,000 14 5 5
12 12 0 0 0 1 2 3 4 5 6 7 8 9 10 11 12 03 04 05 06 07 1 2 3 4 5 6 7 8 9 101112
Monthly average share price, % Shares traded, %
Share price 2003–2007 Earnings and dividend Shareholders’ equity per share per share
` ` ` 25 25 2,5 15
20 20 2.0 12
15 15 1.5 9
10 10 1.0 6
5 5 0.5 3
0 0 0.0 0 2003 2004 2005 2006 2007 03 04 05 06 07 03 04 05 06 07
UPM share price at end of month Earnings per share MSCI (Morgan Stanley Capital International) Dividend per share (2007: proposal) Forest Products & Paper World Index
Shares traded on Helsinki stock exchange 2003–2007 Dividend per share (`) and dividend to earnings ratio (%) 468,8% M` % ` % 3500 30 1.25 150
2800 25 1.00 120
2100 20 0.75 90
1400 15 0.50 60
700 10 0.25 30
0 5 0.00 0 2003 2004 2005 2006 2007 03 04 05 06 07
Monthly trading in UPM shares on Helsinki stock exchange, `m Dividend per share (2007: proposal) Trading in UPM shares as % of total number of shares Dividend to earnings ratio, %
F-110 UPM Information on shares
Distribution of shareholders at 31 December 2007
Number of % of Number of % of Size of shareholding shareholders shareholders shares, million shares
1 – 100 13,936 21.34 0.8 0.2 101 – 1,000 36,565 55.99 15.3 3.0 1,001 – 10,000 13,452 20.60 37.5 7.3 10,001 – 100,000 1,207 1.85 29.2 5.7 100,001 – 143 0.22 82.6 16.1 Total 65,303 100.00 165.4 32.3
Nominee-registered 346.9 67.7 Not registered as book entry units 0.2 0.0 Total 512.5 100.0
Shareholder breakdown by sector at 31 December, %
2007 2006 2005 2004 2003
Companies 2.2 1.8 2.8 3.1 4.4 Financial institutions and insurance companies 2.5 2.1 3.5 2.8 3.2 Public bodies 6.4 5.2 5.8 6.4 6.9 Non-profitmaking organisations 6.0 6.1 6.7 7.0 6.8 Households 14.1 13.5 15.4 15.6 15.3 Non-Finnish nationals 68.8 71.3 65.8 65.1 63.4 Total 100.0 100.0 100.0 100.0 100.0
UPM’s share option programmes
Exercise price per share Number of Number of at date of issue at 31.12.2007 Options exercised Options options shares % ` Subsciption period 2007
2002 E 3,800,000 7,600,000 14.27 *) 11.27 *) 1.4.2005–30.4.2008 1,300 2005 F 3,000,000 3,000,000 18.23 15.98 1.10.2006–31.10.2008 – 2005 G 3,000,000 3,000,000 18.65 17.15 1.10.2007–31.10.2009 – 2005 H 3,000,000 3,000,000 21.65 20.90 1.10.2008–31.10.2010 – * corrected for 2003 bonus issue
F-111 Key indicators ACCOUNTS FOR 2007 Key figures 1998–2007
Adjusted share-related indicators 1998–2007 1) 5)
2007 2006 2005 2004 2003 2002 2001 2000 1999 1998
Earnings per share, % (diluted 2007: 0.16) 0.16 0.65 0.50 1.76 0.60 0.96 1.93 2.38 1.88 1.91 Shareholders’ equity per share, % 13.21 13.90 14.01 14.46 13.36 13.85 13.09 11.72 10.23 9.48 Dividend per share, % 3) 2) 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 1.08 0.55 Dividend to earnings ratio, % 3) 468.8 115.4 150.0 42.6 125.0 78.1 39.0 31.4 57.0 28.6 Effective dividend yield, % 3) 5.4 3.9 4.5 4.6 5.0 4.9 4.0 4.1 5.4 4.6 P/E ratio 86.4 29.4 33.1 8.9 24.8 15.9 9.7 7.7 10.6 6.3 Cash flow from operations per share, % 1.66 2.32 1.63 1.90 2.40 2.73 3.32 3.19 2.39 – Dividend distribution, %m 3) 2) 384 392 392 393 393 390 388 371 557 290 Share price at 31 Dec., % 13.82 19.12 16.56 16.36 15.12 15.30 18.63 18.28 20.00 11.94 Market capitalisation, %m 7,084 10,005 8,665 8,578 7,917 7,960 9,681 9,502 10,663 6,630 Shares traded, %m 4) 16,472 16,021 11,358 9,731 9,11710,827 7,645 6,157 4,834 3,374 Shares traded (1,000s) 952,300 876,023 697,227 625,950 645,988 597,078 443,240 400,822 316,874 294,070 Shares traded, % of all shares 182.1 167.4 133.6 119.5 123.4 115.1 88.1 77.2 59.0 53.4 Lowest quotation, % 13.01 15.36 15.05 14.44 11.05 12.61 14.00 12.46 11.00 8.41 Highest quotation, % 20.59 20.91 18.15 17.13 17.10 22.25 19.93 22.45 21.25 14.63 Average quotation for the period, % 17.30 18.29 16.29 15.55 14.11 18.13 17.24 15.36 15.25 11.47 Number of shares, average (1,000s) 522,867 523,220 522,029 523,641 523,130 518,935 495,784 513,634 528,035 539,445 Number of shares at end of period (1,000s) 512,569 523,259 523,093 524,450 523,579 520,232 517,436 501,295 518,062 529,688
Share prices and shares traded are based on trading on the Helsinki stock exchange.
Notes to the tables on pages F54-F55. 1) Figures for 2002–2007 are reported in accordance with International Financial Reporting Standards (IFRS) and for 1998–2001 in accordance with Finnish Accounting Standards (FAS). More information on the effects of the transition on the balance sheet and income statement is given in the bulletin released on 24.3.2004. The bulletin is available on UPM’s Internet pages at www.upm-kymmene.com. 2) Proposal. 3) The 1999 figure includes an extra dividend payment of % 0.45. 4) Trading on the Helsinki stock exchange. Own shares bought by the company are included in shares traded. 5) Figures reported in Finnish markka for the year 1998 have been converted into euros using the official conversion rate, 1 euro = 5.94573 markka.
F-112 ACCOUNTS FOR 2007 Key indicators
Financial indicators 1998–2007 1) 5) %m 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998
Sales 10,035 10,022 9,348 9,820 9,787 10,417 9,918 9,583 8,261 8,365 EBITDA 1,546 1,678 1,428 1,435 1,442 1,957 2,055 2,081 1,576 1,629 % of sales 15.4 16.7 15.3 14.6 14.7 18.8 20.7 21.7 19.1 19.5 Operating profit, excluding special items items 835 725 558 470 429 963 1,394 1,560 976 1,067 % of sales 8.3 7.2 6.0 4.8 4.4 9.2 14.1 16.3 11.8 12.8 Operating profit 483 536 318 685 368 861 1,614 1,860 1,573 1,620 % of sales 4.8 5.3 3.4 7.0 3.8 8.3 16.3 19.4 19.0 19.4 Profit before tax 292 367 257 556 425 710 1,333 1,859 1,398 1,437 % of sales 2.9 3.7 2.7 5.7 4.3 6.8 13.4 19.4 16.9 17.2 Profit for the period 81 338 261 920 312 500 955 1,366 994 1,029 % of sales 0.8 3.4 2.8 9.4 3.2 4.8 9.6 14.3 12.0 12.3 Exports from Finland and foreign operations 9,170 9,102 8,397 8,791 8,697 9,475 8,948 8,563 7,165 7,219 Exports from Finland 4,546 4,644 4,006 4,301 4,539 4,759 4,635 5,216 4,873 4,571
Non-current assets 10,639 11,355 12,321 12,802 13,509 14,336 12,874 10,163 8,741 8,802 Inventories 1,342 1,255 1,256 1,138 1,144 1,224 1,289 1,184 1,008 1,054 Other current assets 1,972 1,859 1,964 1,887 1,938 2,064 2,368 1,766 1,831 1,593 Assets, total 13,953 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449
Shareholders’ equity and minority 6,783 7,289 7,348 7,612 7,029 7,237 6,838 6,175 5,558 5,335 Non-current liabilities 4,753 4,770 5,845 5,966 7,322 8,104 5,992 4,564 3,830 3,731 Current liabilities 2,417 2,410 2,348 2,249 2,240 2,283 3,601 2,374 2,192 2,383 Equity and liabilities, total 13,953 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449
Capital employed at year end 11,098 11,634 12,650 12,953 12,811 13,689 13,519 10,448 9,004 9,319 Return on equity, % 1.2 4.6 3.5 12.6 4.4 6.8 15.5 21.9 19.2 21.8 Return on capital employed, % 4.3 4.7 3.4 6.0 5.1 7.4 15.6 20.2 17.6 18.0 Equity to assets ratio, %, % 48.8 50.4 47.3 48.2 42.5 41.1 41.5 46.0 47.0 45.3 Gearing ratio, % 59 56 66 61 69 71 89 69 55 74 Net interest-bearing liabilities 3,973 4,048 4,836 4,617 4,874 5,135 6,041 4,071 2,940 3,739 Gross capital expenditure 708 699 749 686 720 620 3,850 2,175 609 696 % of sales 7.1 7.0 8.0 7.0 7.4 6.0 38.8 22.7 7.4 8.3 Gross capital expenditure excluding acquisitions 683 631 705 645 703 568 827 571 548 539 % of sales 6.8 6.3 7.5 6.6 7.2 5.5 8.3 6.0 6.6 6.4 Personnel at year end 26,352 28,704 31,522 33,433 34,482 35,579 36,298 32,755 30,963 32,351
Deliveries and production
Deliveries Production (1998-2004) Papers, total (1,000 t) 11,389 10,988 10,172 10,886 10,232 10,046 8,298 8,285 7,494 7,499 Plywood (1,000 m3) 945 931 827 969 936 905 786 793 729 698 Sawn timber (1,000 m3) 2,325 2,457 2,016 2,409 2,408 2,201 2,035 2,117 1,911 2,104
Formulaes for calculating indicators are given on page F-57.
F-113 Key indicators ACCOUNTS FOR 2007
Quarterly figures 2006–2007
`m Q4/07 Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06 Q1/06 Q1–Q4 /07 Q1–Q4 /06 Q1–Q4 /05
Sales by segment 1) Magazine Papers 811 847 798 793 905 861 817 771 3,249 3,354 3,094 Newsprint 378 365 379 348 380 360 351 345 1,470 1,436 1,308 Fine and Speciality Papers 718 694 686 699 667 626 627 640 2,797 2,560 2,234 Label Materials 249 252 260 261 251 240 245 251 1,022 987 859 Wood Products 297 262 326 314 287 310 378 346 1,199 1,321 1,290 Other Operations 188 173 214 234 224 206 189 204 809 823 970 Internal sales –129 –126 –126 –130 –131 –108 –123 –97 –511 –459 –407 Sales, total 2,512 2,467 2,537 2,519 2,583 2,495 2,484 2,460 10,035 10,022 9,348
Operating profit by segment Magazine Papers –62 34 –339 27 75 –62 –85 16 –340 –56 –76 Newsprint 36 44 53 44 39 50 34 25 177 148 77 Fine and Speciality Papers 12 29 39 32 44 50 –13 27 112 108 85 Label Materials 10 10 13 18 17 11 16 17 51 61 41 Wood Products 21 –2 41 32 14 104 22 4 92 144 6 Other Operations 123 66 112 47 49 2 –36 55 348 70 144 Share of results of associated companies and joint ventures 2 14 6 21 9 18 8 26 43 61 41 Operating profit (loss), total 142 195 –75 221 247 173 –54 170 483 536 318 % of sales 5.7 7.9 –3.0 8.8 9.6 6.9 –2.2 6.9 4.8 5.3 3.4 Gains on available-for-sale investments, net – – – 2 –2 – – – 2 –2 90 Exchange rate and fair value gains and losses –4 –9 8 3 4 –3 5 12 –2 18 –4 Interest and other finance costs, net –46 –42 –54 –49 –46 –41 –52 –46 –191 –185 –147 Profit (loss) before tax 92 144 –121 177 203 129 –101 136 292 367 257 Income taxes –63 –25 –77 –46 –8 18 –2 –37 –211 –29 4 Profit (loss) for the period 29 119 –198 131 195 147 –103 99 81 338 261
Basic earnings per share, ` 0.06 0.23 –0.38 0.25 0.37 0.29 –0.20 0.19 0.16 0.65 0.50 Diluted earnings per share, ` 0.06 0.23 –0.38 0.25 0.38 0.28 –0.20 0.19 0.16 0.65 0.50 Average number of shares basic (1,000) 514,085 527,012 527,111 523,261 523,258 523,256 523,256 523,108 522,867 523,220 522,029 Average number of shares diluted (1,000) 515,322 529,530 530,980 527,086 526,416 525,938 525,874 525,936 525,729 526,041 523,652
Special items in operating profit Magazine Papers –77 – –371 – 6 –126 –133 – –448 –253 –173 Newsprint 5 – – – –2 – –5 – 5 –7 –5 Fine and Speciality papers – – – – –3 –2 –36 – – –41 –8 Label Materials 4 ––––––– 4 – – Wood Products 6 ––––93 – –10 6 83 –32 Other Operations 10 – 71 – –6 –1 41 –5 81 29 –31 Share of results of associated companies and joint ventures –––––––– – – 9 Special items in operating profit, total –52 – –300 – –5 –36 –133 –15 –352 –189 –240 Special items reported after operating profit ––––6––– – 698 Special items reported in taxes –39 – –32 – 35 20 –29 – –71 26 42 Special items, total –91 – –332 – 36 –16 –162 –15 –423 –157 –100
Operating profit, excl. special items 194 195 225 221 252 209 79 185 835 725 558 % of sales 7.7 7.9 8.9 8.8 9.8 8.4 3.2 7.5 8.3 7.2 6.0 Profit before tax, excl. special items 144 144 179 177 202 165 32 151 644 550 399 % of sales 5.7 5.8 7.1 7.0 7.8 6.6 1.3 6.1 6.4 5.5 4.3 Earnings per share, excl. special items, ` 0.24 0.23 0.28 0.25 0.30 0.25 0.04 0.21 1.00 0.80 0.54 Return on equity, excl. special items, % 7.1 6.9 8.5 7.3 8.7 7.2 1.1 6.1 7.4 5.7 3.8 Return on capital employed, excl. special items, % 6.9 6.8 8.3 7.9 8.7 7.1 2.7 6.4 7.4 6.2 4.5
1)Segment classification has been changed, see page F-17.
F-114 ACCOUNTS FOR 2007 Key indicators Calculation of key indicators
Formulae for calculation Formulae for calculation of financial indicators of adjusted share-related indicators
Return on equity, %: Earnings per share: Profit before tax 2) – income taxes x 100 Profit for the period attributable to equity holders Shareholders’ equity (average) of parent company 3) Adjusted average number of shares during the pe- Return on capital employed, %: riod excluding own shares Profit before tax 2) + interest expenses and other financial expenses x 100 Shareholders’ equity per share: Balance sheet total – non-interest-bearing Shareholders’ equity attributable to equity holders liabilities (average) of parent company Adjusted number of shares at end of period Equity to assets ratio, %: Shareholders’ equity – own shares 1) x 100 Dividend per share: Balance sheet total – advances received Dividend distribution – own shares 1) Adjusted number of shares at end of period
Net interest-bearing liabilities: Dividend to earnings ratio, %: Interest-bearing liabilities – interest-bearing assets Dividend per share – listed shares x 100 Earnings per share
Gearing ratio, %: Effective dividend yield, %: Net interest-bearing liabilities x 100 Adjusted dividend per share Shareholders’ equity – own shares 1) x 100 Adjusted share price at 31.12
EBITDA: P/E ratio: Operating profit + depreciation + amortisation Adjusted share price at 31.12 of goodwill + impairment +/– change in value of biological assets +/– share of results of associated Earnings per share companies +/– special items items Market capitalization: Return on capital employed (ROCE) for the divisions Total number of shares x striking price at end of (operating capital), %: period Operating profit x 100 Non-current assets + stocks + trade Adjusted share price at end of period: receivables – trade payables (average) Share price at end of period Share issue coefficient
1) Own shares were shown in the balance sheet in Adjusted average share price: 1998–2001. 2) 1998–2001: Profit/loss before extraordinary items and Total value of shares traded tax. Adjusted number of shares traded during period 3) 1998–2001: Profit/loss before extraordinary items and tax – income tax +/– minority interest. Cash from operating activities per share: Cash from operating activities Adjusted average number of shares during the pe- riod excluding own shares
Key exchange rates for the euro at end of period 31.12.2007 30.9.2007 30.6.2007 31.3.2007 31.12.2006 30.9.2006 30.6.2006 31.3.2006
USD 1.4721 1.4179 1.3505 1.3318 1.3170 1.2660 1.2713 1.2104 CAD 1.4449 1.4122 1.4245 1.5366 1.5281 1.4136 1.4132 1.4084 JPY 164.93 163.55 166.63 157.32 156.93 149.34 145.75 142.42 GBP 0.7334 0.6968 0.6740 0.6798 0.6715 0.6777 0.6921 0.6964 SEK 9.4415 9.2147 9.2525 9.3462 9.0404 9.2797 9.2385 9.4315
F-115 Auditor’s report ACCOUNTS FOR 2007 Auditor’s report
To the shareholders of UPM-Kymmene Corporation
We have audited the accounting records, the report of the Board of Consolidated financial statements Directors, the financial statements and the administration of In our opinion the consolidated financial statements, prepared in UPM-Kymmene Corporation for the period 1 January – 31 Decem- accordance with International Financial Reporting Standards as ber 2007. The Board of Directors and the Managing Director have adopted by the EU, give a true and fair view, as defined in those prepared the consolidated financial statements, prepared in accord- standards and in the Finnish Accounting Act, of the consolidated ance with International Financial Reporting Standards as adopted by results of operations as well as of the financial position. the EU, as well as the report of the Board of Directors and the parent company’s financial statements, prepared in accordance with prevail- Parent company’s financial statements, report of the Board of ing regulations in Finland, containing the parent company’s balance Directors and administration sheet, income statement, cash flow statement and notes to the finan- In our opinion the parent company’s financial statements have been cial statements. Based on our audit, we express an opinion on the prepared in accordance with the Finnish Accounting Act and other consolidated financial statements, as well as on the report of the applicable Finnish rules and regulations. The parent company’s finan- Board of Directors, the parent company’s financial statements and cial statements give a true and fair view of the parent company’s the administration. result of operations and of the financial position. We conducted our audit in accordance with Finnish Standards on In our opinion the report of the Board of Directors has been pre- Auditing. Those standards require that we perform the audit to obtain pared in accordance with the Finnish Accounting Act and other reasonable assurance about whether the report of the Board of Direc- applicable Finnish rules and regulations. The report of the Board of tors and the financial statements are free of material misstatement. Directors is consistent with the consolidated financial statements and An audit includes examining on a test basis evidence supporting the the parent company’s financial statements and gives a true and fair amounts and disclosures in the report of the Board of Directors and view, as defined in the Finnish Accounting Act, of the result of oper- in the financial statements, assessing the accounting principles used ations and of the financial position. and significant estimates made by the management, as well as evalu- The consolidated financial statements and the parent company’s ating the overall financial statement presentation. The purpose of our financial statements can be adopted and the members of the Board of audit of the administration is to examine whether the members of the Directors and the Managing Director of the parent company can be Board of Directors and the Managing Director of the parent com- discharged from liability for the period audited by us. The proposal pany have complied with the rules of the Companies’ Act. by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies’ Act.
Helsinki 22 February 2008
PricewaterhouseCoopers Oy Authorised Public Accountants
Merja Lindh Authorised Public Accountant
F-116 UPM-KYMMENE CORPORATION
AUDITED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION IN RESPECT OF THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 UNDER IFRS
F-117 ACCOUNTS FOR 2006 Group Consolidated income statement 1.1. – 31.12. 2005 2004 `m Note 2006 (As revised*) (As revised*)
Sales 4 10,022 9,348 9,820 Other operating income 6 231 117 168 Costs and expenses 7 –8,514 –8,092 –8,254 Change in fair value of biological assets and wood harvested 8 –126 34 15 Share of results of associated companies and joint ventures 9614158 Depreciation, amortization and impairment charges 10 –1,138 –1,130 –1,122 Operating profit 4 536 318 685
Gains on available-for-sale investments, net 11 –2 90 1 Exchange rate and fair value gains and losses 12 18 –4 48 Interest and other finance costs, net 12 –185 –147 –178 Profit before tax 367 257 556
Income taxes 13 –29 4 364 Profit for the period 338 261 920
Attributable to: Equity holders of parent company 340 263 919 Minority interest –2 –2 1 338 261 920
Earnings per share for profit attributable to the equity holders of the parent company Basic earnings per share, ` 14 0.65 0.50 1.76 Diluted earnings per share, ` 14 0.65 0.50 1.75
*) Reflects the retrospective application of new and revised International Financial Reporting Standards and changes in reporting principles. The notes are an integral part of these financial statements.
F-118 Group ACCOUNTS FOR 2006 Consolidated balance sheet 31.12. `m Note 2006 2005
ASSETS Non-current assets Goodwill 16 1,514 1,514 Other intangible assets 17 461 535 Property, plant and equipment 18 6,500 7,316 Investment property 19 30 35 Biological assets 20 1,037 1,174 Investments in associated companies and joint ventures 21 1,177 1,034 Available-for-sale investments 22 127 153 Non-current financial assets 23 74 170 Deferred tax assets 28 362 352 Other non-current assets 24 73 38 11,355 12,321 Current assets Inventories 25 1,255 1,256 Trade and other receivables 26 1,657 1,653 Income tax receivables 328 Cash and cash equivalents 199 251 3,114 3,188
Assets held for sale 21 – 32 Total assets 14,469 15,541
31.12. `m Note 2006 2005
EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 890 890 Share premium reserve 826 826 Treasury shares ––3 Translation differences –89 –34 Fair value and other reserves 278 233 Retained earnings 5,366 5,415 27 7,271 7,327 Minority interest 18 21 Total equity 7,289 7,348
Non-current liabilities Deferred tax liabilities 28 790 887 Retirement benefit obligations 29 427 429 Provisions 30 187 190 Interest-bearing liabilities 31 3,353 4,326 Other liabilities 32 13 13 4,770 5,845 Current liabilities Current interest-bearing liabilities 31 992 976 Trade and other payables 33 1,399 1,364 Income tax payables 19 8 2,410 2,348 Total liabilities 7,180 8,193
Total equity and liabilities 14,469 15,541
The notes are an integral part of these financial statements.
F-119 ACCOUNTS FOR 2006 Group Consolidated statement of changes in equity
Attributable to equity holders of the parent
Share Fair value Share Share premium Treasury Translation and other Retained Minority Total Mm capital issue reserve sharesdifferences reserves1) earnings1) Total interest equity
Balance at 1 January 2004 (as revised) 890 – 737 – –42 263 5,149 6,997 32 7,029
Transactions with equity holders Share options exercised 1 1 8 – – – – 10 – 10 Share-based compensation – – – – – 12 – 12 – 12 Divided paid –––––––393 –393 – –393 Business combinations –––––– – – –7 –7 Income and expenses recognised directly in equity Translation differences – – – – –13 – – –13 – –13 Other items – – – – – 1 1 2 – 2 Cash ow hedges recorded in equity, net of tax – – – – – 31 – 31 – 31 transferred to income statement, net of tax – – – – – –19 – –19 – –19 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – 13 – 13 – 13 transferred to income statement, net of tax – – – – – – – – – – Revision of profit on valuation of available-for-sale investments –––––27 –27–27 Profit for the period (as revised) ––––––919 919 1 920 Balance at 31 December 2004 (as revised) 891 1 745 – –55 328 5,676 7,586 26 7,612
Transactions with equity holders Share options exercised 12 –1 68 – – – – 79 – 79 Acquisition of treasury shares – – – –151 – – – –151 – –151 Reissuance of treasury shares – – – 11 – – – 11 – 11 Cancellation of treasury shares –13 – 13 137 – – –137 – – – Share-based compensation – – – – – 8 – 8 – 8 Divided paid – – – – – – –387 –387 – –387 Business combinations – – – – – – – – –3 –3 Income and expenses recognised directly in equity Translation differences – – – – 25 – – 25 – 25 Net investment hedge, net of tax – – – – –4 – – –4 – –4 Cash ow hedges recorded in equity, net of tax – – – – – –63 – –63 – –63 transferred to income statement, net of tax – – – – – –2 – –2 – –2 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – 51 – 51 – 51 transferred to income statement, net of tax – – – – – –89 – –89 – –89 Profit for the period – – – – – – 263 263 –2 261 Balance at 31 December 2005 890 – 826 –3 –34 233 5,415 7,327 21 7,348
Transactions with equity holders Reissuance of treasury shares – – – 3 – – 1 4 – 4 Share-based compensation – – – – – 7 – 7 – 7 Divided paid – – – – – – –392 –392 – –392 Business combinations – – – – – – – – –1 –1 Income and expenses recognised directly in equity Translation differences – – – – –63 – – –63 – –63 Other items – – – – – –2 2 – – – Net investment hedge, net of tax – – – – 8 – – 8 – 8 Cash ow hedges recorded in equity, net of tax – – – – – 45 – 45 – 45 transferred to income statement, net of tax – – – – – –5 – –5 – –5 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – – – – – – transferred to income statement, net of tax – – – – – – – – – – Profit for the period – – – – – – 340 340 –2 338 Balance at 31 December 2006 890 – 826 – –89 278 5,366 7,271 18 7,289
1) Reflects the retrospective application of new and revised International Financial Reporting Standards. The notes are an integral part of these financial statements.
F-120 Group ACCOUNTS FOR 2006 Consolidated cash flow statement 1.1. – 31.12. 2004 Mm 2006 2005 (As revised*)
Cash flow from operating activities Profit for the period 338 261 920 Adjustments to profit for the period 1) 1,195 1,125 419 Interest received 91539 Interest paid –187 –156 –189 Dividends received 16 21 39 Other financial items, net –18 –86 –45 Income taxes paid –159 –93 –72 Change in working capital 2) 21 –234 –114 Net cash provided by operating activities 1,215 853 997
Cash flow from investing activities Acquisition of subsidiary shares, net of cash (Note 5) – –6 –1 Acquisition of shares in associated companies –68 –5 –40 Acquisition of available-for-sale investments – –22 –1 Capital expenditure –635 –690 –630 Proceeds from disposal of subsidiary shares, net of cash (Note 5) 203 200 185 Proceeds from disposal of shares in associated companies 52 16 25 Proceeds from disposal of available-for-sale investments 3 284 –41 Proceeds from sale of fixed assets 108 47 29 Proceeds from long-term receivables 23 25 20 Increase in long-term receivables – –7 –12 Other investing cash ow ––– Net cash used in investing activities –314 –158 –466
Cash flow from financing activities Proceeds from long-term liabilities 415 178 – Payments of long-term liabilities –574 –641 –224 Proceeds from (payment of) short-term borrowings, net –398 262 –102 Share options exercised –7810 Dividends paid –392 –388 –393 Purchase of own shares – –151 – Other financing cash ow –2 74 –1 Net cash used in financing activities –951 –588 –710
Change in cash and cash equivalents –50 107 –179
Cash and cash equivalents at the beginning of year 251 142 338 Foreign exchange effect on cash –2 2 –17 Change in cash and cash equivalents –50 107 –179 Cash and cash equivalents at year-end 199 251 142
Notes to the consolidated cash flow statement 1) Adjustments to profit for the period Taxes 29 –4 –364 Depreciation, amortization and impairment charges 1,138 1,130 1,122 Share of results in associated companies and joint ventures –61 –41 –58 Profits and losses on sale of fixed assets and investments –157 –48 –138 Gains on available-for-sale investments, net 2 –90 –1 Finance costs, net 167 151 130 Rosenlew cartel fine –57–– Change in the Finnish pension system – – –269 Other adjustments 134 27 –3 1,195 1,125 419 2) Change in working capital Inventories –60 –124 –26 Current receivables –69 –130 –203 Current non-interest bearing liabilities 150 20 115 21 –234 –114 *) Reflects the retrospective application of new and revised International Financial Reporting Standards. The notes are an integral part of these financial statements.
F-121 ACCOUNTS FOR 2006 Group Notes to the Consolidated Financial Statements
(In the notes all amounts are shown in millions of euros unless otherwise stated.)
1 ACCOUNTING POLICIES directly attributable to the acquisition. Identifiable assets acquired The principal accounting policies to be adopted in the preparation of and liabilities and contingent liabilities assumed in a business com- the consolidated financial statements are set out below: bination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess Principal Activities of the cost of acquisition over the fair value of the Group’s share of UPM is a global paper and forest products company engaged in the the identifiable net assets of the subsidiary acquired is recorded as production of paper, with an emphasis on the manufacture and sale goodwill. If the cost of acquisition is less than the fair value of the of printing and writing papers. The Group is vertically integrated Group’s share of the net assets of the subsidiary acquired, the differ- with operations that are organized through five divisions: Magazine ence is recognized directly in the income statement (see ”Intangible Papers, Newsprint, Fine and Speciality Papers, Converting and Assets” for the accounting policy on goodwill). Subsidiaries Wood Products. The biggest units of UPM’s Other Operations are acquired during the year are included in the consolidated financial forestry departments, and energy department in Finland. The statements from the date on which control is transferred to the Group’s activities are centred in the European Union countries and Group, and subsidiaries sold are included up to the date that control North America, and Asia with production facilities in 15 countries. is relinquished. Where necessary, the accounting policies of subsidi- aries have been adjusted to ensure consistency with the policies Basis of preparation adopted by the Group. These consolidated financial statements of UPM-Kymmene Corpo- All intercompany transactions, receivables, liabilities and unre- ration, a Finnish limited liability company, domiciled in Helsinki in alized profits, as well as intragroup profit distributions, are elimi- the Republic of Finland, are prepared in accordance with Interna- nated. tional Financial Reporting Standards as adopted by the EU (IFRS). These Group consolidated financial statements were authorized for Associated companies and joint ventures issue by the Board of Directors on 1 February 2007. Associated companies are entities over which the Group generally The financial statements have been prepared under the historical holds between 20% and 50% of the voting rights, or over which the cost convention as modified by the revaluation of biological assets, Group has significant influence but not control. Joint ventures are available-for-sale financial assets and certain other financial assets entities over which the Group has contractually agreed to share the and financial liabilities. Share-based payments are recognized at fair power to govern the financial and operating policies of that entity value on the grant date. with another venturer or venturers. The preparation of financial statements requires the use of Interests in associated companies and joint ventures are accounting estimates and assumptions that affect the reported accounted for using the equity method of accounting. Under this amounts of assets and liabilities, the disclosure of contingent assets method the Group’s share of the associated company’s and joint and liabilities at the date of the financial statements, and the venture’s profit or loss for the year is recognized on the income reported amounts of revenues and expenses during the reporting statement and its share of movements in reserves is recognized in periods. Accounting estimates are employed in the financial state- reserves. The Group’s interest in an associated company and joint ments to determine reported amounts, including the realizability of venture is carried on the balance sheet at an amount that reflects its certain assets, the useful lives of tangible and intangible assets, share of the net assets of the associated company and joint venture income taxes and others. Although these estimates are based on together with goodwill on acquisition (net of any accumulated management’s best knowledge of current events and actions, actual impairment loss), less any impairment in the value of individual results may ultimately differ from those estimates. The preparation investments. Gains and losses on transactions between the Group of financial statements also requires management to exercise its and its associated companies and joint ventures are eliminated to the judgement in the process of applying the Group’s accounting poli- extent of the Group’s interest in the associated company and joint cies. venture. Associated company and joint venture accounting policies have been changed where necessary to ensure consistency with the Consolidation principles policies adopted by the Group. Equity accounting is discontinued Subsidiaries when the carrying amount of the investment in an associated com- The consolidated financial statements of UPM include the financial pany or interest in a joint venture reaches zero, unless the Group has statements of the parent company, UPM-Kymmene Corporation, incurred or guaranteed obligations in respect of the associated com- and its subsidiaries. Subsidiaries are those entities in which UPM- pany or joint venture. Kymmene Corporation either owns, directly or indirectly, over fifty percent of the voting rights, or otherwise has the power to govern Minority interests their operating and financial policies. The profit or loss attributable to the parent shareholders and minor- Acquisitions of subsidiaries are accounted for using the pur- ity interests is presented on the face of the income statement. chase method of accounting. The cost of an acquisition is measured Minority interests are presented in the consolidated balance sheet as the fair value of the assets given, equity instruments issued and within equity, separately from the parent shareholders’ equity. liabilities incurred or assumed at the date of exchange, plus costs
F-122 Group ACCOUNTS FOR 2006
Foreign currency transactions tion is ultimately recognized in the income statement. However, if a Items included in the financial statements of each subsidiary in the committed or forecasted transaction is no longer expected to occur, Group are measured using the currency of the primary economic the cumulative gain or loss that was reported in equity is immedi- environment in which the subsidiary operates (”the functional cur- ately transferred to the income statement. rency”). The consolidated financial statements are presented in Hedges of net investments in foreign operations are accounted euros, which is the functional and presentation currency of the for similarly to cash flow hedges. The fair value changes of the parent company. forward exchange contracts that reflect the change in spot exchange Foreign currency transactions are translated into the functional rates are deferred in equity and included in cumulative translation currency using the exchange rates prevailing at the dates of the differences. Any gain or loss relating to the interest portion of the transactions. Receivables and liabilities in foreign currencies are forward exchange contracts is recognized immediately in the translated into the functional currency at the exchange rates prevail- income statement under financial items. Gains and losses accumu- ing on the balance sheet date. Foreign exchange gains and losses lated in equity are included in the income statement when the for- resulting from the settlement of such transactions and from the eign operation is partially disposed of or sold. The Group has termi- translation at year-end exchange rates of monetary assets and liabili- nated in 2006 hedging of net investment in a foreign operation. ties denominated in foreign currencies are recognised in the income Certain derivative transactions, while providing effective eco- statement, except when deferred in equity as qualifying cash flow nomic hedges under the Group Financial Policy, do not qualify for hedges and qualifying net investment hedges. Foreign exchange hedge accounting under the specific rules in IAS 39. Such deriva- differences arising in respect of operating business items are tives are classified held for trading, and changes in the fair value of included in operating profit in the appropriate income statement any derivative instruments that do not qualify for hedge accounting account, and those arising in respect of financial assets and liabili- under IAS 39 are recognized immediately in the income statement ties are included as a net amount in finance costs. as other operating income or under financial items. Income and expenses for each income statement of subsidiaries At the inception of the transaction the Group documents the that have a functional currency different from the Group’s presenta- relationship between hedging instruments and hedged items, as well tion currency are translated into euros at quarterly average exchange as its risk management objective and strategy for undertaking vari- rates. Assets and liabilities for each balance sheet presented are ous hedge transactions. This process includes linking all derivatives translated at the closing rate at the date of that balance sheet. All designated as hedges to specific assets and liabilities or to specific resulting translation differences are recognized as a separate compo- firm commitments or forecast transactions. The Group also docu- nent of equity. When a foreign entity is partially disposed of, sold or ments its assessment, both at the hedge inception and on an ongoing liquidated, such translation differences are recognized in the income basis, as to whether the derivatives that are used in hedging transac- statement as part of the gain or loss on sale. tions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivative financial instruments Fair values of derivative financial instruments have been esti- Derivatives are initially recognized on the balance sheet at cost and mated as follows: Interest forward rate agreements and futures thereafter revalued at their fair value. The method of recognizing the contracts are fair valued based on quoted market rates on the bal- resulting gain or loss is dependent on the nature of the item being ance sheet date; forward foreign exchange contracts are fair valued hedged. On the date a derivative contract is entered into, the Group based on the contract forward rates in effect on the balance sheet designates certain derivatives as either hedges of the fair value of a date; foreign currency options are fair valued based on quoted mar- recognized asset or liability (fair value hedge), a hedge of a fore- ket rates on the balance sheet date; interest and currency swap casted transaction or of a firm commitment (cash flow hedge), or agreements are fair valued based on discounted cash flow analyses; hedges of net investments in foreign operations (net investment and commodity derivatives are fair valued based on quoted market hedge). rates on the balance sheet date. Changes in the fair value of derivatives that are designated and In assessing the fair value of non-traded derivatives such as qualify as fair value hedges and that are highly effective both pro- embedded derivatives the Group uses valuation methods that are spectively and retrospectively are recorded in the income statement based on market conditions existing at each balance sheet date. under financial items, along with any changes in the fair value of the Embedded derivatives that are identified and are monitored by the hedged asset or liability that are attributable to the hedged risk. Group and the fair value changes are reported in other operating Changes in the fair value of derivatives that are designated and income in the income statement. qualify as cash flow hedges and that are highly effective both pro- spectively and retrospectively are recognized in equity (at the spot Segment reporting rate difference). Amounts deferred in equity are transferred to the Business segments provide products or services that are subject to income statement and classified as revenue or an expense in the risks and returns that are different from those of other business same period during which the hedged firm commitment or fore- segments. Geographical segments provide products or services casted transaction affects the income statement (for example, when within a particular economic environment that is subject to risks and the forecasted external sale to the Group that is hedged takes place). returns that are different from those of components operating in The period when the hedging reserve is released to sales after each other economic environments. derivative has matured is approximately 1 month. The accounting policies of the segments and Other Operations When a hedging instrument expires or is sold, or when a hedge are the same as those of the Group. The costs and revenues as well no longer meets the criteria for hedge accounting under IAS 39, any as assets and liabilities of the segments are allocated on a symmetri- cumulative gain or loss existing in equity at that time remains in cal basis. All inter-segment sales are based on market prices, and all equity and is recognized when the committed or forecasted transac- inter-segment sales are eliminated on consolidation.
F-123 ACCOUNTS FOR 2006 Group
Non-current assets held for sale and joint ventures, except where the timing of the reversal of the tempo- discontinued operations rary difference is controlled by the Group and it is probable that the Non-current assets (or disposal groups) are classified as assets held temporary difference will not reverse in the foreseeable future. for sale and stated at the lower of carrying amount and fair value Deferred income tax assets are recognized to the extent that it is less costs to sell if their carrying amount is recovered principally probable that future taxable profit will be available against which the through a sale transaction rather than through a continuing use. temporary differences can be utilized. Non-current assets classified as held for sale, or included within a disposal group that is classified as held for sale, are not depreciated. Intangible assets A discontinued operation is a component of an entity that either Amortization of intangible assets with finite lives is based on the has been disposed of, or that is classified as held for sale, and repre- following expected useful lives: sents a separate major line of business or geographical area of oper- ations, is a part of a single co-ordinated plan to dispose of a separate Computer software 3–5 years major line of business or geographical area of operations, or is a Other intangible assets 5–10 years subsidiary acquired exclusively with a view to resale. The post-tax profit or loss from discontinued operations is shown as a separate Goodwill and other intangible assets that are deemed to have an single item in the consolidated income statement. indefinite life are not amortized.
Revenue recognition Goodwill Sales are recognized when it is probable that future economic bene- Goodwill represents the excess of the cost of acquisition over the fits will flow to the entity, the associated costs and the amount of fair value of the Group’s share of the net identifiable assets of the revenue can be measured reliably and the following criteria are met: acquired subsidiary, associated company or joint venture at the date persuasive evidence of an arrangement exists, delivery has occurred of acquisition. Goodwill on acquisitions of subsidiaries is included or services have been rendered, our price to the buyer is fixed or in intangible assets. Goodwill on acquisitions of associated compa- determinable, and collectibility is reasonably assured. Delivery is nies and joint ventures is included in investments in associated not considered to have occurred until the customer takes title and companies and joint ventures and is tested for impairment as part of assumes the risks and rewards of ownership and the Group has the overall balance. Goodwill is initially recognised as an asset at neither continuing managerial involvement with the goods, nor a cost and is subsequently measured at cost less any accumulated continuing right to dispose of the goods, nor effective control of impairment losses. those goods. The timing of revenue recognition is largely dependent Cash-generating units to which goodwill has been allocated are on delivery terms. Group terms of delivery are based on Incoterms tested for impairment annually, or more frequently when there is an 2000, the official rules for interpretation of trade terms issued by indication that the unit may be impaired. If the recoverable amount International Chamber of Commerce. Revenue is recorded when the of the cash-generating unit is less than the carrying amount of the product is delivered to the destination point for terms designated unit, the impairment loss is allocated first to reduce the carrying Delivered Duty Paid (“DDP”). For sales transactions designated amount of any goodwill allocated to the unit and then to other assets Free on Board (“FOB”) or Cost, Insurance and Freight (“CIF”), of the unit pro-rata on the basis of the carrying amount of each asset revenue is recorded at the time of shipment. in the unit. An impairment loss recognised for goodwill is not Revenues from services are recorded when the service has been reversed in a subsequent period. performed. Sales are recognized net of indirect sales taxes, dis- The gain or loss on disposal of an entity includes the carrying counts, rebates and exchange differences on sales in foreign cur- amount of goodwill related to the entity sold. rency. The costs of distributing products sold are included in costs and expenses. Research and development Research and development costs are expensed as incurred, except Income taxes for certain development costs, which are capitalised when it is prob- The Group’s income taxes include income taxes of Group compa- able that a development project will generate future economic bene- nies based on taxable profit for the financial period, together with fits, and the cost can be measured reliably. Capitalised development tax adjustments for previous periods and the change of deferred costs are amortised on a systematic basis over their expected useful income taxes. future lives, not exceeding five years. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of Computer software assets and liabilities and their carrying amounts in the consolidated Costs associated with maintaining computer software programs and financial statements. However, the deferred income tax is not costs related to the preliminary project phase of internally devel- accounted for if it arises from initial recognition of an asset or lia- oped software are recognized as an expense as incurred. Develop- bility in a transaction other than a business combination that at the ment costs relating to the application development phase of inter- time of the transaction affects neither accounting nor taxable profit nally developed software are capitalized as intangible assets. Direct or loss. Deferred income tax is determined using tax rates (and costs include external direct costs of material and services and staff laws) that have been enacted or substantially enacted by the balance costs of the software development team. Computer software devel- sheet date and are expected to apply when the related deferred opment costs recognized as assets are amortized using the straight- income tax asset is realized or the deferred income tax liability is line method over their useful lives. settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associated companies and
F-124 Group ACCOUNTS FOR 2006
Other intangible assets Government grants Acquired patents, trademarks and licenses with a finite useful life Government grants relating to the purchase of property, plant and are recognized at cost less accumulated amortization and impair- equipment are deducted from the acquisition cost of the asset and ment. Amortization is calculated using the straight-line method to recognized as a reduction to the depreciation charge of the related allocate the cost over their estimated useful lives. Other intangible asset when it is practicable to determine that the eligibility condi- assets that are deemed to have an indefinite life are not amortized tions attached to the grant will be met and the grant will be received. and are tested annually for impairment. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended Emission allowances to compensate when the reimbursement is received or when it is The Group participates in government schemes aimed at reducing practicable to determine the amount and eligibility for the grant. greenhouse gas emissions. Allowances received from the govern- ments free of charge are initially recognized as intangible assets Investment property based on market value at the date of initial recognition. Allowances Investment property includes real estate investments such as flats are not amortized but are recognised at amount not exceeding the and other premises occupied by third parties. market value at the balance sheet date. Government grants are Investment property is treated as a long-term investment and is recognised as deferred income in the balance sheet at the same time stated at historical cost. Depreciation is calculated on a straight-line as the allowances and recognised in the income statement systemati- basis and the carrying value is adjusted for impairment charges, if cally over the compliance period to which the corresponding emis- any. Useful lives are the same as for property, plant and equipment. sion rights relate. Emission rights and associated provisions are The balance sheet value of investment property reflects the cost less derecognised when delivered or sold. Any profit or loss on disposal accumulated depreciation and any impairment charges. is taken to the income statement. Biological Assets Property, plant and equipment Biological assets (i.e. living trees) are measured at their fair value Property, plant and equipment acquired by Group companies are less estimated point-of-sale costs. The fair value of biological assets stated at historical cost. Assets of acquired subsidiaries are stated at other than young seedling stands is based on discounted cash flows fair value at the date of acquisition. Depreciation is calculated on a from continuous operations. The fair value of young seedling stands straight-line basis and the carrying value is adjusted for impairment is the actual reforestation cost of those stands. Continuous opera- charges, if any. The carrying value of the property, plant and equip- tions, the maintenance of currently existing seedling stands and the ment on the balance sheet represents the cost less accumulated felling of forests during one rotation, are based on the Company’s depreciation and any impairment charges. forest management guidelines. The calculation takes into account Borrowing costs incurred for the construction of any qualifying the growth potential and environmental restrictions and other reser- assets are capitalized during the period of time that is required to vations of the forests. Felling revenues and maintenance costs are complete and prepare the asset for its intended use. Other borrowing calculated on the basis of actual costs and prices, taking into costs are expensed. account the Company’s projection of future price development. Land is not depreciated, but otherwise depreciation is based on Periodic changes resulting from growth, felling, prices, discount the following expected useful lives: rate, costs and other premise changes are included in operating profit on the income statement. Buildings 25–40 years Heavy machinery 15–20 years Financial assets Light machinery and equipment 5–15 years Financial assets have been classified into financial assets at fair value through profit or loss (including financial assets held for trad- Expected useful lives of assets are reviewed at each balance sheet ing), loans and receivables and available-for-sale categories. date and, where they differ significantly from previous estimates, Loans and receivables are non-derivative financial assets with depreciation periods are changed prospectively. fixed or determinable payments that are not quoted in an active Subsequent costs are included in the asset’s carrying amount or market. They are included in non-current assets unless they mature recognized as a separate asset, as appropriate, only when it is proba- within 12 months of the balance sheet date. Loan receivables origi- ble that the future economic benefit associated with the item will nated by the company that have a fixed maturity are measured at flow to the Group and the cost of the item can be measured reliably. amortized cost using the effective interest method, and those that do The carrying amount of the replaced part is derecognised. All other not have a fixed maturity are measured at cost. Loan receivables are repairs and maintenance are charged to the income statement during impaired if the carrying amount is greater than the estimated recov- the financial period in which they are incurred. Major renovations erable amount. are depreciated over the remaining useful life of the related asset or Available-for-sale investments are included in non-current assets to the date of the next major renovation, whichever is sooner. unless they are intended to be disposed of within 12 months of the Gains and losses on disposals are determined by comparing the balance sheet date. Purchases and sales of financial investments are disposal proceeds with the carrying amount and are included in recognized on the settlement date, which is the date that the asset is operating profit. Assets to be disposed of are reported at the lower of delivered to or by the Group. Investments are initially recognized at the carrying amount and the fair value less selling costs. cost, including transaction costs, and subsequently carried at fair value. The fair values of listed investments are based on quoted prices. Unlisted equity securities, for which fair values cannot be measured
F-125 ACCOUNTS FOR 2006 Group reliably, are recognized at cost less impairment. Leases where the lessor retains substantially all the risks and Unrealized gains and losses arising from changes in the fair rewards of ownership are classified as operating leases. Payments value of securities classified as available-for-sale are recognized in made under operating leases are charged to the income statement on equity. When securities classified as available-for-sale are sold or a straight-line basis over the period of the lease. impaired, the accumulated fair value adjustments in equity are included in the income statement as gains and losses from available- Inventories for-sale investments. Inventories are stated at the lower of cost and net realizable value. The Group assesses at each balance sheet date whether there is Cost is determined by the method most appropriate to the particular objective evidence that a financial asset or a group of financial nature of inventory, the first in, first out (FIFO) or weighted average assets is impaired. In the case of equity securities classified as avail- cost. The cost of finished goods and work in progress comprises raw able for sale, a significant or prolonged decline in the fair value of materials, direct labour, other direct costs and related production the security below its cost is considered in determining whether the overheads (based on normal operating capacity) but excludes bor- securities are impaired. If any such evidence exists for available-for- rowing costs. Net realizable value is the estimated selling price in sale financial assets, the cumulative loss – measured as the differ- the ordinary course of business, less the costs of completion and ence between the acquisition cost and the current fair value, less any selling expenses. impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income Trade receivables statement. Impairment losses recognized in the income statement on Trade receivables are carried at their anticipated realizable value, equity instruments are not subsequently reversed through the which is the original invoice amount less an allowance for doubtful income statement. accounts. An allowance for doubtful accounts is made when there is objective evidence that the Group will not be able to collect all Impairment of non-financial assets amounts due according to the original terms of the receivables. Assets that have an indefinite useful life are not subject to amortiza- tion and are tested annually for impairment. Assets that are subject Cash and cash equivalents to depreciation (or amortization) are reviewed for impairment when- Cash and cash equivalents comprise cash in hand, deposits held at ever events or changes in circumstances indicate that the carrying call with banks and other short-term highly liquid investments with amount may not be recoverable. An impairment loss is recognized original maturities of three months or less. Bank overdrafts are for the amount by which the asset’s carrying amount exceeds its included within borrowings in current liabilities on the balance recoverable amount. The recoverable amount is the higher of an sheet. asset’s fair value less costs to sell and value in use. The value in use is determined by reference to discounted future cash flows expected Treasury shares to be generated by the asset. For the purposes of assessing impair- Where any Group company purchases the Company’s equity share ment, assets are grouped at the lowest levels for which there are capital (treasury shares), the consideration paid, including any separately identifiable cash flows (cash-generating units). directly attributable incremental costs (net of income taxes), is Non-financial assets other than goodwill that suffered an impair- deducted from equity attributable to the Company’s equity holders ment are reviewed for possible reversal of the impairment at each until the shares are cancelled or reissued. Where such shares are reporting date. Where an impairment loss subsequently reverses, the subsequently reissued, any consideration received, net of any carrying amount of the asset is increased to the revised estimate of directly attributable incremental transaction costs and the related its recoverable amount, but so that the increased carrying amount income tax effects, is included in equity attributable to the Compa- does not exceed the carrying amount that would have been deter- ny’s equity holders. mined had no impairment loss been recognized for the asset in prior years. Interest-bearing liabilities An impairment loss recognized for goodwill is not reversed in a Interest-bearing liabilities are classified as originated loans and are subsequent period. recognized initially at fair value, net of transaction costs incurred. In subsequent periods, interest-bearing liabilities are stated at amor- Leases tized cost using the effective interest method; any difference Leases of property, plant and equipment where the Group has sub- between proceeds (net of transaction costs) and the redemption stantially all the risks and rewards of ownership are classified as value is recognized in the income statement over the period of the finance leases. Finance leases are recognized as assets and liabilities interest-bearing liabilities. in the balance sheet at the commencement of lease term at the lower Most long-term interest-bearing liabilities are designated as of the fair value of the leased property and the present value of the hedged items in a fair value hedge relationship. Fair value variations minimum lease payments. Each lease payment is apportioned resulting from the hedged interest rate risk are recorded to adjust the between the liability and finance charges. The corresponding rental carrying amount of the hedged item and reported on the income obligations, net of finance charges, are included in other long-term statement under finance income and expenses. If the hedge account- interest-bearing liabilities. The interest element of the finance cost is ing is discontinued, the carrying amount of the hedged item is no charged to the income statement over the lease period so as to pro- longer adjusted for fair value changes attributable to the hedged risk duce a constant periodic rate of interest on the remaining balance of and the cumulative fair value adjustment recorded during the hedge the liability for each period. Property, plant and equipment acquired relationship is amortized based on a new effective interest recalcula- under finance leases are depreciated over the shorter of the asset’s tion through the income statement under finance income and useful life and the lease term. expenses.
F-126 Group ACCOUNTS FOR 2006
Interest-bearing liabilities are classified as non-current liabilities program for its executive management. These compensation plans unless they are due to be settled within twelve months after the are recognized as equity-settled or cash-settled share-based payment balance sheet date. transactions depending on the settlement. The fair value of the granted options and shares are recognized as indirect employee Employee benefits costs over the vesting period. The fair values of the options granted are determined using the Black- Scholes valuation model on the Pension obligations grant date. Non-market vesting conditions are included in assump- The Group operates a mixture of pension schemes in accordance tions about the number of options that are expected to vest. The with the local conditions and practices in the countries in which it estimates of the number of the exercisable options are revised quar- operates. Such benefit plans vary according to the customary benefit terly and the impact of the revision of original estimates, if any, is plans prevailing in the country concerned. These programs include recognized in the income statement and equity. defined benefit pension schemes with retirement, disability and Based on the share ownership program, the executive manage- termination benefits. The retirement benefits are generally a function ment is compensated with shares depending on Group’s financial of years of employment and final salary with the Company. Gener- performance. Shares are valued using the market rate on the grant ally, the schemes are either funded through payments to insurance date. The settlement is a combination of shares and cash. The Group companies or to trustee-administered funds as determined by peri- can obtain the necessary shares by using its treasury shares or pur- odic actuarial calculations. In addition, the Group also operates chase shares from the market. defined contribution pension arrangements. Most of Finnish pension arrangements are defined contribution plans. Provisions For defined benefit plans, the liability recognized in the balance Provisions are recognized when the Group has a present legal or sheet in respect of defined benefit pension plans is the present value constructive obligation as a result of past events, and it is probable of the defined benefit obligation at the balance sheet date less the that an outflow of resources will be required to settle the obligation, fair value of plan assets, together with adjustments for unrecognized and a reliable estimate of the amount can be made. Where the Group actuarial gains or losses and past service cost. The defined benefit expects a provision to be reimbursed, for example under an insur- obligation is calculated annually by independent actuaries using the ance contract, the reimbursement is recognized as a separate asset projected unit credit method. The present value of the defined bene- but only when the reimbursement is virtually certain. fit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are Restructuring provisions denominated in the currency in which the benefits will be paid, and Restructuring provisions are recognized in the period in which the that have terms to maturity approximating to the terms of the related Group becomes legally or constructively committed to payment. pension liability. The cost of providing pensions is charged to the Employee termination benefits are recognized only after either an income statement so as to spread the regular cost over the service agreement has been made with the appropriate employee representa- lives of the employees. Actuarial gains and losses arising from tives on the terms of redundancy and the numbers of employees experience adjustments and changes in actuarial assumptions in affected, or after employees have been advised of the specific terms. excess of the greater of 10% of the value of plan assets or 10% of Costs related to the ongoing activities of the Group are not provi- the defined benefit obligation are charged or credited to income over sioned in advance. the expected average remaining service lives of the employees con- cerned. Past service costs are recognized immediately in income, Environmental remediation provisions unless the changes to the pension plan are conditional on the Expenditures that result from remediation of an existing condition employees remaining in service for a specified period of time (the caused by past operations and do not contribute to current or future vesting period). In this case, the past-service costs are amortized on revenues are expensed. The recognition of environmental remedia- a straight-line basis over the vesting period. tion provisions is based on current interpretations of environmental For defined contribution plans, contributions are paid to pension laws and regulations. Such provisions are recognized when it is insurance companies. Once the contributions have been paid, there likely that the liability has been incurred and the amount of such are no further payment obligations. Contributions to defined contri- liability can be reasonably estimated. Amounts provisioned do not bution plans are charged to the income statement in the period to include third-party recoveries. which the contributions relate.
Emission allowances Other post-retirement obligations Emission obligations are recognised in provisions when the liability Some Group companies provide post-retirement healthcare benefits to deliver emission allowances is incurred based on emissions made. to their retirees. The entitlement to these benefits is usually condi- tional on the employee remaining in service up to retirement age The liability to deliver allowances is recognised based on the carry- and the completion of a minimum service period. The expected ing amount of allowances on hand, if the liability is expected to be costs of these benefits are accrued over the period of employment, settled by those allowances, or if excess emissions are incurred, at using an accounting methodology similar to that for defined benefit the market value of the allowances at the balance sheet date. pension plans. Valuations of these obligations are carried out by independent qualified actuaries. Dividends Dividend distribution to the Company’s shareholders is recognized Share-based compensation as a liability in the Group’s financial statements in the period in The Group has granted share options to top management and key which the dividends are approved by the Company’s shareholders. personnel. In addition, the Group has established a share ownership
F-127 ACCOUNTS FOR 2006 Group
Comparatives quently measured at the higher of the unamortized balance of the Where necessary, comparative figures have been reclassified to related fees received and deferred, and the expenditure required to conform to changes in presentation in the current year. In addition, settle the commitment at the balance sheet date. These amendments comparative figures have been revised, where necessary, to reflect do not have any impact on the Group’s financial statements in cur- the impact of the adoption of a number of new and revised IFRS- rent or prior years. standards. IFRIC 4 Determining whether an Arrangement contains a Lease is effective for annual periods beginning on or after 1 January 2006. Earnings per share The Group has reviewed its contracts whether they are required to The basic earnings per share are computed using the weighted ave- be accounted as leases in accordance with IAS 17 Leases. This rage number of shares outstanding during the period. Diluted earn- interpretation does not have any impact on the Group’s financial ings per share are computed using the weighted average number of statements in current or prior years. shares outstanding during the period plus the dilutive effect of con- vertible bonds and share options. Revision to financial statements presentation and reporting Operating profit for 2005 and 2004 has been revised to correspond Adoption of new or revised with the current reporting format. The share of results of associated International Financial Reporting Standards companies and joint ventures, related to business operations, previ- ously reported after operating profit, is now included in operating Standards, interpretations and amendments to published standards profit. As a consequence of this change the operating profit was In 2006, the Group has adopted all of the standards, interpretations increased by ` 41 million and ` 58 million in 2005 and 2004, and amendments to published standards issued by the International respectively. In addition from the beginning of 2006, part of the Accounting Standards Board (the IASB) that are relevant to its results of derivative instruments relating to cash flow hedges are operations and effective for accounting periods beginning on 1 allocated to the respective division. Comparative years have been January 2006. The adoption has resulted in changes to the Group’s revised accordingly. accounting policies or the amounts reported for the current or prior years in the following areas: Amendment to IAS 19 Employee Benefits - Actuarial Gains and Standards, interpretations and amendments to published standards Losses, Group Plans and Disclosures is effective for annual periods that are not yet effective. beginning on or after 1 January 2006. As the Group decided to Certain standards, interpretations and amendments to existing stan- retain its former accounting policy regarding the recognition of dards have been published that are mandatory for accounting peri- actuarial gains and losses, adoption of this amendment has only ods beginning on 1 January 2007 or later but which the Group has impacted format and extent of disclosures presented in financial not early adopted: statement (Note 29). IFRS 7 Financial Instruments: Disclosures, and a complemen- IFRIC 8 Scope of IFRS 2 is effective for annual periods begin- tary amendment to IAS 1 Presentation of Financial Statements - ning on or after 1 May 2006. IFRS 2 applies to share based payment Capital Disclosures are effective for annual periods beginning on or transactions in which the entity receives or acquires goods or ser- after 1 January 2007. IFRS 7 introduces new disclosures to improve vices. IFRIC 8 includes into the scope of IFRS 2 the transactions the information about financial instruments. The amendment to IAS where the entity, when granting its own shares, cannot identify the 1 introduces disclosures about how an entity manages its capital. goods or services received. The Group early adopted IFRIC 8 as of The Group will apply IFRS 7 and the amendment to IAS 1 from the beginning of 2006 resulting in a charge in other costs and annual periods beginning on 1 January 2007. Adoption of IFRS 7 expenses of ` 3 million in 2006. and the amendment to IAS 1 will expand disclosures presented in Amendment to IAS 39 Financial Instruments: Recognition and the financial statements. Measurement - The Fair Value Option is effective for annual periods IFRS 8 Operating Segments is effective for annual periods beginning on or after 1 January 2006. The amendment changes the beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 Seg- definition of financial instruments classified at fair value through ment Reporting and requires the amount reported for each segment profit or loss and restricts the ability to designate financial instru- item to be the measure reported to the chief operating decision ments as part of this category. This amendment does not have any maker for the purposes of allocating resources to that segment and impact on the classification and designation of the Group’s financial assessing its performance. The Group is currently evaluating the instruments classified as at fair value through profit or loss in cur- effects of implementing this standard. rent or prior years. IFRIC 7 Applying the Restatement Approach under IAS 29 Amendment to IAS 21 The Effects of Changes in Foreign Financial Reporting in Hyperinflationary Economies is effective for Exchange Rates - Net Investment in a Foreign Operation is effective annual periods beginning on or after 1 March 2006. The interpreta- for annual periods beginning on or after 1 January 2006. The tion provides guidance on how to apply the requirements of IAS 29 amendment has broadened and clarified the definition of a net in a reporting period in which an entity identifies the existence of investment. This amendment does not have any impact on the hyperinflation in the economy of its functional currency, when that Group’s financial statements in current or prior years. economy was not hyperinflationary in the prior period. The Group Amendments to IAS 39 Financial Instruments: Recognition and does not expect the interpretation to be relevant for the Group. Measurement and IFRS 4 Insurance Contracts - Financial Guarantee IFRIC 9 Reassessment of Embedded Derivatives is effective for Contracts are effective for annual periods beginning on or after 1 annual periods beginning on or after 1 June 2006. The interpretation January 2006. The amendments require issued financial guarantees, concluded that an entity generally should not reassess its conclusion other than those previously asserted by the entity to be insurance as to whether an embedded derivative needs to be separated from contracts, to be initially recognised at their fair value and subse- the hybrid contract after it is initially recognised. The Group
F-128 Group ACCOUNTS FOR 2006 believes that this interpretation should not have a significant impact discount rate, expected return on plan assets and changes in future on the reassessment of embedded derivatives as the Group already compensation. Statistical information used may differ materially assess if embedded derivative should be separated using principles from actual results due to changing market and economic condi- consistent with IFRIC 9. tions, changes in service period of plan participants or changes in IFRIC 10 Interim Financial Reporting and Impairment is effec- other factors. Actual results that differ from assumptions and the tive for annual periods beginning on or after 1 November 2006. The effects of changes in assumptions are accumulated and charged or interpretation concludes that an impairment loss recognised in a pre- credited to income over the expected average remaining service vious interim period in respect of goodwill or an investment in lives of the employees to the extent that these exceed 10% of the either an equity instrument or a financial asset carried at cost should higher of the pension plan assets and defined benefit obligation. not be reversed in subsequent interim financial statements or in Significant differences in actual experience or significant changes in annual financial statements. The Group believes that this interpreta- assumptions may materially affect the future amounts of the defined tion should not have an impact on the Group’s accounts. benefit obligation and future expense. IFRIC 11 IFRS 2 – Group and Treasury Share Transactions is effective for annual periods beginning on or after 1 March 2007. Environmental provisions The Interpretation addresses how to apply IFRS 2 Share-based Operations of the Group are based on heavy process industry which Payment to share-based payment arrangements involving an entity’s requires large production facilities. In addition to basic raw materi- own equity instruments or equity instruments of another entity in als, considerable amount of chemicals, water and energy is used in the same group (e.g. equity instruments of its parent). The Group processes. The Group’s operations are subject to several environ- believes that this interpretation should not have an impact on the mental laws and regulations. The Group aims to operate in compli- Group’s accounts. ance with regulations related to the treatment of waste water, air IFRIC 12 Service Concession Arrangements is effective for emissions and landfill sites. The Group has provisions for normal annual periods beginning on or after 1 January 2008. The Interpreta- environmental remediation costs. Unexpected events occurred du- tion addresses the accounting by private sector operators involved in ring production processes and waste treatment could cause material the provision of public sector infrastructure assets and services. The losses and additional costs in the Group’s operations. Group does not expect the interpretation to be relevant for the Group. Income taxes Management judgement is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Group 2 CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING reviews at each balance sheet date the carrying amount of deferred POLICIES AND KEY SOURCES OF ESTIMATION UNCER- tax assets. The Group considers whether it is probable that the sub- TAINTY sidiaries will have sufficient taxable profits against which the unused tax losses or unused tax credits can be utilized. The factors used in estimates may differ from actual outcome which could lead to sig- Impairment of non-current assets nificant adjustment to deferred tax assets recognized in the income Goodwill, intangible assets not yet available for use and intangible statement. assets with indefinite useful lives are tested at least annually for impairment. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. Estimates are made Legal contingencies of the future cash flows expected to result from the use of the asset Management judgement is required in measurement and recognition and its eventual disposal. If the balance sheet carrying amount of of provisions related to pending litigation. Provisions are recorded the asset exceeds its recoverable amount, an impairment loss is when the Group has a present legal or constructive obligation as a recognized. Actual cash flows could vary from estimated discounted result of past event, an unfavourable outcome is probable and the future cash flows. The long useful lives of assets, changes in esti- amount of loss can be reasonably estimated. Due to inherent uncer- mated future sales prices of products, changes in product costs and tain nature of litigation, the actual losses may differ significantly changes in the discount rates used could lead to significant impair- from the originally estimated provision. ment charges. Details of the impairment tests are provided in Note 16. 3 FINANCIAL RISK MANAGEMENT Biological assets The Group owns about 1 million hectare of forest land. Biological Financial risks assets (i.e. living trees) are measured at their fair value at each bal- The objective of financial risk management is to protect the Group ance sheet date. The fair value of biological assets is determined from unfavourable changes in financial markets and thus help to based among other estimates on growth potential, harvesting, price secure profitability. The objectives and limits for financing activities development and discount rate. Changes in any estimates could lead are defined in the Group Treasury Policy approved by the company’s to recognition of significant fair value changes in income statement. Board of Directors. In financial risk management, various financial instruments are Employee benefits used within the limits specified in the Group Treasury Policy. Only The Group operates a mixture of pension and other post-employ- such instruments whose market value and risk profile can be contin- ment benefit schemes. Several statistical and other actuarial assump- uously and reliably monitored are used for this purpose. tions are used in calculating the expense and liability related to the Financial services are provided and financial risk management plans. These factors include, among others, assumptions about the carried out by a central treasury department (Group Treasury). The
F-129 ACCOUNTS FOR 2006 Group centralization of Treasury functions enables efficient financial risk that, on average, yield curves will be positive. This approach thus management, cost-efficiency and efficient cash management. reduces interest costs in the long term. The duration may deviate between 3 and 12 months. At 31 December 2006, the average dura- Foreign currency risks tion of the net debt portfolio was 6 months (31.12.2005: 6 months). Management of foreign currency exposure is divided into two parts: Most of the long-term loans and the interest rate derivatives related that relating to foreign currency flows and that relating to balance to them meet the IFRS hedge accounting requirements. Changes in sheet items denominated in foreign currency. the fair value of any derivative instruments that do not qualify for The first concerns mainly the 12-month forecasted commercial hedge accounting are recognized immediately in the income state- foreign currency flows and contracts longer than 12 months. Hedg- ment. ing of 50% of the net foreign currency flow for the 12 months ahead is considered neutral. Most of the forwards made to hedge highly Liquidity and refinancing risks probable foreign currency flows meet the IFRS hedge accounting The Group seeks to maintain adequate liquidity under all circum- requirements. The table below shows the nominal values of the stances by means of efficient cash management and restricting hedging instruments at 31 December 2006. investments to those that can be readily converted into cash. In addition to cash funds of ` 199 million (` 251 million), at 31 Nominal values of hedging instruments December 2006 the Group had committed credit facilities amount- Currency `m ing to ` 2.7 billion (at 31 December 2005: ` 2.7 billion). As of 31 USD 543 December 2006, these facilities were unused (used ` 80 million at GBP 384 31 December 2005.) JPY 61 Refinancing risks are minimized by ensuring that the loan portfolio AUD 164 has a balanced maturity schedule and that loans have sufficiently SEK 52 long maturities. The average loan maturity at 31 December 2006 CAD -77 was 7.1 years (7.5 years at 31 December 2005). NOK 32 DKK 40 The most important financial programs in use at present are: Others 19 s $OMESTIC COMMERCIAL PAPER PROGRAM ` 1.0 billion Total 1,218 s "ELGIAN COMMERCIAL PAPER PROGRAM ` 400 million s -EDIUM 4ERM .OTE PROGRAM ` 5.0 billion The Group’s financial results and competitiveness are also affected s 2EVOLVING #REDIT &ACILITY ` 1.2 billion (matures 2008) indirectly by changes in the values of the domestic currencies of its s 2EVOLVING #REDIT &ACILITY ` 1.5 billion (matures 2010) main competitors, principally the US dollar, the Canadian dollar, and the Swedish krona. Exposure to these risks is not hedged. How- Counterparty risk ever, the company’s own production in the United States and Canada Counterparty risk is defined as the risk that a counterparty will be reduces this risk. unable to fulfill its contractual obligations. According to the Group The balance sheet position comprises foreign currency denomi- Treasury Policy, derivative instruments and investments of cash nated debts and receivables. According to the Group Treasury Pol- funds may be made only with a counterparty who meets a certain icy, the aim is a fully hedged position. At 31 December 2006 the standard of creditworthiness. Creditworthiness of counterparties is balance sheet position was ` 11 million (at 31 December 2005: ` 27 monitored by Group Treasury. million). Also the net of accounts receivable and accounts payable is hedged. Foreign currency risks associated with the shareholders’ Credit risk equity of foreign subsidiaries are not hedged. In 2006, the Group Potential concentrations of credit risk with respect to trade and other has terminated the hedging of a net investment in a Canadian sub- receivables are limited due to the large number and geographic sidiary. dispersion of companies that comprise the Group’s customer base. Customer credit limits are established and monitored, and on-going Interest rate risks evaluations of customers’ financial condition are performed. Most The Group’s net debt per currency corresponds to the parent compa- of the receivables are covered by credit risk insurances. The Group ny’s and subsidiaries’ loan portfolios in their home currencies. considers that no significant concentration of credit risk exists. The nominal values of the Group’s interest-bearing net debts (including derivatives) by currency at 31 December 2006 were as Derivatives related to commodity price risk management follows: The Group’s manufacturing process requires a significant amount of electricity and recycled fibre. The procurement and sales of electric- Currency Amount `bn ity (mainly to own mills) is managed and optimized by Group. The EUR 3.4 Group uses electricity forward contracts to manage price risks asso- USD 0.3 ciated with the Group’s electricity exposure, which is the difference CNY 0.5 between the Group’s electricity consumption and production. Recy- Total 4.2 cled paper price risk management includes the use of recycled fibre derivatives. Management of interest rate risks is based on the 6-month average duration of the net debt portfolio as defined in the Group Treasury Policy. This relatively short duration is based on the assumption
F-130 Group ACCOUNTS FOR 2006
4 SEGMENT INFORMATION Fine and Speciality Papers Division This division produces a complete range of coated and uncoated The Group is organised on a worldwide basis into the following wood-free papers for graphic use and office communication. Fine primary business segments: papers are used for copying, non-impact printing, facsimile, direct mail advertising, brochures, and special interest magazines, while s -AGAZINE 0APERS $IVISION speciality papers include label papers and packaging papers. s .EWSPRINT $IVISION s &INE AND 3PECIALITY 0APERS $IVISION Converting Division s #ONVERTING $IVISION This division produces self-adhesive labelstock, RFID tags and s 7OOD 0RODUCTS $IVISION industrial wrappings.
Activities outside the segments are reported under Other Opera- Wood Products Division tions. This division includes plywood manufacturing and sawmilling.
Magazine Papers Division Other Operations Magazine papers have a high mechanical pulp content and are gen- This includes forestry departments, and energy department in Fin- erally used in magazines, newspaper supplements, catalogues and land, logistics operations and real estate units, as well as the new direct mailings. The division manufactures both coated and ventures business unit. It also includes the share of net earnings of uncoated papers. Coated magazine papers are mainly used in the associated companies (mainly Oy Metsä-Botnia Ab and Pohjolan manufacture of high-quality, multi-coated printed products, includ- Voima Oy) and the central administrative functions for the Group. ing magazines, catalogues, brochures, direct mail advertising and The sales of Other Operations comprise only sales outside the other advertising materials. Uncoated papers are mainly used for Group. magazines, weekend newspaper supplements, catalogues, and flyers.
Newsprint Division This division produces standard newsprint and machine-finished uncoated papers. The end-uses include daily newspapers, direct mail, telephone catalogues and books.
F-131 ACCOUNTS FOR 2006 Group
Primary reporting format – Segment data for the year ended 31 December 2006
Fine and Other Magazine Speciality Wood Oper- `m Papers Newsprint Papers Converting Products ations1) Eliminations Group
External sales 3,237 1,433 2,315 1,240 1,226 571 – 10,022 Internal sales 117 3 245 34 95 – –494 – Total sales 3,354 1,436 2,560 1,274 1,321 571 –494 10,022
Share of results of associates and joint ventures – – – – – 61 – 61
Operating profit 2) –56 148 108 64 144 128 – 536 Gains on available-for-sale investments, net –2 Finance costs, net –167 Income taxes 3) –29 Profit for the period 338
Assets 4) 3,964 2,033 2,903 671 631 2,256 –207 12,251 Associates and joint ventures 4) – – – – – 1,177 – 1,177 Unallocated assets – – – – – – – 1,041 Total assets 14,469
Liabilities 5) 221 129 237 168 77 151 –207 776 Unallocated liabilities – – – – – – – 6,404 Total liabilities 7,180
Other items Depreciation and amortization 376 190 218 37 43 26 – 890 Impairment charge 228 – 19 1 – – – 248 Capital expenditure 155 145 189 73 39 98 – 699 Capital employed, 31 December 6) 3,743 1,905 2,666 503 554 3,282 –1,019 11,634 Capital employed, average 4,010 1,921 2,760 489 616 – – 12,142 Return on capital employed, % 7) –1.4 7.7 3.9 13.1 23.4 – – 4.7 1) Sales include only sales outside the Group. Internal sales to segments amount to ` 1,534 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profit of the Magazine paper segment includes personnel charges of ` 28 million related to the profitability programme, impairment charges of ` 116 million related to the closure of the Voikkaa paper mill, impairment charges of ` 115 million for Miramichi, and other income net of ` 6 million, primarily including a capital gain of ` 10 million on the sale of Rauma power plant. Related to the profitability programme, the operating profit of the Newsprint segment and Fine and Speciality Papers segment includes restructuring charges of ` 7 million, and personnel and impairment charges of ` 41 million, respectively. In Wood Products segment, the operating profit includes a loss of ` 10 million from the sale of the Loulay plywood mill and a capital gain of ` 93 million on the sale of Puukeskus. The operating profit in Other Operations includes a capital gain of ` 41 million of the Group head office real estate, a donation of ` 5 million and restructuring charges of ` 7 million. 3) Income taxes comprise a charge of ` 22 million related to the decrease of deferred tax assets due to the reduction of income tax rate in Canada, a ` 20 million income due to an increase in deferred tax assets related to the change in the Group’s structure in Canada, a ` 28 million income due to the change in German tax legislation. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: ` 1,369 million and the Energy Department in Finland: ` 1,110 million. Eliminations include unallocated assets and unallocated non-interest bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other finance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.
F-132 Group ACCOUNTS FOR 2006
Primary reporting format – Segment data for the year ended 31 December 2005
Fine and Other Magazine Speciality Wood Oper- `m Papers Newsprint Papers Converting Products ations1) Eliminations Group
External sales 3,010 1,304 2,003 1,313 1,201 517 – 9,348 Internal sales 84 4 231 34 89 – –442 – Total sales 3,094 1,308 2,234 1,347 1,290 517 –442 9,348
Share of results of associates and joint ventures – – – – – 41 – 41
Operating profit 2) –76 77 85 70 6 156 – 318 Gains on available-for-sale investments, net 90 Finance costs, net –151 Income taxes 3) 4 Profit for the period 261
Assets 4) 4,424 2,000 3,145 615 734 2,614 –219 13,313 Associates and joint ventures 4) – – – – – 1,034 – 1,034 Unallocated assets 1,194 Total assets 15,541
Liabilities 5) 214 122 220 148 100 147 –219 732 Unallocated liabilities 7,461 Total liabilities 8,193
Other items Depreciation and amortization 407 192 216 44 48 22 – 929 Impairment charge 159 6 8 1 27 – – 201 Capital expenditure 177 135 265 52 51 69 – 749 Capital employed, 31 December 6) 4,210 1,878 2,925 467 634 3,501 –965 12,650 Capital employed, average 4,397 1,900 2,843 603 660 – – 12,801 Return on capital employed. % 7) –1.7 4.1 3.0 11.6 0.9 – – 3.4
1) Sales include only sales outside the Group. Internal sales to segments amount to ` 1,457 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profit of the Magazine Papers segment includes impairment charges of ` 151 million, as well as expenses of ` 17 million relating to a new collective labour agree- ment at the Miramichi mill, and one-time depreciation of ` 5 million at Augsburg. The operating profit of the Newsprint segment includes a ` 5 million share of the Augsburg write-offs. The operating profit of the Fine and Speciality Papers segment includes one-time depreciation of ` 8 million relating to the Nordland paper machine rebuild. The operating profit of the Converting segment includes a capital gain of ` 26 million from the sale of the Loparex Group, and the operating profit of the Wood Products segment includes an impairment charge of ` 25 million in respect of sawmills in Finland and an expense of ` 7 million relating mainly to restructuring of the sales network. The operating profit from Other Operations includes a ` 57 million fine imposed by the EU Commission concerning antitrust activities in the plastic industrial sacks market. 3) Taxes include income of ` 58 million relating to the change in deferred tax assets arising from the Miramichi mill’s losses and depreciation difference, and a ` 16 million expense relating to an associated company due to a change in tax law. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: ` 1,580 million and the Energy Department in Finland: ` 1,013 million. Eliminations include unallocated assets and unallocated non-interest bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other finance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.
F-133 ACCOUNTS FOR 2006 Group
Primary reporting format – Segment data for the year ended 31 December 2004
Fine and Other Magazine Speciality Wood Oper- `m Papers Newsprint Papers Converting Products ations1) Eliminations Group
External sales 3,217 1,293 2,001 1,373 1,398 538 – 9,820 Internal sales 91 11 285 41 94 – –522 – Total sales 3,308 1,304 2,286 1,414 1,492 538 –522 9,820
Share of results of associates and joint ventures – – – – – 58 – 58
Operating profit 2) –67 7 171 71 111 392 – 685 Gains on available-for-sale investments, net 1 Finance costs, net –130 Income taxes3) 364 Profit for the period 920
Assets 4) 4,673 2,016 2,871 777 737 2,527 –203 13,398 Associates and joint ventures 4) – – – – – 1,047 – 1,047 Unallocated assets 1,382 Total assets 15,827
Liabilities 5) 197 111 197 142 90 219 –203 753 Unallocated liabilities 7,462 Total liabilities 8,215
Other items Depreciation and amortization 460 224 197 53 52 38 – 1,024 Impairment charge 75 – 2 – 21 – – 98 Capital expenditure 149 74 345 32 30 56 – 686 Capital employed, 31 December 6) 4,476 1,905 2,674 635 647 3,355 –739 12,953 Capital employed, average 4,749 2,002 2,640 654 748 – – 12,882 Return on capital employed, % 7) –1.4 0.3 6.5 10.9 14.8 – – 6.0
1) Sales include only sales outside the Group. Internal sales to segments amount to ` 1,464 million, consisting mainly from the Forestry Department and Energy Department in Finland.
2) The operating profit of the Magazine Papers segment includes expenses of ` 110 million relating to the closure of Miramichi pulp mill as well as income of ` 6 million from a change in the Finnish pension system. The change in the pension system resulted in income of ` 2 million being booked to Newsprint, ` 3 million to Fine and Speciality Papers, and ` 2 million to Converting. The operating profit of the Wood Products segment includes a capital gain of ` 110 million from the sale of Brooks Group, expenses totalling ` 34 million from restructuring arrangements made at Finnish sawmills and plywood mills, and income of ` 7 million from the change in the pension system. Other Operations includes income of ` 249 million arising from the change in Finland’s TEL employee pension scheme, a ` 11 million provision for group restructuring expenses and a ` 19 mil- lion provision for long-term wood procurement agreements in Great Britain 3) Taxes include a tax benefit of ` 235 million due to a change in Finnish tax legislation and a benefit of ` 284 million resulting from a decrease in the German tax liability. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other operations includes the Forestry Department: ` 1,412 million and the Energy Department in Finland: ` 1,011 million. Eliminations include unallocated assets and unallocated non-interest-bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other finance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.
F-134 Group ACCOUNTS FOR 2006
Personnel (average) by segment 5 ACQUISITIONS AND DISPOSALS Year ended 31 December 2006 2005 2004 In 2006, no acquisitions were made. In 2005 and 2004, the acquisitions Magazine Papers 7,869 8,464 8,861 amounted to ` 6 million and ` 10 million respectively. Newsprint 3,361 3,471 3,631 In November 2005 the Group acquired 99 % of the shares of the Fine and Speciality Papers 6,680 6,933 6,933 Russian wood procurement company ZAO Tikhvinsky Komplexny Converting 3,607 4,374 4,751 Lespromkhoz. ` 3 million of the acquisition price was allocated to Wood Products 6,158 6,633 7,503 intangible assets in respect of felling rights. Other Operations 3,364 3,074 3,136 No significant arrangement fees or corresponding expenses were Total 31,039 32,949 34,815 paid in connection with acquisitions in the years 2004-2005. In June 2006, UPM sold the Group Head Office real estate for 77 Personnel at year end 28,704 31,522 33,433 ` million, which generated a pre-tax capital gain of ` 41 million. In August 2006, UPM sold its Finnish building merchant Puukeskus Oy, Secondary reporting format part of the Wood Products segment, to the private equity investor Triton External sales by destination and Puukeskus’s management. A tax exempt capital gain of ` 93 million was recognised on the sale. Year ended 31 December `m 2006 2005 2004 In August 2005, UPM sold Loparex Group, a part of the Converting division, for ` 200 million (` 230 million of cash consideration less ` 30 Germany 1,587 1,475 1,543 million of net liabilities). A capital gain of ` 26 million was recognized Great Britain 1,223 1,166 1,295 Finland 920 951 1,029 on the sale. France 661 627 710 In August 2004, UPM sold Brooks Group Limited, the Irish build- Other EU countries 2,247 2,091 2,291 ing material merchant, for ` 213 million. A pre-tax capital gain of ` 110 Other European countries 661 498 422 million was recognized on the sale. United States 1,124 1,173 1,323 None of these disposals are classified as discontinued operations. Canada 126 123 143 China 526 290 226 Rest of world 947 954 838 Assets and liabilities arising from the acquisition Total 10,022 9,348 9,820 Year ended 31 December `m 2006 2005 2004 Cash and cash equivalents – – 9 Total external assets by country Other intangible assets – 5 1 As at 31 December Property, plant and equipment – 1 – `m 2006 2005 2004 Inventories – 1 8 Receivables – 1 14 Germany 3,028 2,926 2,958 Borrowings and other liabilities – –2 –22 Great Britain 702 707 668 Fair value of net assets acquired – 6 10 Finland 6,779 7,636 8,088 Goodwill – – – France 612 600 624 Total purchase price – 6 10 Other EU countries 682 863 940 Other European countries 131 127 107 Less: United States 660 671 738 Cash and cash equivalents in subsidiary Canada 735 870 838 acquired – – –9 China 909 922 678 Cash ow on acquisition – –6 –1 Rest of world 231 219 188 Total 14,469 15,541 15,827
Capital expenditure by country Year ended 31 December `m 2006 2005 2004 Germany 123 115 49 Great Britain 52 61 43 Finland 255 245 329 France 74 58 11 Russia 4 20 9 Other European countries 11 15 9 North America 46 43 32 China 45 146 188 Rest of world 89 46 16 Total 699 749 686
F-135 ACCOUNTS FOR 2006 Group
Net assets and liabilities of disposals Year ended 31 December Year ended 31 December `m 2006 2005 2004 `m 2006 2005 2004 Pension costs-defined contribution plans 170 134 149 Cash and cash equivalents 6 10 28 Other post-employment benefits (Note 29) 4 3 2 Other intangible assets 2 5 – Share-based payments (Note 36) 7 8 12 Goodwill – 49 – Other indirect employee costs 3) 175 168 178 Property, plant and equipment 63 80 19 356 313 341 Shares 1 1 – Other operating costs and expenses Inventories 36 42 31 Rents and lease expenses 56 66 62 Receivables 55 98 70 Emission expenses (Note 6) 10 29 – Accounts payable and other liabilities –42 –42 –45 Losses on sale of non-current assets 15 2 4 Borrowings and other liabilities –36 –59 – Other operating expenses 4) 1,149 1,194 1,281 85 184 103 1,230 1,291 1,347 Gain/loss on disposal 124 26 110 Total consideration 209 210 213 Costs and expenses, total 8,514 8,092 8,254 1) External services comprise mainly distribution costs of products sold. Satisfied by cash and cash equivalents 209 210 213 2) Changes were made to Finland’s TEL employee pension scheme in 2004. This Cash and cash equivalents in subsidiary resulted in a decrease of ` 269 million in the pension liability. disposed –6 –10 –28 3) Other indirect employee expenses include primarily other statutory social Net cash in ow arising from disposals 203 200 185 expenses, excluding pension expenses. 4) Other operating expenses include, among others, energy and maintenance expenses as well as expenses relating to services and the company’s administra- 6 OTHER OPERATING INCOME tion. The 2005 figure includes a fine of ` 57 million imposed by the European Commission Year ended 31 December `m 2006 2005 2004 The research and development costs included in costs and expenses Gains on sale of non-current assets 1) 172 50 142 were ` 44 million (2005: ` 50 and 2004: ` 47 million). Rental income, investment property 12 13 16 Rental income, other 8 7 6 Remuneration paid to the members of the Board of Directors and Emission allowances received (Note 7) 18 40 – Other 21 7 4 the Executive Team 231 117 168 Shareholdings (no of shares) and fees of the Board of Directors 1) Year 2006 includes a capital gain of ` 41 million on the sale of Group Head Office Shareholding Year ended 31 December. real estate and a capital gain of ` 93 million on the sale of Puukeskus Oy. Year 2005 % 1,000 31.12.2006 2006 2005 2004 includes a capital gain of ` 26 million on the sale of the Loparex Group, and year 2004 includes a capital gain of ` 110 million on the sale of the Brooks Group. Board members Vesa Vainio, Chairman 14,073 160 160 164 Berndt Brunow, Vice Chairman 264,613 110 110 89 Jorma Ollila, Vice Chairman 34,193 110 110 114 7 COSTS AND EXPENSES Martti Ahtisaari 7,790 85 85 89 Year ended 31 December Michael C. Bottenheim 8,401 110 110 89 `m 2006 2005 2004 Karl Grotenfelt 10,767 85 85 85 Change in inventories of finished goods and Georg Holzhey 433,546 85 85 89 work in progress –92 –45 –36 Wendy E. Lane 2,078 85 85 – Production for own use –24 –44 –44 Ursula Ranin 1,140 85 – – –116 –89 –80 Françoise Sampermans 4,767 85 85 85 Materials and services Former Board members Raw materials, consumables and goods Gustaf Serlachius – – 39 114 Purchased during the period 4,997 4,667 4,737 Carl H. Amon III – – – 4 Change in inventories 42 –74 –29 Donna Soble Kaufman – – – 4 External services 1) 745 753 820 Total 781,368 1,000 954 926 5,784 5,346 5,528 of which in company shares – – 382 356 Personnel expenses Salaries and fees In accordance with the decision made by the 2006, 2005 and 2004 Salaries of boards of directors and Annual General Meetings, the Chairman of the Board of Directors managing directors 16 15 15 received a fee of ` 160,000 for the year, the Vice Chairmen of the Board Other salaries 1,202 1,177 1,310 of Directors and the Chairman of the Audit Committee a fee of 1,218 1,192 1,325 ` 110,000, and the members of the Board of Directors a fee of ` 85,000. Of this fee in 2005 and 2004, 60 per cent was paid in cash and 40 per Indirect employee costs Pension costs-defined benefit plans (Note 29) cent in the form of company shares purchased on the members’ behalf. Pension expenses 42 39 62 Additionally, in 2004, the members were paid ` 4,000 for attendance Change in the Finnish pension system 2) – – –269 allowances. 42 39 –207
F-136 Group ACCOUNTS FOR 2006
Executive team remuneration Audit fees Year ended 31 December Year ended 31 December % 1,000 2006 2005 2004 `m 2006 2005 2004 President and CEO Jussi Pesonen Audit fees 4.9 3.1 2.9 Remuneration Audit related fees 1.6 2.1 0.8 Salaries 883 742 544 Tax consulting fees 1.3 1.1 1.2 Incentives – 240 90 Total 7.8 6.3 4.9 Benefits 16 30 31 Total 899 1,012 665 Pension costs 8 CHANGE IN FAIR VALUE OF BIOLOGICAL ASSETS Finnish TEL scheme 161 178 127 AND WOOD HARVESTED Voluntary pension plan 154 84 – Year ended 31 December Total 315 262 127 `m 2006 2005 2004 Biological assets harvested during the The former President and CEO Juha Niemelä received termination period –107 –34 –42 Fair value change of biological assets –19 68 57 benefits amounting to ` 490 thousand (2005: ` 735 and 2004: ` 306 Total –126 34 15 thousand). The combined value of his salary and fringe benefits in 2004 was ` 467 thousand. Contributions paid to the voluntary pension plan amounted to ` 1,883 thousand in 2006 (2005: ` 0 and 2004: ` 116 9 SHARE OF RESULTS OF ASSOCIATED COMPANIES thousand), and the expenses recognized with respect to pension costs AND JOINT VENTURES arising from the Finnish TEL scheme totalled ` 89 thousand in 2004. The 14 (2005: 14 and 2004: 13) members of the Executive Team, Year ended 31 December `m 2006 2005 2004 including President and CEO, were paid salaries and fringe benefits totalling ` 5.5 (2005: ` 6.4 and 2004: ` 4.6) million, of which ` 0.3 Oy Metsä-Botnia Ab 69 36 56 Pohjolan Voima Oy –14 – –5 (2005: ` 1.0 and 2004: ` 0.4) million were paid as bonuses. The remu- Others 6 5 7 nerations paid are based on the performance of the Executive Team 61 41 58 members in the previous year. According to the company’s pay scheme, CEO can be paid an 18 months’ maximum reward, and the other executives can be paid a per- formance-related reward amounting to not more than twelve months’ 10 DEPRECIATION, AMORTIZATION AND salary. In addition to salaries and bonuses the members of the Executive IMPAIRMENT CHARGES Team are also entitled to participate in the company’s stock option plans Year ended 31 December and share ownership plan. The expenses recognized in respect of share- `m 2006 2005 2004 based payments were ` 0.8 (2005: ` 1.2 and 2004: ` 2.2) million. Depreciation on property, plant and The retirement age of President and CEO Jussi Pesonen is 60 years. equipment Depending on the service contracts, the retirement age of the other Buildings 101 108 104 members of the Executive Team is 62-63 years. The target pension is Machinery and equipment 671 703 717 60% of the average indexed earnings from the last ten years. The costs Other tangible assets 32 34 36 of lowering the retirement age or supplementing statutory pension 804 845 857 security are generally covered by voluntary pension insurance. The Depreciation on investment property expenses of the Executive team members’ defined benefit pension plans Buildings 1 2 1 in 2006 were ` 0.9 (2005: ` 1.5 and 2004: ` 0.4) million, and the expenses of their defined contribution plans were ` 0.8 (2005: ` 0.9 and Amortization of intangible assets 2004: ` 0.8) million. Intangible rights 16 15 11 Members of the Executive Team have certain benefits in the event of Goodwill – – 100 their service contracts being terminated prior to the expiration date Other intangible assets 69 67 56 stated in them. If UPM-Kymmene Corporation gives notice of termina- 85 82 167 tion to Jussi Pesonen, the President and CEO, a severance compensation Impairment charges on property, of 24 months’ basic salary will be paid, in addition to the six months’ plant and equipment salary for the notice period. For other members of the Executive team, Buildings 62 61 18 Machinery and equipment 177 137 78 the period for additional severance compensation is 12 months in addi- Other tangible assets 4 3 1 tion to the six months’ salary for the notice period. 243 201 97 The President and CEO is appointed by the Board of Directors. Impairment of intangible assets If there is a change of control in UPM-Kymmene Corporation as Other intangible assets 5 – – defined in the service contracts, each member of the Executive Team 5–– may terminate such service contract within one month or, in the case of Jussi Pesonen within three months, from the date of the event that trig- Depreciation, amortization and gered the change of control, and shall receive compensation equivalent impairment charges, total 1,138 1,130 1,122 to 24 months’ basic salary.
F-137 ACCOUNTS FOR 2006 Group
In 2006, impairments of fixed assets include ` 135 million impairment The aggregate foreign exchange gains and losses charges in respect of production capacity close-downs and restructuring included in the consolidated income statement measures in Finland, and a ` 115 million impairment charge relating to Year ended 31 December the Miramichi paper mill in New Brunswick in Cananda. `m 2006 2005 2004 In 2006, UPM started a programme to restore its profitability. The Sales –25 31 11 programme covers all of the company’s activities and includes both Costs and expenses 20 4 2 streamlining of operations and closures of uncompetitive production Net financial items –8 –16 48 capacity. As part of the programme, UPM closed, in the Magazine Total –13 19 61 Papers segment, a total of 410,000 t/a of coated magazine paper capa- city at the Voikkaa paper mill, and in the Fine and Speciality Papers segment, a total of 150.000 t/a of coated fine paper capacity at the Kymi 13 INCOME TAXES mill. In addition, in 2007, related to the profitability programme, UPM Year ended 31 December will close 115,000 t/a of sack paper capacity at the Tervasaari mill `m 2006 2005 2004 belonging to the Fine and Speciality Papers segment. Major components of tax expenses In 2006 relating to the Miramichi paper mill, which belongs to Current tax expense 187 91 118 Magazine Paper Segment’s, UPM recognized an impairment charge of Change in deferred taxes (Note 28) –158 –95 –482 ` 115 million mainly due to the negative currency impact. The cash flow Income taxes, total 29 –4 –364 of Miramichi mill has remained weak especially due to the strengthened Canadian dollar in relation to the US dollar. The mill’s recoverable Income tax reconciliation statement amount was determined based on value in use and using a pre-tax dis- Profit before tax 367 257 556 count rate of 9.96%. Computed tax at Finnish statutory rate In 2005, impairments of fixed assets include ` 151 million relating of 26 % (2005: 26%, 2004: 29 %) 95 67 161 to the Miramichi paper mill in Canada, ` 10 million relating to the Difference between Finnish and foreign rates –2 –17 –20 Augsburg mill in Germany, ` 8 million relating to the Nordland mill in Non-deductible expenses and Germany and ` 25 million relating to Finnish sawmills. Miramichi tax exempt income –20 –25 1 mill’s recoverable amount was determined based on value in use and Non-deductible purchase price difference – – 37 Tax loss with no tax benefit 1 9 39 using discount rate of 10.14%. In Wood Products segment, the recover- Results of associated companies –16 –11 –15 able amount of Finnish sawmills was determined based on value in use Change in tax legislation –5 – –246 and using discount rate of 8.70%. Other –24 –27 –321 In 2004, impairments of fixed assets included ` 75 million relat- Income taxes, total 29 –4 –364 ing to the closure of the Magazine Papers segment’s Miramichi pulp mill in Canada and ` 21 million relating to restructuring of the wood Effective tax rate 7.8 % –1.6 % –65.5 % product industry in Finland. Income taxes for 2006 include tax expense of ` 22 million due to a decrease in the income tax rate in Canada and a tax income of ` 28 11 GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET million from a tax receivable arising from the change in German tax legislation. Other items include a tax income of ` 20 million due to an Year ended 31 December `m 2006 2005 2004 increase in deferred tax assets related to the change in the Group’s structure in Canada. Profit before taxes for 2006 includes tax-exempt Fair value gains and losses on disposals –2 90 1 capital gains totalling ` 93 million. Total –2 90 1 Income taxes for 2005 include tax income of ` 58 million relating to In 2005, the gain relates to the sale of shares of Metso Corporation. the change in deferred tax assets arising from the losses and deprecia- tion difference of Canadian operations, and tax expense of ` 16 million relating to an associated company due to a change in tax law. Profit 12 FINANCE COSTS before taxes for 2005 includes tax-exempt capital gains totalling ` 126 million. Taxes for 2004 include tax benefit of ` 235 million due to a Year ended 31 December `m 2006 2005 2004 change in Finnish tax legislation and tax benefit of ` 284 million result- ing from a decrease in the German deferred tax liability (included in Interest expenses –190 –161 –202 Other items). Interest income 7 15 32 Dividend income from available-for-sale investments – 1 7 Exchange gains and losses –8 –16 48 Fair value gains and losses on derivative financial instruments 1) 26 12 – Gains and losses on sale of associated companies and joint ventures shares 10 11 –6 Other financial income – 1 7 Other financial expenses –12 –14 –16 Total –167 –151 –130
1) The fair value hedge ineffectiveness, net was ` 19, ` 19 and ` 12 million in 2006, 2005 and 2004, respectively.
F-138 Group ACCOUNTS FOR 2006
14 EARNINGS PER SHARE Impairment tests Year ended 31 December The company prepares impairment test calculations annually. The key 2006 2005 2004 assumptions for calculations are those regarding the business growth Profit attributable to the parent company’s outlooks, product prices, cost development, and the discount rate. shareholders, `m 340 263 919 Business growth outlooks are based on general forecasts for the Average weighted number of shares businesses in question. Ten-year forecasts are used in the calculations as (1,000) 523,220 522,029 523,641 the nature of the company’s business is long-term due to its capital Basic earnings per share, % 0.65 0.50 1.76 intensity, and exposed to cyclical changes. In estimates of product prices and cost development, the budgets prepared by management for the next For the diluted earnings per share the year and estimates made for the following nine years are taken into number of shares is adjusted by the effect consideration. The company’s recent profitability trend is taken into of the share options account in the forecasts. In addition, when preparing estimates, consi- deration is given to the investment decisions made by the company as Profit attributable to the parent company’s well as the profitability programmes that the Group has implemented shareholders, `m 340 263 919 and the views of knowledgeable experts of the industry on the long-term Adjustments to the profit – – – development of demand and prices. Discount rate is estimated using the Profit used to determine diluted costs of debt on the calculation date as well as risks specific to busi- earnings per share, `m 340 263 919 nesses in question. The pre-tax discount rates used in 2006 for Maga- zine Papers, Newsprint and Fine Papers were 8.72 %, 9.60 % and Average weighted number of shares 9.14 % (2005: 8.08 %, 8.42 % and 8.68 %), respectively. (1,000) 523,220 522,029 523,641 The recoverable amount of groups of cash generating units is deter- Effect of options 2,821 1,623 2,606 mined based on value in use calculations. Average weighted number of shares for No impairments were recognised based on goodwill tests prepared diluted earnings per share (1,000) 526,041 523,652 526,247 in 2006 and 2005. Diluted earnings per share, ` 1) 0.65 0.50 1.75 The estimated product prices are the most important assumptions in impairment tests. A hypothetic 4% decrease in product prices used in impairment tests would lead to a recognition of impairment loss against 1) 7.3 million shares exercisable with options (2005: 10.2 million and 2004: 7.3 mil- goodwill approximately by ` 300 million in Magazine Papers and lion) were excluded from the calculation of diluted earnings per share as they were not approximately by ` 300 million in Newsprint. In Fine Papers, a hypo- dilutive. thetic decrease of 2 % in product prices used in impairment test would lead to an impairment of the entire goodwill of ` 102 million. Group 15 DIVIDEND PER SHARE believes that any reasonably possible change in the other key assump- tions on which recoverable amount is based would not cause the aggre- The dividends paid in 2006 and 2005 were ` 392 million (` 0.75 per gate carrying amount to exceed the aggregate recoverable amount of share) and ` 387 million (` 0.75 per share). The Board of Directors cash-generating units. proposes to the Annual General Meeting that a dividend of ` 392 mil- lion (` 0.75 per share) will be paid in respect of 2006. 17 OTHER INTANGIBLE ASSETS As at 31 December 16 GOODWILL IMPAIRMENT TESTS `m 2006 2005 As at 31 December Intangible rights `m 2006 2005 Acquisition cost at 1 Jan. 394 362 Additions 2 21 Acquisition cost at 1 Jan. 1,514 2,024 Disposals –2 –2 Transfer of accumulated amortization – –464 Reclassifications 19 4 Additions – 3 Acquisitions through business combinations – 5 Disposals – –49 Translation differences –2 4 Carrying value at 31 Dec. 1,514 1,514 Acquisition cost at 31 Dec. 411 394
Accumulated amortization at 1 Jan. – –464 Accumulated amortization and impairment at 1 Jan. –110 –95 Transfer of accumulated amortization – 464 Amortization –16 –16 Accumulated amortization and impairment at 31 Dec. – – Disposals 2 1 Accumulated amortization and impairment at 31 Dec. –124 –110 Carrying value at 1 Jan. 1,514 1,560 Carrying value at 31 Dec. 1,514 1,514 Carrying value at 1 Jan. 284 267 Carrying value at 31 Dec. 287 284 The carrying value of goodwill is divided among the following groups of cash generating units: As at 31 December `m 2006 2005 Magazine Papers 915 915 Newsprint 475 475 Fine Papers 102 102 Others 22 22 1,514 1,514
F-139 ACCOUNTS FOR 2006 Group
As at 31 December 18 PROPERTY, PLANT AND EQUIPMENT `m 2006 2005 As at 31 December `m 2006 2005 Other intangible assets 1) Acquisition cost at 1 Jan. 508 445 Land and water areas Additions 6 33 Acquisition cost at 1 Jan. 357 362 Disposals –34 –2 Additions 14 10 Reclassifications 33 28 Disposals –11 –17 Translation differences –2 4 Reclassifications 2 1 Acquisition cost at 31 Dec. 511 508 Translation differences –1 1 Acquisition cost at 31 Dec. 361 357 Accumulated amortization and impairment at 1 Jan. –326 –261 Amortization –69 –67 Accumulated depreciation and impairment at 1 Jan. –4 –11 Impairment charges –4 –1 Disposals – 7 Disposals 30 1 Impairment –3 – Reclassifications 4 5 Accumulated depreciation and impairment at 31 Dec. –7 –4 Translation differences 1 –3 Accumulated amortization and impairment at 31 Dec. –364 –326 Carrying value at 1 Jan. 353 351 Carrying value at 31 Dec. 354 353 Carrying value at 1 Jan. 182 184 Carrying value at 31 Dec. 147 182 Buildings Acquisition cost at 1 Jan. 3,062 3,092 Advance payments and construction in progress Additions 45 22 Acquisition cost at 1 Jan. 33 68 Acquisitions through business combinations – 1 Additions 16 3 Disposals –182 –129 Disposals – –6 Reclassifications 36 22 Reclassifications –38 –32 Translation differences –20 54 Acquisition cost at 31 Dec. 11 33 Acquisition cost at 31 Dec. 2,941 3,062
Carrying value at 1 Jan. 33 68 Accumulated depreciation and impairment at 1 Jan. –1,382 –1,316 Carrying value at 31 Dec. 11 33 Depreciation –101 –109 Impairment –59 –62 Disposals 87 105 Emission allowances Reclassifications 2 19 Acquisition cost 1 Jan. 36 – Translation differences 6 –19 Additions 2) 19 40 Accumulated depreciation and impairment at 31 Dec. –1,447 –1,382 Disposals and settlements –39 –4 Acquisition cost 31 Dec. 16 36 Carrying value at 1 Jan. 1,680 1,776 Carrying value at 31 Dec. 1,494 1,680 Carrying value at 1 Jan. 36 – Carrying value at 31 Dec. 16 36 Machinery and equipment Other intangible assets, total 461 535 Acquisition cost at 1 Jan. 12,911 12,856 Additions 315 178 1) Other intangible assests consist primarily of capitalized software assets. Acquisitions through business combinations – 4 2) Additions include allowances received free of charge. Disposals –732 –618 Reclassifications 167 230 Translation differences –116 261 Water rights Acquisition cost at 31 Dec. 12,545 12,911 Intangible rights include ` 189 million (2005: ` 178 million) in respect of the water rights of hydropower plants belonging to the Other Opera- Accumulated depreciation and impairment at 1 Jan. –8,181 –7,840 tions segment. In 2006, ` 0 million (2005: 123 million) of water rights Depreciation –667 –710 was acquired under finance lease agreements. The water rights of power Impairment –174 –138 plants are deemed to have an indefinite useful life as the company has a Disposals 565 554 contractual right to exploit water resources in the energy production of Reclassifications 26 99 power plants. The values of water rights are tested annually for impair- Translation differences 54 –146 ment. Accumulated depreciation and impairment at 31 Dec. –8,377 –8,181
Carrying value at 1 Jan. 4,730 5,016 Carrying value at 31 Dec. 4,168 4,730
F-140 Group ACCOUNTS FOR 2006
As at 31 December Capitalized borrowing costs `m 2006 2005 The borrowing costs capitalized as part of non-current assets amounted Other tangible assets to ` 6 million in 2006 and ` 9 million in 2005. Amortization of capita- Acquisition cost at 1 Jan. 874 845 lized borrowing costs was ` 10 million in 2006 (2005: ` 13 million and Additions 21 17 2004: ` 16 million). In 2006, 2005 and 2004 there were no capitalized Acquisitions through business combinations – 1 borrowing costs associated with sold assets. Disposals –9 –17 The average interest rate used was 3.9 % (2005: 3.5 %), which Reclassifications –1 19 represents the costs of the loan used to finance the projects. Translation differences –6 9 Acquisition cost at 31 Dec. 879 874
Accumulated depreciation and impairment at 1 Jan. –649 –622 19 INVESTMENT PROPERTY Depreciation –32 –34 As at 31 December Disposals 16 14 `m 2006 2005 Reclassifications –1 – Acquisition cost at 1 Jan. 81 82 Impairment –3 –2 Additions 3 5 Translation differences 3 –5 Disposals –5 –7 Accumulated depreciation and impairment at 31 Dec. –666 –649 Reclassifications –5 1 Acquisition cost at 31 Dec. 74 81 Carrying value at 1 Jan. 225 223 Carrying value at 31 Dec. 213 225 Accumulated depreciation and impairment at 1 Jan. –46 –44 Depreciation –1 –2 Advance payments and construction in progress Disposals 3 1 Acquisition cost at 1 Jan. 328 255 Reclassifications – –1 Additions 209 446 Accumulated depreciation and impairment at 31 Dec. –44 –46 Disposals –25 –12 Reclassifications –238 –392 Carrying value at 1 Jan. 35 38 Translation differences –3 31 Carrying value at 31 Dec. 30 35 Acquisition cost at 31 Dec. 271 328 The fair value of investment property is determined annually on 31 Carrying value at 1 Jan. 328 255 December by the Group. Fair value is based on active market prices, Carrying value at 31 Dec. 271 328 adjusted, if necessary, for any difference in the nature of the specific asset. Property, plant and equipment, total 6,500 7,316 Investment property in Finland includes investments in flats and other premises occupied by third parties. The fair value of these flats at In 2006, additions include assets of ` 0 million (2005: ` 4 million) 31 December 2006 was ` 55 million (2005: ` 28 million). At 31 Decem- acquired under finance lease arrangements. ber 2006 approximately 85 % (2005: 84 %) of the flats were state- subsidized buildings, for which certain restrictions for sale apply. The Finance lease arrangements fair value of other premises at 31 December 2006 was ` 5 million Property, plant and equipment includes property that is acquired under (2005: ` 10 million). The fair value of investment property in other finance lease and sale and leaseback contracts: countries at 31 December 2006 was ` 13 million (2005: ` 14 million).
As at 31 December `m 2006 2005 The amounts recognized on the income statement: Land and water areas Year ended 31 December Acquisition cost – 1 `m 2006 2005 2004 Accumulated depreciation – – Carrying value at 31 Dec. – 1 Rental income 12 13 16 Direct operating expenses arising from investment properties that generate Buildings rental income 6 7 8 Acquisition cost – 28 Accumulated depreciation – –10 Carrying value at 31 Dec. – 18 There were no contractual obligations for future repair and maintenance or purchase of investment property. Machinery and equipment All assets under investment property are leased to third parties Acquisition cost 77 202 under operating leasing contracts. Accumulated depreciation –45 –59 Carrying value at 31 Dec. 32 143
Leased assets, total 32 162
There is no property, plant and equipment leased to third parties under operating lease contracts.
F-141 ACCOUNTS FOR 2006 Group
20 BIOLOGICAL ASSETS Group holding As at 31 December percentage % Carrying value 2006 2005 2006 2005 `m 2006 2005 Joint ventures At 1 Jan. 1,174 1,143 Kainuun Voima Oy, FI 50.00 50.00 6 6 Purchases during the period 3 4 66 Sales during the period –12 –7 Harvested during the period –107 –34 Associated companies and Gains and losses arising from changes in fair values –19 68 joint ventures at 31 Dec. 1,177 1,034 Translation differences –2 – 1) The Group’s share of the voting right in Powest Oy is 0.61% (2005: 0.64%). The At 31 Dec. 1,037 1,174 Group is entitled to 51.22% (2005: 51.11%) of the respective dividends of Powest Oy. The discount rate used in determing the fair value in 2006 was 7.50 % 2) Oy Metsä-Botnia South America S.A. is a subsidiary of UPM’s associated company (2005: 7.0 %). A 1 % decrease (increase) in discount rate would Oy Metsä-Botnia Ab increase (decrease) the fair value of biological assets by approximately ` 120 million. Pohjolan Voima Oy (“PVO”) holds a 57.72 % shareholding in Teollisu- uden Voima Oy (“TVO”), which owns and operates nuclear powers plants in Olkiluoto, Finland. The operation of a nuclear power plant 21 INVESTMENTS IN ASSOCIATED COMPANIES involves potential costs and liabilities related to decommissioning and AND JOINT VENTURES dismantling of the nuclear power plant and storage and disposal of spent fuel, and is governed by international, European Union and local As at 31 December `m 2006 2005 nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility is strictly liable for damage result- At 1 Jan. 1,034 1,047 Increases 126 15 ing from a nuclear incident at the operator’s installation or occurring in Decreases –8 –21 the course of transporting nuclear fuels. Shareholders of power compa- Share of results after tax 61 41 nies that own and operate nuclear power plants are not subject to liabil- Dividens received –16 –20 ity under the Nuclear Liability Act. In Finland, the future costs of condi- Reclassified as assets held for sale – –32 tioning, storage and final disposal of spent fuel, management of low and Translation differences –20 4 intermediate-level radioactive waste and nuclear power plant decommis- At 31 Dec. 1,177 1,034 sioning are the responsibility of the operator. Reimbursements of the operators’ costs related to decommissioning and dismantling of the Investments in associated companies at 31 December 2006 include power plant and storage and disposal of spent fuel are provided for by goodwill of ` 51 million which relates to Pohjolan Voima Oy’s shares state-established funds funded by annual contributions from nuclear (2005: ` 36 million). power plant operators. Pursuant to PVO and TVO shareholders’ agree- ments, the Group bears its proportionate share of the costs related to As at 31 December decommissioning and dismantling of the nuclear power plant and stor- `m 2006 2005 age and disposal of spent fuel through the price of electricity acquired from PVO. The contributions to such funds are intended to be sufficient Sale and leaseback contracts included in investments in associated companies to cover estimated future costs. If the actual costs deviate from fund Acquisition cost 13 13 provisions, the Group would be affected accordingly. Contributions to Accumulated increases 5 7 the fund are recognized in accordance with IFRIC 5 “Rights to Interests Carrying value at 31 Dec. 18 20 Arising from Decommissioning, Restoration and Environmental Reha- bilitation Funds”. Associated companies and joint ventures The Group’s share of the results of its principal associates and joint- ventures equity accounted for, all of which are unlisted, and its share of Group holding percentage % Carrying value the assets, liabilities and sales are as follows: 2006 2005 2006 2005 Associated companies 2006 Profit/ `m Assets Liabilities Sales Loss Austria Papier Recycling Ges.m.b.H.. AT 33.30 33.30 – – Associated companies and joint ventures Oy Metsä-Botnia Ab, FI 1,038 410 627 69 Oy Keskuslaboratorio- Centrallaboratorium Ab. FI 38.65 38.65 1 1 Pohjolan Voima Oy, FI 1,125 618 327 –14 Others 248 206 270 6 Oy Metsä-Botnia South America S.A.. Uruguay 2) 12.40 – 70 – Total 2,411 1,234 1,224 61 Oy Metsä-Botnia Ab. FI 47.00 47.00 558 518 2005 Profit/ Paperinkeräys Oy. FI 22.98 22.98 3 3 `m Assets Liabilties Sales Loss Pohjolan Voima Oy. FI 42.19 40.90 509 478 Associated companies and joint ventures Powest Oy. FI 1) 9.98 9.98 18 16 Oy Metsä-Botnia Ab, FI 775 257 445 36 RETS Timber Oy Ltd. FI 50.00 50.00 1 1 Pohjolan Voima Oy, FI 1,003 525 219 – Steveco Oy. FI 34.32 34.32 8 6 Others 260 222 259 5 Others 3 5 Total 2,038 1,004 923 41 31.12. 1,171 1,028
F-142 Group ACCOUNTS FOR 2006
The amounts representing the Group’s share of the assets and liabilities 22 AVAILABLE-FOR-SALE INVESTMENTS (NON-CURRENT) and sales and results of the joint ventures that have been accounted for using the equity method are presented in the table below. Year ended 31 December `m 2006 2005 Year ended 31 December At 1 Jan. 153 366 `m 2006 2005 Additions 5 27 The amount of assets and liabilities Disposals –8 –290 related to investments in joint ventures Changes in fair values 1 50 Non-current assets 32 33 Transferred to associated companies –20 – Current assets 2 3 Other changes (impairment) –4 – Non-current liabilities –23 –25 At 31 Dec. 127 153 Current liabilities –4 –4 Net assets 7 7 Available-for-sale investments comprise of investments in unlisted The income and expenses related equity shares and equity securities in listed companies. Equity securities to investments in joint ventures in listed companies are fair valued. Certain unlisted equities, where the Sales 14 12 fair value cannot be measured reliably are carried at cost, less impair- Expenses –14 –12 ment. The fair value of the shares in Kemijoki Oy cannot be realibly Profit – – measured as the redemption clause in the articles of association of the company limits fair market transactions. The average number of employees The fair value of equity investments traded in active markets is 2 in the joint ventures 44 46 ` million in 2006 and 2005. The fair value of equity investments traded in active markets is determined by using quoted prices. Transactions and balances with associates and joint ventures Year ended 31 December Principal available-for-sale investments `m 2006 2005 Group Number of holding Carrying value Sales to associates and joint ventures 61 43 shares percentage 2006 2005 Purchases from associates and joint ventures 448 438 Kemijoki Oy 100,797 4.13 106 106 Non-current receivables from associates and Listed companies 2 2 joint ventures – 4 Other 19 45 Receivables from associates and joint ventures 20 21 Payables to associates and joint ventures 23 19 Carrying value of available-for- sale investments at 31 Dec. 127 153 Loan receivables from associates and joint ventures 1) At 1 Jan. 11 14 23 NON-CURRENT FINANCIAL ASSETS Loans granted – 9 As at 31 December Repayments –5 –12 `m 2006 2005 At 31 Dec. 6 11 Loans to associates and joint ventures – 4 1) Loans to associated companies and joint ventures include current and non-current Other loan receivables 8 7 loan receivables. Derivative financial instruments 66 159 At 31 Dec. 74 170 Assets held for sale In 2005, assets held for sale include the Group’s share of Compañia The carrying value is considered to approximate the fair value. Forestal Oriental S.A, a forest company based in Uruguay. The carrying value on the balance sheet is based on preliminary agreement relating to There were no loans granted to the Executive Team or managing direc- the pulp mill building in Uruguay. Before reclassification to assets held tors at 31 December 2006 or 2005. for sale the Group’s share of Compañia Forestal Oriental S.A. was included in investments in joint ventures. The sale was realised in March 2006. 24 OTHER NON-CURRENT ASSETS As at 31 December `m 2006 2005 Defined benefit plans (Note 29) 45 37 Other non-current assets 28 1 At 31 Dec. 73 38
F-143 ACCOUNTS FOR 2006 Group
25 INVENTORIES Doubtful accounts receivable As at 31 December Trade receivables are recorded net of the following allowances `m 2006 2005 for doubtful accounts: Raw materials and consumables 485 544 As at 31 December `m 2006 2005 Work in progress 63 51 Finished products and goods 667 623 At 1 January 2 2 Advance payments 40 38 Additions 6 5 At 31 Dec. 1,255 1,256 Deductions –5 –5 At 31 Dec. 3 2
26 TRADE AND OTHER RECEIVABLES Main items included in prepayments and accrued income As at 31 December `m 2006 2005 As at 31 December `m 2006 2005 Trade receivables 1,349 1,377 Personnel expenses 3 11 Loan receivables 13 39 Interest income – 1 Other receivables 142 138 Indirect taxes 31 24 Derivative financial instruments 73 15 Other items 46 48 Prepayments and accrued income 80 84 At 31 Dec. 80 84 At 31 Dec. 1,657 1,653 The carrying value of trade and other receivables is considered to approximate the fair value.
27 EQUITY AND RESERVES
Share capital and share premium reserve Number of shares Share Share `m (1,000) capital premium reserve Total At 1 Jan. 2005 524,320 891 745 1,636 Exercise of share options 1) 6,935 12 68 80 Treasury shares declared void –8,000 –13 13 – 31.12.2005 523,255 890 826 1,716 Exercise of share options 4 – – – At 31 Dec. 2006 523,259 890 826 1,716 1) Includes 130 020 shares subscribed for in 2004 and entered into the Trade Register of Finland in 2005.
Share capital During 2006, the company did not buy any of its own shares under Under UPM-Kymmene Corporation’s Articles of Association, the com- the authorizations from the 2005 and 2006 Annual General Meetings. pany’s issued share capital may be not less than ` 750,000,000 and not The Annual General Meeting of 22 March 2006 approved a proposal to more than ` 3,000,000,000. The issued share capital may be increased buy back a minimum of 100 and a maximum of 49,825,000 own shares or decreased between these limits without amendment to the Articles of using funds available for the distribution of profit. Association. At 31 December 2006, the company’s fully paid-in share capital was ` 889,541,031.00 and the number of shares was Authorizations to increase the share capital 523,259,430. Each share, which has an equivalent value of ` 1.70, The Annual General Meeting of 22 March 2006 authorized the Board of carries one vote. The shares are kept in a computerized book entry Directors to decide to increase the company’s share capital by issuing system. new shares and/or convertible bonds in one or more issues. The number of the company’s new shares carrying the equivalent value of ` 1.70 per Treasury shares share made available for subscription under this authorization may not At the beginning of the year, the company held 162,000, representing exceed 99,650,000 and the share capital may be increased by a maxi- 0.031% of share capital, of its own shares. These shares have been mum total amount of ` 169,405,000.00. Under the same authorization, bought in 2005 based on the decision of the Annual General Meeting of the number of shares at the end of the year may rise by 19.04%. The 31 March 2005 with an acquisition cost of ` 2.5 million, on average share issue authorization was not used during the year. ` 15.50 per share. The Annual General Meeting held on 22 March 2006 In 2006, a total of 2,150 E options issued in 2002 were exercised to authorized the Board to donate these shares to a Cultural Foundation to subscribe 4,300 shares. be established.
F-144 Group ACCOUNTS FOR 2006
If all the remaining 3,800,000 2002D share options and all ciated voting rights shall, at the request of other shareholders, be liable 3,795,850 2002E share options are exercised to subscribe all 15,191,700 to redeem in the manner prescribed in § 12 their shares and any securi- shares and all 3,000,000 2005F share options, 3,000,000 2005G share ties that, under the Companies Act, carry the right to such shares. options and 3,000,000 2005H share options authorized in 2005 are A resolution of general meeting of shareholders to amend or delete exercised to subscribe all 9,000,000 shares, the number of the compa- this redemption clause must be carried by shareholders representing not ny’s shares will increase by a total of 24,191,700, i.e. by 4.62%. less than three-quarters of the votes cast and shares represented at the The shares available for subscription under the Board’s share issue meeting. authorization and through the exercise of options may increase the total number of the company’s shares by 23.67%, i.e. by 123,841,700 shares, Fair value and other reserves to 647,101,130 shares, and the share capital by ` 210,530,890 to As at 31 December ` 1,100,071,921.00. `m 2006 2005 Fair value reserve of available-for-sale investments 1 1 Redemption clause Hedging reserve 19 –21 Under § 12 of UPM-Kymmene Corporation’s Articles of Association, a Legal reserve 225 227 shareholder who alone or jointly with another shareholder owns 33 1/3 Share-based compensation 33 26 percent or 50 percent or more of all the company’s shares or their asso- At 31 Dec. 278 233
28 DEFERRED INCOME TAXES
Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. `m 2006 statement equity differences and disposals 2006 Deferred tax assets Retirement benefit and other provisions 108 6 – –3 – 111 Intercompany profit in inventory 14 –3 – – – 11 Book over tax depreciation 215 28 – –22 – 221 Tax losses and tax credits carried forward 210 23 – –6 – 227 Other temporary differences 31 –27 – – –1 3 Deferred tax assets, total 578 27 – –31 –1 573
Deferred tax liabilities Tax over book depreciation 772 –75 – 2 –1 698 Fair value adjustments of net assets acquired and biological assets 317 –51 – – – 266 Other temporary differences 24 –5 18 – – 37 Deferred tax liabilities, total 1,113 –131 18 2 –1 1,001
The amounts recognised in the balance sheet Assets 352 42 – –31 –1 362 Liabilities 887 –116 18 2 –1 790 Deferred tax liabilities, less deferred tax assets 535 –158 18 33 – 428
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 taxes relate to the same fiscal authority.
F-145 ACCOUNTS FOR 2006 Group
Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. `m 2005 statement equity differences and disposals 2005 Deferred tax assets Retirement benefit and other provisions 90 18 – – – 108 Intercompany profit in inventory 15 –1 – – – 14 Book over tax depreciation 115 74 – 26 – 215 Tax losses and tax credits carried forward 212 –3 – 2 –1 210 Other temporary differences 59 –24 – – –4 31 Deferred tax assets, total 491 64 – 28 –5 578
Deferred tax liabilities Tax over book depreciation 812 –36 – – –4 772 Fair value adjustments of net assets acquired and biological assets 320 –4 – – 1 317 Other temporary differences 45 9 –23 –1 –6 24 Deferred tax liabilities, total 1,177 –31 –23 –1 –9 1,113
The amounts recognised in the balance sheet Assets 246 83 – 28 –5 352 Liabilities 932 –12 –23 –1 –9 887 Deferred tax liabilities, less deferred tax assets 686 –95 –23 –29 –4 535
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 taxes relate to the same fiscal authority.
The deferred income tax charged to equity during the years: No deferred tax liability has been recognised for the undistributed `m 2006 2005 profits of Finnish subsidiaries and associated companies as, in most Cash ow hedges 15 –23 cases, such earnings are transferred to the Group without any tax conse- Net investment hedge 3 – quences. Total 18 –23 In addition the Group does not recognise a deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are intended to be permanently reinvested in At 31 December 2006, the net operating loss carry-forwards for which those operations. the Group has recorded a deferred tax asset amounted to ` 639 million In 2005, the Group has recorded additional deferred tax assets of (2005: ` 568 million), of which ` 274 million (2005: ` 243 million) was ` 58 million relating to net operating losses and book over tax deprecia- attributable to German subsidiaries, ` 212 million (2005: ` 139 million) tion in Canada due to a clarification of a tax ruling. to a Canadian subsidiary and ` 56 million (2005: ` 73 million) to French subsidiaries. In Germany and France net operating loss carry- 29 RETIREMENT BENEFIT OBLIGATIONS forwards do not expire. In other countries net operating loss carry- The Group operates a number of defined benefit and contribution plans forwards expire at various dates and in varying amounts. The net operat- all over the world. ing loss carry-forwards for which no deferred tax asset is recognized The most significant pension plan in Finland is the statutory Finnish due to uncertainty of their utilization amounted to ` 38 million in 2006 employee pension scheme (TEL), according to which benefits are (2005: ` 120 million). These net operating loss carry-forwards are directly linked to the beneficiary’s earnings. The TEL pension scheme is mainly attributable to Canadian and Chinese subsidiaries. The capital mainly arranged with pension insurance companies. loss carry-forwards for which no deferred tax asset is recognized due to As a consequence of changes made in the Finnish TEL scheme, the uncertainty of their utilization amounted to ` 63 million in 2006 (2005: disability pensions arranged with insurance companies changed from ` 74 million). The Group does not believe that it will be possible to use being a defined benefit to a defined contribution plan on 1 January 2006. these losses in the future as reductions of qualifying taxable income. As the change was enacted in 2004 the Company’s pension liability In 2006, the Group has recorded additional deferred tax assets of decreased by ` 246 million in 2004. The pension liability also decreased ` 20 million relating to the change in Group’s structure in Canada. On by ` 23 million in 2004 due to other changes in the TEL pension 31 December 2006 the Group had deferred tax assets of ` 203 million scheme. (2005: ` 206 million) relating to book over tax depreciation in Canada In Finland, the pensions of less than 10 % of employees are which do not expire. The Group has implemented a prudent and feasible arranged through Group’s own pension funds. All schemes managed tax planning strategy to utilize deferred tax assets in Canada. The tax by the pension funds are classified as defined benefit plans. planning strategy intends to generate sufficient taxable income against The foreign plans include both defined contribution and defined which the deferred tax assets may be utilized. benefit plans.
F-146 Group ACCOUNTS FOR 2006
Defined benefit plans Changes in the fair value of plan assets As at 31 December As at 31 December `m 2006 2005 `m 2006 2005 Defined benefit pension plans 327 341 Fair value of plan assets as of beginning of year 625 511 Other post-employment benefits (medical) 23 24 Expected return on plan assets 41 38 Net liability 350 365 Actuarial gains and losses 20 21 Contributions by plan participants 4 3 Other long-term employee benefits 32 27 Contributions by the employer 54 49 Overfunded plan shown as asset (Note 24) 45 37 Disposals – –26 Total liability in balance sheet 427 429 Settlements – –2 Other adjustments 2 40 Benefits paid –49 –45 DEFINED BENEFIT PENSION PLANS Transfers from inside the plan – 2 The amounts recognised in the balance sheet Translation difference –16 34 As at 31 December Fair value of plan assets of end of the year 681 625 `m 2006 2005 Present value of funded obligations 806 770 The Group expects to contribute ` 75 million to its defined benefit Present value of unfunded obligations 388 375 pension plans in 2007. 1,194 1,145 The major categories of plan assets as a percentage of total plan assets Fair value of plan assets –681 –625 As at 31 December Unrecognized actuarial gains and losses –185 –177 2006 2005 Unrecognized past service costs –1 –2 Equity securities 45 % 43 % Net liability 327 341 Debt securities 35 % 38 % Real estate 6 % 6 % Money market 3 % 1 % The amounts recognised in the income statement Bonds 11 % 12 % Year ended 31 December Total 100 % 100 % `m 2006 2005 2004 Current service cost 23 20 35 In Finland, the pension plan assets include ordinary shares issued by the Interest cost 51 54 61 company with a fair value of ` 3 million (2005: ` 7 million) and a loan Expected return on plan assets –41 –38 –32 receivable of ` 168 million issued to the company (2005: ` 185 million) Net actuarial gains and losses recognized during by the company’s own fund. The interest paid on the loan in 2006 was the year 7 –3 –4 ` 7 million (2005: ` 6 million and 2004: ` 6 million ). Transfers from inside the plan – –2 – Past service cost 2 14 –26 Settlements – –6 8 OTHER POST-EMPLOYMENT BENEFITS (MEDICAL) Curtailment – – –249 Total included in personnel expenses (Note 7) 42 39 –207 The Group also funds certain other post-employment benefits in North America relating to retirement medical and life insurance programmes. The actual return on plan assets was ` 61 million in 2006 (2005: ` 59 million and 2004: ` 40 million). The amounts recognised in the balance sheet As at 31 December Changes in the present value of defined benefit obligations `m 2006 2005 As at 31 December Present value of unfunded obligations 33 37 `m 2006 2005 Unrecognized actuarial gains and losses –10 –13 Defined benefit obligation as of beginning of year 1,145 963 Net liability 23 24 Current service cost 23 20 Interest costs 51 54 The amounts recognised in the income statement Contributions by plan participants 4 3 Year ended 31 December Actuarial gains and losses 32 86 `m 2006 2005 2004 Past service costs 1 15 Disposals – –27 Current service cost 1 1 1 Curtailments and settlements – –9 Interest cost 2 2 1 Net acturial gains and losses recognized Other adjustments 10 35 during the year 1 – – Benefits paid –49 –45 Total included in personnel expenses (Note 7) 4 3 2 Translation differences –23 50 Defined benefit obligation as of end of the year 1,194 1,145
F-147 ACCOUNTS FOR 2006 Group
Changes in the present value of defined benefit obligations Changes in the fair value of plan assets As at 31 December 31.12. `m 2006 2005 M% 2006 2005 Defined benefit obligation as of beginning of year 37 24 Fair value of plan assets of beginning of year – – Current service cost 1 1 Contributions by plan participants 2 2 Interest costs 2 2 Contributions by the employer 3 2 Contributions by plan participants 2 2 Benefits paid –5 –4 Actuarial gains and losses – 9 Fair value of plan assets as of end of the year – – Benefits paid –5 –4 Translation differences –4 3 The Group expects to contribute ` 3 million to its other post- Defined benefit obligation as of end of the year 33 37 employment benefits plans in 2007.
POST-EMPLOYMENT BENEFITS (PENSION AND MEDICAL)
Post-employment benefits: the principal actuarial assumptions used as at 31 December Finland Canada Germany USA Great Britain Other 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Discount rate % 4.25 4.25 5.20 5.00 4.25 4.25 5.19 5.10 5.13 4.79 4.30 4.25 Expected return on plan assets % 6.15 5.93 7.50 7.50 N/A N/A 4.50 4.50 7.07 7.03 3.87 4.25 Future salary increases % 3.75 3.75 2.05 2.01 2.50 2.50 N/A N/A 4.14 3.75 2.55 2.62 Future pension increases % N/A N/A 1.22 1.19 1.50 1.50 N/A N/A 3.06 2.54 0.86 0.83 Expected average remaining working years of staff 12.3 12.2 11.3 12.1 14.5 14.8 10.2 10.3 17.0 17.9 13.0 13.9
For foreign plans, the assumption for the weighted average expected The assumed health care cost trend rate used in measuring the return on plan assets is based on target asset allocation of each plan, accumulated post-retirement benefit obligation for U.S. plans was 10.0 historical market performance, relevant forward-looking economic % in 2006, 11.0 % in 2005, declining to 5 % by the year 2011 and analyses, expected returns, variances, and correlations for different asset remaining at that level thereafter. A one-percentage-point increase and categories held. For domestic plans, the overall expected return on plan decrease in assumed health care cost trend rates in the USA would effect assets is based on the weighted average of the expected returns on the post employment benefit obligation by ` 2 million and ` –2 million, different asset categories held. correspondingly.
The amounts of pension and other post-employment benefit plans recognised in the balance sheet as at 31 December 2006 Great Finland Canada Germany USA Britain Other Total Present value of funded obligations 233 208 – 31 322 12 806 Present value of unfunded obligations – 21 322 29 – 49 421 Fair value of plan assets –235 –172 – –30 –234 –10 –681 Unrecognized actuarial gains and losses –42 –14 –40 –9 –85 –5 –195 Unrecognized past service costs – –1 – – – – –1 Net liability –44 42 282 21 3 46 350
The amounts of pension and other post-employment benefit plans recognised in the balance sheet as at 31 December 2005 Great `m Finland Canada Germany USA Britain Other Total Present value of funded obligations 199 235 – 36 289 11 770 Present value of unfunded obligations – 24 306 33 – 49 412 Fair value of plan assets –218 –168 – –35 –198 –6 –625 Unrecognized actuarial gains and losses –15 –34 –29 –11 –92 –9 –190 Unrecognized past service costs – –2 – – – – –2 Net liability –34 55 277 23 –1 45 365
F-148 Group ACCOUNTS FOR 2006
Amounts for the current and previous periods As at 31 December `m 2006 2005 Present value of defined benefit obligations –1,227 –1,182 Fair value of plan assets 681 625 Funded status –546 –557
Experience adjustments on plan liabilities –20 13 Experience adjustments on plan assets 20 21
30 PROVISIONS Closure and Environ- Reforesta- Actual restructuring mental Termination tion Tax emissions, Other `m provisions provisions provisions provisions provisions provision provisions Total At 1 Jan. 2005 29 19 61 4 23 – 41 177 Translation difference 2 – 3 – – – 1 6 Additional provisions and increases to existing provisions 7 10 12 – 1 31 6 67 Utilized during year –13 –1 –22 –1 –1 – –16 –54 Unused amounts reversed – – – – –5 – –1 –6 At 31 Dec. 2005 25 28 54 3 18 31 31 190
At 1 Jan. 2006 25 28 54 3 18 31 31 190 Translation difference –1 –1 – – – – – –2 Additional provisions and increases to existing provisions 7 1 56 8 1 8 3 84 Utilized during year –17 –3 –21 –2 – –25 –12 –80 Unused amounts reversed – – –5 – – – – –5 At 31 Dec. 2006 14 25 84 9 19 14 22 187
Provisions 31.12. Closure and restructuring provisions include charges related primarily to `m 2006 2005 dismantling of closed mills. Environmental provisions include expenses Non-current provisions 125 120 relating to old mill sites and the remediation of industrial landfills. Current provisions 62 70 Termination provisions are concerned with operational restructuring as Total 187 190 well as unemployment arrangements and disability pensions primarily in Finland. 31 INTEREST-BEARING LIABILITIES In 2006, UPM started programme to restore its profitability. The 31.12. programme covers all of the company’s operations and includes both `m 2006 2005 streamlining of operations and closures of uncompetitive production Non-current Interest-bearing liabilities capacity. The programme seeks to achieve a reduction of approximately Bonds 2,244 2,766 3,600 employees. A provision amounting to ` 35 million relating to Loans from financial institutions 550 556 Pension loans 213 406 unemployment, early retirement and termination arrangements was Trade payables 10 11 recognised in 2006. Finance lease liabilities 115 329 The company takes part in government programmes aimed at reduc- Derivative financial instruments 98 95 ing greenhouse gas emissions. In 2006, the Group has recognised a Other liabilities 123 163 provision amounting to ` 14 million (2005: ` 31 million) to cover 3,353 4,326 the obligation to return emission allowances. The company possesses emission allowances worth of ` 16 million (2005: ` 36 million) as Current Interest-bearing liabilities intangible assets. Current portion of long-term debt 521 182 In 2005, mainly restructuring expenses relating to the US and Euro- Short-term loans 105 78 pean sales network for wood products were recognized in closure and Derivative financial instruments 117 66 Other liabilities 1) 249 650 restructuring provisions. 992 976
Total interest-bearing liabilities 4,345 5,302
1) Includes issued commercial papers of ` 203 million in 2006 (2005: ` 599 million).
F-149 ACCOUNTS FOR 2006 Group
Maturity of non-current interest-bearing liabilities `m 2007 2008 2009 2010 2011 2012+ Total Bonds 280 87 249 58 2 1,848 2,524 Loans from financial institutions 59 145 43 26 39 297 609 Pension loans 172 148 42 15 8 – 385 Trade payables 1 1 –11711 Finance lease liabilities 5 5 11 4 84 11 120 Derivative financial instruments – – 1 – 1 96 98 Other liabilities 47343106127 521 393 349 108 138 2,365 3,874
Current portion of long-term debt –521 Non-current interest-bearing liabilities , 3,353
Bonds in interest-bearing liabilities The interest rate ranges of interest-bearing liabilities Interest Currency Nominal As at 31 Dec. As at 31 December rate of value issued 2006 2005 % 2006 2005 % bond m `m `m Loans from financial institutions 3.55–5.77 2.33–5.70 Fixed rate Pension loans 3.65–7.50 3.65–7.50 1997–2007 6.875 USD 215 159 182 Finance lease liabilities 2.70–6.90 2.20–6.90 1997–2007 6.625 EUR 102 105 107 1997–2027 7.450 USD 375 300 349 Fair values of non-current liabilities 1999–2009 6.350 EUR 250 250 263 2000–2030 3.550 JPY 10,000 14 32 As at 31 December `m 2006 2005 2001–2006 0.962 JPY 2,000 – 14 2001–2007 6.875 USD 10 7 9 Carrying Fair Carrying Fair value value value value 2002–2007 0.869 JPY 2,000 12 14 2002–2012 6.125 EUR 600 603 642 Bonds 2,524 2,829 2,779 2,928 2002–2014 5.625 USD 500 350 399 Loans from financial institutions 609 623 631 646 2002–2017 6.625 GBP 250 361 380 Pension loans 385 383 482 500 2003–2018 5.500 USD 250 179 204 3,518 3,835 3,892 4,074 2,340 2,595 Fair values of long-term loans, including the current portion and Floating-rate accrued interests, have been estimated as follows: 2002–2008 4.528 EUR 39 39 39 2002–2008 4.348 EUR 50 50 50 The fair value of the quoted bonds is based on the quoted market 2002–2010 4.350 EUR 59 59 59 value as of December 31. The fair value of fixed rate and market-based 2002–2012 4.155 EUR 25 25 25 floating rate loans is estimated using the expected future payments 2002–2012 4.748 EUR 11 11 11 discounted at market interest rates. 184 184 Bonds, total 2,524 2,779 Interest rate swaps - current portion –280 –13 The Group uses interest rate swap agreements to hedge the interest rate Bonds, long-term portion 2,244 2,766 risk relating to long-term loans. At 31 December, 2006 the fixed interest rates varied from 0.87% to 7.45 (0.87% to 8.0% in 2005) and the floating rates varied from 2.48% Fair value hedge of the long-term interest-bearing liabilities to 7.09% (1.12% to 6.28% in 2005). Fair value hedge accounting in accordance with IAS 39 results in a cumulative fair value adjustment totalling ` 90 million (2005: ` 59 million), which has decreased (2005: increased) the carrying amounts of the liabilities. Accordingly, the positive fair value of the hedging instru- ments excluding accrued interest amounts to ` 68 million (2005: ` 161 million) in assets, and negative fair value of ` 98 million in liabilities (2005: ` 61 million). The carrying amounts of the hedged liabilities and the fair values of the hedging instruments are included in the net interest bearing liabilities. The effect of the fair value hedge ineffectiveness on the income statement was ` 19 million (2005: ` 19 million).
F-150 Group ACCOUNTS FOR 2006
NET INTEREST-BEARING LIABILITIES 32 OTHER LIABILITIES As at 31 December As at 31 December `m 2006 2005 `m 2006 2005 Derivative financial instruments 2 – Interest-bearing liabilities, total 4,345 5,302 Other 11 13 13 13 Interest-bearing financial assets Non-current Loan receivables 5 4 33 TRADE AND OTHER PAYABLES Available-for-sale investments (listed shares) 2 2 As at 31 December Derivative financial instruments 66 159 `m 2006 2005 Other receivables 7 9 Advances received 15 10 80 174 Trade payables 727 691 Current Amounts due to associates and joint ventures 23 19 Loan receivables 6 28 Accrued expenses and deferred income 451 408 Trade receivables – 2 Derivative financial instruments 53 38 Other receivables 6 9 Fine imposed by the EU Commission 1) –57 Derivative financial instruments 6 2 Other current liabilities 130 141 Cash and cash equivalents 199 251 1,399 1,364 217 292 Interest-bearing financial assets 297 466 1) In November 2005 The European Commission has imposed UPM a fine of ` 56.55 million concerning antitrust activities in the market for plastic industrial sacks. Rosenlew’s plastic industrial sack business was sold in December 2000. Net interest-bearing liabilities 4,048 4,836
Finance lease liabilities Main items included in accrued expenses In December 2006, the Group exercised its option and redeemed Kymi and deferred income River power plants which resulted in a decrease of lease liability by As at 31 December ` 126 million. After that the Group has two power plants acquired under `m 2006 2005 sale and leaseback agreement. The Group uses the electrical power Personnel expenses 193 169 generated by this plant in its own production. Payments of this power Interest expenses 28 26 plant are due by the end of 2011. Indirect taxes 21 18 In April 2006, the control over Wisapower Oy was transferred from Other items 1) 209 195 UPM to Pohjolan Voima Oy, decreasing the lease liability by ` 85 mil- 451 408 lion. 1) Consists mainly of customer rebates. In addition the Group leases certain tangible assets under long-term The carrying value of trade and other payables is considered to approxi- arrangements. mate the fair value.
Finance lease liabilities – minimum lease payments As at 31 December `m 2006 2005 34 DERIVATIVE FINANCIAL INSTRUMENTS Not later than 1 year 12 28 1–2 years 12 27 Derivative financial instruments are recorded on the balance sheet at fair 2–3 years 17 27 value, which is defined as the monetary amount for which the instru- 3–4 years 10 153 ments could be exchanged between willing parties in a current trans- 4–5 years 89 15 action, other than in a liquidation or forced sale. Later than 5 years 11 181 The fair values of such financial items have been estimated on the 151 431 following basis: Future finance charges –31 –89 Interest forward rate agreements are fair valued based on quoted Finance lease liabilities – the present value market rates on the balance sheet date. of minimum lease payments 120 342 Forward foreign exchange contracts are fair valued based on the contract forward rates in effect on the balance sheet date. Finance lease liabilities – the present value of minimum lease payments Foreign currency options are fair valued based on quoted market As at 31 December rates on the balance sheet date. `m 2006 2005 Interest and currency swap agreements are fair valued based on Not later than 1 year 11 26 discounted cash flow analyses. 1–2 years 11 25 Commodity derivatives are fair valued based on quoted market rates 2–3 years 14 23 on the balance sheet date. 3–4 years 8 124 4–5 years 68 12 Later than 5 years 8 132 120 342
F-151 ACCOUNTS FOR 2006 Group
Net fair values of derivative financial instruments Group As at 31 December Name of the subsidiary, country of incorporation holding % `m 2006 2006 2006 2005 UPM-Kymmene AB, SE 100,00 Positive Negative fair Net fair Net fair UPM-Kymmene AG, CH 99,80 fair values values values values UPM-Kymmene AS, NO 100,00 UPM-Kymmene Asia Pacific Pte Ltd., SG 100,00 Interest rate swaps 1) 120 –18 102 205 UPM-Kymmene Austria GmbH, AT 100,00 Forward foreign exchange contracts 2) 69 –69 – –37 UPM-Kymmene A/S, DK 100,00 Interest rate options – – – – UPM-Kymmene B.V., NL 100,00 Cross currency swaps 3) 1 –185 –184 –138 OOO UPM-Kymmene Chudovo, RU 100,00 Commodity contracts 3 – 3 1 UPM-Kymmene Forest AS, EE 100,00 193 –272 –79 31 OOO UPM-Kymmene Forest Russia, RU 100,00 UPM-Kymmene France S.A.S., FR 100,00 1) The fair value of interest rate swaps designated for fair value hedges of long-term UPM-Kymmene Inc., US 100,00 borrowings was ` 102 million as at 31 December 2006 (` 208 million as at 31 UPM-Kymmene Japan K.K., JP 100,00 December 2005) and they mature together with the hedged borrowings. UPM-Kymmene Miramichi Inc., CA 100,00 2) The fair value of forward foreign exchange contracts designated as future cash UPM-Kymmene NV/SA, BE 99,60 flow hedges was ` 13 million at 31 December 2006 (` –29 million at 31 Decem- UPM-Kymmene Otepää AS, EE 100,00 ber 2005) and they are reported in fair value and other reserves, net of tax, as ` 18 OOO UPM-Kymmene Pestovo, RU 100,00 million (` –21 million at 31 December 2005) from which they are transferred to UPM-Kymmene Papier GmbH & Co. KG, DE 100,00 income statement at various dates up to 1 year from the Balance sheet date. UPM-Kymmene Sales GmbH, DE 100,00 The fair value of forward foreign exchange contracts designated as hedges of net UPM-Kymmene Seven Seas Oy, FI 100,00 investments in foreign units was ` 0 million at 31 December 2006 (` –5 million at UPM-Kymmene Sp.z o.o., PL 100,00 31 December 2005). They are reported in Translation differences of the Group’s UPM-Kymmene S.r.l., IT 100,00 equity, net of tax, as ` 4 million at 31 December 2006 (` –4 million at 31 Decem- UPM-Kymmene S.A., ES 100,00 ber 2005). UPM-Kymmene Wood AB, SE 100,00 UPM-Kymmene Wood A/S, DK 99,93 3) The fair value of cross currency swaps designated for fair value hedges of long- UPM-Kymmene Wood B.V., NL 100,00 term borrowings was ` –157 million as at 31 December 2006 (` –105 million as at UPM-Kymmene Wood GmbH, DE 100,00 31 December 2005) and they mature together with the hedged borrowings. UPM-Kymmene Wood Ltd, GB 100,00 UPM-Kymmene Wood Oy, FI 100,00 Positive and negative fair values of financial instruments are shown UPM-Kymmene Wood S.A., ES 100,00 under non-current financial assets, trade and other receivables, interest- UPM-Kymmene Wood S.A., FR 99,99 bearing liabilities and trade and other payables. UPM-Kymmene Wood S.r.l., IT, 100,00 UPM-Kymmene (Changshu) Paper Industry Co. Ltd, CN 100,00 Notional amounts of derivative financial instruments UPM-Kymmene (Shanghai) Trading Co., CN 100,00 As at 31 December UPM-Kymmene (UK) Ltd, GB 100,00 `m 2006 2005 UPM Ra atac Canada Inc., CA 100,00 Interest rate swaps 2,566 2,856 UPM Ra atac CZ s.r.o., CZ 100,00 Forward foreign exchange contracts 4,293 4,552 UPM Ra atac GmbH, DE 100,00 Currency options 30 – UPM Ra atac Iberica S.A., ES 100,00 Cross currency swaps 570 588 UPM Ra atac Inc., US 100,00 Commodity contracts 29 54 UPM Ra atac Italia S.r.l., IT 100,00 Interest rate forward contracts 2,500 2,609 UPM Ra atac Kft., HU 100,00 UPM Ra atac Ltd, GB 100,00 UPM Ra atac Mexico S.A. de C.V., ME 100,00 35 PRINCIPAL SUBSIDIARIES AS AT 31 DECEMBER 2006 UPM Ra atac Oy, FI 100,00 Group UPM Ra atac Polska Sp.z o.o., PL 100,00 Name of the subsidiary, country of incorporation holding % UPM Ra atac South Africa (Pty) Ltd, ZA 100,00 UPM Ra atac S.A.S., FR 100,00 Blandin Paper Company, US 100,00 UPM Ra atac Sdn. Bhd., MY 100,00 Oy Botnia Shipping Ab, FI 100,00 UPM Ra atac Pty Ltd, AU 100,00 Lignis GmbH & Co. KG, DE 74,90 UPM Ra atac Co., Ltd, TH 100,00 Nordland Papier GmbH, DE 100,00 Walki Wisa Conver ex AB, SE 51,60 NorService GmbH, DE 100,00 Walki Wisa GmbH, DE 100,00 nortrans Speditionsgesellschaft mbH, DE 100,00 Walki Wisa Ltd, GB 100,00 Ra atac Shanghai Co Ltd, CN 100,00 Walki Wisa Oy, FI 100,00 Oy Rauma Stevedoring Ltd, FI 100,00 Walki Wisa Packaging Paper (Changshu) Co, CN 100,00 STAG-SCA Frischholz GmbH, AT 66,67 Werla Insurance Company Ltd, GB 100,00 Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT 100,00 ZAO Tikhvinsky Komplexny Lespromkhoz, RU 99,36 The table includes subsidiaries with sales exceeding ` 2 million. Tilhill Forestry Ltd, GB 100,00 UPM-Asunnot Oy, FI 100,00 UPM Sähkönsiirto Oy, FI 100,00 UPM Tehdasmittaus Oy, FI 100,00
F-152 Group ACCOUNTS FOR 2006
36 SHARE-BASED PAYMENTS The subscription price for 2005F share options is the average trade- weighted price for the company’s share on the Helsinki Stock Exchange between 1 January and 28 February 2005 plus 10 %, i.e. ` 18.23 per Share options granted to key personnel share. The subscription price for 2005G options is the average trade- As authorized by the Annual General Meeting of 19 March 2002, D and weighted share price between 1 January and 28 February 2006 plus 10 E options have been issued to key personnel. Of these, 3,800,000 are %, i.e. ` 18.65 per share, and that for 2005H options the average trade- designated 2002D and 3,800,000 are designated 2002E. Each option weighted share price between 1 January and 28 February 2007 plus 10 entitles the holder to subscribe two UPM-Kymmene Corporation shares. %. The share subscription prices will be reduced by the amount of The subscription period for 2002D options is 1 April 2004 to 30 April dividend confirmed after the end of the subscription price determination 2007 and that for 2002E options 1 April 2005 to 30 April 2008. period and before the date of share subscription, in each case on the The share subscription price is ` 43.90 per two shares for 2002D options record date for dividend distribution. Share subscriptions based on and ` 14.27 per share for 2002E options. The share subscription prices 2005F, 2005G and 2005H options may raise the share capital by a total will be reduced by the amount of dividend confirmed after the end of maximum of ` 15,300,000. the subscription price determination period and before the date of share subscription, in each case on the record date for dividend distribution. Share subscriptions based on these options may raise the share capital Equity-based rewards scheme by a maximum of ` 25,840,000. Key personnel of the Group who fall within the scope of the equity- The Annual General Meeting held on 31 March 2005 approved the based rewards scheme may be rewarded with UPM-Kymmene shares Board of Directors’ proposal to issue share options to the Group’s key annually in the calendar years 2005, 2006 and 2007. The reward will be personnel. The number of share options is 9,000,000 and these can be paid at the end of each year as a combination of shares and cash. Alto- exercised to subscribe a maximum total of 9,000,000 UPM-Kymmene gether not more than 1,046,400 shares will be given to key personnel on Corporation shares. A total of 3,000,000 of the share options are desig- the basis of the scheme. The amount to be paid in cash may be not more nated 2005F, 3,000,000 2005G and 3,000,000 2005H. The subscription than 1.5 times the value of the shares given. The amount of the reward is periods are 1 October 2006 to 31 October 2008 for 2005F options, 1 tied to the achievement of set performance targets. For 2006, no deci- October 2007 to 31 October 2009 for 2005G options, and 1 October sion for rewards has been made. No rewards were given for 2005. 2008 to 31 October 2010 for 2005H options.
Changes in the numbers of share options granted 2006 2005 2004 Weighted average Number of share Weighted average Number of share Weighted average Number of share exercise price, % options exercise price, % options exercise price, % options 1 Jan. 16.55 10,348,700 16.16 10,792,029 16.55 11,071,700 Share options granted 16.73 6,500 17.48 2,970,500 13.52 330,200 Share options forfeited 16.73 –47,500 17.48 –7,500 16.24 –174,200 Share options exercised 12.02 –2,150 11.47 –3,402 429 11.42 –435,671 Share options expired – – 10.30 –3,900 – – 31 Dec. 15.80 10,305,550 16.55 10,348,700 16.16 10,792,029 Exercisable share options 10,305,550 7,385,700 7,033,829
Weighted average remaining contractual life was 13, 26 and 29 months as at 31 December 2006, 2005 and 2004, respectively.
Outstanding share option plans as at 31 December 2006
Plan/Distribution Exercise price 1) Total number of Number of share Vesting of share options Class at 1 Jan. at 31 Dec. share options options granted Exercise period schedule 2005 F 17.48 16.73 3,000,000 2,922,000 1.10.2006–31.10.2008 Vested 2002/2003 E 12.77 12.02 3,800,000 3,754,050 1.4.2005–30.4.2008 Vested 2002/2002 D 39.40 37.90 3,800,000 3,629,500 1.4.2004–30.4.2007 Vested 10,600,000 10,305,550 1) The exercise price for class D options is for two shares.
F-153 ACCOUNTS FOR 2006 Group
The Black-Scholes valuation model and the following weighted average provided on an arm’s-length basis and upon terms that the Group assumptions are used in measuring the fair value of share options. believes to be customary within the industry and generally no less favourable than would be available from independent third parties. 2006 2005 2004 The Group purchases raw materials from certain associated compa- Share price, % 16.81 16.02 16.03 nies, the most significant of which is Paperinkeräys Oy, a Finnish com- Exercise price, % 16.73 17.48 13.52 pany engaged in the procurement, processing and transport of recovered Volatility 1) 28 % 35 % 32 % paper in which the Group has a 22.98 % interest. The total value of raw Risk-free interest rate 3.03 % 2.26 % 3.28 % material purchases from associated companies was ` 15 million in 2006, Assumed annual dividend yield – – – ` 17 million in 2005 and ` 15 million in 2004. Recovered paper is sold Expected option life, year 3 3 4 to the Group and other shareholders of Paperinkeräys Oy at a contract- based price that takes into account paper recycling expenses and the 1) Volatility is a measure of price changes expressed in terms of the standard devia- world market prices for recovered paper. In Austria, the Group has a tion of the price of the security in question over the period of analysis. In the calculations the volatility is based on three- and four-year periods. Volatility is similar arrangement concerning recovered paper which is purchased reported as an annual percentage figure. from Austria Papier Recycling G.m.b.H., a company in which the Group owns a 33.3 % equity interest. The total value of recovered paper pur- Assumed forfeiture used in 2006 was 0%, 2005 5% and 2004 8 %. chases was ` 12 million in 2006, ` 14 million in 2005 and ` 12 million in 2004. 37 RELATED PARTY TRANSACTIONS In Finland, UPM has a pension foundation (Kymin Eläkesäätiö) which is a separate legal entity. The pensions of about 9 % of the The Group holds a 47 % interest in Oy Metsä-Botnia Ab (“Metsä- Group’s Finnish employees are arranged through the foundation. The Botnia”), a joint venture between M-real Oyj (“M-real”) and Metsäliitto contributions paid by UPM to the foundation amounted to ` 17 million Group. M-real is a Finnish paper producer, and Metsäliitto Group is a in 2006 (` 16 million in 2005 and ` 19 million in 2004). The foundation co-operative organization of Finnish forest owners. Metsäliitto Group is manages and invests the contributions paid to the plan. The fair value of also the controlling shareholder of M-real. Chemical pulp produced by the foundation’s assets at 31 December 2006 was ` 206 million, of Metsä-Botnia is sold to the Group and to M-real at the market price less which 84 % was in the form of loans to the company and 16 % invested certain transportation and other costs. In 2006, 2005 and 2004 the in equities and property. Group’s chemical pulp entitlement with respect to the production of The pensions of about 68% of the Group’s employees in Great Metsä-Botnia was 1.1 million tonnes per year. Total purchases of chemi- Britain are arranged through the Pension Funds. UPM-Kymmene UK cal pulp from Metsä-Botnia amounted to ` 197 million in 2006, ` 201 Pension Scheme is a separate legal entity. The contributions paid by the million in 2005 and ` 238 million in 2004. Metsä-Botnia is currently Group to this fund amounted to GBP 5 million in 2006 (GBP 6 million building a new pulp mill in Uruguay. The total cost of the project is in 2005 and GBP 3 million in 2004). The fair value of the fund’s assets about USD 1.1 billion. The annual capacity of the mill will be approxi- at 31 December 2006 was GBP 131 million, of which 68 % is invested mately one million tonnes of bleached eucalyptus pulp. UPM will invest in equities and 32 % in debt instruments and property. USD 99 million in the pulp mill project. In 2006, related to the pulp mill project. UPM sold its shares in the Uruguayan forestry company, Com- pañia Forestal Oriental S.A. to Metsä-Botnia for ` 36 million. 38 COMMITMENTS AND CONTINGENCIES The Group obtains most of the energy for its production units in Contingent liabilities Finland from the Group’s owned and leased power plants, as well as The Group is a defendant or plaintiff in a number of legal proceedings through ownership in power companies which entitles it to receive incidental to its operations. These lawsuits primarily involve claims electricity and heat from those companies. A significant proportion of arising out of commercial law issues. the Group’s electricity procurement comes from Pohjolan Voima Oy, a The competition authorities are continuing investigations into Finnish energy producer in which the Group holds a 42.19 % equity alleged antitrust activities with respect to various products of the com- interest, and from Kemijoki Oy, a Finnish hydropower producer in pany. The US Department of Justice, the EU authorities and the authori- which the Group holds a 4.13 % equity interest. Pohjolan Voima Oy is ties in several of its Member States, Canada and certain other countries also a majority shareholder in Teollisuuden Voima Oy, one of Finland’s have granted UPM conditional full immunities with respect to certain two nuclear power companies. The combined total of these energy conducts disclosed to the authorities. purchases was ` 194 million in 2006, ` 166 million in 2005 and ` 198 During 2006, the investigations of the U.S. labelstock industry and million in 2004. In accordance with the articles of association of the European fine paper, newsprint, magazine paper, label paper and self- power companies and with related shareholder agreements, the prices adhesive labelstock markets were closed by the U.S. Department of paid by the Group to the power companies are based on production Justice and the European Commission competition author ity. In Decem- costs, which are generally lower than market prices. Internal sales to the ber 2006, the Finnish Competition Authority decided not to propose a Group’s segments are based on the prevailing market price. fine for UPM in its investigation of raw wood procurement in Finland. Approximately 10 to 15 % of the Group’s research and development UPM has been named as a defendant in multiple class-action law- work is conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab suits against labelstock and magazine paper manufacturers in the United (the Finnish Pulp and Paper Research Institute or “FPPRI”), in which States. The remaining litigation matters may last several years. No the Group is one of four corporate owners with a 38.65 % interest. provisions have been made in relation to these investigations. Ownership of FPPRI provides the Group with fundamental research In March 2006, UPM paid a fine of ` 56.55 million imposed by the information regarding the Group’s main raw materials, major manufac- European Commission concerning antitrust activities in the market for turing processes and key product attributes. In addition to joint research plastic sacks but has appealed the decision. at FPPRI, the Group also utilizes the institute for contract research in connection with product and process development. These services are
F-154 Parent Company ACCOUNTS FOR 2006
Commitments Commitments related to associated companies and In the normal course of business, UPM-Kymmene Corporation and joint ventures some of its subsidiaries enter into various agreements providing finan- As at 31 December cial or performance assurance to third parties on behalf of those subsidi- `m 2006 2005 aries. These agreements are entered into primarily to support or enhance the creditworthiness of subsidiaries so that they can accomplish their Proportionate interest in joint ventures’ commitments 22 22 intended business purposes. The maximum amount of future payments Contingent liabilities relating to the Group’s interest for which UPM-Kymmene Corporation is liable on behalf of its subsid- in the joint ventures 10 11 iaries are disclosed in the table below under “Other commitments”. Share of associated companies contingent liabilities 141 169 The Group has also entered into various agreements to provide Operating lease commitments financial or performance assurance to third parties on behalf of certain – where a Group company is the lessee companies in which the Group has a minority interest. These agree- The Group leases office, manufacturing and warehouse space under ments are entered into primarily to support or enhance the creditworthi- various non-cancellable operating leases. Certain contracts contain ness of these companies. The Group has no collateral or other recourse renewal options for various periods of time. provisions related to these guarantees. The maximum amounts of future payments by UPM-Kymmene Corporation on behalf of its associated companies under these guarantees are disclosed in the table below under The future costs for contracts exceeding one year “Guarantees on behalf of associated companies”. It is the Group’s policy and for non-cancellable operating lease contracts not to give guarantees on behalf third parties, and the commitments As at 31 December included under the caption “Guarantees on behalf of others” in the table `m 2006 2005 relate mainly to companies that have been sold. less than 1 year 23 25 In the normal course of business, certain subsidiaries of UPM 1–2 years 25 31 Kymmene Corporation, especially in Germany, grant commercial guar- 2–3 years 17 11 antees to their customers to help them purchase goods from the subsidi- 3–4 years 15 7 ary. The Group has no liability with respect to these commercial guaran- 4–5 years 14 5 tees, but they are covered by its credit risk insurance. These guarantees over 5 years 23 16 117 95 mature within one year. The maximum potential amount of future pay- ments under these guarantees amounted to ` 10 million at 31 December 2006 and ` 6 million at 31 December 2005 They are included in the amounts disclosed in the table under “Other commitments”. Capital commitments at the balance sheet date but not recognized in the financial statements; Commitments major commitments under construction listed below As at 31 December Commitment as at `m 2006 2005 31 December On own behalf `m Total cost 2006 2005 Mortgages 92 94 Pulp mill rebuild, Kymi 325 300 – New mill in USA, Ra atac 88 80 – On behalf of associated companies and New bioboiler, Caledonia 72 72 – joint ventures PM5 quality upgrade, Jämsänkoski 38 38 – Guarantees 12 18 PM4 rebuild, Jämsänkoski 45 34 – On behalf of others Guarantees 6 8 39 EVENTS AFTER THE BALANCE SHEET DATE Other commitments, own Operating leases, due within 12 months 23 25 On 30 January 2007, M-real announced to sell 9% of Metsä-Bonia’s Operating leases, due after 12 months 94 70 shares to its parent company Metsäliitto for ` 240 million. Conse- Other commitments 69 61 quently, M-real reject UPM’s offer made in November 2006 to buy 15% Total 296 276 of Metsä-Botnia’s shares for ` 500 million. The Group’s management is not aware of any other significant events Mortgages 92 94 occurring after 31 December 2006 which would have had an impact on Guarantees 18 26 the financial statements. Operating leases 117 95 Other commitments 69 61 Total 296 276
Property under mortgages given as collateral for own commitments include industrial estates and forest land.
F-155 ACCOUNTS FOR 2006 Parent Company
Parent company accounts (Finnish Accounting Principles, FAS)
PROFIT AND LOSS ACCOUNT FUNDS STATEMENT 1.1.–31.12., `m Note 2006 2005 `m 2006 2005
Turnover (1) 4,499 4,025 Operating activities Increase or decrease in finished goods 36 69 Operating profit 264 445 Production for own use 18 42 Adjustments to operating profit a) 504 129 Other operating income (2) 226 259 Change in working capital b) 98 –211 Raw materials and services Interest paid –187 –167 Raw materials and consumables Dividends received 115 21 Purchases during the financial period –2,204 –2,136 Interest received 95 125 Increase or decrease in stocks –49 44 Other financial items –172 33 External services –333 –287 Taxes paid c) –96 –65 –2,586 –2,379 Net cash from operating activities 621 310 Personnel expenses Wages and salaries (3) –475 –448 Investing activities Social security expenses Pension expenses –117 –79 Investments in tangible and intangible assets –314 –185 Other social security expenses –50 –44 Income from sales of tangible and intangible assets 68 16 –642 –571 Investments in shares and holdings –24 –778 Depreciation and value adjustments (4) Income from sales of shares and holdings 352 395 Depreciation according to plan –353 –359 Increase in other investments –15 –39 Value adjustments to goods held as Decrease in other investments 39 803 non-current assets –133 –5 Net cash used in investing activities 106 212 –486 –364 Other operating costs and expenses –801 –636 Cash flow before financing 727 522 Operating profit 264 445 Financing activities Financial income and expenses Increase in non-current liabilities 350 80 Income from investments held as non-current assets Decrease in non-current liabilities –366 –400 Income from Group companies 100 – Increase or decrease in current receivables –22 –184 Income from participating interest companies 15 21 Increase or decrease in current liabilities –354 377 Interest income from Group companies 39 51 Dividends paid –392 –387 Interest income from other companies 12 Group contributions, received and paid 13 30 Other interest and financial income Other interest income from Group companies 51 61 Purchases of treasury shares – –151 Other interest income from other companies 410Income from exercise of share options –78 Other financial income from Group companies – 203 Net cash used in financing activities –771 –557 Other financial income from other companies 85 – Interest and other financial expenses Cash and cash equivalents Interest expenses paid to Group companies –38 –46 Increase or decrease in cash funds –44 –35 Interest expenses paid to other companies –152 –123 Cash ow from merged companeis 2 – Other financial expenses paid Cash and cash equivalents at 1 Jan. 158 193 to Group companies –79 – Cash and cash equivalents at 31 Dec. 116 158 Other financial expenses paid to other companies –6 –253 20 –74 a) Adjustments to operating profit Profit before extraordinary items 284 371 Depreciation 353 359 Gains and losses on sale of non-current assets 18 –235 Extraordinary items (5) Value adjustments on non-current assets 133 5 Extraordinary income 52 26 Total 504 129 Extraordinary expenses –14 – 38 26 b) Change in working capital Profit before appropriations and taxes 322 397 Stocks 8 –122 Appropriations Current non-interest-bearing receivables 73 –118 Increase or decrease in accumulated Current non-interest-bearing liabilities 17 29 depreciation difference 217 102 Total 98 –211 Income taxes (6) –151 –63 Profit for the financial period 388 436 c) Taxes stemming from extraordinary items and sales of non-current assets are reported here on a net basis.
F-156 Parent Company ACCOUNTS FOR 2006
BALANCE SHEET `m Note 31.12.2006 31.12.2005 `m Note 31.12.2006 31.12.2005
ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders’ equity (11) Intangible assets (7) Share capital 890 890 Intangible rights 64Share premium reserve 776 776 Other capitalized expenditure 220 139 Revaluation reserve 552 554 Advance payments 832Legal reserve 187 187 234 175 Retained earnings 2 937 2,893 Profit for the financial period 388 436 Tangible assets (8) 5,730 5,736 Land and water areas 1,042 1,039 Buildings 523 566 Appropriations Machinery and equipment 1 600 1,757 Accumulated depreciation difference 1,211 1,427 Other tangible assets 47 52 Advance payments and construction Provisions (12) in progress 98 102 Provisions for pensions 60 33 3,310 3,516 Other provisions 28 18 88 51 Investments (9) Holdings in Group companies 4,078 4,465 Liabilities Receivables from Group companies 985 1,054 Non-current (13) Holdings in participating interest companies 630 654 Bonds 2,324 2,630 Receivables from participating interest Loans from financial institutions 338 198 companies –4Pension loans 205 391 Other shares and holdings 177 181 Payables to Group companies 31 31 Other receivables 724Other liabilities 134 151 5,877 6,382 3,032 3,401 9,421 10,073 Current (14) Current assets Bonds 184 14 Stocks Loans from financial institutions 212 Raw materials and consumables 194 243 Pension loans 167 71 Finished products and goods 266 229 Advances received 42 Advance payments 40 36 Trade payables 218 201 500 508 Payables to Group companies 804 780 Payables to participating interest Receivables companies 22 17 Current (10) Other liabilities 287 749 Trade receivables 54 145 Accruals and deferred income 243 220 Receivables from Group companies 1,827 1,678 1,931 2,066 Receivables from participating interest companies 99 4,963 5,467 Loan receivables –8 Other receivables 44 54 Prepayments and accrued income 21 48 1,955 1,942
Cash and cash equivalents 116 158 2,571 2,608
Total assets 11,992 12,681 Total equity and liabilities 11,992 12,681
F-157 ACCOUNTS FOR 2006 Parent Company Notes to the parent company financial statements (All amounts in millions of euros unless otherwise stated.)
1 TURNOVER 6 INCOME TAXES Owing to the corporate structure of the Group, the turnover of the pa- `m 2006 2005 rent company has not been broken down by division and market. Taxes on business income for the financial period 151 64 Income taxes from previous periods – –1 151 63 2 OTHER OPERATING INCOME `m 2006 2005 Gains on sale of non-current assets 207 245 Deferred tax liabilities and assets Income from rents 10 10 Deferred tax liabilities and receivables for the parent company are not Sales of emission allowances 1) 83recorded on the balance sheet. Other 1 1 Deferred tax liability comprises mainly depreciation differences, for 226 259 which the deferred tax liability at 31 December 2006 was ` 315 million (371 million). 1) Emissions trading rights are accounted for on a net basis. Deferred tax liability is not stated separately for revaluations. Applying a tax rate of 26%/ to the amount of the revaluations, the poten- 3 PERSONNEL EXPENSES tial tax liability arising from the sale of revalued assets is ` 185 million `m 2006 2005 (185 million). Wages and salaries Managing director and members of the Board of Directors 2) 227 INTANGIBLE ASSETS Other wages and salaries 473 446 `m 2006 2005 475 448 Intangible rights 2) See notes to the consolidated accounts, note 7. Acquisition cost at 1 Jan. 11 11 Increases 9 – – Loans to company directors Decreases –6 At 31 December 2006, the company’s Managing Director and members Acquisition cost at 31 Dec. 14 11 of the Board of Directors had no loans outstanding from the company or Accumulated depreciation at 1 Jan. –7 –6 Depreciation for the period –1 –1 its subsidiaries. Accumulated depreciation at 31 Dec. –8 –7 Book value at 31 Dec. 6 4 4 DEPRECIATION ACCORDING TO PLAN AND VALUE ADJUSTMENTS Other capitalized expenditure `m 2006 2005 Acquisition cost at 1 Jan. 275 237 Depreciation according to plan Increases 112 38 Intangible rights 1 1 Decreases –24 –5 Other capitalized expenditure 31 29 Transfers between balance sheet items 5 5 Buildings 38 38 Acquisition cost at 31 Dec. 368 275 Machinery and equipment 276 284 Accumulated depreciation at 1 Jan. –136 –109 Other tangible assets 7 7 Accumulated depreciation on decreases and transfers 23 5 353 359 Depreciation for the period –31 –29 Value adjustments and their cancellations –4 –3 Value adjustments Accumulated depreciation at 31 Dec. –148 –136 Non-current assets 133 5 Book value at 31 Dec. 220 139 486 364
Advance payments 5 EXTRAORDINARY ITEMS Acquisition cost at 1 Jan. 32 67 Decreases –20 –31 `m 2006 2005 Transfers between balance sheet items –4 –4 Extraordinary income Book value at 31 Dec. 8 32 Group contributions 51 26 Gains on mergers 1 - 52 26
Extraordinary expenses Losses on mergers –14 –
38 26 During the period, Jämsänkosken Voima Oy, Kokemäenjoen Voima Oy and Tyrvään Voimaosakeyhtiö have been merged to the parent company.
F-158 Parent Company ACCOUNTS FOR 2006
8 TANGIBLE ASSETS 9 INVESTMENTS `m 2006 2005 `m 2006 2005 Land and water areas Holdings in Group companies Acquisition cost at 1 Jan. 492 486 Acquisition cost at 1 Jan. 4,744 3,967 Increases 5 7 Increases 27 772 Decreases –2 –1 Decreases –186 –21 Acquisition cost at 31 Dec. 495 492 Transfers between balance sheet items – 26 Revaluations at 1 Jan. 547 547 Acquisition cost at 31 Dec. 4,585 4,744 Revaluations at 31 Dec. 547 547 Accumulated depreciation at 1 Jan. –281 –281 Book value at 31 Dec. 1,042 1,039 Value adjustments and their cancellations –226 – Accumulated depreciation at 31 Dec. –507 –281 Buildings Revaluations at 1 Jan. 2 2 Acquisition cost at 1 Jan. 1,104 1 100 Reversal of revaluation 1.1.-31.12 –2 – Increases 27 8 Revaluations at 31 Dec. – 2 Decreases –75 –10 Book value at 31 Dec. 4,078 4,465 Transfers between balance sheet items 12 6 Acquisition cost at 31 Dec. 1,068 1,104 Receivables from Group companies Accumulated depreciation at 1 Jan. –538 –510 Acquisition cost at 1 Jan. 1,054 1,753 Accumulated depreciation on decreases and transfers 63 10 Increases 16 60 Depreciation for the period –38 –38 Decreases –85 –786 Value adjustments and their cancellations –32 – Transfers between balance sheet items – 27 Accumulated depreciation at 31 Dec. –545 –538 Book value at 31 Dec. 985 1,054 Book value at 31 Dec. 523 566 Holdings in participating interest companies Machinery and equipment Acquisition cost at 1 Jan. 551 574 Acquisition cost at 1 Jan. 5,660 5,672 Increases 12 5 Increases 175 69 Decreases –36 –23 Decreases –448 –119 Transfers between balance sheet items – –5 Transfers between balance sheet items 72 38 Acquisition cost at 31 Dec. 527 551 Acquisition cost at 31 Dec. 5,459 5,660 Revaluations at 1 Jan. 103 103 Accumulated depreciation at 1 Jan. –3,903 –3,732 Revaluations at 31 Dec. 103 103 Accumulated depreciation on decreases and transfers 414 115 Book value at 31 Dec. 630 654 Depreciation for the period –276 –284 Value adjustments and their cancellations –94 –2 Receivables from participating interest companies Accumulated depreciation at 31 Dec. –3,859 –3,903 Acquisition cost at 1 Jan. 4 11 Book value at 31 Dec. 1,600 1,757 Increases – 32 Transfers between balance sheet items –4 –39 Other tangible assets Book value at 31 Dec. – 4 Acquisition cost at 1 Jan. 172 169 Increases 2 3 Other shares and holdings – Decreases –10 Acquisition cost at 1 Jan. 120 242 Transfers between balance sheet items 3 – Increases – 1 Acquisition cost at 31 Dec. 167 172 Decreases –4 –123 Accumulated depreciation at 1 Jan. –120 –113 Acquisition cost at 31 Dec. 116 120 Accumulated depreciation on decreases and transfers 10 – Revaluations at 1 Jan. 61 61 Depreciation for the period –7 –7 Revaluations at 31 Dec. 61 61 – Value adjustments and their cancellations –3 Book value at 31 Dec. 177 181 Accumulated depreciation at 31 Dec. –120 –120 Book value at 31 Dec. 47 52 Other receivables Acquisition cost at 1 Jan. 24 47 Advance payments and construction in progress Decreases –21 –23 Acquisition cost at 1 Jan. 102 58 Transfers between balance sheet items 4 – Increases 84 89 Book value at 31 Dec. 7 24 Transfers between balance sheet items –88 –45 Book value at 31 Dec. 98 102 The principal subsidiaries are listed in the Consolidated Financial State- mets (Note 35).
F-159 ACCOUNTS FOR 2006 Parent Company
10 CURRENT RECEIVABLES `m 2006 2005 M% 2006 2005 Trade receivables 539 582 Receivables from Group companies Loan receivables 1,278 1,250 Trade receivables 478 431 Other receivables 44 54 Loan receivables 1,276 1,240 Prepayments and accrued income 94 56 Prepayments and accrued income 73 7 1,955 1,942 1,827 1,678
Main items included in current Receivables from participating interest companies prepayments and accrued income Trade receivables 7 6 Personnel expenses 2 9 Loans receivables 2 2 Interest income 17 17 Prepayments and accured income – 1 Currency derivatives 66 – 99 Income taxes – 18 Others 9 12 94 56
11 SHAREHOLDERS’ EQUITY Share Shareholders’ Share Share premium Revaluation Legal Retained equity, `m capital issue reserve reserve reserve earnings total
Balance sheet value, 1 Jan. 2005 891 1 695 554 187 3 420 5 748 Share options 12 –1 68 – – – 79 Treasury shares 1) –13 – 13 – – –140 –140 Dividends paid – – – – – –387 –387 Profit for the period – – – – – 436 436 Balance sheet value, 31 Dec. 2005 890 – 776 554 187 3 329 5 736
Revaluations – – – –2 – – –2 Dividends paid – – – – – –392 –392 Profit for the financial period – – – – – 388 388 Balance sheet value, 31 Dec. 2006 890 – 776 552 187 3 325 5 730
1) See notes to the consolidated accounts, note 27.
13 NON-CURRENT LIABILITIES `m 2006 2005 `m 2006 2005 Distributable funds at 31 Dec. Bonds 2,324 2,630 Retained earnings 2,937 2,893 Loans from financial institutions 338 198 Profit for the financial period 388 436 Pension loans 205 391 Distributable funds at 31 Dec. 3,325 3,329 Other liabilities 165 182 3,032 3,401 12 PROVISIONS `m 2006 2005 Payables to Group companies Provisions for pensions 60 33 Other liabilities 31 31 Environmental provisions 12 15 31 31 Provisions for closures and restructurings 12 – Other provisions 4 3 Long-term loans and their repayment schedule 88 51 In 2007–2010 / 2006–2009 Bonds 398 676 Loans from financial institutions 80 133 Pension loans 205 196 Payables to Group companies 31 31 714 1,036 In 2011 / 2010 or later Bonds 1,926 1 954 Loans from financial institutions 258 65 Pension loans – 195 Other liabilities 134 151 2,318 2,365
Total at 31 Dec. 3,032 3,401
F-160 ACCOUNTS FOR 2006 Parent Company Parent Company ACCOUNTS FOR 2006
Bonds 15 CONTINGENT LIABILITIES Initial amount `m 2006 2005 Interest, % million 2006 2005 Mortgages 1) Fixed-rate As security against own debts 60 62 1997–2007 6.875 USD 215 163 182 1997–2027 7.450 USD 375 285 318 Guarantees 1999–2009 6.350 EUR 250 250 250 Guarantees for loans 2000–2030 3.550 JPY 10,000 64 72 On behalf of Group companies 1,049 1,109 2001–2006 0,962 JPY 2,000 - 14 On behalf of participating 12 18 2001–2007 6.875 USD 10 7 9 Other guarantees 2002–2007 0.869 JPY 2,000 13 14 On behalf of Group companies 87 92 2002–2012 6.125 EUR 600 600 600 On behalf of others 2 3 2002–2014 5.625 USD 500 380 424 2002–2017 6.625 GBP 250 372 365 Leasing commitments 2) 2003–2018 5.500 USD 250 190 212 Commitments for next year 2 4 2,324 2,460 Commitments for subsequent years 9 14
Floating-rate 2002–2008 4,538 EUR 39 39 39 1) 2002–2008 4,348 EUR 50 50 50 The mortgages given relate mainly to reborrowing of statutory employment pension contributions. 2002–2010 4,350 EUR 59 59 59 2002–2012 4,155 EUR 25 25 25 2) UPM-Kymmene Corporation has also leased certain power plants under long-term 2002–2012 4,748 EUR 11 11 11 agreements and uses the electrical power generated by these plants in its produc- 184 184 tion. The company has the right, but not the obligation, to purchase these power plants or shares therein. Leasing commitments are ` 6 million in 2007 and sub- Bonds, total 2,508 2,644 sequently ` 22 million up to 2011. UPM-Kymmene estimates that the market value – current portion –184 –14 of these agreements exceeds the above commitments. Bonds, long-term portion 2,324 2,630 Directors’ pension commitments The Managing Director’s agreed retirement age is 60 years. 14 CURRENT LIABILITIES `m 2006 2005 Derivate contracts Bonds 184 14 Interest rate derivatives are included under interest expenses during the Loans from financial institutions 2 12 Pension loans 167 71 period of validity of the contracts. Currency derivates are included in Advances received 7 2 the financial result at market value except for those relating to net cur- Trade payables 292 268 rency flows, which are entered in the profit and loss account as the cash Other liabilities 917 1,357 flow is credited or debied. The outcomes of other derivates are entered Accruals and deferred income 362 342 in the profit and loss account as the cash flow is credited or debited. Fair 1 931 2,066 values and notional values are disclosed in the consolidated Financial Statements (Note 34). Main items included in current accruals and deferred income Emission allowances Personnel expenses 86 82 Interest expenses 17 17 The actual tonnage of emissions was less than the emission allowances Income tax 5 – received as of 31 December 2006, so the corresponding off-balance- Currency derivatives 244 231 sheet asset was ` 1 million (` 3 million). Others 10 12 362 342
Payables to Group companies Advances received 3 – Trade payables 52 50 Other liabilities 630 608 Accruals and deferred income 119 122 804 780
Payables to participating interest companies Trade payables 22 17 22 17
F-161 UPM Information on shares Information on shares
Changes in number of shares and share capital, 1 January 2002 – 31 December 2006
Number of Share shares capital, %
2001 Share capital at 31 Dec. 2001 259,893,223 441,818,479.10
2002 Own shares declared void –1,175,398 –1,998,176.60 Exchanged under convertible bond issue (1994) 1,398,150 2,376,855.00 Share capital at 31 Dec. 2002 260,115,975 442,197,157.50
2003 Exchanged under convertible bond issue (1994) 1,673,490 2,844,933.00 Bonus share issue (1:1) 261,789,465 445,042,090.50 Share capital at 31 Dec. 2003 523,578,930 890,084,181.00
2004 Options exercised 741,322 1,260,247.40 Share capital at 31 Dec. 2004 524,320,252 891,344,428.40
2005 Options exercised 6,934,878 11,789,292.60 Own shares declared void –8,000,000 –13,600,000.00 Share capital at 31 Dec. 2005 523,255,130 889,533,721.00
2006 Options exercised 4,300 7,310,00 Share capital 31 Dec. 2006 523,259,430 889,541,031,00
Stock exchange trading sponding figures for 2005 were USD 338 million and 16.5 million The company’s shares are listed on the Helsinki and New York stock shares.The company’s shares are also traded on SEAQ International exchanges. in London, and in Germany on the Freier Markt in Frankfurt, Berlin A total of 876.0 million UPM-Kymmene Corporation shares and Munich. were traded on the Helsinki Stock Exchange in 2006 (697.2 million in 2005). This represented 167.4% (133.6%) of the total number of Directors’ interest at 31 December 2006 shares. The highest quotation was ` 20.91 in March and the lowest ` At the end of the year, the members of the Board of Directors and the 15.36 in June. The total value of shares traded was ` 16,021 million President and CEO owned a total of 801,382 shares UPM-Kymmene in 2006 (` 11,358 million in 2005). During the year, 10.0 million Corporation shares (1,015,242 in 2005), including those held by 2002D share options were traded for ` 27.3 million (1.1 million and underage children or by organisations or foundations of which the ` 1.7 million) and 3.8 million 2002E options for ` 51.9 million (1.5 holder has control. These represent 0.15% of the share capital million and ` 13.6 million). A total of 0.2 million share options (0.19%) and 0.15% of the voting rights (0.19%). At the end of the 2005F were traded for ` 0.9 million as of the beginning of the listing year, President and CEO Jussi Pesonen owned 170,000 share op- of 1 October 2006. tions. Exercise of these options would increase the number of the Trading in the company’s shares on the New York Stock companys’s shares by 290,000, which at 31 December 2006 would Exchange was USD 310 million (13.7 million shares). The corre- have represented 0.06% of the company’s share capital and voting rights.
F-162 Information on shares UPM
Biggest registered shareholders at 31 December 2006
Shares at % of % of 31 Dec. 2006 shares votes
Holzhey/Bischoff group (representing 10 shareholders) 9,647,704 1.84 1.84
IImarinen Mutual Pension Insurance Company 8,803,144 1.68 1.68
Gustaf Serlachius (representing 5 shareholders) 6,309,811 1.21 1.21
Svenska litteratursällskapet i Finland 3,544,070 0.68 0.68
Varma Mutual Pension Insurance Company 3,499,540 0.67 0.67
The State Pension Fund 3,150,000 0.60 0.60
Etera Mutual Pension Insurance Company 2,122,700 0.41 0.41
Mutual Insurance Company Pension Fennia 2,027,316 0.39 0.39
Kymin Osakeyhtiön 100-vuotissäätiö 1,885,482 0.36 0.36
The Finnish Cultural Foundation 1,743,816 0.33 0.33
Nominees & registered foreign owners 361,054,994 69.00 69.00 (including Holzhey/Bischoff) (370,702,698) (70.84) (70.84)
Others 119,470,853 22.83 22.83
Total 523,259,430 100.00 100.00
The company has received following notifications from shareholders: On 15 December 2006, the Capital Group Companies Inc. held 51,660,753 shares representing 9.78 per cent of share capital, of which shares it held voting rights representing 7.86 per cent of the share capital of UPM-Kymmene Corporation. On 7 March 2005, the Franklin Templeton Group and its affiliated investment advisers of Franklin Resources held 10.11% of the voting rights of UPM- Kymmene Corporation.
F-163 UPM Information on shares
Share price in 2006 Market capitalization Monthly average share price and shares traded 1–12/2006
` M% % % of all shares 22 22 10,000 30 30
20 20 8,000 25 25 20 20 18 18 6,000 15 15 16 16 4,000 10 10 14 2,000 14 5 5
12 12 0 0 0 1 2 3 4 5 6 7 8 9 10 11 12 02 03 04 05 06 1 2 3 4 5 6 7 8 9 101112
Monthly average share price, % Shares traded, %
Share price 2002–2006 Earnings and dividend Shareholders’ equity per share per share
` ` ` 25 25 2.5 15
20 20 2.0 12
15 15 1.5 9
10 10 1.0 6
5 5 0.5 3
0 0 0.0 0 2002 2003 2004 2005 2006 02 03 04 05 06 02 03 04 05 06
UPM share price at end of month Earnings per share MSCI (Morgan Stanley Capital International) Dividend per share (2006: proposal) Forest Products & Paper World Index
Shares traded on Helsinki Stock Exchange 2002–2006 Dividend per share (`) and dividend to earnings ratio (%)
M` % ` % 3,500 30 1.25 150
2,800 25 1.00 120
2,100 20 0.75 90
1,400 15 0.50 60
700 10 0.25 30
0 5 000 0 2002 2003 2004 2005 2006 02 03 04 05 06
Monthly trading in UPM shares on Helsinki Stock Exchange, `m Dividend per share (2006: proposal) Trading in UPM shares as % of total number of shares Dividend to earnings ratio, %
F-164 UPM Information on shares Information on shares UPM
Distribution of shareholders at 31 December 2006
Number of % of Number of % of Size of shareholding shareholders shareholders shares, million shares
1 – 100 13,675 21.33 0.8 0.2 101 – 1,000 35,866 55.95 14.8 2.8 1,001 – 10,000 13,218 20.62 36.9 7.0 10,001 – 100,000 1,204 1.88 29.9 5.7 100,001 – 139 0.22 74.0 14.2 Total 64,102 100.00 156.4 29.9
Nominee-registered 366.7 70.1 Not registered as book entry units 0.2 0.0 Total 523.3 100.0
Shareholder breakdown by sector at 31 December, %
2006 2005 2004 2003 2002
Companies 1,8 2,8 3,1 4,4 2,5 Financial institutions and insurance companies 2,1 3,5 2,8 3,2 4,8 Public bodies 5,2 5,8 6,4 6,9 6,0 Non-profitmaking organizations 6,1 6,7 7,0 6,8 6,3 Households 13,5 15,4 15,6 15,3 13,2 Non-Finnish nationals 71,3 65,8 65,1 63,4 67,2 Total 100,0 100,0 100,0 100,0 100,0
UPM’s share option programmes
Redemption price per share Number of Number of at date of issue at 31.12.2006 Options exercised Options options shares %* `* Subsciption period 2006
2002 D 3,800,000 7,600,000 21.95 18.95 1.4.2004–30.4.2007 – 2002 E 3,800,000 7,600,000 14.27 12.02 1.4.2005–30.4.2008 2,150 2005 F 3,000,000 3,000,000 18.23 16.73 1.10.2006–31.10.2008 –
* corrected for 2003 bonus issue
F-165 ACCOUNTS FOR 2006 Key indicators Key figures 1997–2006
Adjusted share-related indicators 1997–2006 1) 6)
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Earnings per share, % (diluted 2006: 0.65) 0.65 0.50 1.76 0.60 0.96 1.93 2.38 1.88 1.91 1.31 Shareholders’ equity per share, % 13.90 14.01 14.46 13.36 13.85 13.09 11.72 10.23 9.48 8.20 Dividend per share, % 4) 3) 0.75 0.75 0.75 0.75 0.75 0.75 0.75 1.08 0.55 0.46 Dividend to earnings ratio, % 4) 115.4 150.0 42.6 125.0 78.1 39.0 31.4 57.0 28.6 35.4 Effective dividend yield, % 4) 3.9 4.5 4.6 5.0 4.9 4.0 4.1 5.4 4.6 5.0 P/E ratio 29.4 33.1 8.9 24.8 15.9 9.7 7.7 10.6 6.3 7.0 Cash ow from operations per share, % 2.32 1.63 1.90 2.40 2.73 3.32 3.19 2.39 – – Dividend distribution, %m 4) 3) 392 392 393 393 390 388 371 557 290 249 Share price at 31 Dec., % 19.12 16.56 16.36 15.12 15.30 18.63 18.28 20.00 11.94 9.17 Market capitalization, %m 10,005 8,665 8,578 7,917 7,960 9,681 9,502 10,663 6,630 4,957 Shares traded, %m 5) 16,021 11,358 9,731 9,11710,827 7,645 6,157 4,834 3,374 3,125 Shares traded (1,000s) 876,023 697,227 625,950 645,988 597,078 443,240 400,822 316,874 294,070 302,108 Shares traded, % of all shares 167.4 133.6 119.5 123.4 115.1 88.1 77.2 59.0 53.4 56.2 Lowest quotation, % 15.36 15.05 14.44 11.05 12.61 14.00 12.46 11.00 8.41 7.91 Highest quotation, % 20.91 18.15 17.13 17.10 22.25 19.93 22.45 21.25 14.63 12.82 Average quotation for the period, % 18.29 16.29 15.55 14.11 18.13 17.24 15.36 15.25 11.47 10.34 Number of shares, average (1,000s) 523,220 522,029 523,641 523,130 518,935 495,784 513,634 528,035 539,445 537,775 Number of shares at end of period (1,000s) 523,259 523,093 524,450 523,579 520,232 517,436 501,295 518,062 529,688 540,778
Share prices and shares traded are based on trading on the Helsinki Stock Exchange.
Notes to the tables on page F-108 - F-109. 1) Figures for 2002–2006 are reported in accordance with International Financial Reporting Standards (IFRS) and for 1997–2001 in accordance with Finnish Accounting Standards (FAS). More information on the effects of the transition on the balance sheet and income statement is given in the bulletin released on 24.3.2004. The bulletin is available on UPM’s Internet pages at www.upm-kymmene.com. 2) Includes the Rauma engineering group and Simpele’s board and packaging unit. 3) Proposal.
4) The 1999 figure includes an extra dividend payment of % 0.45. 5) Trading on the Helsinki Stock Exchange. Own shares bought by the company are included in shares traded. 6) Figures reported in Finnish markka for the years 1997–1998 have been converted into euros using the official conversion rate, 1 euro = 5.94573 markka.
F-166 Key indicators ACCOUNTS FOR 2006
Financial indicators 1997–2006 1) 6)
%m 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Sales 10,022 9,348 9,820 9,787 10,417 9,918 9,583 8,261 8,365 7,776 Sales, businesses disposed of 2) – – – – –––––702 Sales, total 10,022 9,348 9,820 9,787 10,417 9,918 9,583 8,261 8,365 8,478 EBITDA 1,678 1,428 1,435 1,442 1,957 2,055 2,081 1,576 1,629 1,374 % of sales 16.7 15.3 14.6 14.7 18.8 20.7 21.7 19.1 19.5 16.2 Operating profit, excluding non-recurring items 725 558 470 429 963 1,394 1,560 976 1,067 877 % of sales 7.2 6.0 4.8 4.4 9.2 14.1 16.3 11.8 12.8 10.3 Operating profit 536 318 685 368 861 1,614 1,860 1,573 1,620 1,242 % of sales 5.3 3.4 7.0 3.8 8.3 16.3 19.4 19.0 19.4 14.7 Profit before tax 367 257 556 425 710 1,333 1,859 1,398 1,437 937 % of sales 3.7 2.7 5.7 4.3 6.8 13.4 19.4 16.9 17.2 11.1 Profit for the period 338 261 920 312 500 955 1,366 994 1,029 703 % of sales 3.4 2.8 9.4 3.2 4.8 9.6 14.3 12.0 12.3 8.3 Exports from Finland and foreign operations 9,102 8,397 8,791 8,697 9,475 8,948 8,563 7,165 7,219 6,522 Exports from Finland 4,644 4,006 4,301 4,539 4,759 4,635 5,216 4,873 4,571 4,152
Non-current assets 11,355 12,321 12,802 13,509 14,336 12,874 10,163 8,741 8,802 8,530 Inventories 1,255 1,256 1,138 1,144 1,224 1,289 1,184 1,008 1,054 1,047 Other current assets 1,859 1,964 1,887 1,938 2,064 2,368 1,766 1,831 1,593 1,827 Assets, total 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449 11,404
Shareholders’ equity and minority 7,289 7,348 7,612 7029 7,237 6,838 6,175 5,558 5,335 4,565 Non-current liabilities 4,770 5,845 5,943 7,322 8,104 5,992 4,564 3,830 3,731 3,872 Current liabilities 2,410 2,348 2,272 2,240 2,283 3,601 2,374 2,192 2,383 2,967 Equity and liabilities, total 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449 11,404
Capital employed at year end 11,634 12,650 12,953 12,811 13,689 13,519 10,448 9,004 9,319 9,371 Return on equity, % 4.6 3.5 12.6 4.4 6.8 15.5 21.9 19.2 21.8 16.6 Return on capital employed, % 4.7 3.4 6.0 5.1 7.4 15.6 20.2 17.6 18.0 13.4 Equity to assets ratio, %, % 50.4 47.3 48.2 42.5 41.1 41.5 46.0 47.0 45.3 40.1 Gearing ratio, % 56 66 61 69 71 89 69 55 74 93 Net interest-bearing liabilities 4,048 4,836 4,617 4,874 5,135 6,041 4,071 2,940 3,739 4,252 Gross capital expenditure 699 749 686 720 620 3,850 2,175 609 696 1,418 % of sales 7.0 8.0 7.0 7.4 6.0 38.8 22.7 7.4 8.3 16.7 Gross capital expenditure excluding acquisitions 631 705 645 703 568 827 571 548 539 578 % of sales 6.3 7.5 6.6 7.2 5.5 8.3 6.0 6.6 6.4 6.8 Personnel at year end 28,704 31,522 33,433 34,482 35,579 36,298 32,755 30,963 32,351 33,814
Production
Papers, total (1,000 t) 11,151 10,223 10,886 10,232 10,046 8,298 8,285 7,494 7,499 7,198 Plywood (1,000 m3) 955 916 969 936 905 786 793 729 698 710 Sawn timber (1,000 m3) 2,357 2,147 2,409 2,408 2,201 2,035 2,117 1,911 2,104 2,050 Pulp (1,000 t) 2,095 1,840 2,243 2,027 2,102 2,038 1,965 1,846 1,913 1,963
Formulaes for calculating indicators are given on page F-111.
F-167 ACCOUNTS FOR 2006 Key indicators
Quarterly figures 2005–2006
`m Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05 Q1–Q4 /06 Q1–Q4 /05 Q1–Q4 /04
Sales by segment Magazine Papers 905 861 817 771 928 726 697 743 3,354 3,094 3,308 Newsprint 380 360 351 345 379 296 320 313 1,436 1,308 1,304 Fine and Speciality Papers 667 626 627 640 626 574 495 539 2,560 2,234 2,286 Converting 323 312 316 323 297 343 346 361 1,274 1,347 1,414 Wood Products 287 310 378 346 331 302 343 314 1,321 1,290 1,492 Other Operations 162 143 126 140 133 111 136 137 571 517 538 Internal sales –141 –117 –131 –105 –120 –109 –84 –129 –494 –442 –522 Sales, total 2,583 2,495 2,484 2,460 2,574 2,243 2,253 2,278 10,022 9,348 9,820
Operating profit by segment Magazine Papers 75 –62 –85 16 –99 35 –43 31 –56 –76 –67 Newsprint 39 50 34 25 20 27 12 18 148 77 7 Fine and Speciality Papers 44 50 –13 27 20 36 –17 46 108 85 171 Converting 16 12 17 19 8 36 6 20 64 70 71 Wood Products 14 104 22 4 –23 –2 14 17 144 6 111 Other Operations 50 1 –37 53 2 33 40 40 67 115 334 Share of results of associated companies and joint ventures 9 18 8 26 14 15 –19 31 61 41 58 Operating profit (loss), total 247 173 –54 170 –58 180 –7 203 536 318 685 % of sales 9.6 6.9 –2.2 6.9 –2.3 8.0 –0.3 8.9 5.3 3.4 7.0 Gains on available-for-sale investments, net –2 –––––189–2901 Exchange rate and fair value gains and losses 4 –3 5 12 – 14 –15 –3 18 –4 48 Interest and other finance costs, net –46 –41 –52 –46 –33 –45 –29 –40 –185 –147 –178 Profit (loss) before tax 203 129 –101 136 –91 149 –50 249 367 257 556 Income taxes –8 18 –2 –37 14 –38 72 –44 –29 4 364 Profit (loss) for the period 195 147 –103 99 –77 111 22 205 338 261 920
Basic earnings per share, ` 0.37 0.29 –0.20 0.19 –0.15 0.21 0.05 0.39 0.65 0.50 1.76 Diluted earnings per share, ` 0.38 0.28 –0.20 0.19 –0.15 0.21 0.05 0.39 0.65 0.50 1.75 Average number of shares basic (1,000) 523,258 523,256 523,256 523,108 523,105 523,115 521,617 520,281 523,220 522,029 523,641 Average number of shares diluted (1,000) 526,416 525,938 525,874 525,936 524,703 524,710 522,131 523,065 526,041 523,652 526,247
Non-recurring items in operating profit Magazine Papers 6 –126 –133 – –156 –17 – – –253 –173 –104 Newsprint –2 – –5 – –5 – – – –7 –5 2 Fine and Speciality papers –3 –2 –36 – –8 – – – –41 –8 3 Converting ––––125–––262 Wood Products – 93 – –10 –32 – – – 83 –32 83 Other Operations –6 –1 41 –5 –57 – – – 29 –57 219 Share of results of associated companies and joint ventures –––––3––12– 910 Non-recurring items in operating profit, total –5 –36 –133 –15 –260 8 – 12 –189 –240 215 Non-recurring items reported after operating profit 6–––9––89698– Non-recurring items reported in taxes 35 20 –29 – –16 – 58 – 26 42 519 Non-recurring items, total 36 –16 –162 –15 –267 8 58 101 –157 –100 734
Operating profit, excl. non-recurring items 252 209 79 185 202 172 –7 191 725 558 470 % of sales 9.8 8.4 3.2 7.5 7.8 7.7 –0.3 8.4 7.2 6.0 4.8 Profit before tax, excl. non-recurring items 202 165 32 151 160 141 –50 148 550 399 341 % of sales 7.8 6.6 1.3 6.1 6.2 6.3 –2.2 6.5 5.5 4.3 3.5 Earnings per share, excl. non-recurring items, ` 0.30 0.25 0.04 0.21 0.22 0.19 –0.07 0.20 0.80 0.54 0.49 Return on equity, excl. non-recurring items, % 8.7 7.2 1.1 6.1 5.9 5.3 neg. 5.6 5.7 3.8 3.4 Return on capital employed, excl. non-recurring items, % 8.7 7.1 2.7 6.4 6.5 6.0 neg. 6.1 6.2 4.5 4.3
F-168 Key indicators ACCOUNTS FOR 2006 Calculation of key indicators
Formulae for calculation Formulae for calculation of financial indicators of adjusted share-related indicators
Return on equity, %: Earnings per share: Profit before tax 2) – income taxes x 100 Profit for the period attributable to equity holders Shareholders’ equity (average) of parent company 3) Adjusted average number of shares during the pe- Return on capital employed, %: riod excluding own shares Profit before tax 2) + interest expenses and other financial expenses x 100 Shareholders’ equity per share: Balance sheet total – non-interest-bearing Shareholders’ equity attributable to equity holders liabilities (average) of parent company Adjusted number of shares at end of period Equity to assets ratio, %: Shareholders’ equity – own shares 1) x 100 Dividend per share: Balance sheet total – advances received Dividend distribution – own shares 1) Adjusted number of shares at end of period
Net interest-bearing liabilities: Dividend to earnings ratio, %: Interest-bearing liabilities – interest-bearing assets Dividend per share – listed shares x 100 Earnings per share
Gearing ratio, %: Effective dividend yield, %: Net interest-bearing liabilities x 100 Adjusted dividend per share Shareholders’ equity – own shares 1) x 100 Adjusted share price at 31.12
EBITDA: P/E ratio: Operating profit + depreciation + amortization Adjusted share price at 31.12 of goodwill + impairment +/– change in value of biological assets +/– share of results of associated Earnings per share companies +/– non-recurring items Market capitalization: Return on capital employed (ROCE) for the divisions Total number of shares x striking price at end of (operating capital), %: period Operating profit x 100 Non-current assets + stocks + trade Adjusted share price at end of period: receivables – trade payables (average) Share price at end of period Share issue coefficient
1) Own shares were shown in the balance sheet in 1998– Adjusted average share price: 2001. Total value of shares traded 2) 1997–2001: Profit/loss before extraordinary items and Adjusted number of shares traded during period tax. Cash from operating activities per share: 3) 1997–2001: Profit/loss before extraordinary items and tax – income tax +/– minority interest. Cash from operating activities Adjusted average number of shares during the pe- riod excluding own shares
Key exchange rates for the euro at end of period 31.12.2006 30.9.2006 30.6.2006 31.3.2006 31.12.2005 30.9.2005 30.6.2005 31.3.2005
USD 1.3170 1.2660 1.2713 1.2104 1.1797 1.2042 1.2092 1.2964 CAD 1.5281 1.4136 1.4132 1.4084 1.3725 1.4063 1.4900 1.5737 JPY 156.93 149.34 145.75 142.42 138.90 136.25 133.95 138.44 GBP 0.6715 0.6777 0.6921 0.6964 0.6853 0.6820 0.6742 0.6885 SEK 9.0404 9.2797 9.2385 9.4315 9.3885 9.3267 9.4259 9.1430
F-169 ACCOUNTS FOR 2006 Parent Company Auditor’s report
To the shareholders of UPM-Kymmene Corporation
We have audited the accounting records, the report of the Board of Consolidated financial statements Directors, the financial statements and the administration of UPM- In our opinion the consolidated financial statements, prepared in Kymmene Corporation for the period 1 January – 31 December accordance with International Financial Reporting Standards as 2006. The Board of Directors and the Managing Director have pre- adopted by the EU, give a true and fair view, as defined in those pared the consolidated financial statements, prepared in accordance standards and in the Finnish Accounting Act, of the consolidated with International Financial Reporting Standards as adopted by the results of operations as well as of the financial position. EU, as well as the report of the Board of Directors and the parent company’s financial statements, prepared in accordance with prevail- Parent company’s financial statements report of the Board of ing regulations in Finland, containing the parent company’s balance Directors and administration sheet, income statement, cash flow statement and notes to the finan- In our opinion the parent company’s financial statements have been cial statements. Based on our audit, we express an opinion on the prepared in accordance with the Finnish Accounting Act and other consolidated financial statements, as well as on the report of the applicable Finnish rules and regulations. The parent company’s finan- Board of Directors, the parent company’s financial statements and cial statements give a true and fair view of the parent company’s the administration. result of operations and of the financial position. We conducted our audit in accordance with Finnish Standards on In our opinion the report of the Board of Directors has been pre- Auditing. Those standards require that we perform the audit to obtain pared in accordance with the Finnish Accounting Act and other reasonable assurance about whether the report of the Board of Direc- applicable Finnish rules and regulations. The report of the Board of tors and the financial statements are free of material misstatement. Directors is consistent with the consolidated financial statements and An audit includes examining on a test basis evidence supporting the the parent company’s financial statements and gives a true and fair amounts and disclosures in the report and in the financial statements, view, as defined in the Finnish Accounting Act, of the result of oper- assessing the accounting principles used and significant estimates ations and of the financial position. made by the management, as well as evaluating the overall financial The consolidated financial statements and the parent company’s statement presentation. The purpose of our audit of the administra- financial statements can be adopted and the members of the Board of tion is to examine whether the members of the Board of Directors Directors and the Managing Director of the parent company can be and the Managing Director of the parent company have complied discharged from liability for the period audited by us. The proposal with the rules of the Companies Act. by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies Act.
Helsinki 23 February 2007
PricewaterhouseCoopers Oy Authorised Public Accountants
Merja Lindh Authorised Public Accountant
F-170 ISSUER Principal Office of UPM-Kymmene Corporation Etelaesplanadi¨ 2 P.O. Box 380 FI-00101 Helsinki Finland
ARRANGER Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB England
DEALERS BNP Paribas Citigroup Global Markets Limited 10 Harewood Avenue Citigroup Centre London NW1 6AA Canada Square England Canary Wharf London E14 5LB England
Commerzbank Aktiengesellschaft Deutsche Bank AG, London Branch 60 Gracechurch Street Winchester House London EC3V 0HR 1 Great Winchester Street England London EC2N 2DB England
Dresdner Bank Aktiengesellschaft Merrill Lynch International Jurgen-Ponto-Platz¨ 1 Merrill Lynch Financial Centre 60301 Frankfurt am Main 2 King Edward Street Germany London EC1A 1HQ England
Nordea Bank Danmark A/S Nordea Bank Finland Plc Christiansbro 2948 Debt and Structured Finance Legal 3 Strandgade Aleksis Kivenkatu 9, Helsinki DK-1401 FI-00020 NORDEA, Copenhagen K Finland Denmark
The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR England
TRUSTEE Citicorp Trustee Company Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB England PRINCIPAL PAYING AGENT Citibank, N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB England
PAYING AND TRANSFER AGENTS BGL Soci´et´e Anonyme Citibank, N.A., London Branch 50 Avenue John F Kennedy Citigroup Centre L-2951 Luxembourg Canada Square Canary Wharf London E14 5LB England
REGISTRAR Citibank, N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB England
LISTING AGENT BGL Soci´et´e Anonyme 50 Avenue John F Kennedy L-2951 Luxembourg
LEGAL ADVISERS To the Issuer as to Finnish law Hannes Snellman Attorneys at Law Ltd Etelaranta¨ 8 FI-00131 Helsinki Finland
To the Issuer as to English and U.S. law White & Case LLP 5 Old Broad Street Etelaranta¨ 14 London EC2N 1DW FI-00130 Helsinki England Finland
To the Dealers and the Trustee as to English law Clifford Chance LLP 10 Upper Bank Street Canary Wharf London E14 5JJ England
AUDITORS TO UPM-KYMMENE CORPORATION PricewaterhouseCoopers Oy Itamerentori¨ 2 P.O. Box 1015 FI-00101 Helsinki Finland
5FEB200717051850
Merrill Corporation Ltd, London 09ZAX16501