Annual Report 2012 Annual Report

ANNUAL REPORT 2012 ANNUAL REPORT

Borregaard ASA Postboks 162 1701 Sarpsborg, Norway Telephone (+47) 69 11 80 00 Fax (+47) 69 11 87 70 ANNUAL REPORT 2012 email: [email protected] www.borregaard.com

ANNUAL REPORT 2012

The Borregaard Group 4

Message from the CEO 7

The Board of Directors 8

Report of the Board of Directors 10

The Group Executive Board 16

Corporate Governance 18

Annual Financial Statements 2012 26

Historical Key Figures 76

Group Directory 78 4 The Borregaard Group

The Borregaard Group The Borregaard Group 5

Chair Jan A. Oksum, member of the board Terje Andersen, President & CEO Bente A. Landsnes, President & CEO Per A. Sørlie, CFO Per Bjarne Lyngstad, member of the board Kimberly Lein-Mathisen, SVP HR & Com- munication Dag Arthur Aasbø and Director of IR Jørn Syvertsen at the listing ceremony 18 October 2012.

The Borregaard Group Borregaard operates one of the world’s most advanced biorefineries. By using natural, sustainable raw materials, the Group produces advanced and environmentally friendly biochemicals, biomaterials and bioethanol that replace oil-based products. Borregaard also holds strong positions in ingredients and fine chemicals.

Borregaard is a supplier of specialised biochemicals for a customer base. At the end of 2012, the Group employed 1,025 global customer base. The Group’s main products are lignin- man-years. based products and specialty cellulose, but its product portfolio also extends to vanillin, bioethanol and fine chemicals. Borregaard is a competence-driven company with production, Borregaard’s niche products serve applications in a wide range research and development, and sales and marketing as core of global end-markets including construction, agriculture, food competencies. To maintain its leading position, Borregaard and beverages, transportation and pharmaceuticals. places a significant emphasis on training programmes and cooperation between the various disciplines. Borregaard has The Group’s business model is closely linked to the integrated a leading research centre combining wood chemistry and nature of its biorefinery in Norway, which utilises the three organic chemistry. At the Group’s research centre in Sarpsborg, key components of wood (cellulose fibres, lignin and sugar) Norway, 73 employees from different parts of the world work to produce a diversified portfolio of products. The biorefinery with development of new or improved products, applications utilises approximately 85 per cent of the feedstock to make or technologies. Borregaard’s products, while most of the remaining biomass is used to produce thermal energy for its production processes. Borregaard invests significant resources, three per cent of annual sales, in innovation each year. The Group also receives In addition to its biorefinery in Norway, Borregaard has six considerable international recognition for its research and has plants outside of Norway dedicated to producing lignin-based been granted more than NOK 140 million in Governmental products. The company also has sales offices in 17 countries (Norway and EU) funding for various research projects over the in Europe, Asia, Africa and the Americas serving its global past three years. 6 The Borregaard Group

Borregaard is organised in three business segments: Performance Chemicals develops, produces and sells lignin- Other Businesses mainly consists of Ingredients and Fine based binding- and dispersing agents for use in a wide range of Chemicals. Borregaard Ingredients supplies wood-based and end market applications, with a particular focus on specialised petrochemical-based vanillin products to flavour and fragrance products within categories such as concrete admixtures, bat- companies, as well as to companies in the food and beverage teries, oilfield chemicals and agro chemicals. In addition, Per- industry. Borregaard is the only producer of wood-based vanil- formance Chemicals includes some trading activity in respect lin in the world. Borregaard Synthesis supplies fine chemicals of chemicals that are either linked to lignin-based products or to the pharmaceutical industry and is the world’s largest sup- have historically been produced by Borregaard. plier of C3-aminodiols for non-ionic X-ray contrast media.

Specialty Cellulose develops, produces and sells specialty cel- Other Businesses also includes sales of surplus basic chemi- lulose mainly for use in the production of cellulose acetate, cals from its chlor-alkali production in Sarpsborg. In addition, cellulose ethers and other specialty segments. The production Borregaard headquarter costs, corporate functions, utilities and and sale of second-generation bioethanol also form part of the services at the Sarpsborg site are included in the business area. Specialty Cellulose business area.

Performance Chemicals Specialty Cellulose Other Businesses Technology leader and largest Leading global specialty cel- Only producer of wood-based supplier of lignin-based products lulose supplier. Significant vanillin. Largest producer of

in the world with global market producer of second generation C3-aminodiols for X-ray contrast coverage. bioethanol. media.

Key figures

Operating revenues (NOK million) EBITA1 ROCE2 (%) Sales distribution (2012) Man years by geographical areas 5 000 700 13.9% 13.8% 15% 25% 20.4% 600 19.2% 4 000 12% 20% Asia 28% Norway 70% 500 542 536 3 941

3 854 8.4% 3 000 9% 15%

3 461 400 7.5% 3 382 11.3% Europe 48% Europe 11% 300 9.5% 2 000 6% 10% (ex. Norway)

200 289 253 Asia 4% 1 000 3% 5% Americas 23% 100 Americas 10% 0 0 0% 0% RoW 5% 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 RoW 1% Operating revenues EBITA (NOK Million) EBITA margin (%)

1. Operating profit before amortisation and other income 2. Return on capital employed and expenses (adjusted EBITA)

Earnings per share (NOK) Trends in sickness absence1

4 6.0%

5.0%

3 5.3 % 3.17

4.0% 4.8 % 4.8 % 2.73 4.1 % 2 3.0%

1.8 2.0% 1 1.39 1.0%

0 0 2009 2010 2011 2012 2009 2010 2011 2012 1. For production plants

Cash flow from operation activities1 Trends in H1 value1 800

700 5.0%

600 700 659

4.0% 4.5 500 547 528 3.8 400 3.0% 3.3 300 2.0% 200 2.0

100 1.0% 0 2009 2010 2011 2012 0% 2009 2010 2011 2012 1. Cash flow from operating activities + taxes paid + net financial items. 1. Number of injuries leading to absence per million hours worked, for production plants. The Borregaard Group 7

Message from the CEO

Borregaard has over the years grown from being a traditional pulp and paper company to becoming one of the world’s most advanced biorefineries. The Group holds strong market positions within advanced and sustainable biochemicals, biomaterials and bioethanol, in addition to ingredients and fine chemicals.

Borregaard was founded as and operates within a number of different niches, such as a British company under the construction, agriculture, food and beverages, transportation name of “The Kellner Parting- and pharmaceuticals. Our own research centre in Sarpsborg ton Paper Pulp Company Ltd” with 73 employees leads us into the future with regard to in 1889. Borregaard AS was new products and new applications. Over 15 per cent of the established in 1918 with the Group’s turnover comes from new products that we did not intention to buy the shares have five years ago. This illustrates how important it is for in the British company and Borregaard to retain a leading position in innovation. We also secure the business to Nor- work continuously to boost productivity in our organization wegian ownership, in what and competitiveness in the global market. was regarded as a national and historic event. Subse- Our strategy has contributed to stable results over time. quently, Borregaard merged Moreover, we have achieved record results during the last with Orkla in 1986, a group which has contributed to making two years - thanks to being able to capitalize on market con- Borregaard into what it is today. Finally, 18 October 2012 ditions within specialty cellulose and a generally high degree was another historic date for Borregaard, when the group of specialisation for our products. once again became listed on the Oslo Stock Exchange. The company had over 7000 shareholders at the end of 2012. Borregaard not only has 123 years of history, but also an exciting future. We will continue to develop our business Borregaard today is an international group, with operations model through further specialisation of our product portfolio. and sales offices in 17 countries in Europe, Asia, Africa and We are also working on more innovation projects, based on the Americas. The Group’s business model - the biorefinery our own technology, which will complement our business concept - is based on utilising the various components in activities and provide opportunities for growth. wood to manufacture a series of specialised products which can replace oil-based products. The concept ensures a high In closing, I want to take this opportunity to thank all degree of utilisation and value-added from the common raw Borregaard employees for an extraordinary effort in the year materials. gone by. I also want to thank all our new shareholders, who have placed their trust in us. Borregaard’s operational strategy is two-fold: The Group aims to be a world leader both in innovation and productivity within its selected market segments. This strategy is supported by a strong corporate culture and a unique competence base. In this way, know-how and competence become our biggest Kind regards, competitive advantages.

Borregaard has core competence within production, research and development as well as sales and marketing. The Per Sørlie company benifits from a wide understanding of the market President and CEO 8 The Borregaard Group

The Board of Directors

1 2 3

4 5 56

Observer Observer

7 8 9 The Borregaard Group 9

1 Jan Anders Oksum 4 Kristine Ryssdal 6 Roar Linder Chair of the board Member Employee representative Jan Anders Oksum has been a member Kristine Ryssdal was elected member Roar Linder is Deputy Chair of the of the Board of Directors in Borregaard of the Board of Directors in Borregaard Executive Committee of Borregaard Industries Limited (BIL) since 2007. He is in 2012. She has been with Statoil ASA Union (Borregaard Fagforening) and an independent consultant within organisa- since 2012 as Vice President Legal. Deputy Chair of the Borregaard Workers tional and leadership development, strategy Prior to joining Statoil, Ms. Ryssdal Shop Stewards Committee (Borregaard- and project execution at JAAG Consult AS. served as the Senior Vice President arbeidernes tillitsmannsutvalg). He was Mr. Oksum has worked in various positions and Chief Legal Officer of Renewable first elected in 2009 (BIL). Mr. Linder has at Norske Skogindustrier ASA from 1979 Energy Corporation ASA. Ms. Ryssdal attended four out of four Board Meetings to 2006, including position as CEO from also has experience from various other since the listing of Borregaard. 2004 to 2006. Mr. Oksum has served as positions, including Attorney at the Chair and Director of various national and Norwegian Attorney General’s Office, international companies. He holds a degree Legal Counsel for Norsk Hydro ASA 7 Ragnhild Anker Eide in Chemical Engineering from the Norwe- and senior advisor for Commercial and Employee representative gian University of Science and Technology Legal affairs of Norsk Hydro Canada Ragnhild Anker Eide works as a Man- in Trondheim, Norway. Mr. Oksum has Oil & Gas Inc. Ms. Ryssdal holds a ager in Mechanical Maintenance at attended four out of four Board Meetings Cand. Jur. degree from the University Borregaard AS. She is Chair of The since the listing of Borregaard. of Oslo and a Master of Laws from Norwegian Society of Graduate Techni- the London School of Economics. Ms. cal and Scientific Professionals (Tekna) Ryssdal has attended three out of four at Borregaard AS and member of the 2 Terje Andersen Board Meetings since the listing of board at the joint union for Officials and Member Borregaard. Engineers at Borregaard AS. Ms. Anker Terje Andersen has been a member of the Eide was first elected in 2012 (BIL). Ms. Board of Directors in Borregaard Industries Anker Eide has attended four out of Limited (BIL) since 2005. He has been CFO 5 Kimberly Lein-Mathisen four Board Meetings since the listing of of Orkla ASA since 2004 and has assumed Member Borregaard. various positions within the Orkla group Kimberly Lein-Mathisen was elected since 1989. Mr. Andersen also has experi- member of the Board of Directors in ence from Nevi Finans AS and as Manage- Borregaard in 2012. She has been with 8 Bente Seljebakken Klausen ment Consultant in Deloitte Touche. He Eli Lilly & Co since 2001, currently Observer holds a degree in Business Administration as Global Alliance Leader. She has Bente Seljebakken Klausen works as (siviløkonom) from the Norwegian School assumed various positions within Eli Laboratory Technician at Borregaard of Economics and Business Administra- Lilly & Co, including General Manager R&D. She is Chair of The Norwegian tion in Bergen, Norway. Mr. Andersen has in Germany, Managing Director in Engineers and Managers Association attended four out of four Board Meetings Norway and Strategic Consultant Euro- (FLT) at Borregaard Sarpsborg (Norway), since the listing of Borregaard. pean Operations. Ms. Lein-Mathisen and secretary of the Borregaard Work- has also worked for Procter & Gamble ers Shop Stewards Committee (Borre- in the USA in various positions. She gaardarbeidernes tillitsmannsutvalg). Ms. 3 Jan Erik Korssjøen has experience from boards both in Seljebakken Klausen was first elected in Member Norway and internationally, includ- 2012 (BIL). Jan Erik Korssjøen was elected member of ing serving as a member of the Board the Board of Directors in Borregaard in of Directors in Dagens Næringsliv 2012. He was CEO of Kongsberg Grup- AS and in Kappa Bioscience AS. Ms. 9 Roy Kåre Appelgren Lein-Mathisen holds an MBA degree pen from 1999-2008 and has previously Observer from Harvard Business School and a held a number of management positions Roy Kåre Appelgren works as a Senior Bachelor of Science degree in Engi- in Kongsberg Industry and Kongsberg Engineer in Mechanical Maintenance neering from the University of Illinois. Gruppen. He has been a member of the at Borregaard Sarpsborg (Norway). He Ms. Lein-Mathisen has attended three Board of Directors in Cermaq ASA since is Chair of The Norwegian Society of out of four Board Meetings since the 2009 and currently also holds the position Engineers and Technologists (NITO) at listing of Borregaard. as Industrial Professor at Buskerud Univer- Borregaard and a member of the joint sity College. Mr. Korssjøen holds a Master union for Officials and Engineers at degree in Mechanical Engineering from Borregaard. Mr. Appelgren was first the Norwegian University of Science and elected in 2010 (BIL). Technology in Trondheim. Mr. Korssjøen has attended four out of four Board Meetings since the listing of Borregaard. 10 REPORT OF THE BOARD OF DIRECTORS

REPORT OF THE BOARD OF DIRECTORS REPORT OF THE BOARD OF DIRECTORS 11

Report of the Board of Directors Operating revenues (NOK million) EBITA1 ROCE2 (%) Operating revenues (NOK million) EBITA1 ROCE2 (%) An eventful and successful year Sales distribution (2012) Man years by geographical areas Sales distribution (2012) Man years by geographical areas 5 000 700 13.9% 15% 25% 5 000 700 201213.9% was a13.8% major 15%milestone in Borregaard’s long history. After more than 26 years 700 13.9% 13.8% 15% 25% under Orkla’s ownership, Borregaard was listed on the20.4% Oslo Stock Exchange as an 600 20.4% 19.2% 4 000 600 12% 20% 19.2% 4 000 independent company12% on 18 October.20% Prior to the listing, the company had seen a Asia 28% Norway 70% 500 Asia 28% Norway 70% 542 536 3 941 542 536 3 941

3 854 500 8.4%

3 854 8.4% restructuring which left parts of the operations, notably the hydro power plant and 542 536 3 000 3 941 3 000 3 854 8.4% 9% 15% 3 461 400 7.5% 3 461 3 000 3 382 400 7.5% 3 382 the Omega 3 oils business,9% with Orkla,15% whereas11.3% the new legal entity (Borregaard 3 461 400 7.5% 11.3% 3 382 Europe 48% 11.3% Europe 48% Europe 11% 9.5% Europe 48% Europe 11% 2 000 300 AS) emerged as a homogeneous chemicals10% company focusing on biochemicals. Europe(ex. Norway) 11% 2 000 300 6% 10% 9.5% (ex. Norway) 2 000 6% 10% (ex. Norway) 289 200 289 253 200 289 200 253 Asia 4% 1 000 253 Today, Borregaard 3%is a leading global5% player with strong positions within selected Asia 4% 1 000 3% 5% Americas 23% Asia 4% 1 000 100 3% 5% Americas 23% 100 niches of bio-based speciality chemicals, speciality cellulose and fine chemicals. Americas 10% 0 0 The Group operates0% one of the world’s0% most advanced biorefineries with an inno- Americas 10% 0 2009 2010 2011 2012 0 2009 2010 2011 2012 0% 0% 2009 2010 2011 2012 RoW 5% 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 RoW 1% RoW 5% 2009 2010 2011 2012 2009 2010vation2011 portfolio2012 which contributes to continuous2009 2010 specialisation2011 2012 and, potentially, RoW 1% Operating revenues Operating revenues EBITA (NOK Million) EBITA margin (%) Operating revenues EBITA (NOK Million)new and EBITAeven margin more (%) far-reaching products and applications. The Group’s strong 1. Operating profitR&D before competence amortisation and other is income vital to these efforts,2. Returnwhich on capital also employed in 2012 received recognition 1. andOperating expenses profit (adjusted before amortisationEBITA) and other income 2. Return on capital employed and expensesin (adjusted the shapeEBITA) of substantial financial grants from Norwegian authorities and the EU.

Borregaard’s strength as the principal and only global player within lignin-based Earnings per share (NOK) Trends in sickness absence1 Earnings per share (NOK) Trends in sickness absence1 products was evidenced during 2012 by an ability to maintain and reinforce its 4 6.0% 4 presence in South America following the mothballing of its lignin operation in 6.0% 5.0% Brazil due to the close-down of the plant’s external raw material source. 5.0%

3 5.3 %

3 5.3 % 3.17 3.17 4.0% 4.8 % 4.8 % 4.0% 4.8 % 4.8 % 3.17

4.0% 4.8 % 4.8 % 2.73

Borregaard’s biorefinery concept in Sarpsborg has proven its sustainability and its 2.73 4.1 % 4.1 % 2.73

2 3.0% 4.1 % environment-friendly properties in comparison with a number of petrochemical- 2 3.0%

based alternatives. Throughout 2012, work has been pursued on several investment 1.8 1.8 2.0% 1 1.8 2.0% 1 1.39 projects which will further enhance our favourable environmental profile. A new 1.39 1 1.39 1.0% plant for waste water purification and production of biogas, together with a new 1.0%

energy plant for natural gas as a substitution for heavy oil, will yield environmental 0 0 0 0 benefits and an improved energy supply when construction is completed in 2013. In 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 1. For production plants the area of safety, Borregaard recorded all-time low injury numbers in 2012. 1. For production plants

Finally, in the wake of two financially strong years, the Group delivered its highest operating profit level ever in 2012.

1 Cash flow from operation activities1 Market trends Cash flow from operation activities 1 Trends in H1 value1 800 Trends in H1 value In the aftermath of the 2008/09 financial crisis, Borregaard has enjoyed generally 800 700 5.0% favourable market conditions for key products and product groups. This situation 700 5.0% 700 600 700 659 has prevailed during the more recent macroeconomic turmoil affecting a number 600 700 659

600 4.5 4.5 659 4.0% of traditionally important markets, especially in the eurozone. Throughout these 500 4.0% 4.5 547 547

500 528 3.8 528 3.8 547 528

periods of financial downturn, the company’s specialisation strategy, diversified 3.8 400 3.0% 3.3 400 3.0% 3.3 product portfolio and multi-plant structure have proved to be robust, and has 3.3 300 300 demonstrated resiliency against the negative impact of soft spots for some products 2.0% 200 2.0% 2.0 or markets. 200 2.0 100 2.0 100 1.0% 100 1.0% 0 Performance Chemicals has experienced a recovery from the downturn in 2008/09 0 2009 2010 2011 2012 0% within several specialty lignin products. More recently, a revival has also occurred 2009 2010 2011 2012 0% 2009 2010 2011 2012 for concrete additives to the construction industry, still the predominant segment 1. Cash flow from operating activities + taxes 2009 2010 2011 2012 1. paidCash +flow net fromfinancial operating items. activities + taxes in Performance Chemicals’ product portfolio. The downturn in Southern Europe paid + net financial items. 1. Number of injuries leading to absence 1. Number of injuries leading to absence has been off-set by renewed strength of the Asian markets and a distinct growth per million hours worked, for productionper million hoursplants. worked, for in Latin America. In addition, new applications being explored show promising production plants. growth prospects. The all-time high profitability for Specialty Cellulose seen in fourth quarter 2011 (largely due to product mix and strong demand for viscose cellulose) receded during 2012. In Ingredients, the strong demand and high prices for lignin-based vanillin seen in 2010 and 2011 have subsided, largely due to stronger competition from Chinese producers of petrochemical-based vanillin. 12 REPORT OF THE BOARD OF DIRECTORS

Business segments In Fine Chemicals, the C3 aminodiols business has been suc- cessfully revived through several multi-year contracts. The pharmaceutical intermediates business has been modest for Performance Chemicals some time, but with some bright spots resulting from efforts to Performance Chemicals had operating revenues in 2012 of develope new products and projects. Production capacity for NOK 1,689 million (NOK 1,539 million). EBITA amounted pharmaceutical intermediates at the Sarpsborg site was moth- to NOK 266 million, compared to NOK 225 million in the balled in 2011, resulting in a lower cost base due to downsiz- preceding year. The market situation for the lignin business ing the operations. was generally positive, with a 6% overall sales volume growth, higher prices and improved product mix in line Financial performance in 2012 with the business area’s specialisation strategy. Sales for Borregaard’s operating revenues in 2012 totalled NOK 3,941 use in concrete admixtures showed good progress, espe- million (NOK 3,854 million1). EBITA2 amounted to NOK 542 cially in Asia, whereas the markets in Southern Europe con- million, compared to NOK 536 million in the preceding year. tracted further. Speciality grades saw encouraging growth. Raw material and energy costs rose from their 2011 level, Favourable market conditions for both Performance Chemicals but peaked in the second quarter of 2012. Following the and Specialty Cellulose contributed to the strong fincancial per- close-down of the lignin operations in Brazil, freight costs formance also in 2012. Some soft spots became apparent during increased due to more volume being shipped from other the year in specialty cellulose end markets, primarily construc- Borregaard lignin plants to serve the local and regional tion and coatings. Reduced wood costs contributed positively, market. whereas lower gains from currency hedging had a negative impact. EBITA in Performance Chemicals improved significantly Specialty Cellulose following a substantial volume increase, an improved product Specialty Cellulose posted operating revenues of NOK mix and higher prices. In Specialty Cellulose, the result declined 1,616 million (NOK 1,644 million). EBITA, at NOK 281 due to a weaker product mix during the second half of 2012. million, declined moderately from the all-time high level Within Other Businesses, progress was recorded in Fine Chemi- in 2011 (NOK 317 million). The modest decline in operat- cals, whilst market conditions for Ingredients were challenging. ing revenues and profit level were due to a weaker product Net financial costs declined in 2012 due to a changed capital mix, the share of highly specialised grades being lower structure where net interest-bearing debt was reduced, resulting than in 2011. This development was, in turn, partly attrib- in a decline in interest expenses. utable to increased competition and less favourable conditions in major end markets, primarily construction and Group profit before tax in 2012 amounted to NOK 415 million coatings. The impact of a weaker product mix was partly (NOK 455 million) with a tax charge of NOK 140 million (NOK offset by lower wood and energy costs, higher sales volume 135 million). and improved production quality and volume.

Net earnings per share were NOK 2.73 for the full year. In line Other Businesses with Borregaard’s dividend policy, the Board of Directors of Other Businesses mainly includes Borregaard’s Ingredients Borregaard ASA proposes a dividend for 2012 of NOK 1.00 per and Fine Chemicals businesses, but also sales of surplus share, i.e. a total dividend payment of NOK 100 million. basic chemicals from its chlor-alkali production in Sarps- borg. In addition, the segment includes Borregaard head- Cash flow and financial structure quarter costs, corporate functions, utilities and services at Cash flow from operating activities in 2012 amounted to NOK the Sarpsborg site. 551 million (NOK 536 million). Net working capital declined modestly and is in line with the company’s target level. Invest- Other Businesses had total operating revenues of NOK 715 ments in 2012, dominated by the new waste water purification million (NOK 749 million) and an EBITA of NOK −5 mil- plant in Sarpsborg, were notably higher than the preceding lion (NOK −6 million). The Ingredients business suffered year. Capital expenditure in 2012 included stamp duty of NOK from a challenging market situation with price pressure for 23 million for the transfer of property deeds related to pre-IPO vanillin products due to overcapacity and stronger com- restructuring of assets. petition from Chinese producers of petrochemical-based products. The Fine Chemicals business saw a satisfactory As of 31 December, the Group had net interest-bearing liabilities level of sales for its main product groups. Earnings ben- totalling NOK 840 million (NOK 1,306 million). In conjunc- efitted from an improved product mix and a reduced cost tion with the IPO and as of 23 October, Borregaard repaid its level following the previous year’s capacity adjustments. entire debt to Orkla ASA by drawing NOK 990 million on the Costs associated with corporate functions and unallocated long-term revolving credit facilities totalling NOK 1,800 million group costs were slightly higher than in 2011, mainly due established with Scandinavian banks prior to the IPO. As at 31 to depreciation charges related to the new pilot plant for December 2012, the company is well capitalized with an equity producing lignin and sugars from low-value biomass. ratio of 49 % and a NIBD/EBITDA ratio of 1.1.

1Figures in parentheses are for the corresponding period in the previous year 2Operating profit before amortization and other income and expenses REPORT OF THE BOARD OF DIRECTORS 13

Working conditions Borregaard aims at creating good working conditions for its employees. Both precautionary activities and schemes which contribute to reducing undue strains in working conditions have been established. Operating revenues (NOK million) EBITA1 ROCE2 (%) Employee health is monitored through healthSales and workingdistribution environment (2012) surveys. Man years by geographical areas 5 000 700 13.9% 13.8% 15% 25% The working environment is generally considered to be good, and enhancement efforts20.4% are continuously being made through a variety of measures. 600 19.2% 4 000 12% 20% Asia 28% Norway 70% 500 542 536 3 941

3 854 8.4% As a result of a shortage of raw materials, the lignin plant in Brazil ceased produc- 3 000 9% 15%

3 461 400 7.5% 3 382 11.3% tion in April 2012. In October, the situation became more permanent as the raw Europe 48% Europe 11% 300 9.5% materials supplier dismissed its employees. Consequently, 43 employees at the 2 000 6% 10% (ex. Norway)

289 lignin factory were given notice. Assistance with finding new jobs was provided. 200 253 Asia 4% 1 000 3% 5% Americas 23% 100 Safety Americas 10% 0 0 0% 0% 2012 showed a positive development for the Group as a whole with a decline RoW 5% 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 in2011 the total2012 number of injuries. For injuries with absence,RoW 1% measured as H1 value Operating revenues EBITA (NOK Million) EBITA margin (%) (number of injuries with absence per million work hours), the injury figure 1. Operating profit before amortisation and other income 2. Return on capital employeddecreased by 48%, from 3.8 in 2011 to 2.0, for the Group as a whole. Total and expenses (adjusted EBITA) number of injuries, measured as H2 value (number of injuries per million work hours), declined from 11.9 in 2011 to 11.4. At the Sarpsborg plant in Norway (rep- resenting two thirds of operations), there wasEarnings a discernible per share decline (NOK) in the number Trends in sickness absence1

of injuries, resulting in an H1 value of 0.84 and an H2 value of 9.7. The corre- 6.0% sponding figures for 2011 were 5.8 and 17.4. Activities related to reporting, root cause analysis, and improvement measures to reduce near accidents and elimi- 5.0%

3 5.3 %

nate hazardous conditions, as well as frequent plant inspections,3.17 will continue. 4.0% 4.8 % 4.8 % 2.73 4.1 % Sickness absence 2 3.0%

Sickness absence in the Group was 4.8% in 2012 (4.25%1.8 in 2011). There is 2.0% 1 emphasis on close follow-up of persons on sick 1.39 leave and on individual adaptation of tasks for affected employees. For the operations in Sarpsborg, absence due to 1.0%

illness increased somewhat in 2012 to 5.7%0 compared to 4.9% the previous year. 0 The increase may be explained by several employees2009 2010 having2011 long-term2012 absence 2009 2010 2011 2012 during 2012 as a result of serious illness. A number of preventive programmes 1. For production plants related to physical exercise, diet and smoking have been pursued in 2012.

Competence Borregaard is a competence-driven company, and our set of competencies - Cash flow from operation activities1 and the interplay between them - are our primary competitive assets. Trends in H1 value1 800 Borregaard has a unique competence within700 sales and marketing, research and 5.0%

600 700

development (R&D) as well as production. 659

4.0% 4.5 500 547 528 Within sales and marketing, which accounts for close to 10% of our employ- 3.8 400 3.0% ees, the emphasis is on knowledge application and on understanding our 3.3 300 customers’ needs and the value of our products and solutions. To maintain and 2.0% 200 improve the competence within sales and marketing, Borregaard runs pro- 2.0 grammes such as “application schools”,100 a new global sales training programme 1.0% that was launched in 2012. 0 2009 2010 2011 2012 0% 2009 2010 2011 2012 Borregaard’s R&D centre has a unique set of1. combinedCash flow from operating competencies activities + taxes within a paid + net financial items. wide range of chemical and biochemical disciplines. Of the 73 employees from 1. Number of injuries leading to absence 10 countries at the corporate R&D centre in Norway, 25 hold a PhD degree. R&D per million hours worked, for production plants. activity has increased in recent years, particularly due to implementation of pilot plants in the two most important innovation projects. Gross cost of innovation efforts in 2012 amounted to nearly NOK 130 million.

Production skills and competence within the bio refinery are crucial because of its high complexity and level of integration. The new 2010 central control centre 14 REPORT OF THE BOARD OF DIRECTORS

for the operations in Sarpsborg has contributed positively to reduce emissions of dust to air, and these emissions comply streamlining production, but has also required higher compe- with the new permit. tence at all levels of operations. Borregaard has a comprehensive training programme for operators and apprentices and has For more comprehensive information, the company publishes a recently built a dedicated internal training centre in addition to separate sustainability report. co-operating with Orkla’s Production Academy. Financial and operational risks Borregaard strives to strengthen and develop a strong corpo- Borregaard is financially exposed to currency risk for most rate culture that encourages commercial focus, continuous of its sales, primarily in US dollars, but increasingly also in improvement and competence development, aspects that are EUR. A substantial part of this exposure, defined as estimat- integrated in corporate management programmes and other ed net cash flow in USD or EUR, is routinely hedged with a training programmes. nine month time horizon. Subject to certain criteria being met, the hedging horizon may be extended up to 36 months. Diversity Borregaard is also exposed to price risk for wood, energy Borregaard wishes to encourage positive diversity among the (thermal energy and electric power) as well as other strategic company’s employees and will combat discrimination based raw materials. On the selling side, all Borregaard’s business on gender, ethnicity, religion, age, sexual orientation and func- segments are exposed to price risk in international markets. tional ability. Competence-building programmes at Borregaard In addition, there is production risk inherently associated regularly include employees from all over the world in order with the type of process plants used in its operations. Work to enhance international experience and understanding. Total on risk assessment and risk curtailment was pursued in share of female employees is approximately 20%. The Group’s 2012. Borregaard has a strong commitment to “continuous board of directors has three (out of seven) female members, improvement” throughout its worldwide operations, calling and there is also one woman in the company’s senior manage- on a wide range of measures both on the revenue and cost ment. The company has dedicated schemes to foster recruit- side. ment of more female employees and managers, including a recruitment database of eligible women and a deliberately high Credit risk in Borregaard is perceived as modest due to the share of female participants in leadership programmes. quality of its customer base and its stringent credit management policy. Environmental matters The products from Borregaard’s biorefinery concept, produced Short term liquidity risk associated with cash flow fluctua- from renewable raw materials, are sustainable alternatives to tions is low due to Borregaard having secured, prior to being oil-based products. Lifecycle analysis of the products confirms listed, ample short-term and long-term credit facilities from the beneficial environmental properties of the biorefinery a select group of major Nordic banks. As of 31 December concept compared to petrochemical alternatives. Borregaard 2012, the undrawn portion of these facilities amounted to aims at minimising the impact on the environment in terms of NOK 880 million. emissions and discharges of substances to air and water as well as odour and noise from the operations. The plant in Sarpsborg The company’s business activities and financial position, is by far the Group’s largest and accounts for more than two together with the factors likely to affect its future develop- thirds of total production. ment and performance, are set out above. With its considerable financial resources together with contracts with During 2012, a major investment in a new wastewater purifica- customers and suppliers across different geographic areas tion plant has been carried out to satisfy new permit require- and industry sectors, the company is well placed to manage ments from 1 July 2013. Concurrently, other implemented its on-going business risks. The directors therefore have a measures have resulted in a reduction of such discharges in well-founded confidence that the company has adequate 2012 by more than nine per cent. Emissions to air are closely resources to continue in operational existence for the fore- related to thermal energy production. An energy strategy seeable future, and the financial statements are prepared on aiming at phasing out the use of heavy oil at the plant through a going concern basis. See Note 28. increased use of bioenergy, waste recycling and energy con- Corporate governance servation has contributed to a reduction of CO2, SO2 and NOx. In 2012, new measures were initiated aiming at completely Borregaard’s governance systems are based on principles abandoning the use of heavy fuel oil. This will further reduce set out in the Norwegian Code of Conduct for Corporate emissions to air. A project for modifying the chlor-alkali plant Governance. An overall report on Corporate Governance at to produce hydrochloric acid instead of liquid chlorine was Borregaard may be found from page 18. completed in 2012, minimising the risk of emissions of chlorine gas to the environment. Lignin operations outside Norway Remuneration of Group Executive Board have limited emissions. During the year, the production plant The Board of Directors has established its own Compensa- in Germany invested in new filtration measures to further tion Committee which deals with all important matters related to pay and other remuneration of senior executives REPORT OF THE BOARD OF DIRECTORS 15

before such matters are formally discussed and decided Free equity in Borregaard ASA amounted to NOK 205 mil- by the Board of Directors. In accordance with Norwe- lion at year-end after provision of dividend. gian company legislation, the Board of Directors has also prepared a separate statement of guidelines on the pay and The Board of Directors proposes the distribution of an ordi- other remuneration of senior executives, included in Note 9 nary dividend of NOK 1.00 per share for the 2012 financial to the consolidated financial statements of Borregaard ASA, year. Total dividend proposed is NOK 100 million. which will be presented and discussed at the 2013 Ordinary General Meeting. Outlook for 2013 Performance Chemicals experience generally strong Shareholder matters demand for its products, especially in Asia and the Ameri- All shares in Borregaard ASA have equal rights and there are cas. However, the supply of lignin raw material will be no provisions in the company’s bylaws restricting free trad- reduced due to the 2012 closure of the lignin plant in ing of its shares. The company has established a programme Brazil, and lower deliveries to the production units in the enabling employees to purchase shares at a discounted Czech Republic and Spain. Overall, a net reduction in price. In connection with the 2013 programme, Borregaard sales volume of 5–10% is expected for the full year. The has purchased 360,000 own shares during the period from impact from reduced volume will be partly offset by a posi- 15 until 28 February. 352,593 shares have subsequently tive contribution from an improved product mix. Specialty been sold to employees. The remaining 7,407 shares are in Cellulose has implemented selective price adjustments the company’s possession, but without the right to exercise for 2013, primarily in segments impacted by lower cotton ownership. linter pulp prices. An improved product mix is expected to contribute positively compared to the second half of The company is unaware of any agreements between share- 2012. However, there is less visibility in the market for the holders aiming at restricting the free trading of the com- second half of 2013, with the construction market develop- pany’s shares or limiting the exercise of ownership rights for ment being one of the important factors. Borregaard has a such shares. significant currency exposure. A stronger NOK will have a negative impact on profitability. Wood cost is expected to The company has not entered into any material agreements continue its favourable trend with further purchase price which become enforceable, altered or will expire in the case reductions in Norway. of an offer being made to purchase the company. Medium to long term performance for Borregaard will be Allocation of profit affected by the general economic development as well as In 2012 Borregaard ASA posted a profit of NOK 5 million. changes in supply and demand. In particular, Specialty The Board of Directors proposes the following alloction Cellulose, will be influenced by cyclicality in construction (NOK million): end markets, announced production capacity increases and spillover effects from related markets like textile cellulose Dividend 100 and cotton. Further specialisation and productivity efforts Retained earnings -95 will continue to be Borregaard’s main drivers for perfor- Total 5 mance improvement.

Jan A. Oksum Terje Andersen Kimberly Lein-Mathisen (chair)

Kristine Ryssdal Jan Erik Korssjøen Ragnhild Anker Eide

Roar Linder Per A. Sørlie Sarpsborg, 20 March 2013 (President and CEO) The Board of Directors of Borregaard ASA 16

Presentation of Group Executive Board

1 Per A. Sørlie 2 Morten Harlem President and Chief Executive Officer (CEO) Executive Vice President (EVP), Performance Chemicals Per A. Sørlie has been with Borregaard since 1990 and was Morten Harlem has served as EVP of Borregaard LignoTech appointed President and CEO in 1999. Prior to that, he (Performance Chemicals business) since 2003. Since joining served Borregaard as CFO (1990–1993) and Executive Vice Borregaard in 1994, he has assumed various roles in sales President of the Fine Chemicals division (1993–1999). Previ- and marketing. Previously, Mr. Harlem held positions in ously, Mr. Sørlie held positions as CFO at Bjølsen Valsemølle various marketing roles with Nutreco. Mr. Harlem holds a and Hafslund’s US operations. Mr. Sørlie holds a degree in Master of Science in Business Administration from the Uni- Business Administration (siviløkonom) from the Norwegian versity of Colorado in Boulder, USA. School of Economics and Business Administration in Bergen, Norway. 17

3 Tuva Barnholt 4 Bjørn Erik Amundsen Senior Vice President (SVP), Purchasing and Strategic Sourcing Executive Vice President (EVP), Ingredients and Fine Chemicals Tuva Barnholt has been SVP, Purchasing and Strategic Sourc- Bjørn Erik Amundsen has served as EVP of Borregaard ’s ing since 2005. Since joining Borregaard in 1998, she has Ingredients and Fine Chemicals business since 2003. Since assumed various positions in Borregaard including Project joining Borregaard in 1991, he has assumed different posi- Manager Borregaard Energy and Production Manager and tions within finance and management including General Technical Director at the Sarpsborg site. Previously, Ms. Manager for Borregaard’s business in Singapore/Asia. Mr. Barnholt held positions in engineering management and Amundsen holds a degree in Business Administration (siv- energy systems development at Nexans, ABB and Oslo iløkonom) from the Norwegian School of Economics and Energi. Ms. Barnholt holds a Master of Science Degree Business Administration in Bergen, Norway. from the Norwegian University of Science and Technology (NTNU) in Trondheim, Norway.

5 Per Bjarne Lyngstad 6 Tom Erik Foss-Jacobsen Chief Financial Officer (CFO) Executive Vice President (EVP), Specialty Cellulose Per Bjarne Lyngstad has been with Borregaard since 1988 Tom Erik Foss-Jacobsen has served as EVP of Borregaard and was appointed CFO in 1998. Prior to that, he assumed ChemCell (Specialty Cellulose business) since 2007. Since various finance and administration positions in Borregaard joining Borregaard in 1996, he has assumed various roles in and LignoTech USA. Mr. Lyngstad holds a Master of Science sales and marketing. Previously, Mr. Foss-Jacobsen worked degree (siviløkonom HAE) from the Norwegian School of as a Business Development Manager EMEA at InFocus Corp. Economics and Business Administration in Bergen, Norway. Prior to that, he worked as a product manager for the Coca- Cola products at Borg Bryggerier. Mr. Foss-Jacobsen holds a Master’s Degree in International Marketing and Strategy from the Norwegian Business School (BI) and a Bachelour’s Degree in Civil Engineering.

7 Gisle Løhre Johansen 8 Dag Arthur Aasbø Senior Vice President (SVP), Business development and Senior Vice President (SVP), HR and Public Affairs Research & Development Dag Arthur Aasbø has been SVP of HR and Public Affairs Gisle Løhre Johansen has served as SVP of Business since 2008. Since joining Borregaard in 1993, he has development/R&D since 2007. Since joining Borregaard assumed positions in Borregaard relating to communica- in 1991, he has assumed various positions including Site tions and public affairs. Mr. Aasbø also has experience as Manager in Sarpsborg (1999–2007) and Site Director of editor/communication management roles in various organi- Borregaard Schweiz (2006–2007). Mr. Johansen holds a sations. Mr. Aasbø holds a Bachelor’s Degree in Business Master’s Degree in Organic Chemistry from the Norwegian Administration from the Norwegian Business School (BI) University of Science and Technology (NTNU) in Trondheim, in addition to studies in Communications/ Journalism and Norway. Religion/Ethics.

9 Ole Gunnar Jakobsen Plant Director of Borregaard’s Sarpsborg Site (Norway) Ole Gunnar Jakobsen has served as Plant Director of 9 Borregaard’s Sarpsborg production site since 2006. Since 6 7 8 joining Borregaard in 1995, he has assumed various posi- 2 tions in production management in various plants at the 3 4 1 5 site in Sarpsborg. Mr. Jakobsen holds a Bachelor Degree in Mechanical Engineering and a Master’s Degree in Process Engineering from Telemark University College (HiT) in Pors- grunn, Norway. 18 CORPORATE GOVERNANCE

CORPORATE GOVERNANCE CORPORATE GOVERNANCE 19

Corporate Governance

Borregaard’s principles for good corporate governance will underpin the work to promote a healthy corporate culture in form the basis for long-term value creation for the benefit of which openness, responsibility and equality are fundamental shareholders, employees and society at large. These principles values that strengthen confidence in the Group.

1. Corporate Governance Report

Borregaard is subject to the requirements of Sections 3–3b of The Board of Directors will work to ensure that the Com- the Norwegian Accounting Act, Clause 7 of the Norwegian pany complies with the requirements in Section 3–3b of the Code of Practice for Corporate Governance (Code of Practice) Accounting Act and the Code of Practice. The principles of and the rules concerning the continuing obligations of listed good corporate governance will be integrated into the Board’s companies. Electronic versions of the Accounting Act and decision-making process, and the Board will continually dis- Code of Practice are freely available at www.lovdata.no and cuss and evaluate the principles and their implementation. www.nues.no, respectively. Borregaard will contribute to the sustainable development This report follows the system used in the Code of Practice. It of society through responsible commercial operation and covers all clauses of the Code of Practice. and describes how systematic enhancement work that may generate positive spin Borregaard has complied with it. Where there is a discrepancy, offs for society. The Group has ethical guidelines and guide- this is discussed and the reason given. The Board of Directors lines for social responsibility. These documents were revised in considered the report at its meeting of 20 March 2013, and 2012 and can be found under “Sustainability” on Borregaard’s the auditor has stated that the information in the report is website. They are described in more detail in Borregaard’s in accordance with the information in the annual accounts. sustainability report. This report also gives an account of the The statement is cited at page 73. The General Meeting will Company’s systematic work in areas that are important for the consider the statement at the Company’s Ordinary General community. Meeting on 15 April 2013.

2. Business

According to the Articles of Association, the purpose of the Chemicals. For a more detailed description, please refer to Company is as follows: Message from the CEO.

“... development, production and sale of speciality cellulose Borregaard aims to be superior to and to create greater value and, in addition, a number of other chemicals, letting of real than its competitors and others that naturally lend themselves property and other naturally related activities. The business can for comparison. This will be secured through a businesslike also be conducted through participation in or in cooperation focus, close collaboration with the customers and exten- with other companies.” sive research and development. A more detailed account of corporate goals and strategies can be found in the chapter The main areas of Borregaard’s activities focus on Performance The Borregaard Group. Chemicals, Specialty Cellulose and Ingredients and Fine

3. Equity and dividends

The Group’s equity as of 31 December 2012 stood at NOK 30 per cent and 50 per cent of the company’s net profit for the 1.737 billion. In the prospectus on which the stock exchange preceding financial year. listing was based, the Board made the following statement about the dividend policy: The Board has proposed to allocate a dividend of NOK 1.00 per share for the financial year 2012. This dividend will be paid Under the current dividend policy adopted by the Board, on 25 April to those shareholders registered as owners on 15 Borregaard intends to pay regular and progressive dividends April 2013. reflecting the expected long-term earnings and cash flows of the Borregaard Group, targeting an annual dividend between Authorisations that provide the Board with the authority to issue new shares and to purchase own shares are limited to defined causes and apply until the next General Meeting. The General 20 CORPORATE GOVERNANCE

Meeting votes on each individual cause to be covered by the employees. In addition, the Board of Directors was authorised to authorisation. increase the share capital by up to NOK 10 million, corresponding to 10 per cent of the Company’s current share capital, to At an extraordinary General Meeting in 2012, the Board of be used in connection with acquisitions and the raising of new Directors was authorised to repurchase the Company’s own equity. The authorisations are valid until the Company’s Ordinary shares within a total nominal value of NOK 10 million, corre- General Meeting in 2013, but no longer than to 30 June 2013. sponding to 10 per cent of the current share capital. The authori- The preferential rights of the existing shareholders to subscribe sation is valid until the Company’s Ordinary General Meeting for the new shares pursuant to Section 10-4 of the Norwegian in 2013, but no longer than to 30 June 2013. The authorisation Limited Liability Companies Act may be deviated from. The may only be used in connection with any share-based incentive authorisations do comprise potential share capital increases programme for Borregaard’s employees and to repurchase shares against contributions in kind, but do not comprise share capital for cancellation. As at 31 December 2012 the Company did not increases in connection with mergers. The Board has not pro- own such shares. posed to prelong this authorisation.

The Board of Directors was also authorised to increase the share Transactions in own shares take place on the market at stock capital by up to NOK 3 million, corresponding to 3 per cent of exchange prices, in keeping with good stock exchange practice the Company’s current share capital, to be used in connection in Norway. There are otherwise no provisions in Borregaard’s with any share-based incentive programme for Borregaard’s Articles of Association regulating the buy-back or issue of shares.

4. Equality of treatment of shareholders and transactions with close associates

Borregaard has one share class, and each share entitles the holder Any transactions with close associates are shown in Note 34 in the to one vote. The nominal value is NOK 1.00. A more detailed Group accounts. In the case of transactions between the Company account of the terms and conditions relating to the entitlement to and a shareholder, the shareholder’s parent company, a member of vote at the General Meeting is given below under item 6. the Board, executive personnel or close associate of any of these, the Board will ensure that a value assessment is carried out by an It is a policy of the Company that shareholders shall not be independent third party. In the same way, the Board will arrange watered down by the issue of shares. If the Board should propose for a value assessment by an independent third party in the case a deviation from the pre-emption rights of existing shareholders of transactions between companies within the Group where there in the event of an increase in capital, it must be possible to justify are minority shareholders in one of the companies. this as being in the common interests of the Company and its shareholders. This justification must be stated in the notice of the The Instructions for the Board of Directors have regulations about General Meeting. If the Board uses its authority to increase the impartiality. They establish that members of the Board may not share capital and deviate from the pre-emption rights, the Board take part in the handling of, or decisions in, cases in which will provide justification of this in the stock exchange release that the member of the Board or a close associate has a prominent announces the capital increase. personal or financial interest. Members of the Board shall also at all times consider whether there are any circumstances which, The Instructions for the Board of Directors of Borregaard ASA from an objective point of view, are likely to weaken confidence include rules for dealing with cases of transactions with close in the member’s impartiality, or which may open up conflicts of associates. The Instructions for the Board of Directors are publicly interest in connection with the Board’s handling of the case. Such available under “Investor Relations” on the Company’s website. circumstances must be discussed with the Chair of the Board. According to the Instructions, the Chair of the Board must be With regard to the Group’s ethical guidelines, employees must informed about the transaction and make a decision on how to under their own initiative inform their superiors of any case of deal with the case. impartiality or conflict of interest, and they must not take part in the processing of such items.

5. Free negotiability

All of Borregaard’s shares confer equal rights and are freely negotiable. There are no provisions in the Articles of Associa- tion restricting the free negotiability of shares. CORPORATE GOVERNANCE 21

6. General Meeting

Borregaard will arrange for the shareholders to be able to exer- at the General Meeting, the shareholder will also be allowed cise their shareholder rights at the General Meeting. The Gen- to vote. According to Norwegian law, voting is only permitted eral Meeting should be an effective meeting place for share- in relation to shares registered in the owner’s name. In order holders and the Board. The notice of the General Meeting and to confer voting rights, shares registered to a nominee account administrative documents must be available on Borregaard’s must be reregistered in VPS before the final date for registration website no later than 21 days before the General Meeting. with the General Meeting. The final date for registration is three working days before the General Meeting. The auditor as well as members of the Board Shareholders who are unable to attend the General Meeting and Nomination Committee, will be present at the General may vote by proxy. If the proxy has been given to the company, Meetings. The Board will decide who should attend in addition Borregaard will appoint the Chair of the Board or the Chair to the Chair depending on which issues are to be dealt with. of the meeting to vote on the shareholder’s behalf. The proxy form has been designed in such a way that the shareholder may Shareholders may either appoint a proxy or submit a vote provide instructions for each item that will be dealt with, and in advance using the Internet, using either DNB’s or the for each candidate to be elected. Information on the use of Norwegian Central Securities Depository´s (VPS) investor ser- proxy voting and shareholders’ rights to have items dealt with vices. There are links to these services on the Company’s web- at the General Meeting is given both in the notice of a General site. It is stipulated in the Articles of Association that the notice Meeting and on Borregaard’s website. of the General Meeting must indicate the rules established by the Board for advance voting. According to Clause 7, Sub-clause 1 of the Articles of Associa- tion, the Board may decide that documents relating to items The Articles of Association contain no special provisions with that will be dealt with at the General Meeting should not regard to the opening and chairing of the General Meeting. In be sent to the shareholders but instead made available on line with the Code of Practice, the Board will arrange for the the company’s website. The same also applies to documents General Meeting to be opened and chaired by an independ- which by law must be included in, or attached to, the notice ent person. The Chair is chosen by the General Meeting, but in of a General Meeting. A shareholder may always demand the notice of a General Meeting the Board will indicate who to have documents sent relating to items that will be dealt will open the meeting and propose a Chair who satisfies the with at the General Meeting. This provision in the Articles of independence requirements of the Code of Practice. Association deviates from the main rule stipulated in Chapter 5 of the Norwegian Public Limited Liability Companies Act, If shares have been transferred, the shareholder may vote once whereby according to Section 6-16(a) the annual accounts, the transfer has been registered with the VPS before the final annual report, auditor’s report and Statement from the Board of date for registration with the General Meeting. If the transfer Directors must be sent to shareholders no later than one week has been notified to VPS and evidence of this can be provided before the General Meeting.

7. Nomination Committee

The Articles of Association stipulate that the Company shall tee. The Nomination Committee was elected to serve until the have a Nomination Committee. The members and Chair of the ordinary General Meeting in 2014, and this deviation from the committee are elected by the General Meeting. This was done Code of Practice and the Articles of Association was justified on at an extraordinary General Meeting on 10 January 2013. At practical grounds. this time, the General Meeting also adopted instructions for the Nomination Committee. These instructions are available under The Nomination Committee will propose: Investor Relations on the Company’s website. The election took place on the basis of a recommendation from the Board. • candidates for the election of shareholder-elected This deviates from the Code of Practice, in which it is recom- Board members and the Chair mended that the Nomination Committee proposes members for the Nomination Committee. The practical justification for • candidates for the election of members and the Chair this deviation was that this was the Company’s first Nomination of the Nomination Committee Committee. • remuneration for the Board and Nomination The Nomination Committee consists of three members, who Committee according to the Articles of Association will be elected for up to two years at a time. There is the option to vote for each When the committee is dealing with proposals for the Chair of individual candidate for a position on the Nomination Commit- the Board, it is supplemented by a representative appointed by the employee-elected Board members. 22 CORPORATE GOVERNANCE

The instructions establish guidelines for the preparation and shareholder community. The composition meets the Code’s conducting of elections to the Nomination Committee and requirements for independence. None of the members of the Board, as well as the criteria for electability, general require- Nomination Committee are members of the Board, nor does ments for the recommendations and rules for dealing with the Nomination Committee include the Company’s Chief cases in the course of the Nomination Committee’s work. Executive or any other executive personnel.

Information about the composition of the Nomination Com- The members of the Nomination Committee are: mittee, which members are up for election and how input and proposals can be given to the Nomination Committee, can be - Terje R. Venold (Chair) found under Investor Relations on the Company’s website. - Mimi K. Berdal - John-Ove Ottestad The Nomination Committee has been put together in accordance with the Code of Practice to safeguard the interests of the

8. The Board: Composition and independence

Until the Company’s stock exchange listing on 18 October of the Board. According to recommendation, shareholder-elect- 2012, the Group complied with Orkla’s internal rules concerned members of the Board should be elected for a period of one ing the composition of the Board. Since the stock exchange year, as an annual evaluation of the composition provides the listing, the Board has been put together with the aim of greatest flexibility. The current Board has been elected for the safeguarding the interests of the shareholder community and period leading up to the 2013 General Meeting. the Company’s need for competence, capacity and diversity. The Board consists of the Chair, six members and two observ- The Articles of Association do not require members of the ers. Two of the members, and the two observers, have been Board to own shares in the Company. The “Board of Direc- elected by the employees. The composition of the Board meets tors” clause provides information about Board members’ share the requirements of the Code of Practice, which states that ownership, backgrounds, qualifications, terms of office, inde- members must be independent of the Company’s management, pendence and the lengths of time for which they have been main shareholders and important business associates. One of members of the Board at Borregaard. There is also information the members of the Board is defined as not being independent about any major positions in other companies and organisa- of the Company’s main shareholder. No-one from day-to-day tions, and participation in Board meetings at Borregaard. management is a member of the Board. There have been no cases in which members of the Board have been disqualified It has been agreed with the employees that there will be no on the grounds of a lack of impartiality. corporate assembly in either Borregaard ASA or Borregaard AS. Instead, employees have extended representation rights According to the Norwegian Public Limited Liability Companies on the companies’ Boards. In accordance with the Norwegian Act the Board’s term of office is maximum two years. The law Public Limited Liability Companies Act and a resolution by also apply to the replacement of Board members. Borregaard’s the Corporate Democracy Committee, employees are entitled Articles of Association complies with this requirement. The to elect two members and two observers to the Board. Since General Meeting may set a shorter term of office. It is the task November 2012, the same persons have served on the Boards of the Nomination Committee to recommend the term of office at Borregaard ASA and Borregaard AS.

9. The work of the Board

The Board’s tasks preparation of matters for the Board and provisions whereby The tasks of the Board are stated in the Public Limited Liability employees must be informed of the Board’s resolutions. Other Companies Act and Instructions for the Board of Directors, instructions, and clarification of the obligations, authorisations which among other things regulates the responsibilities and and responsibilities of day-to-day management, are adopted on obligations of the Board. The rules governing handling of an ongoing basis. cases by the Board are also determined in the Instructions for the Board of Directors, e.g. which cases should be handled The Board adopts an annual plan of meetings and work that by the Board, the rules for issuing notices of meetings and covers, among other things, its strategic work, commer- the management of meetings. The Instructions for the Board cial issues and control work. Since the listing on the stock of Directors also include regulations governing the Chief exchange, the Board has held four meetings. Eight meetings are Executive’s disclosure requirements and the duty to carry out planned in 2013, with one meeting extending over two days in the resolutions of the Board. There are also guidelines on the order to deal with strategic issues. The Board dealt with a total CORPORATE GOVERNANCE 23

of 24 items in 2012. The Board’s annual report discusses the independent of the executive personnel. The mandate of the content of the Board’s work in more detail. committee has been incorporated into the Instructions for the Board of Directors. The Chief Executive prepares items for the Board in consulta- tion with the Chair of the Board. The Instructions for the Board The committee will additionally deal with any specific ques- of Directors contain provisions for the handling of issues, as tions relating to compensation for employees of the Group. well as rules concerning impartiality, joint and parallel investments. This is described in greater detail above under item 4. Audit Committee The Audit Committee is led by Terje Andersen. Kimberly The Board has established two permanent committees, the Lein-Mathisen and Ragnhild Anker Eide are members and VP Compensation Committee and the Audit Committee, both of Finance is the secretary. The composition of the committee which are described in more detail below. The committees pass meets the Code of Practice’s requirements for independence no resolutions, but they do supervise the work of administra- and competence. The recommendation of the Nomination tion on behalf of the Board and prepare items for handling Committee provides information as to which members of the by the Board. The committees may draw on the resources of Board meet the independence and competence requirements the Company and obtain advice and recommendations from for sitting on the Audit Committee. The mandate of the commit- sources outside the Company. tee has been incorporated into the Instructions for the Board of Directors. Compensation Committee The Compensation Committee is headed by Jan Oksum. Jan Internal evaluation by the Board Erik Korssjøen and Roar Linder are also members. The Compa- The Board will carry out an annual evaluation of its own activi- ny’s SVP HR is the secretary. The composition of the committee ties and competence. The results will be made available to the complies with the Code of Practice’s requirements for inde- Nomination Committee. pendence, and all members of the committee are considered

10. Risk management and internal control

The Board of Directors is ultimately responsible for Borregaard’s handling of these risks. A central risk management function has internal control system. Each member of the management team been established at Group level headed by a Chief Risk Officer is responsible for the internal control within their respective (CRO), who is responsible for Borregaard’s risk management areas. model and implementation support. Furthermore, the Group’s Chief Risk Officer shall contribute towards the identification, Borregaard’s overall goals: analysis, handling and use of risk pertinent to Borregaard’s Borregaard aims at value creation benefitting shareholders, objectives across business areas and professional disciplines. employees and society at large through socially responsible operations and profitable growth. Borregaard’s risk manage- Borregaard ASA’s Board of Directors conducts a review of the ment system is fundamental in achieving these overall objec- Group’s risk picture at least annually. The aggregate risk picture tives. is consolidated by the CRO and reviewed with the Group Executive Board before it is submitted to the Group’s Audit Risk management shall ensure that risks which are relevant to Committee and finally to Borregaard ASA’s Board of Directors. Borregaard’s objectives are identified, analysed and dealt with at the earliest possible stage and in a cost-effective manner. Management prepares monthly financial reports that are sent to the Board. Each legal entity reports into the consolidation A sound risk culture in Borregaard’s operating units is a prereq- system in accordance with the annual financial calendar. The uisite for a successful risk management process. Group Accountant Manager prepares the consolidated figures based on the reporting from each subsidiary. Comprehensive risk assessments – related to either operations or projects – are carried out on an ongoing basis in all units There are monthly meetings among key financial employees and reported to the next management level. The risk picture of from the business areas, group accounting, controlling, finance each unit is presented and reviewed annually by the internal and the CFO to discuss financial results, incidents, projects, Boards. estimates, etc. This input is used in the monthly reporting to the Board and the quarterly meetings with the Audit Committee. A unit’s risk picture identifies the principal risk factors associated with the unit’s value chain. The individual unit manag- When the Group’s quarterly reports are to be presented, the ers in the Group are responsible for being acquainted with Audit Committee reviews these prior to the Board meeting. all significant risk factors within their area of responsibility, The External Auditor is also present at the Audit Committee thus contributing to a financially and administratively sound 24 CORPORATE GOVERNANCE

meetings. The External Auditor meets with the Board when the Borregaard has established a whistle-blowing channel, cur- annual financial statements are presented. rently operated by the Company’s legal director. Any reporting of unethical behaviour etc. can be reported to: As Borregaard used to be part of the Orkla Group, it also had [email protected] or by phone +47 69 11 83 15. the internal audit function from Orkla. Borregaard has not established its own internal audit after listing on 18 October Ethics and social responsibility 2012, but Vice President Finance (previously employed in The Group’s companies work continuously with ethics and Orkla’s internal audit) cooperates with the various functions in social responsibility, which are integral parts of the basis for the Group to identify any internal control issues and to elimi- decisions by local companies. The status of the work by the nate these. Vice President Finance also acts as secretary to the business areas involving social responsibility is also reported to Audit Committee. the Group as part of the annual sustainability report.

Borregaard has documented its internal procedures, including Borregaard revised its guidelines on ethics and social responsi- description of authority in the Quality Management System bility in 2012. The Group’s companies must undergo an annual (QMS). The Group in general has a four-eye principle for review of the risk circumstances linked to the Company’s social approvals, and SAP as the main ERP system enforces this. responsibility at a general level, and review the risk of breaches of the ethical requirements. Corporate Governance and internal control is on the agenda for the Board and the Audit Committee annually.

11. Remuneration of the Board

All remunerations of the Board have been declared in Note 6 the compensation to the Board for the period from the stock of Borregaard ASA’s accounts. It is stated here that the remu- exchange listing up to the Ordinary General Meeting in 2013. neration of the Board is not dependent on profits, and that It has also been proposed how members of the Board and no options have been granted to members of the Board. In members of the Nomination Committee will be compensated its recommendation, the Nomination Committee proposed up to the Ordinary General Meeting in 2014.

12. Remuneration of executive personnel

The Board’s Compensation Committee makes recommendations to executive personnel and the Group’s policy on conditions, to the Board regarding the CEO’s salary and terms, and super- including the extent and direction of bonus and share value- vises the general conditions for other executive personnel within related schemes. A cap has been placed on profit-dependent the Group. The Board assesses the CEO’s terms once a year. remunerations. The statement by the Board is made available to shareholders at the same time as the notice of the Ordinary The Board’s statement on salaries and other remuneration of General Meeting is given. executive personnel, see Note 9 in the consolidated financial statement, contains an account of the remunerations given

13. Information and communication

Borregaard’s accounting procedures are transparent and in on Borregaard’s website, along with the quarterly and annual accordance with the International Financial Reporting Stand- reports, under “Investor Relations”. ards (IFRS). The Board of Directors’ Audit Committee monitors the company’s reporting on behalf of the Board. All shareholders and other financial market players are treated equally as regards access to financial information. The Group’s Borregaard strives to communicate actively and openly with Investor Relations Department maintains regular contact with the market. The company’s annual and quarterly reports company shareholders, potential investors, analysts and other contain information on the various aspects of the company’s financial market stakeholders. The Board is regularly informed activities. The company’s quarterly presentations are found of the company’s investor relations activities. The financial calendar for 2013 is found under “Investor Relations”. CORPORATE GOVERNANCE 25

14. Approach to takeovers

The Board of Directors will not seek to hinder or obstruct any written guidelines for procedures to be followed in the event of takeover bid for the Company’s operations or shares. a takeover bid.

In the event of such a bid the Board of Directors will, in addi- The Board of Directors has not found it appropriate to draw up tion to complying with relevant legislation and regulations, any explicit principles for Borregaard’s conduct in the event seek to comply with the recommendations in the Code of of a takeover bid, other than the actions described above. The Practice, including obtaining a valuation from an independent Board otherwise concurs with what is stated in the Code of expert. On this basis, the Board will recommend whether or Practice regarding this issue. not the shareholders should accept the bid. There are no other

15. External Auditor

The Board of Directors has determined the procedure for the Responsibility for monitoring such use in detail has been external auditor’s regular reporting to the Board. delegated to the secretary of the Audit Committee, which is Vice President Finance. The secretary will approve sig- Each autumn, the external auditor will present to the Board an nificant assignments in advance and compile an annual assessment of risk, internal control and an assessment of the summary of services other than auditing provided to the quality of financial reporting, and at the same time will present Company. Details of the Company’s use and remuneration of the audit plan for the following year. The external auditor will the external auditor are disclosed in Note 5 to the financial also take part in the Board’s discussions on the annual finan- statements of Borregaard ASA. The General Meeting will cial statements. The Board will ensure that it is able to discuss be informed about the Group’s overall remuneration of the relevant matters with the auditor when the management is not auditor. present. Both the external auditor and the CEO attend all meetings of the Board’s Audit Committee. For further information, In connection with the auditor’s participation in the Audit reference is made to Section 10 regarding risk management Committee and the Board of Directors’ consideration of the and internal control. annual financial statements, the auditor also confirms its independence. Borregaard has guidelines for the general management’s use of the external auditor for services other than auditing.

Stay up-to-date on investor relations by visiting our website: www.borregaard.com/investor-relations 26 ANNUAL FINANCIAL STATEMENTS 2012

ANNUAL FINANCIAL STATEMENTS 2012

Consolidated Financial Statement 27 Income Statement 27 Earnings per Share 27 Statement of Comprehensive Income 27 Statement of Financial Position 28 Statement of Cash Flows 29 Statement of changes in Equity 30 Notes 31 Financial Statement Borregaard ASA 67 Statement from the Board of Directors 73 Auditor’s report 74 ANNUAL FINANCIAL STATEMENTS 2012 27

Consolidated Financial Statement 2012

Income Statement

Amounts in NOK million Note 2012 2011 Sales revenues 8 3 894 3 810 Other operating revenues 47 44 Operating revenues 7 3 941 3 854 Cost of materials 19 -1 666 -1 605 Payroll expenses 9,10 -696 -699 Other operating expenses 9,11 -819 -815 Depreciation and write-down property, plant and equipment 17,18 -218 -199 Amortisation intangible assets 17 -3 -6 Other income and expenses 12 -71 0 Operating profit 468 530 Finance income 13 162 160 Finance costs 13 -215 -235 Profit/loss before taxes 415 455 Taxes 14 -140 -135 Profit/loss for the year 275 320 Profit/loss attributable to non-controlling interests 31 2 3 Profit/loss attributable to owners of the parent 273 317 EBITA adjusted1 7 542 536 EBITDA adjusted2 760 735 1. Operating profit before amortisation and other income and expenses 2. Operating profit before depreciation, amortisation and other income and expenses

Earnings per share

Amounts in NOK Note 2012 2011 Earnings per share (100 million. shares) 15 2.73 3.17 Diluted earnings per share 15 2.73 3.17

Statement of Comprehensive Income

Amounts in NOK million Note 2012 2011 Profit/loss for the year 275 320 Change in hedging reserve after tax 29 29 -70 Exchange differences -45 -28 Comprehensive income 259 222 Profit/loss attributable to non-controlling interests 2 2 Profit/loss attributable to owners of the parent 257 220 28 ANNUAL FINANCIAL STATEMENTS 2012

Statement of Financial Position

Amounts in NOK million Note 2012 2011 Assets Intangible assets 17 39 72 Property, plant and equipment 18 1 954 1 822 Deferred tax assets 14 0 0 Other assets 24 79 91 Non-current assets 2 072 1 985 Inventories 19 589 558 Receivables 22 727 665 Cash and cash equivalents 23 155 496 Current assets 1 471 1 719 Total assets 3 543 3 704

Equity and liabilities Equity attributable to equity holders of Borregaard ASA 1 726 1 109 Non-controlling interests 31 11 14 Total equity 1 737 1 123 Deferred tax 14 143 158 Provisions and other liabilities 20 50 42 Interest-bearing liabilities 27 990 1 788 Non-current liabilities 1 183 1 988 Interest-bearing liabilities 27 16 20 Income tax payable 14 99 62 Other liabilities 25 508 511 Current liabilities 623 593 Equity and liabilities 3 543 3 704

Jan A. Oksum Terje Andersen Kimberly Lein-Mathisen (chair)

Kristine Ryssdal Jan Erik Korssjøen Ragnhild Anker Eide

Roar Linder Per A. Sørlie Sarpsborg, 20 March 2013 (President and CEO) The Board of Directors of Borregaard ASA ANNUAL FINANCIAL STATEMENTS 2012 29

Statement of Cash Flows

Amounts in NOK million Note 2012 2011 Profit/loss before taxes 415 455 Amortisation, depreciation and impairment charges 265 205 Changes in net working capital, etc. -33 -75 Taxes paid -96 -49 Cash flow from operating activities 551 536 Investments in property, plant and equipment and intangible assets 17,18 -388 -251 Other capital transactions 2 4 Cash flow from investing activities -386 -247 Dividends/Group contributions paid 310 -149 Change in interest-bearing liabilities -806 -74 Change in interest-bearing receivables 5 9 Change in net interest-bearing liabilities 27 -801 -65 Cash flow from financing activities -491 -214 Change in cash and cash equivalents 23 -326 75

Cash and cash equivalents as of 1 January 496 427 Change in cash and cash equivalents -326 75 Currency effect of cash and cash equivalents -15 -6 Cash and cash equivalents as of 31 December 23 155 496

Joint ventures affect the cash flow as follows:

Amounts in NOK million Note 2012 2011 Cash flow from operating activities 32 14 Cash flow from investing activities -3 -2 Cash flow from financing activities -25 -29 Change in cash and cash equivalents 6 4 -17 30 ANNUAL FINANCIAL STATEMENTS 2012

Statement of Changes in Equity

Allocated Share Other equity/ Non- Share premium paid-in Retained Hedging Translation retained Total controlling Total Amounts in NOK million capital fund equity earnings reserve effect earnings Group interests equity Equity 31 December 2010 0 0 0 0 91 -41 948 998 16 1 014 Profit/loss for the year – – – – – – 317 317 3 320 The Group’s comprehensive income – – – – -70 -28 1 -97 -1 -98 Total comprehensive income – – – – -70 -28 318 220 2 222 Dividend/Group contributions – – – – – – -113 -113 -4 -117 Option costs (share based payment) – – – – – – 4 4 – 4

Equity 31 December 2011 0 0 0 0 21 -69 1 157 1 109 14 1 123 Profit/loss for the year – – – 42 – – 231 273 2 275 The Group’s comprehensive income – – – – 29 -45 – -16 – -16 Total comprehensive income 0 0 0 42 29 -45 231 257 2 259 Capital transactions as part of establishment of Borregaard Group – – – – – – 1 420 1 420 -5 1 415 Option costs (share based payment) – – 2 – – – – 2 – 2 Separation agreement and reduction due to pooling of interest method 100 1 346 300 – – – -2 808 -1 062 – -1 062

Equity 31 December 2012 100 1 346 302 42 50 -114 0 1 726 11 1 737

The Group was established with a new parent company in 2012. The formation and equity transactions are described in Note 30. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31

NOTES

Note 1 General information 32 Note 20 Provisions and other non-current liabilities 53 Note 2 Basis for preparation 32 Note 21 Overview of financial instruments 53 Note 3 New accounting standards 33 Note 22 Receivables (current) 55 Note 4 Key accounting principles 34 Note 23 Cash and cash equivalents 55 Note 5 Use of estimates 39 Note 24 Other assets (non-current) 55 Note 6 Joint Ventures 39 Note 25 Other liabilities (current) 55 Note 7 Segments 40 Note 26 Capital management 56 Note 8 Geographical breakdown 42 Note 27 Funding and interest-bearing liabilities 57 Note 9 Payroll expenses and remuneration 42 Note 28 Financial risk 58 Note 10 Pensions 45 Note 29 Derivatives and hedging 62 Note 11 Other operating expenses 47 Note 30 Equity and Share capital 63 Note 12 Other income and expenses 47 Note 31 Non-controlling interests 64 Note 13 Finance income and finance costs 47 Note 32 Leases, leasing 64 Note 14 Taxes 48 Note 33 Pledges and guarantees 64 Note 15 Earnings per share (EPS) 49 Note 34 Related parties 65 Note 16 Impairment assessments 50 Note 35 Government grants 65 Note 17 Intangible assets 51 Note 36 Other matters 66 Note 18 Property, plant and equipment 52 Note 37 Subsequent events 66 Note 19 Inventories and Cost of Materials 52 ANNUAL FINANCIAL STATEMENTS 2012 32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 General information

The consolidated financial statements for Borregaard ASA “Other income and expenses” (OIE) are presented as part of (Borregaard/Group), including notes, for the year 2012, were operating profit in the Income Statement, but are presented endorsed by the Board of Directors of Borregaard ASA on 20 after adjusted EBITA in the segment information in Note 7, March 2013. Borregaard ASA is a public limited company and which are reported according to management reporting. See its offices are located in Hjalmar Wessels vei 10, 1721 Sarps- Note 12 for details and specifications. borg, Norway. Borregaard develops, produces and markets specialised biomaterials, biochemicals and biofuels to a wide The accounting policies for business areas are described in range of customers in global niches. Borregaard’s business Note 4 and segment information for the various business areas model is linked to its advanced biorefinery that utilises the is provided in Note 7. different components in the biomass to produce high value added products that to a large extent can substitute petrochemi- Borregaard has business areas as operating segments. The oper- cal alternatives. Borregaard is an international company with ating segments correspond to the way in which the business production units and sales offices in the world’s most important areas report figures to the Group executive management (key industrial markets. decision maker). The segments are divided into Performance Chemicals, Specialty Cellulose and Other Businesses. The financial statements for 2012 have been prepared and presented in full compliance with the International Financial Borregaard has largely switched to defined contribution pen- Reporting Standards (IFRS), as adopted by the EU. The valuation sion plans. The fall in interest rates therefore has little impact and recognition of the items in the financial statements have on the Group’s pension plans and thus on the Group’s financial been carried out in accordance with current IFRS standards. health. The contractual early retirement scheme in Norway The consolidated financial statements contain certain items that is accounted for as a defined contribution plan. This may be are crucial to understand the financial results for 2012. The changed if reliable and consistent data that justify accounting most important principles are described below. Borregaard is for the plan as a defined benefit plan can be obtained. exposed to currency risk for most of its sales, primarily in USD and EUR. A substantial part of this exposure, defined as esti- Impairment tests that have been carried out confirm that the mated net cash flow in USD or EUR, is routinely hedged on a value of the combined Borregaard Group’s most exposed assets rolling basis with a nine-month time horizon. Subject to certain is also intact as of 31 December 2012. All intangible and most criteria being met, the hedging horizon may be extended to of the tangible assets at LignoTech Brasil Produtos de Lignina three years in order to lock in favourable margins. On the rev- Ltda have been written down with a total amount of NOK 43 enue side, most of Borregaard’s business segments are exposed million in 2012. See Note 16 for further details. to price risk in international markets. The accounting policies regarding hedging are described in Note 4 and information regarding currency risks is provided in Note 28.

Note 2 Basis for preparation

Background 2012. Historical figures from the transferred business from BIL Borregaard ASA (“The Company”) was incorporated as a (continuity) are the basis for the historical figures of Borregaard public limited liability company on 22 August 2012. On 17 AS and the Borregaard Group. September, The Company was inserted as a holding company of Borregaard AS. The transaction is not a business combi- Basis for preparation nation and does not result in any change of economic sub- The Borregaard Group includes subsidiaries and joint venture stance. Accordingly, the consolidated financial statements of directly and indirectly owned by Borregaard ASA. Borregaard ASA are a continuation of the existing Borregaard Group. The consolidated financial statements are primarily based on the historical cost principle. Hedging instruments that satisfy The Biorefinery Business was transferred from Borregaard Indus- the criteria for hedge accounting are reported at fair value in tries Limited (“BIL”) to Borregaard AS on 30 March 2012. the statement of financial position and changes in value are recognised in comprehensive income. Derivatives that do not On 19 March 2012 BIL, Borregaard AS and Orkla ASA entered satisfy the criteria for hedge accounting are recognised at fair into a Transfer Agreement regarding the transfer by way of con- value through profit and loss. tribution in kind of certain assets, rights and obligations related to the Biorefinery Business formerly conducted by BIL from BIL Assets that no longer justify their value are written down to the to Borregaard AS. The said transfer was completed on 30 March recoverable amount, which is the higher of value in use and fair value minus selling costs. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33

The accrual accounting principle and the going concern presented as a single economic entity. All the companies have assumption are underlying assumptions for preparing the com- applied consistent principles and all internal matters between bined financial statements. the companies have been eliminated.

An asset or liability is classified as current when it is part of a Interests in companies in which the Group alone has control- normal operating cycle, when it is held primarily for trading ling influence (subsidiaries) have been fully consolidated, line purposes, when it falls due within 12 months and when it con- by line, in the consolidated financial statements from the date sists of cash or cash equivalents on the statement of financial the Group has control and are consolidated until the date position date. Other items are non-current. A dividend/group that such control ends. “Controlling influence” means formal contribution does not become a liability until it has been for- “power to govern”, i.e. ownership of more than a 50% equity mally approved by the General Meeting. interest or through shareholders agreements. If the Group owns more than 50%, but less than 100% of a subsidiary, the non- The amortisation of intangible assets and “Other income and controlling interests’ share of profit or loss after tax and their expenses” are presented on separate lines, broken down by share of equity are presented on separate lines. segment. Interests in companies in which the Group together with others All amounts are in NOK million unless otherwise stated. The has controlling influence (joint ventures, see Note 6) are com- functional currency of the parent company (Borregaard ASA) is bined with the Group’s interest line by line in the consolidated NOK and the Group’s reporting currency is NOK. financial statements using the proportionate consolidation method from the date joint control is obtained/established. Consolidation principles The consolidated financial statements show the overall finan- Borregaard ASA does not have any interests in associated com- cial results and the overall financial position when the parent panies (normally 20-50% owned companies). company Borregaard ASA and its controlling interests are

Note 3 New accounting standards

The consolidated financial statements will be affected by IFRS IAS 19 Employee Benefits amendments in the future. Many IFRS projects are in the final The IASB has issued numerous amendments to IAS 19. These phases, but many of them have either not been finally adopted range from fundamental changes such as removing the corridor or not been endorsed by the EU. It is highly likely that many mechanism and the concept of expected returns on plan assets of these projects will be adopted. The following section covers to simple clarifications and rewording. Removing the corridor only the amendments that will or may be of relevance for mechanism implies that actuarial gains and losses shall be accounting in Borregaard. recognised in other comprehensive income (OCI) in the current period. The amendments to IAS 19 will impact the net benefit Standards and interpretations that are issued up to the date of expense, as the expected return on plan assets will be calcu- issuance of the consolidated financial statements, but not yet lated using the same interest rate as applied for the purpose of effective, are disclosed below. The Group’s intention is to adopt discounting the benefit obligation. the relevant new and amended standards and interpretations when they become effective, subject to EU approval before the The amendments are effective for accounting periods beginning consolidated financial statements are issued. on or after 1 January 2013. Borregaard has a large proportion of defined contribution plans and the effect of the described IAS 1 Presentation of Financial Statements amendments will be limited. Based on figures reported at 31 The amendments to IAS 1 imply that the items presented in December 2012, however, Borregaard’s equity will be reduced by other comprehensive income (OCI) shall be grouped in two NOK 41 million (after tax) due to the approved change. See Note categories. Items that could be reclassified to profit or loss at 10. The interest expense resulting from the effect of discounting a future point in time (for example, net gain on hedge of net will be reported as a financial expense in the future. Adjusted investment, exchange differences on translation of foreign EBITA will increase with approximately NOK 1 million for 2012 operations, net movement on cash flow hedges and net gain as a result. or loss on available-for-sale financial assets) shall be presented separately from items that will never be reclassified (for exam- IAS 28 Investment in Associates and Joint Ventures ple, actuarial gains and losses on defined benefit plans). The As a consequence of the new standards IFRS 11 Joint Arrange- amendments affect the presentation only and have no impact ments and IFRS 12 Disclosure of Interests in Other Entities, IAS on the Group’s financial position or performance. The amend- 28 Investments in Associates has been renamed IAS 28 Investment ments become effective for annual periods beginning on or in Associates and Joint Ventures, and describes the application of after 1 July 2012, and will therefore be applied in the Group’s the equity method to investments in joint ventures in addition to first annual report after becoming effective. ANNUAL FINANCIAL STATEMENTS 2012 34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

associates. Within the EU/EEA area, the amendments are effective IFRS 10 establishes a single control model that applies to all enti- for annual periods beginning on or after 1 January 2014. ties including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judge- IAS 32 Financial Instruments: Presentation ment to determine which entities are controlled and therefore IAS 32 is amended in order to clarify the meaning of “currently are required to be consolidated by a parent, compared with the has a legally enforceable right to set-off” and the application of requirements that were in IAS 27. As a result, the Group has the IAS 32 offsetting criteria to settlement systems (such as central evaluated the entities to be consolidated pursuant to IFRS 10 and clearing house systems) which apply gross settlement mecha- compared with the requirements of the current IAS 27. nisms that are not simultaneous. The amendments are effective for annual periods beginning on or after 1 January 2014. Within the EU/EEA area, IFRS 10 is effective for annual periods starting on or after 2014. IFRS 7 Financial Instruments: Disclosures The amendments imply that entities are required to disclose IFRS 11 Joint Arrangements information about rights to set-off and related arrangements (e.g., This standard replaces IAS 31 Interests in Joint Ventures and SIC-13 collateral agreements). The disclosures would provide users with Jointly-controlled Entitites – Non-monetary Contributions by Ven- information that is useful in evaluating the effect of netting agree- turers. IFRS 11 removes the option to account for jointly controlled ments on an entity’s financial position. The new disclosures are entities (JCEs) using proportionate consolidation. All entities meet- required for all recognised financial instruments that are set off in ing the definition of a joint venture must be accounted for using accordance with IAS 32 Financial Instruments: Presentation. The the equity method. Within the EU/EEA area, IFRS 11 is effective disclosures also apply to recognised financial instruments that are for annual periods beginning on or after 1 January 2014. Figures subject to an enforceable master netting arrangement or similar for Joint Ventures are presented in Note 6. Borregaard’s share of agreement, irrespective of whether they are set off in accord- profit/loss after tax and minority interests will be reclassified to ance with IAS 32. The amendments will not impact the Group’s the item profit from companies reported under the equity method financial position or performance and become effective for annual as a finance item. Profit for the year in Note 6 will correspond to periods beginning on or after 1 January 2013 and interim periods profit from companies reported according to the equity method. within those annual periods. The result from the joint venture will be accouinted for as part of operating profit. Some key figures will be impacted by the change IFRS 9 Financial Instruments: Classification and Measurement as the equity ratio will increase and total assets will decrease. IFRS 9, as issued, reflects the first phase of IASB’s work on the replacement of IAS 39 and applies to the classification and meas- IFRS 12 Disclosure of Interests in Other Entities urement of financial assets and financial liabilities as defined in IFRS 12 applies for enterprises with interests in subsidiaries, joint IAS 39. The standard was initially effective for accounting periods arrangements, associates and structured entities. IFRS 12 replaces beginning on or after 1 January 2013, but amendments to IFRS the disclosure requirements that were previously included in 9 issued in December 2011 moved the mandatory effective date IAS 27 Consolidated and Separate Financial Statements, IAS 28 to 1 January 2015. Subsequent phases of this project will address Investments in Associates and IAS 31 Interests in Joint Ventures. A hedge accounting and impairment of financial assets. number of new disclosures are also required, but has no impact on the Group’s financial position or performance. Within the EU/ The Group will evaluate potential effects of IFRS 9 in accordance EEA area, IFRS 12 is effective for annual periods beginning on or with the other phases as soon as the final standard, including all after 1 January 2014. phases, is issued. IFRS 13 Fair Value Measurement IFRS 10 Consolidated Financial Statements, IAS 27 Separate Finan- The standard establishes a single source of guidance under IFRS for cial Statements all fair value measurements, i.e., for requirements of all standards IFRS 10 replaces the portion of IAS 27 Consolidated and Separate related to measuring fair value for assets and obligations. IFRS Financial Statements that addresses the accounting for consoli- 13 is effective for annual periods beginning on or after 1 January dated financial statements and SIC-12 Consolidation – Special 2013. Purpose Entities. Not all the effects of the new standards have been reviewed.

Note 4 Key accounting principles

Income statement charges and taxes. Borregaard sells goods in many different Sales are recognised when it is probable that economic benefits markets, and revenues from the sale of goods are recognised in will flow to the company and the amount of the revenue can the income statement when the risk and rewards of ownership be measured with reliability. Sales revenues are presented after of the goods are passed to the buyer, which is when the goods deducting discounts, value added tax and other government have been shipped. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35

Interest income is recognised in the income statement when with indefinite life will not be amortised while other intangible earned, while any dividends are recognised on the date they assets will be amortised over their useful life. are approved for payment. Interest income and dividends are presented under “finance income”. Goodwill is initially measured at cost, being the excess of the aggregate of the transferred and the amount recognised for Assets non-controlling interest over the net identified asset acquired Property, plant and equipment are tangible assets intended for and liabilities assumed. If this consideration is lower than the production, delivery of goods or administrative purposes and fair value of the net assets of the subsidiary acquired, the differ- have a lasting useful life. They are recognized in the statement ence is recognised in income statement. of financial position at cost minus any accumulated depreciation and write-downs. Annual major maintenance stops are Goodwill and intangible assets with an indefinite useful life capitalised as part of property, plant and equipment and depre- must be tested annually for impairment to assess whether the ciated over a period of 12 months. All other maintenance and values are recoverable. Borregaard carries out this test prior to repairs are expensed under operating expenses as and when preparing and presenting its financial statements for the third the maintenance is carried out, while expenditure on replace- quarter. If there are indications of impairments, the assets are ments or improvements is added to the cost price of the assets. tested immediately. A new impairment test is carried out in the Property, plant and equipment is depreciated on a straight line fourth quarter when necessary, for instance, if the underlying basis over the useful life. Residual value and useful lives are assumptions have changed. Impairment tests are described in reviewed annually. If there is any indication that an asset may Note 16. be impaired, the asset will be written down to the recoverable amount, if the recoverable amount is lower than the carrying Inventories are valued at the lower of cost and net realisable value. value. Purchased goods are valued at purchase cost according to the FIFO principle, while internally manufactured finished Borrowing costs related to the construction of the Group’s own goods and work in progress are valued at production cost. property, plant and equipment are capitalised as part of the Deductions are made for obsolescence. Net realisable value is cost of the asset. the estimated selling price minus selling costs.

Intangible assets and goodwill. Capitalised expenditure on Receivables are initially recognised at fair value which is gener- internally generated or specially adapted computer pro- ally the original invoice amount. Subsequently, receivables grammes is presented as intangible assets. The reinvestment are recognised at amortised cost using the effective interest need of specially adapted computer programmes is similar to rate method, less write downs. Receivables are written down that of other tangible assets, and the amortisation of intangible if events potentially causing a loss have occurred that can be assets are presented together with Borregaard’s other deprecia- measured reliably and that will affect payment of the receiv- tion. able. The interest rate element is disregarded if it is insignificant, which is the case for the majority of receivables. Research and development (R&D) expenditure is the expenses incurred by Borregaard in conducting research and devel- Cash and cash equivalents are held for the purpose of meeting opment, including studies of existing or new products and short-term fluctuations in liquidity rather than for investment production processes in order to secure future earnings. purposes. Cash and cash equivalents consist of cash, bank Expenditure on research is always expensed as incurred, while deposits and current deposits with a maturity of three months expenditure on development will be recognised in the state- or less. As far as possible, excess liquidity in wholly-owned ment of financial position if the underlying economic fac- subsidiaries is channelled to Borregaard’s cash pool or placed tors are identifiable and represent probable future economic as deposits with Borregaard AS, see Note 23. In some countries benefits of which Borregaard has control. Borregaard has a there are legal or technical impediments on placing such liquid large number of projects in process at all times, but the number assets with Borregaard’s cash pool or making deposits with of projects that end in capitalisation is limited. This is due to Borregaard AS. the considerable uncertainty throughout the decision-making process and the fact that only a small percentage of all projects Debt and liabilities culminate in commercial products. Furthermore, the portion Pensions. Borregaard mainly has defined contribution pension of the total project expenses that qualify for recognition in the plans, but also has some defined benefit pension plans, primar- statement of financial position are relatively small, as it is only ily in the USA and Norway. The pension liabilities and the from the time the decision to develop the product is made it pension assets are not netted as they are not part of the same can be capitalised, and that decision-making point comes at a scheme. late stage of the process (see Note 17) In the defined contribution pension plans, the company is The fair value of intangible assets acquired by the company responsible for making an agreed contribution to the employ- through business combinations is capitalised. Intangible assets ee’s pension assets. The future pension will be determined by the amount of the contributions and the return on the pension ANNUAL FINANCIAL STATEMENTS 2012 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

savings. Once the contributions have been paid, there are no arisen; if the probability is lower, the matter is disclosed in further payment obligations attached to the defined contribu- notes to the financial statements unless the probability of pay- tion pension. As a result, there is no liability recorded in the ment is remote. An asset will only be recognised in the state- statement of financial position. The pension costs related to ment of financial position if it is virtually certain (95%) that the defined contribution plans will be equal to the contributions to Group will realize the asset. The disclosure requirement applies employees’ pension savings in each reporting period. to other contingent assets.

Defined benefit pension plans are based on an obligation of Taxes. Income tax expense consists of the total of current taxes the Company to the employees to provide a certain level of and changes in deferred tax. Current taxes are recognised pension upon retirement, normally defined as a percentage of in the financial statements at the amount that is expected to the final salary. The Company is responsible for funding the be paid to the tax authorities on the basis of taxable income amount of the future pension benefit and the present value of reported for entities included in combined financial statements. this obligation, less the fair value of pension assets, less actu- Current taxes and changes in deferred tax are taken to other arial gains and losses must be reported in statement of financial comprehensive income to the extent that they relate to items position. that are included in other comprehensive income.

The pension obligation is calculated on a straight-line accru- Deferred tax in the statement of financial position have been als basis and is measured as the present value of the estimated calculated at the nominal tax rate based on temporary differ- future pension payments that are vested on the statement of ences between accounting and tax basis of assets and liabili- financial position date. ties on the statement of financial position date. Deferred tax liability relating to goodwill has not been recognised in the Changes in the pension obligation for defined benefit plans due statement of financial position. to curtailments or settlements are reported in their entirety in the income statement when benefits are terminated or settled A provision for deferred tax on retained earnings in foreign sub- by acquiring. Actuarial gains and losses are recognized in the sidiaries is recognised to the extent it is probable that dividends income statement over the estimated average remaining vesting will be distributed in the near future. period for the part of the gains and losses that exceeds 10% of the greater of the gross pension obligation or the gross pension Deferred tax assets are continuously assessed and are only plan assets. Gains and losses on curtailment or settlement of recognised in the statement of financial position to the extent a defined benefit pension plan are recognised at the time of it is probable that future taxable profit will be large enough for curtailment or settlement. the asset to be usefully applied.

Provisions. Provisions are recognised in the financial state- Deferred tax liability and deferred tax assets are offset as far as ments in the case of onerous contracts or when restructuring this is possible under taxation legislation and regulations. measures have been adopted. Future operating losses will not be part of the provisions. In the case of restructuring provisions, Financial matters there must be a detailed plan that identifies which parts of the Foreign currency. Transactions in foreign currencies are business are to be restructured. The location and number of recognised at the exchange rate on the date of the transaction, employees affected and a valid expectation must have been while monetary items in foreign currencies are presented at created among those concerned that the restructuring will be the exchange rate on the balance sheet date, and any gain/loss carried out. In addition, it must be possible to provide a reli- is reported in the income statement as financial items. Rev- able estimate of the amount of the liability. It is a condition that enues and expenses in subsidiaries with a functional currency the restructuring materially changes the size of the business different from the Groups presentation currency are translated or the way in which it is operated. The provision is calculated monthly at the average exchange rate for the month and on the basis of the best estimate of estimated expenses. If the accumulated. Statement of financial position items in subsidi- effect is material, anticipated future cash flows will be dis- aries with a different functional currency are translated at the counted using a current pre-tax interest rate that reflects the exchange rate on the balance sheet date. Translation differ- risks specific to the provision. Provisions as of 31 December ences are reported in comprehensive income. 2012 are described in Notes 16 and 20. Derivatives. Derivatives are valued at fair value on the balance Contingent liabilities and contingent assets. A contingent liabil- sheet date and reported as receivables or liabilities. Gains and ity or asset is a possible obligation or a possible asset whose losses due to realisation or changes in fair value are reported existence is uncertain and will be confirmed by the occurrence in the income statement in cases where the derivative is not or non-occurrence of a future event, such as the outcome of part of a hedge relationship that satisfies the criteria for hedge legal proceedings or the final settlement of an insurance claim. accounting. Embedded derivatives in contracts are identified Contingent liabilities are recognised in the financial statements and valued separately. Borregaard currently has no embedded if there is a more than a 50% probability that the liability has derivatives. Purchases and sales of derivatives are recognised at trade date. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 37

Loans/receivables. Loans and receivables are carried at amor- Level 2: Other techniques for which all inputs which have tised cost. Thus changes in fair value resulting from changes in significant effect on the recorded fair value are interest rates during the interest rate period are not reported in observable, either directly or indirectly the income statement. Borrowing costs related to the long-term funding are capitalised over the period of the loan facilities. Level 3: Other techniques which use inputs that have significant effect on the recorded fair value that are Hedging. The Group uses the following criteria for classifying a not based on observable market data. derivative or another financial instrument as a hedging instrument: (1) the hedging instrument is expected to be highly effec- Derivatives are considered to be in level 2. The foreign tive in offsetting the changes in fair value or the cash flow of an exchange element in currency forward contracts is measured at identified object – the hedging effectiveness is expected to be observable market prices using the foreign exchange rate set by between 80% and 125%, (2) the hedging effectiveness can be Norges Bank, Norway’s central bank. Different maturity dates measured reliably, (3) satisfactory documentation is established add an interest-rate element resulting in an estimated fair value before entering into the hedging instrument, showing among of the currency forward contracts. other things that the hedging relationship is effective, (4) for cash flow hedges, that the future transaction is considered to be Segments highly probable, and (5) the hedging relationship is evaluated Borregaard develops, produces and markets specialised bioma- regularly and is considered to be effective. terials, biochemicals and biofuels to a wide range of customers in global niches. Borregaard’s business model is linked to its Fair value hedges. Gains and losses on derivatives designated advanced biorefinery that utilises the different components as hedging instruments in fair value hedges are reported in the in the biomass to produce high value added products that income statement and are offset by changes in the value of the to a large extent can substitute petrochemical alternatives. hedged item. Hedge accounting is discontinued if: (a) the hedg- Borregaard’s main product groups are lignin-based products ing instrument has matured, or is terminated, exercised or sold, and specialty cellulose in addition to vanillin, bioethanol and (b) the hedge no longer satisfied the above mentioned criteria fine chemicals, serving a wide range of global growth industries for hedging, or (c) the Group for some reason decides not to such as construction, agriculture, food and beverages, transpor- continue the fair value hedge. In the case of a discontinued tation and pharmaceuticals. hedge relationship, the changes in the fair value of the hedged item recognised in the statement of financial position will be Borregaard has business areas as operating segments. The oper- amortised over the remaining life of the item, using the effec- ating segments correspond to the way in which the business tive interest rate method. The same will apply for the hedging areas report figures to the Group executive management (key instrument. decision maker). The business segments are divided into Perfor- mance Chemicals, Specialty Cellulose and Other Businesses. Cash flow hedges. The efficient part of changes in the fair value of a hedging instrument is recognised in comprehen- Borregaard’s Performance Chemicals business develops, sive income and reclassified to the income statement when produces, markets and sells lignin-based products as a niche the hedged transaction is carried out, and presented on the supplier and solutions provider. Borregaard’s Specialty Cel- same line as the hedged transaction. The inefficient part of the lulose business develops, produces, markets and sells specialty hedging instrument is reported in the income statement. When cellulose products as a niche supplier and solutions provider. a hedging instrument has matured, or is sold, exercised or In addition, Borregaard produces second generation bioethanol. terminated, or the Group discontinues the hedging relationship, even though the hedged transaction is still expected to occur, Performance Chemicals and Specialty Cellulose conduct over the accumulated gains and losses at this point will remain in 75% of the revenue and adjusted EBITA in the Borregaard comprehensive income, and will be recognised in the income Group.Borregaard utilises the lignin from the sulphite pulping statement when the transaction occurs. If the hedged transac- process to produce wood-based vanillin. Other Businesses con- tion is no longer expected to occur, the accumulated unrealised sists of the areas Ingreditents and Fine Chemicals in addition gains or losses on the hedging instrument will be recognised in to utilities (water works, incineration facilities and purification the income statement immediately. plants) and services at the Sarpsborg site and corporate functions. Borregaard is a supplier of fine chemicals for the global Measurement of financial instruments:The Group uses the fol- pharmaceutical industry. Borregaard also produces certain of lowing hierarchy for determining and disclosing the fair value the chemicals used in its production processes in Sarpsborg of financial instruments, by valuation technique (see Note 21): and sells excess chemicals from such production to customers. See Note 7. Level 1: Quoted, unadjusted prices in active markets for identical assets and liabilities The arm’s length principle is applied to pricing of transactions between the various segments and companies. Borregaard AS provides services to the companies in the Group and charges them for these services. ANNUAL FINANCIAL STATEMENTS 2012 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Figures for the geographical distribution of capital employed, Cash flow. The cash flow statement has been prepared accord- investments in property, plant and equipment, sales revenues ing to the indirect method and reflects cash flows from operating, and the number of man-years are also presented. See Note 8. investing and financing activities and explains changes in “Cash and cash equivalents “ in the reporting period. Other matters Acquisitions. Business combinations are accounted for using Leasing. Leases are classified according to the extent to which the acquisition method. In connection with the acquisition the risks and rewards associated with ownership of a leased asset of a subsidiary, the establishment of a joint venture or any lie with the lessor or the lessee. A lease is classified as a finance acquisitions of significant influence in associates, a purchase lease if it substantially transfers all risks and rewards incidental price allocation is carried out. The acquisition is reported in to ownership of an asset to the Company. Finance leases will be the financial statements from the date the Group has control. capitalised and depreciated over the lease period. Other leases are The date of control is normally the date on which the acquisi- operating leases. Lease expenses related to operating leases are tion agreement takes effect and has been approved by all the reported as current operating expenses. relevant authorities. Assets and liabilities are valued at fair value at the time of acquisition. If there are non-controlling Government grants. Government grants are recognised in the interests in the acquired company, these will be valued at financial statements when there is a reasonable assurance they their share of identified assets and liabilities. Goodwill allo- will be received. The grants are presented either as revenue or as cated to non-controlling interests are considered seperately a reduction in costs and, in the latter case, matched with the costs in each acquisitions. Goodwill is determined as the excess for which they are intended to compensate. Government grants of the purchase price and the amount recognised as non that relate to assets are recognised as a reduction in the acquisi- controlling interest over the fair value of identified assets and tion cost of the asset. The grant reduces the depreciation of the liabilities assumed. asset. The amounts of government grants are specified in Note 35. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39

Note 5 Use of estimates in preparing the financial statements

The management has made use of estimates and assumptions in Areas where estimates have considerable significance are, for preparing the financial statements. This applies to assets, liabili- example: ties, revenues, expenses and supplementary information related to contingent liabilities.

Accounting item Note Estimate/assumptions Carrying value

Amounts in NOK million Property, plant and Recoverable amount and estimation of equipment 18 correct remaining useful life 1 954 Goodwill and other intangible assets 17 Net present value future cash flows/NSV1 26 Pension liabilities 10 Economic and demographic assumptions 43 Assumption of what is considered as research and development respectively. Research & development 17 Some development is capitalised. 11

1 NSV: Net sales value

Property, plant and equipment are largely based on a directly Other estimates and assumptions are reported in various notes paid cost price and depreciated over estimated useful life. In and any information that is not logically included in other notes the case of several of Borregaard’s tangible assets, changes in is presented in Note 36 “Other matters”. assumptions may lead to substantial changes in value. Future events and changes in operating parameters may make it Goodwill is capitalised based on recognition principles from necessary to change estimates and assumptions. New inter- purchase price allocations. Goodwill is not routinely amortised, pretations of standards may result in changes in the principles but their value is tested at least once a year. The impairment chosen and presentation. Such changes will be recognised in tests are based on estimates of the value of the cash-generating the financial statements when new estimates are prepared and units to which goodwill has been allocated. The estimates are whenever new requirements with regard to presentation are based on assumptions of anticipated future cash flows based on introduced. These matters are discussed in both the section on a selected discount rate. The latter is based on the Borregaard’s principles and other notes. Weighted Cost of Capital and adjusted to the relevant calculation that is carried out in relation to country risk, inflation and Exercise of judgement operational risk. See Note 16. The financial statements may also be affected by the choice of accounting principles and the judgement exercised in apply- Borregaard has replaced the use of the government bond inter- ing them. This applies, for instance, to the distinctions between est on the Norwegian benefit plans to the covered bonds inter- operating and finance leases, and to the assessment of items est rate. This change does not have any impact on the profit and presented as “Other income and expenses” on a separate line. loss statement for 2012. It is important to note that a different set of assumptions for the presentation of the financial statements could have resulted in changes in the lines presented.

Note 6 Joint Ventures

Amounts in NOK million 2012 2011 Operating revenues 172 137 Operating expenses -139 -117 Operating profit/loss 33 20 Profit/loss for the year *) 26 11 Non-current assets 62 80 Current assets 68 65 Non-current liabilities 9 24 Current liabilities 27 27 Cash and cash equivalents 21 17 *) Profit/loss for the year will correspond to the figures presented according to the equity method after implementation of IFRS 11, presented as Operating profit (see Note 3).

No significant capital contribution is required in the joint venture in which Borregaard is a participant. ANNUAL FINANCIAL STATEMENTS 2012 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 7 Segments

The Group applies the same principles for the presentation of tion and write downs of intangible assets, other income and segment information as for the rest of its consolidated financial expenses and operating profit for each business area. It does statements, and the operating profit/loss in the segment infor- not disclose internal sale between the various segments as it is mation is identical to the information presented in the income considered immaterial. statement for the Group. There is therefore no need for further reconciliation of these income statement items. Borregaard has This table shows the revenues generated by the Performance a central finance function and the financing of the various seg- Chemicals business area, the Specialty Cellulose business area ments does not necessarily reflect the real financial strength of and Other Businesses. the individual segments. Financial items are therefore presented only for the Group as a whole. The segment information also includes cash flow from operations, expansion investments, working capital and capital The segment information tables show the key figures in which employed for each area. Borregaard uses the following defini- management monitors the business, such as total operat- tion for Capital Employed: net working capital + intangible ing revenue, operating expenses, adjusted EBITA, amortisa- assets + tangible assets - net pension liabilities - deferred tax excess value.

Segments 2012 Performance Specialty Other Borregaard Amounts in NOK million Chemicals Cellulose Businesses Eliminations Group Income statement Total operating revenue 1 689 1 616 715 -79 3 941 Operating expenses -1 423 -1 335 -720 79 -3 399 Adjusted EBITA1 266 281 -5 – 542 Adjusted EBITA margin 15.8% 17.9% -7.0% – 13.8% Amortisation and write downs intangible assets -3 – – – -3 Other income and expenses -57 -2 -12 – -71 Operating profit 206 279 -17 – 468 Net financial items – – – – -53 Profit before tax – – – – 415 Cash flow Cash flow from operations before net replacement expenditures 253 396 51 – 700 Replacement expenditures2 -28 -84 -213 – -325 Cash flow from operations 225 312 -162 – 375 Expansion investments -7 -12 -44 – -63 Capital structure Working capital 328 344 73 – 745 Capital employed (see Note 8) 728 1 538 478 – 2 744 Return on capital employed3 32.4% 18.8% -7.9% – 19.2% 1. Operating profit before amortisation and other income and expenses 2. Replacement expenditures Other Businesses includes stamp duty of NOK 23 million 3. EBITA/(Average net working capital+average tangible assets+average intangible assets at cost-average net pension liabilities-average deferred tax excess values) ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41

Segments 2011 Performance Specialty Other Borregaard Amounts in NOK million Chemicals Cellulose Businesses Eliminations Group Income statement Total operating revenue 1 539 1 644 749 -78 3 854 Operating expenses -1 314 -1 327 -755 78 -3 318 Adjusted EBITA1 225 317 -6 – 536 Adjusted EBITA margin 14.6% 19.3% -8.0% – 13.9% Amortisation and write downs intangible assets -6 – – – -6 Other income and expenses – – – – 0 Operating profit 219 317 -6 – 530 Net financial items – – – – -75 Profit before tax – – – – 455 Cash flow Cash flow from operations before net replacement expenditures 234 258 168 – 660 Replacement expenditures -36 -63 -107 – -206 Cash flow from operations 198 195 61 – 454 Expansion investments -4 -17 -24 – -45 Capital structure Working capital 315 357 28 – 700 Capital employed (see Note 8) 758 1 466 368 – 2 592 Return of capital employed 28.3% 22.6% -1.3% – 20.4%

1. Operating profit before amortisation and other income and expenses

Reconciliation Capital Employed Amounts in NOK million 2012 2011 Capital Employed 2 744 2 592 Other non-current assets 79 91 Cash and Cash equivalents 155 496 Net deferred tax -143 -158 Provisions and other liabilities -50 -42 Interest bearing liabilities -1 006 -1 808 Income tax -99 -62 Other 57 14 Equity 1 737 1 123

Reconciliation Cash Flow from operations Amounts in NOK million 2012 2011 Cash Flow from operating activities 551 536 Financial items, net 53 75 Taxes paid 96 49 Cash flow from operations before net replacement expenditures 700 660 Replacement expenditures -325 -206 Cash flow from operations 375 454 Expansion investments -63 -45

Reconciliation Working Capital Amounts in NOK million 2012 2011 Receivables 727 665 Inventories 589 558 Other liabilities -508 -511 Derivatives etc included in above items -63 -12 Working Capital 745 700 ANNUAL FINANCIAL STATEMENTS 2012 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 8 Geographical breakdown of capital employed, investments, number of man-years and sales revenues

Capital Employed Investments Number of man-years Sales revenues Amounts in NOK million 2012 2011 2012 2011 2012 2011 2012 2011 Norway 2 354 2 166 370 235 716 720 140 152 Rest of Europe 105 105 5 2 118 115 1 712 1 854 Asia 8 10 1 3 46 44 1 079 976 America 184 202 9 8 98 136 915 778 Rest of the world 93 109 3 3 47 47 48 50 Total 2 744 2 592 388 251 1 025 1 062 3 894 3 810 Link between segments and «Investments»: Net replacement expend. segments (see Note 7) 302 206 Expansion investments (see Note 7) 63 45 Stamp duty 23 – Total 388 251

Sales revenues per product group Amounts in NOK million 2012 2011 Performance Chemicals 1 657 1 508 Cellulose 1 522 1 554 Ethanol 91 87 Fine Chemicals 243 193 Ingredients 297 360 Other 84 108 Total revenues 3 894 3 810

Note 9 Payroll expenses and remuneration

Amounts in NOK million 2012 2011 Wages -575 -584 Sharebased payments -6 -4 Employer’s national insurance contribution -83 -81 Pension costs (see Note 10) -31 -29 Other payments etc. -1 -1 Payroll expenses -696 -699 Average number of man-years 1 051 1 061

Remuneration of the Group Executive Board

2012 2011 Base Pension Benefits No. of Base Pension Benefits Amounts in NOK thousand salary Bonuses1 cost in kind options2 salary Bonuses cost in kind Per A. Sørlie 2 308 3 280 333 183 430 000 2 199 793 309 191 Per Bjarne Lyngstad 1 326 1 947 114 172 205 000 1 260 548 109 183 Dag Arthur Aasbø 1 325 1 947 114 144 185 000 1 259 548 109 144 Tuva Barnholt 1 327 1 947 129 172 190 000 1 262 548 121 186 Morten Harlem 1 790 2 319 181 177 225 000 1 670 788 171 186 Tom Erik Foss-Jacobsen 1 445 2 221 121 169 215 000 1 297 708 109 179 Bjørn Erik Amundsen 1 458 2 223 131 166 210 000 1 388 530 125 176 Ole Gunnar Jakobsen 1 343 1 908 112 164 210 000 1 305 426 108 169 Gisle Løhre Johansen 1 436 2 060 132 140 185 000 1 369 602 126 180 Total remuneration 13 758 19 852 1 367 1 487 2 055 000 13 009 5 491 1 287 1 594

1. All members of the Group Executive Board received stay-on bonuses equalling 12 months salary in 2012 (NOK 12 million) related to the separation from the Orkla Group. 2. Number of share options in Borregaard ASA held at 31 December 2012 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 43

No compensation has been paid to the Board Members for the Borregaard uses external recognised job assessment systems period from listing. Compensation to members of the Board as a basis for procedures regarding remuneration levels and of Directors for the period from the first day of listing and up elements. The remuneration programme consists of base salary, to the date of the annual General Meeting of the Company’s pension arrangements, annual bonuses and long-term incen- shareholders in 2013 will be determined by the shareholders tives (LTI). In addition the executive management, a limited at such meeting and such determination shall have retrospec- number of key personnel will also be included in the annual tive effect. Thereafter, compensation will be determined on bonus system and LTI programme. an annual basis by the shareholders at the Company’s annual General Meeting. As of 31 December 2012 NOK 510 thousand The base salary should be up to median level for compara- has been reserved for compensation to the Board of Directors ble companies and positions. The pension plan is based on (including compensation to the Compensation Committee and Borregaard’s established defined contribution plan in Norway. the Audit Committee). Remuneration of the Board of Directors In general, the intention is that the system should give the same amounted to NOK 204 thousand in 2011. Remuneration was relative pension level independent of salary level. only paid to employee representatives and to the one external board member at that time. Annual bonuses are based on performance and improvement within financial results, productivity and EHS in addition to Per Arthur Sørlie (CEO) entered into a new employment con- other defined personal goals. An annual bonus may provide a tract with Borregaard to reflect the transfer of employment from maximum of 50% of the base annual salary. A defined “good BIL to Borregaard. performance level” will, over time, give a bonus of 30%. An annual bonus includes holiday payment, but does not provide If the CEO, by mutual agreement and in the best interests a basis for pension contributions. of the company, terminates the employment contract, the employee will receive pay and contractual benefits for up to The long-term incentive (LTI) plan is a cash-based arrange- 18 months after the period of notice. 75% of any income from ment that can be earned and paid out over several years and another permanent post during the 18-month period will be is related to the share price trends. The plan will not provide deducted. The CEO is included in the company’s ordinary a return until a defined increase in the share price from grant pension schemes and in addition has a pension agreement date is achieved (adjusted for paid out dividend during the to receive 60% of annual pay including benefits from 65 to period). The maximum annual payment is twice the annual 67 years with no deduction for income from other permanent base salary for the CEO, and equivalent to the annual base employment income. salary for the others in the Group Executive Board. At least 50% of potential net proceeds must be used to purchase shares Members of Management (including CEO) were granted stay- in the Company until the shareholdings equal twice, or are on bonuses equalling 12 months’ salary in connection with equivalent to, the annual base salary for the CEO and the rest the restructuring and listing of Borregaard. The bonus was of the Group Executive Board respectively. Proceeds or values paid out in November 2012. of the LTI do not provide a basis for pension contributions. The Board evaluates whether LTI will be used during the coming Current bonus systems year on an annual basis. As part of Orkla, Borregaard had a system of annual bonuses that rewards improvement (operational excellence) in 2012. Current option programmes In connection with the IPO of Borregaard ASA, the Board of Under this system, a “good performance”, which is specifi- Directors resolved to offer Borregaard employees who held cally defined for the various elements, can result in an annual share options in Orkla ASA to exchange these for an equal bonus of 30% of an employee’s fixed pay, while the maxi- number of share options in Borregaard ASA. Each option will mum bonus is 100% of the employee’s annual pay. This bonus entitle the holder to buy one share in Borregaard ASA at a system applied to approximately 33 senior executives in 2012 strike price of NOK 20.03. Management and employees of including the CEO and the rest of the Group Exectutive Board. Borregaard accepted the offer. Total number of options for shares exchanged was 1,590,000. The changes were account- New remuneration programme ed for as a modification of an existing share based payment. A new remuneration programme including bonus programme The life of the options changed from 6 to 4 years and the vest- is being developed in 2013 and will be presented before the ing period changed from 3 to 1 year. The incremental fair value Ordinary General Meeting for approval on 15 April 2013. The granted as a result of the modifications was NOK 3.6 million. suggested new programme is as follows: The incremental fair value granted was measured using the Black-Scholes model. In general, remuneration to persons in managerial positions should be competitive and simple with long-term arrange- In addition, the Group Executive Board has been offered ments that have appropriate flexibility. There should also be 950,000 new options for shares at a strike price of NOK 22.50. consistency between the personal conditions and the Com- Share based related expenses for 2012 for the Group Executive pany’s goals and results. Board was NOK 5 million. ANNUAL FINANCIAL STATEMENTS 2012 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Both option programmes has a maturity of 4 years, and no share on the day the option is exercised. Total fair value of options can be exercised before 31 October 2013. When an the options outstanding as of 31 December 2012 is NOK 15 option is exercised, Borregaard alternatively has the right to million. Changes in outstanding share options for Borregaard’s redeem the option by paying a cash amount equivalent to employees are shown in the following table (the figures for the difference between the exercise price and the price of the 2011 are related to the share options within Orkla):

2012 2011 Number of share options No. WAEP 1) No. WAEP 1) Outstanding at the beginning of the year 1 695 000 55.29 1 390 000 60.81 Granted during the year 2) 2 540 000 20.95 435 000 57.53 Exercised during the year – – – – Exchanged options from Orkla to Borregaard during the year 2) -1 590 000 – – – Forfeited during the year -105 000 – -130 000 51.58 Outstanding at year-end 1) 2 540 000 20.95 1 695 000 55.29 Exercisable options at year-end 0 – 375 000 78.41 1) Weighted average exercise price. Amounts in NOK. 2011 for Orkla, 2012 for Borregaard 2) Granted 950 000 options in Borregaard at listing and exchanged 1 590 000 from Orkla to Borregaard options at listing

Weighted average exercise price for outstanding options at year end:

2012 2011 Expiry date WAEP 1) No. WAEP 1) No. 15-12-12 – – 88.94 60 000 08-05-14 – – 76.40 315 000 22-05-15 – – 47.36 430 000 10-05-16 – – 46.38 455 000 09-05-17 – – 52.53 435 000 31-10-16 20.95 2 540 000 – – 2 540 000 1 695 000 1) Weighted average exercise price. Amounts in NOK. 2011 for Orkla, 2012 for Borregaard

Borregaard has used the Black-Scholes model when estimating Assumptions 2012 2011 the value of the options. The volatility is calculated on the basis Expected dividend-yield (%) 0 6 the average volatility the past years for Borregaard peers since Expected volatility (%) 34 40 Borregaard has no recorded historic volatility. In the model, Historical volatility (%) 34 40 new option awards have been based on the following assump- Risk-free return (%) 2.0 2.0 tions: Expected life of option (years) 4.0 5.6 Weighted average share price (NOK) 1) 20.97 47.7

1) Figures 2011 are Orkla, 2012 figures are Borregaard

Fees to Group external auditor

Amounts in NOK million 2012 2011 Statutory audit 2 2 Other attestation services 0 0 Tax consultancy services 0 0 Other non-audit services 1 1 Total fees to Ernst & Young 3 3

Fees to other external auditors 1 1 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45

Note 10 Pensions

Defined contribution plans Defined contribution plans comprise arrangements whereby the The new early retirement scheme is recognised as a defined company makes annual contributions to the employees’ pen- contribution plan. This may change if there are sufficient reli- sion plans, and where the future pension is determined by the able, consistent data to be able to recognise it as a defined amount of the contributions and the return on the pension plan benefit plan. The premium for the new early retirement scheme assets. Contribution plans also comprise pension plans that are will increase from 1.75% in 2012 to 2.00% in 2013 of total common to several companies and where the pension premium payments of wages between 1 and 7.1 times the average basic is determined independently of the demographic profile in the amount. This change in premium is in line with the announced individual companies (multi-employer plans). Employees in change whereby the premium for the new early retirement Borregaard are mainly covered by pension plans classified as scheme for the years 2011-2015 is gradually to be increased contribution plans. as the premiums and employer’s contributions for the old AFP scheme are phased out. Defined benefit plans Borregaard has pension plans that are classified as funded Assumptions relating to defined benefit plans benefit plans and unfunded benefit plans. The largest part of the Borregaard has replaced the use of the government bond benefit plans are in the USA and Norway. interest rate on the Norwegian benefit plans by the covered bonds interest rate. The discount rate is fixed at the rate on high USA quality corporate bonds with the same lifetime as the pension The pension plans in the USA contains three different plans; two liabilities (AA-rated corporate bonds). In countries where there defined benefit plans for salaried and hourly employees and one is no deep market in such bonds, the market yields on govern- supplemental postretirement plan. ment bonds are used, adjusted for the actual lifetime of the pension liabilities. Norway The net pension liabilities consist of unfunded pension plans for As a rule, parameters such as wage growth, growth in G (future key personnel and liabilities related to contribution-based plans social security wage base) and inflation are set in accordance for employees who earn more than twelve times the Norwegian with recommendations in the various countries. National Insurance Scheme’s basic amount (12G). The pension plan for employees in Norway who earn more than 12G is a The mortality estimate is based on up-to-date mortality tables contribution-based plan. The sum of the accrued contributions for the various countries (K2005 in Norway). and the return on the plan assets are presented as a pension liability in the company’s statement of financial position. The Pension plan assets pension plan is therefore presented as a defined benefit plan. The pension plans with pension plan assets are located in the USA. Pension plan assets are mainly invested in bonds A small part of the pension liability consists also of provisions and shares. The estimated return will vary depending on the made to cover the underfunding in the old early retirement composition of the various classes of assets. The breakdown of scheme (AFP), as recommended under the Norwegian Account- pension plan assets is presented below. Expected contributions ing Standards. for 2013 are approximately NOK 12 million.

Assumptions defined benefit plans

Norway USA 2012 2011 2012 2011 Discount rate 3.75% 2.5% 4.00% 4.75%

Rate of return on assets – – 6% 6% Future salary adjustment 3.25% 3.75% 5% 5% G-multiplier 1) / Future social security wage base 3.25% 3.75% 4,5% 4.5%

Adjustment of benefits 0.50% 0.7% – – Turnover 2.00% 0-5% 1-5% 3%

Expected average remaining vesting period 12 12.5 – – ANNUAL FINANCIAL STATEMENTS 2012 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Breakdown of net pension costs Changes in pension plan assets during the year

Amounts in NOK million 2012 2011 Amounts in NOK million 2012 2011 Contribution plans -19 -19 Pension plan assets (fair value) 1 January 193 183 Current service cost Expected return on pension plan assets 12 11 (incl. national insurance contributions) -8 -10 Unrecognised actuarial gains and losses 18 -13 Interest on pension obligations -11 -10 Contributions and benefits paid during the year 7 8 Expected return on pension plan assets 12 11 Currency translations -21 4 Actuarial gains and losses/past service cost -5 -1 Pension plan assets (fair value) Net pension costs -31 -29 31 December 209 193

Breakdown of net pension liabilities as of 31 December Breakdown of pension plan assets (fair value) as of 31 December

Amounts in NOK million 2012 2011 2012 2011 Present value of funded pension obligations -209 -193 Cash and cash equivalents and money market Pension plan assets (fair value) 209 193 investments 1% 0% Net funded pension assets 0 0 Bonds 39% 39% Present value of unfunded pension obligations -52 -51 Shares 60% 61% Unrecognised actuarial gains and losses 58 58 Total pension plan assets 100% 100% Capitalised net pension liabilities 6 7 Capitalised pension liabilities -43 -42 Capitalised plan assets 49 49 See Note 19 and 23 for capitalised pension assets and pension liabilities

Changes in the present value of pension obligations during the year

Amounts in NOK million 2012 2011 Pension obligations 1 January -244 -207 Current service cost (incl. national insurance contributions) -8 -10 Interest on pension obligations -11 -10 Unrecognised actuarial gains and losses -27 -20 Benefits paid during the year 7 8 Currency translations 21 -5 Pension obligations 31 December -262 -244

Summary of net pension liabilities and adjustments in past four1 years

Amounts in NOK million 2012 2011 2010 2009 Pension obligations -261 -244 -207 -244 Pension plan assets 209 193 183 158 Net pension liabilities -53 -51 -24 -86 Changes in unrecognised actuarial gains and losses in pension obligations -27 -20 -24 -18 Changes in unrecognised actuarial gains and losses in pension plan assets 18 -13 1 1 1. Adjustment for 2008 not available ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 47

Note 11 Other operating expenses

Amounts in NOK million 2012 2011 External selling/distribution (freight) costs -322 -302 Repair and maintenance costs -129 -121 Consultants, legal advisors, temporary staff, etc. -93 -93 Operating expenses vehicles -2 -3 Rental/leasing -42 -52 Operating expenses, office equipment etc. -4 -4 Other -227 -240 Total other operating expenses -819 -815

Note 12 Other income and expenses

Amounts in NOK million 2012 2011 Stay-on bonuses to the management team related to the separation from the Orkla Group -16 0 Reserved restructuring charge LignoTech Brazil PL -11 0 Write-down of tangible assets in LignoTech Brazil PL -9 0 Write-down of intangible assets in LignoTech Brazil PL -35 0 Total other income and expenses -71 0

Note 13 Finance income and finance costs

Amounts in NOK million 2012 2011 Interest income from Orkla Group 2 2 Interest income 9 13 Foreign exchange gain 150 144 Other finance income 1 1 Total finance income 162 160

Interest costs from Orkla Group -62 -83 Interest costs -9 -1 Foreign exchange loss -143 -150 Other finance costs -1 -1 Total finance costs -215 -235

Net finance costs -53 -75 ANNUAL FINANCIAL STATEMENTS 2012 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 14 Taxes

Amounts in NOK million 2012 2011 The ordinary tax rate for companies domiciled in Norway is 28%. Profit before tax 415 455 The businesses in countries with tax rates other than 28% have the Current tax expense -128 -124 net effect of increasing the tax expense. Particularly the Perfor- Deferred tax expense -12 -11 mance chemicals business in the US, subject to a tax rate of 40% Total tax expense -140 -135 inclusive state tax, is contributing to an increased tax expense. Tax as % of “Profit/loss before taxes” 34.0% 30.0% The business in South Africa is subject to a tax rate of 25% not taken into consideration the distribution of dividend.

Reconciliation of the Group’s tax rate Other non-deductible expenses consist mainly of write downs In the following table, reported taxes are reconciled with the related to the closure of the lignin plant in Brazil, see Note 16. tax charge based on the Norwegian tax rate of 28%. The main tax components are specified. Other current taxes are mainly due to increased corporate tax rate in South Africa on distribution of dividend. Amounts in NOK million 2012 2011 28% of profit before taxes (tax rate in Norway) -116 -127 Deferred tax liabilities Foreign operations with other tax rates than 28% -5 -6 Deferred tax liability consists of the Group’s tax liabilities that are Other non-deductible expenses -21 -2 payable in the future. The table below lists deferred tax assets and Other non-taxable income 1 4 liabilities relating to the timing differences between tax accounting Other current taxes 1 -4 and financial accounting. The Group’s total tax expense -140 -135

The table shows the composition of the Group’s deferred tax.

Amounts in NOK million 2012 2011 Deferred tax on tax increasing/-reducing differences Hedging taken to comprehensive income 19 8 Intangible assets 1 1 Property, plant and equipment 101 104 Net pension liabilities 9 -2 Gain and loss tax deferral 2 2 Other non-current items -3 0 Total non-current items 129 113 Current receivables -1 -2 Time lag group contributions 0 36 Inventories 21 23 Provisions -7 -6 Other current items 1 6 Total current items 14 57 Losses carried forward 0 -12 Net deferred tax 143 158 Change in deferred tax 15 15 Change in deferred tax hedging reserve taken to comprehensive income 11 -27 Acquisitions/sale of companies, translation effects etc. -2 -3 Other -36 4 Change in deferred tax income statement -12 -11

Net deferred tax presented in statement of financial position Losses carried forward by expiry date

Amounts in NOK million 2012 2011 Amounts in NOK million 2012 2011 Deferred Tax 143 158 2018 or later 0 34 Deferred tax assets 0 0 Without expiry date 1 1 Net deferred tax 143 158 Total tax losses carried forward 1 35 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 49

Tax reducing timing differences with corresponding deferred tax assets

2012 Tax reducing Recognised Unrecognised timing differ- deferred tax deferred tax Total deferred Amounts in NOK million ences assets assets tax Losses carried forward by country Germany 1 – – 0 Total 1 – – 0 Other tax reducing timing differences 34 10 – 10 Total tax reducing timing differences 35 10 0 10 Netted deferred tax -35 -10 – -10 Net tax reducing timing differences 0 0 0 0

Deferred tax assets are only capitalised to the extent that it been identified. If future profits are not likely to be sufficient is probable that there will be sufficient future taxable profit to absorb the tax reducing timing differences, deferred tax for the tax asset to be used, either because the unit recently assets are not recognised. reported a profit or because assets with excess value have

Note 15 Earnings per share (EPS)

The share capital consists of 100 million shares as of 31 Amounts in million 2012 2011 December 2012. As the Company did not exist prior to 2012, Profit/loss for the year after non-controlling the EPS calculation for the comparable year is also based interests (NOK million) 273 317 on 100 million shares. As of 31 December 2012 there are Weighted average number of shares outstanding 100 100 100,058,861 diluted shares. There is no dilution effect as of 31 Estimated dilution effect option programme 0 0 December 2011. Weighted average number of shares outstanding diluted 100 100

Amounts in NOK 2012 2011 Earnings per share 2.73 3.17 Eearnings per diluted share 2.73 3.17 ANNUAL FINANCIAL STATEMENTS 2012 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 16 Impairment assessments

Borregaard has substantial non-current assets in the form of tan- In April 2012, Cambará, the supplier of lignin to Borregaard’s gible (property, plant and equipment) and some minor intangible lignin plant in Brazil, stopped its pulp production due to unfa- assets. An explanation of the details of and changes in these vourable results and lack of water. As Cambará was the sole assets is presented separately in Note 17 and 18. source of lignin supply in Brazil, Borregaard stopped production of lignin-based products at the same time. In the valua- Estimate uncertainty, in some cases considerable, attaches to tion from Q2 2012 the updated information was taken into both property, plant and equipment and intangible assets. Both consideration, and it resulted in a write down of the booked valuation and estimated useful lifetime are based on future infor- value of the companies in Brasil with NOK 35 million, where mation that is always subject to a great degree of uncertainty. of NOK 30 million was related to goodwill and NOK 5 million was related to intangible rights. NOK 20 million for close down Tangible assets (property, plant and equipment) are basically costs and write down of tangible assets was booked in the capitalised at acquisition cost and, if they have a limited useful second half of 2012, see Note 12. life, will be systematically depreciated over that period. Useful life and residual value are based on estimates of future growth. Budget assumptions and cash-generating units A cash-generating unit (CGU) is the lowest level at which inde- The value of intangible assets is primarily derived from the pendent cash flows can be measured. Based on the forecasts, Group’s own valuations and has generally been capitalised expectations and assumptions that were applied, Biotech’s in connection with the Group’s acquisition of a new business. CGU justify the capitalised value of goodwill at 31 December Goodwill is to be regarded as a residual in the same acquisition. 2012 and the fair value exceeds the book value of more than Intangible assets consist of lye supplies which are amortised over 20%. the contract period. Calculations of future cash flows are based on a number of Borregaard routinely monitors assets and if there are indications assumptions regarding both economic trends and the estimated that the value of an asset is no longer recoverable, an impair- useful life. Borregaard is affected by fluctuating markets and ment test will immediately be carried out to determine whether estimates made in weak markets can differ substantially from the asset can still justify its carrying value. If new estimates con- estimates made in stronger markets. clude that the value is no longer recoverable, the asset is written down to the recoverable amount, i.e. the greater of the net sales The discount rate applied is based on the Group’s cost of capi- value and the value in use (discounted cash flow). tal, which has been estimated to be 10.7% before tax in 2012 (10.7% in 2011), based on a weighted average of required rates Goodwill is tested at least annually for impairment. At of return for the Group’s equity and debt (WACC). The required Borregaard, impairment testing is carried out in the third quarter. rate of return on the Group’s equity is estimated by using If there are indications of a reduction in value, impairment test- the capital asset pricing model (CAPM). The required rate of ing is carried out more frequently. return on debt is estimated on the basis of a long-term risk-free interest rate to which is added a credit margin derived from Cash flows relating to the assets are identified (see below) and Borregaard’s marginal long-term borrowing rate. The discount discounted. Future cash flow is based on specified assump- rate is adjusted for country risk, the level of inflation and operations and the plans adopted by the entity. If the discounted tional risk, depending on the particular value being calculated. value of future cash flows is lower than the capitalised value of The discount rate applied in the impairment test of the goodwill the unit’s capital employed, the assets are written down to the in Biotech is 12%. recoverable amount. If the discounted value is higher than the capital employed, this means that the value of the intangible Future cash flows are estimated on the basis of the budget for asset or goodwill is recoverable. In cases where the discounted next year and the following two forecast years. As from year value exceeds the capital employed by less than 20%, a further four a terminal value is calculated. Cash flow estimates are sensitivity analysis is carried out to check the calculation. When sensitive to changes in raw material prices and thereby other relevant, assumptions and estimates are reviewed and the robust- purchase prices and the coherent ability to maintain margin ness of the investment is measured in relation thereto. assumptions. The sensitivity of the estimates, even when there is a reasonable possibility of a change in assumptions, did not Borregaard’s goodwill is related to the prior acquisition of Bio- give grounds for impairment charges. tech Lignosulfonate Handels GmbH:

Goodwill Amounts in NOK million 2012 2011 Lignotech Brazil PL 0 30 Biotech Lignosulfonate Handels GmbH 24 25 Total goodwill 24 55 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51

Note 17 Intangible assets

Amortisable intangible assets are amortised on a straight line resources being involved in development projects. IT consists basis at the following rates: Development 20% and other intan- mainly of external costs. gible assets 10-15%. Development consists mainly of internal

Other intan- Amounts in NOK million Development IT gible assets Goodwill Total Book value 1 January 2012 7 0 10 55 72 Additions 7 3 – – 10 Depreciation/Amortisation -3 -1 -3 – -7 Write-downs – – -5 -30 -35 Currency translations – – – -1 -1 Book value 31 December 2012 11 2 2 24 39

Initial cost 31 December 2012 20 109 53 55 237 Accumulated amortisation and write-downs -9 -107 -51 -31 -198 Book value 31 December 2012 11 2 2 24 39

Book value 1 January 2011 5 0 16 55 76 Additions 4 – – – 4 Depreciation/Amortisation -2 – -6 – -8 Write-downs – – – – 0 Currency translations – – – – 0 Book value 31 December 2011 7 0 10 55 72

Initial cost 31 December 2011 13 106 53 55 227 Accumulated amortisation and write-downs -6 -106 -43 0 -155 Book value 31 December 2011 7 0 10 55 72

In addition, Borregaard expensed NOK 82 million in 2012 in Remaining goodwill and intangible assets related to LignoTech research and development costs (NOK 56 million in 2011). The Brasil PLL were written down in 2012, see Note 16 for details. amounts include cost deductions/grants. See Note 35. ANNUAL FINANCIAL STATEMENTS 2012 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 18 Property, plant and equipment

Property, plant and equipment are depreciated on a straight carrying value, depreciation is stopped. This applies in par- line basis at the following rates: buildings 2-4%, machinery, ticular to buildings. The Group is committed to fulfill contracts fixtures and fittings 5-15%, vehicles 15-25% and EDP equip- amounting to NOK 108 million which is not recorded in the ment 16-33%. The period of depreciation is reviewed each year statement of financial position as of December 31, 2012 (NOK and if there are changes in useful life, depreciation is adjusted. 195 million as of 31 December 2011). The residual value is also calculated and if it is higher than the

Land, buildings Machinery Assets under Fixtures, fittings, Amounts in NOK million and other property and plants constructions vehicles, EDP etc. Total Book value 1 January 2012 680 923 205 14 1 822 Additions 70 105 195 9 378 Disposals – – – -1 -1 Transferred assets under construction 42 88 -140 2 -7 Write-downs -8 – – – -8 Depreciation -47 -164 – -5 -215 Currency translation -5 -8 -1 -1 -15 Book value 31 December 2012 732 944 259 19 1 954 Initial cost 31 December 2012 1 462 4 453 260 147 6 322 Accumulated depreciation and write-downs -730 -3 509 -1 -128 -4 368 Book value 31 December 2012 732 944 259 19 1 954

Book value 1 January 2011 667 975 134 15 1 791 Additions 26 68 148 5 247 Disposals – -2 – – -2 Transferred assets under construction 28 48 -76 – 0 Write-downs – – – – 0 Depreciation -38 -154 – -5 -197 Currency translation -3 -12 -1 -1 -17 Book value 31 December 2011 680 923 205 14 1 822 Initial cost 31 December 2011 1 350 4 248 205 135 5 938 Accumulated depreciation and write-downs -670 -3 325 0 -121 -4 116 Book value 31 December 2011 680 923 205 14 1 822

See Note 33 for disclosures of security and mortgages related to Borregaard’s property, plant and equipment.

Note 19 Inventories and Cost of Materials

Inventories are valued at the lower of acquisition cost and net Amounts in NOK million 2012 2011 realisable value after deducting selling costs. This has resulted Raw materials 96 114 in a total write-down of inventories as of 31 December 2012 of Work in progress 3 5 NOK 8 million (NOK 6 million in 2011). There are no reversed Finished goods and merchandise 490 439 write-downs from earlier years. Inventories valued at net realis- Total inventories 589 558 able value total NOK 9 million (NOK 9 million in 2011). Wood 417 437 Energy 505 478 Other materials 813 841 Change in inventories -69 -151 Total cost of materials 1 666 1 605 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 53

Note 20 Provisions and other non-current liabilities

Amounts in NOK million 2012 2011 Pension liabilities (see Note 10) 1) 43 42 Other provisions 7 0 Total 50 42 1) Pension liabilities are classified as non-interest-bearing liabilities because the interest elements are presented with other pension expenses under “Payroll expenses”.

Note 21 Overview of financial instruments

Following measurement levels are used for determining the fair Level 3: Other techniques which use inputs that have signifi- value of financial instruments: cant effect on the recorded fair value that are not based on observable market data. Level 1: Quoted, unadjusted prices in active markets for identical assets and liabilities There were no transfers from one level to another in the measurement hierarchy in 2011 and 2012. Borregaard has Level 2: Other techniques for which all inputs which have sig- no items defined as level 1 and level 3. The measurement of nificant effect on the recorded fair value are observable, either Borregaard’s derivatives is defined as level 2. A description of directly or indirectly how the derivatives are measured is provided in Note 29.

Overview of Financial instruments 2012 Financial Financial instruments instruments Financial at fair value at fair value liabilities through through measured at Measure- profit and compre-hen- amortised Deposits and Of this inter- Amounts in NOK million Note ment level loss sive income cost receivables Total est bearing Fair value 1)

Non-current assets Non-current financial receivables 24 – – – 30 30 11 30 Non-current derivatives 24, 29 2 – – – 0 – 0 Total 0 0 0 30 30 11 30

Current assets Accounts receivable 22 – – – 534 534 – 534 Current derivatives 22, 29 2 1 69 – – 70 – 70 Cash and cash equivalents 23 – – – 155 155 155 155 Total 1 69 0 689 759 155 759

Non-current liabilities Non-current financial liabilities 27 – – 990 – 990 990 990 Total 0 0 990 0 990 990 990

Current liabilities Current financial liabilities 27 – – 16 – 16 16 16 Accounts payable 25 – – 258 – 258 – 258 Other current liabilities 25 – – 4 – 4 0 4 Current derivatives 25, 29 2 1 – – – 1 – 1 Total 1 0 278 0 279 16 279

Total financial instruments 0 69 -1 268 719 -480 -840 -480

Total measurement level 1 0 Total measurement level 2 69 Total measurement level 3 0

1) Fair value of interest bearing debt is valued at booked value as the bank facilities agreements are newly established. ANNUAL FINANCIAL STATEMENTS 2012 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Overview of Financial instruments 2011 Financial Financial instruments instruments Financial at fair value at fair value liabilities through through measured at Measure- profit and compre-hen- amortised Deposits and Of this inter- Amounts in NOK million Note ment level loss sive income cost receivables Total est bearing Fair value

Non-current assets Non-current financial receivables 24 – – – 22 22 6 22 Non-current derivatives 24, 29 2 – 20 – – 20 – 20 Total 0 20 0 22 42 6 42

Current assets Accounts receivable 22 – – – 550 550 – 550 Current derivatives 22, 29 2 – 10 – – 10 – 10 Cash and cash equivalents 23 – – – 496 496 496 496 Total 0 10 0 1 046 1 056 496 1056

Non-current liabilities Non-current financial liabilities 27 – – 1 788 – 1 788 1788 1788 Total 0 0 1 788 0 1 788 1788 1788

Current liabilities Current financial liabilities 27 – – 19 – 19 19 19 Accounts payable 25 – – 299 – 299 – 299 Other current liabilities 25 – – 1 – 1 1 1 Current derivatives 25, 29 2 2 1 – – 3 – 3 Total 2 1 319 0 322 20 322

Total financial instruments -2 29 -2 107 1 068 -1 012 -1306 -1012

Total measurement level 1 0 Total measurement level 2 27 Total measurement level 3 0 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 55

Note 22 Receivables (current)

Amounts in NOK million 2012 2011 Accounts receivable 534 550 Non interest-bearing derivatives 70 10 Other current receivables 27 0 Total financial receivables 631 560 Advance payment to suppliers/earned income 96 105 Total current receivables 727 665

Change in provisions for bad debt: Accounts receivables have the following due dates:

Amounts in NOK million 2012 2011 Amounts in NOK million 2012 2011 Provisions for bad debts 1 January 6 3 Accounts receivable not due 442 468 Bad debts recognised as expense (- income) 0 3 Overdue receivables 1-30 days 85 75 Realised losses -1 0 Overdue receivables 31-60 days 5 8 Provisions for bad debts 31 December 5 6 Overdue receivables 61-90 days 2 2 Overdue receivables over 90 days 5 3 Accounts receivable carrying amount 31 Dec.. 539 556

Note 23 Cash and cash equivalents

Amounts in NOK million 2012 2011 ment purposes. Cash and cash equivalents consist of cash, Cash at bank and in hand 134 18 bank deposits and current deposits with a maturity of three Cash and cash equivalents in Joint Ventures 21 17 months or less. As far as possible, excess liquidity in wholly- Deposits with Orkla 0 461 owned subsidiaries is channelled to Borregaard’s cash pool Total cash and cash equivalents 155 496 or placed as deposits with Borregaard AS. In some countries there are legal or technical impediments on placing such liquid Cash and cash equivalents are held for the purpose of meet- assets with Borregaard’s cash pool or making deposits with ing short-term fluctuations in liquidity rather than for invest- Borregaard AS.

Note 24 Other assets (non-current)

Amounts in NOK million 2012 2011 Non interest-bearing derivatives 0 20 Receivables interest-bearing 11 6 Receivables non interest-bearing 19 16 Total financial assets 30 42 Pension plan assets (see Note 10) 49 49 Total other assets 79 91

Note 25 Other liabilities (current)

Amounts in NOK million 2012 2011 Accounts payable 258 299 Non interest-bearing derivatives 1 3 Non interest-bearing liabilities 4 0 Total financial liabilities non interest-bearing 263 302 Value added tax, employee taxes etc. 55 47 Accruals 190 162 Total current liabilities 508 511 ANNUAL FINANCIAL STATEMENTS 2012 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 26 Capital management

Overall objectives

Borregaard’s financial policy shall ensure short-term and long- financial risks, primarily related to currency fluctuations in a term financial flexibility for the Group. prudent manner, in accordance with established guidelines. Borregaard shall develop and maintain relationships with a Borregaard shall aim at maintaining an ”investment grade” core group of banks, based on long-term financing commit- credit quality in order to ensure access to debt capital on ments. favourable terms and conditions. Borregaard shall manage

Long-term funding

On 28 September 2012 Borregaard entered into Bank Facility and (ii) a 5-year revolving loan facility in the aggregate amount Agreements in an aggregate amount of NOK 1,800 million. The of NOK 1,200 million available from and including the IPO purpose of the Bank Facilities Agreements was to finance the completion date, until one month prior to the facility termina- Group’s working capital and general corporate purposes and to tion date, which will be 60 months after the date of the relevant refinance the amount then outstanding under the intra-group Bank Facility Agreement. Each revolving loan made available loan facilities made available to Borregaard by Orkla. The total to Borregaard under the Bank Facilities Agreements must be facility amount under the Bank Facilities Agreements are split repaid on the last day of an interest period selected by the into two tranches: (i) a 3-year revolving loan facility avail- borrower. Borregaard may select an interest period of one, two, able in the aggregate amount of NOK 600 million from and three or six months. All outstanding loans and all other sums including the IPO completion date (18 October 2012) until one due and outstanding must be repaid in full on the termination month prior to the facility termination date, which will be 36 date specified for each tranche under the Bank Facilities Agree- months after the date of the relevant Bank Facility Agreement; ments.

The Bank Facilities Agreements include the following financial covenants:

1) Leverage ratio: the ratio of Net Interest Bearing Debt to EBITDA shall not exceed the following ratios: Up to and including the accounting period ending on 30 June 2013: < 3.50:1. Thereafter and up to and including the accounting period ending on 30 June 2015: < 3.25:1. After the period ending on 30 June 2015: < 3.00:1

2) Equity ratio: the ratio of Total Consolidated Equity to Total Assets shall not be lower than 25%

3) Interest Cover ratio: the ratio of Consolidated EBITDA to net Interest Expense shall not be lower than 3.00:1

The Bank Facilities Agreements also contain restrictions i.a. on mercial paper markets and/or short term bank loans as sources the Group companies’ ability to grant security or guarantees of liquidity, provided that such loans can be substituted by (negative pledge). Borregaard is not in breach of any covenants undrawn long term committed loan facilities. as of 31 December 2012. Partially owned companies (Joint Ventures) or companies Borregaard’s policy for long-term funding is for debt to have whose domestic legislation prevents them from entering into a maturity of at least 2.5 years, with a maturity profile spread loan agreements with Borregaard AS (holding the Finance over several years. Refinancing risk shall be actively managed function for the Group), will need either to be financed on and the refinancing process for maturing loans shall commence equal (pro rata) terms by the partners or will have to establish at least one year ahead of scheduled maturity. Borregaard shall independent funding. seek to diversify its long-term funding sources, supplementing bank loans with debt capital markets and other sources, subject As an industrial group, Borregaard is not subject to any external to availability and conditions. The company may utilise com- capital requirements.

Liquidity and cash management

At 31 December 2012, Borregaard had an overdraft limit of 70 with Nordea. This facility shall be reviewed in October 2013. million NOK linked to its cash pool (Group account system) Borregaard’s policy is to have sufficient overdraft lines to cover ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57

daily liquidity fluctuations. Group liquidity shall be managed The Group’s capital consists of net interest-bearing in cash pools, with Borregaard AS as owner of top accounts liabilities and equity: and legal counterpart to relevant banks. Group companies shall Amounts in NOK million 2012 2011 participate in cash pools to the extent possible, with allocated internal credit lines if required. Group companies which are Total interest-bearing liabilities Orkla ASA 0 1 773 prevented from participating in cash pools, shall enter into Total interest-bearing liabilities other 1 006 35 deposit and/or loan agreements with Borregaard AS and shall Total interest-bearing receivables 166 502 aim at keeping locally held cash balances at a near-zero level. Net interest-bearing liabilities 840 1 306 Excess liquidity should primarily be used to repay debt. Alter- natively, excess liquidity can be placed into relationship banks Group’s equity 1 737 1 123 or other well-rated banks. Equity ratio1 49.0% 30.3% Net gearing2 0.48 1.16 Partially owned companies (Joint Ventures) or companies 1. Book equity/Total assets whose domestic legislation prevents them from entering into 2. Net interest-bearing liabilities/equity deposit and/or loan agreements with Borregaard AS, shall invest surplus cash in low-risk deposits and/or pay dividend.

Note 27 Funding and interest-bearing liabilities

Funding covenants (leverage ratio, equity ratio and interest cover ratio) Borregaard’s main source of financing is long-term revolving and some limitations on new indebtedness beside change of loan facilities totaling NOK 1,800 million from Scandinavian control and cross-default provisions. In addition, a NOK 70 banks. The facilities, granted to Borregaard ASA and Borregaard million overdraft facility from a bank providing cash manage- AS on a joint and several basis, were entered into in 2012 and ment services is in place. Finally, there are two term loans to mature in 2015 (NOK 600 million) and in 2017 (NOK 1,200 Borregaard’s joint ventures, both maturing in 2013. Each of million), respectively. The facilities are unsecured (negative these loans is secured by a pledge on certain assets. pledge), but the loan agreements contain certain financial

Book value Fair value Amounts in NOK million 2012 2011 2012 2011 Non-current interest-bearing liabilities Bank loans 990 15 990 15 Other loans from Orkla 0 1 773 0 1 773 Total non-current interest-bearing liabilities 990 1 788 990 1 788

Current interest-bearing liabilities Bonds, maturity < 1 year Bank loans, overdraft 16 19 16 19 Other loans 0 1 0 1 Total current interest-bearing liabilities 16 20 16 20

Total interest-bearing liabilities 1 006 1 808 1 006 1 808

Interest bearing receivables Non-current interest-bearing receivables 11 6 11 6 Cash and cash equivalents 155 496 155 496 Net interest-bearing liabilities 840 1 306 840 1 306

Borregaard repaid NOK 1,300 million of its debt to Orkla on The maturity profiles of the Group’s interest bearing liabilities 16 October 2012. Borregaard also made initial drawings under are shown in the table below and are based on the current the Bank Facilities Agreements in the aggregate amount of financing, (See Note 26) NOK 990 million on 23 October 2012 and used the proceeds to repay in full its remaining indebtedness to Orkla. ANNUAL FINANCIAL STATEMENTS 2012 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Maturity profile interest-bearing liabilities and unutilised credit facilities

Gross interest-bearing liabilities Unutililised credit facilities Amounts in NOK million 2012 2011 2012 2011 Maturity <1 year 16 20 70 – Maturity 1-3 years 600 15 – – Maturity 3-5 years 390 1 773 810 – Maturity 5-7 years – – – – Total 1 006 1 808 880 –

Note 28 Financial risk

(I) ORGANISATION OF FINANCIAL RISK MANAGEMENT

Borregaard operates internationally and is exposed to financial financial risk is defined as risk related to financial instruments. risks like currency risk, interest rate risk, commodity price risk, These may either be hedging instruments for underlying risk, or liquidity risk and credit risk. Borregaard uses derivatives and viewed as a source of risk themselves. other financial instruments to reduce these risks in accordance with the Group’s finance policy. Borregaard is exposed to currency risk for most of its sales, primarily in USD and EUR. A substantial part of this exposure, Responsibility for managing financial risk in Borregaard is defined as estimated net cash flow in USD or EUR, is routinely divided between business areas, which manage risk related hedged on a rolling basis with a nine-month time horizon. to business processes, and Group HQ, which manages risk Subject to certain criteria being met, the hedging horizon may related to centralised activities like funding, interest-rate man- be extended up to three years in order to lock in favourable agement, cash management, currency risk management and margins. credit management policy. Borregaard’s CFO and the Group’s Finance Department are responsible for managing centralised On the revenue side, most of Borregaard’s business segments financial risk elements, until further notice with the support of are exposed to price risk in international markets. Borregaard Orkla ASA staff under a service agreement signed prior to the is also exposed to price risk on wood, energy (thermal energy IPO in 2012. and electric power) and other strategic raw materials. In 2011, Borregaard entered into a long-term power contract for a total Financial risks of 6.1 TWh to be supplied in the period 2013-2024. This is This section describes the most important risk factors within energy to be used by Borregaard solely for production pur- the Group and the management of these risks. In this context, poses. ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59

(II) CATEGORIES OF FINANCIAL RISK FOR THE BORREGAARD GROUP

Currency risk As NOK is the presentation currency for the Group, Borregaard of future transactions, either cash flow hedges or fair value is exposed to currency translation risk for net investments in hedges of firm commitments. The different types of hedges foreign operations. Borregaard does not, at present, make any are described in Note 29. hedges for this category of risk. The Group’s aggregated outstanding currency hedges of Transaction risk is hedged against each entity’s functional cur- future transactions on the balance sheet date are shown in rency. Borregaard applies hedge accounting for most hedges the table below.

Foreign exchange contracts linked to hedging of future revenues and costs

2012 Amounts in million Amount Sale currency Amount Maturity NOK 582 USD 99 2013 NOK 8 USD 1 2014 USD 2 NOK 13 2013 USD 3 EUR 2 2013 NOK 447 EUR 54 2013 EUR 10 NOK 75 2013 SEK 56 NOK 48 2013

2011 Amounts in million Amount Sale currency Amount Maturity NOK 567 USD 99 2012 NOK 8 USD 1 2013 NOK 8 USD 1 2014 USD 5 NOK 29 2012 EUR 1 USD 2 2012 NOK 548 EUR 65 2012 NOK 333 EUR 39 2013 EUR 14 NOK 109 2012 EUR 2 NOK 17 2013 SEK 60 NOK 51 2012

Interest rate risk tors liquidity flows, short- and long-term, through reporting Borregaard’s interest rate risk is mainly related to the Group’s and selected forecasting routines. Due to the above-mentioned interest bearing liabilities and assets. This risk is managed at measures, the Group has limited liquidity risk. parent level. Borregaard shall primarily follow a floating rate strategy, but may consider fixed rates for a maximum of 50% of The table shows the maturity profile for the Group’s contrac- its debt, using appropriate derivatives. tual financial liabilities, including liabilities which are not recognised in the financial position. The amounts represent Liquidity risk undiscounted future cash flows, and may therefore deviate Liquidity risk is the risk that Borregaard is not able to meet from recognised figures. The table also includes derivatives its payment obligations. This risk is managed centrally, but in recognised as assets on the balance sheet date, as derivatives close concert with affected subsidiaries. Borregaard initiates may include both positive and negative cash flows, and the measures deemed necessary to maintain a strong liquidity. fair value fluctuates over time. Forward interest rate curves are applied to estimate future interest payments. Similarly, forward Cash flow from operations, which among other factors is prices are used to determine the future settlement amounts for affected by changes in working capital, is managed operation- currency derivatives. ally at Group level, and is relatively stable. Borregaard moni- ANNUAL FINANCIAL STATEMENTS 2012 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Maturity profile financial liabilities

2012 Contractual Amounts in NOK million Book value cash flows < 1 year 1-3 years 3-5 years 5-7 years > 7 years Interest-bearing liabilities 1 006 1 006 16 600 390 – – Interest payable 0 162 43 85 34 – – Accounts payable 258 258 258 – – – – Gross settled derivatives * -70 0 – – – – – Inflow – -1 185 -1 177 -8 – – – Outflow – 1 111 1 103 8 – – – Total 1 194 1 352 243 685 424 0 0

2011 Contractual Amounts in NOK million Book value cash flows < 1 year 1-3 years 3-5 years 5-7 years > 7 years Interest-bearing liabilities 1 808 1 808 20 15 1 773 – – Interest payable 0 292 74 146 72 – – Accounts payable 299 299 299 – – – – Gross settled derivatives * -27 0 – – – – – Inflow – -1 678 -1 318 -360 – – – Outflow – 1 635 1 304 331 – – – Total 2 080 2 356 379 132 1 845 0 0

* Including derivatives recognised as assets

The financial liabilities are serviced by cash flow from opera- Amounts in NOK million 2012 2011 tions, liquid and interest-bearing assets, and, when necessary, Cash and cash equivalents 155 496 drawings on unutilised credit facilities. Accounts receivable 534 550 Other current receivables 27 0 Credit risk Non-current receivables 30 22 The management of credit risk related to accounts receiv- Derivatives 70 30 able and other operating receivables is handled as part of the Total 816 1 098 business risk, but based on guidelines set by Borregaard AS and continuously monitored by the operating entities. There is Commodity price risk no significant concentration of credit risk in respect of single The Group is exposed to price risks in respect of a number counterparts. A credit management policy is in place and is of raw materials, of which electric power and wood are the being regularly reviewed. Credit losses are historically modest most substantial. However, the prices of sold products are also due to a stable and financially healthy customer base as well as affected by raw material prices, and it is generally Borregaard’s stringent monitoring of trade receivables. For sales to countries policy to reduce the price risk through commercial contracts. or customers associated with high political or commercial risk, trade finance products are widely used to reduce the credit risk. Sensitivity analysis With these risk mitigation measures in place, the current credit The financial instruments of the Borregaard Group are exposed risk is considered acceptable. to different types of market risk which can affect the income statement or equity. Financial instruments, in particular deriva- Borregaard considers its credit risk related to other financial tives, are applied as means of hedging both financial and instruments to be low. Firstly, only core relationship banks act operational exposure. as counterparts for financial hedge transactions. Secondly, bank accounts are mainly held with relationship banks. For deposits In the table below, Borregaard presents a partial analysis of the of liquidity with other counterparts in countries where relation- sensitivity of financial instruments, where the isolated effect ship banks are not present, Borregaard has requirements relat- of each type of risk on the income statement and on equity is ing to the bank’s credit rating. estimated. This is done on the basis of a selected hypothetical change in market prices/rates on the statement of financial Maximum credit risk position as of 31 December. According to IFRS, the analysis The maximum credit exposure for the Group related to finan- covers only financial instruments and is not meant to give a cial instruments corresponds to total gross receivables. In the complete overview of the Group’s market risk, for instance: hypothetical and highly unlikely event that no receivables are redeemed, this amounts to: ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 61

• For currency hedges of contracts entered into, changes • Financial instruments denominated in the entities’ in fair value of the hedging instrument will affect the functional currencies do not constitute any currency income statement, while changes in the fair value of risk and are therefore not included in this analysis. the underlying hedged contract offset by the hedging Nor is the currency exposure on translation of such instrument will not be shown, as it is not a financial financial instruments to the presentation currency of instrument. the Group included, for the same reason.

• If one of the parameters changes, the analysis will not Generally, the effect on the income statement and equity of take account of any correlation with other parameters. financial instruments in the table below is expected to offset the effects of the hedged items where financial instruments are part of a hedging relationship.

Sensitivity financial instruments

2012 Accounting effects on income statement of equity of Amounts in NOK million increase decrease increase decrease Interest rate risk: 100 bp parallel shift in interest curves all currencies -8 8 – – Financial instruments in hedging relationships: Currency risk: 10% change in FX-rate USD/NOK – – -39 39 Currency risk: 10% change in FX-rate EUR/NOK – – -24 24 Currency risk: 10% change in FX-rate SEK/NOK – – 3 -3

2011 Accounting effects on income statement of equity of Operating profit increase decrease increase decrease Interest rate risk: 100 bp parallel shift in interest curves all currencies -12 12 – – Financial instruments in hedging relationships: Currency risk: 10% change in FX-rate USD/NOK – – -42 42 Currency risk: 10% change in FX-rate EUR/NOK – – -49 49 Currency risk: 10% change in FX-rate SEK/NOK – – 4 -4

Balance sheet items are economically hedged to eliminate the currency exposure and sensitvity analyses are not relevant.

Accounting effects of changes in market risk are classified to ognised in the income statement will also affect equity beyond income statement and equity according to where the effect of the figures presented in the table. the changes in fair value will be recognised initially. Effects rec- ANNUAL FINANCIAL STATEMENTS 2012 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 29 Derivatives and hedging

The table below shows the fair value of all outstanding derivative financial instruments grouped according to treatment in the financial statements:

2012 2011 Amounts in NOK million Assets Liabilities Assets Liabilities Cash flow hedges Currency forwards, currency swaps 69 – 30 – Other derivatives - Fair value changes recognised in income statement Currency forwards, currency swaps, options 1 1 – 3 Total derivatives 70 1 30 3

Calculation of fair value:

• Currency forwards and currency swaps are measured • The fair value of currency options is calculated using at fair value using the observed forward exchange rate Garman-Kohlhagen’s version of the Black-Scholes for contracts with a corresponding term to maturity at Option pricing method, and the variables are based the balance sheet date. on observed indicative market prices at the balance sheet date.

These derivative financial instruments are designated in hedge relationships as follows:

Cash flow hedges In 2012 a gain of NOK 0.5 million (2011: NOK 0.5 million) All derivatives designated as hedging instruments in cash flow was recorded in the income statement as the related posi- hedges are carried at fair value in the balance sheet. Changes tions were not part of the Company’s hedge accounting. All in fair value are provisionally recognised in the equity hedging expected cash flows which have been hedged during 2012 still reserve, and recycled to the income statement as the cash flows qualify for hedge accounting. being hedged are recognised in the income statement.

Development in the equity hedging reserve

Amounts in NOK million 2012 2011 forward currency contracts to manage some of its transaction Opening balance hedging reserve exposures. These currency forward contracts are not desig- before tax 30 126 nated as cash flow, fair value or net investment hedges and are Reclassified to P/L - operating revenues -9 -115 entered into for periods consistent with currency transactions Reclassified to P/L - operating costs – 9 exposures, genereally from one to nine months. Reclassified to P/L - net financial income -1 – Fair value change during the year 50 10 Derivatives not included in IFRS hedging relationships There are also derivatives not included in hedging relationships Closing balance hedging reserve according to IFRS for the following reasons: before tax 70 30 Deferred tax hedging reserve -20 -9 • Derivatives are not designated in formal hedg- Closing balance hedging reserve ing relationships when changes in the fair value after tax 50 21 of hedging instruments and hedging objects are naturally offset in the income statement, for A negative hedging reserve means a negative recognition in the example currency risk on loans and other mon- income statement in the future. Accumulated hedging gains/ etary items. losses from cash flow hedges recognized in the equity hedging reserve as of 31 December 2012 are expected to be recycled to • Meeting strict IFRS hedge accounting criteria the income statement as follows (before tax): is not always possible or practical. Some of the other currency hedges are in this category. - 2013: NOK 70 million - After 2013: NOK 0 million Changes in the fair value of derivative instruments which are not part of a hedging relationship are immediately Derivatives not designated as hedging instruments recognised in the income statement. The Group uses foreign currency denominated borrowings and ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 63

Note 30 Equity and Share capital

Borregaard ASA was established on 22 August 2012 with a million, of which NOK 1,748 million is presented as paid-in share capital of NOK 1 million. equity in the Statement of changes in Equity. The differense of NOK 410 million is due to establishment of the current group On 11 September 2012 Borregaard ASA increased its share structure and is accounted for as reduction in share premium. capital and share premium fund by cash contribution of NOK 299 million. Further, on 17 September an additional cash The equity presented for 2011 is based on Orkla policy of contribution of NOK 700 million took place. At the same time, having approximately 25% equity share in the subsidiaries. The NOK 300 million was converted from share capital and share equity presented as of 31 December 2012 is the actual equity premium fund to distributable equity. for the Borregaard Group as of that date.

On 17 September 2012 the share in Borregaard AS was Share capital, share premium fund, other paid-in equity and transferred to Borregaard ASA as a contribution in kind which retained earnings are presented from the establishment of the increased the share capital and share premium fund by NOK Borregaard Group in 2012. 1,158 million. Total paid-in equity for the Group is NOK 2,158

Share capital Date/year Number of shares Nominal value (NOK) (NOK million)

31 December 2012 100 000 000 1 100

The 20 largest shareholders as of 31 December 2012 Shareholder Number of shares % of capital 1 BRG Holding AS1 19 000 000 19.00% 2 Canica 7 600 000 7.60% 3 Folketrydfondet 3 934 000 3.93% 4 JP Morgan Chase Bank 3 850 000 Nominee 3.85% 5 Skandinaviska Enskilda Banken 3 079 000 Nominee 3.08% 6 Skandinaviska Enskilda Banken 2 490 000 Nominee 2.49% 7 Fondsfinans Spar 2 025 000 2.03% 8 Goldman Sachs & CO 1 952 553 Nominee 1.95% 9 Barclays Capital Securities 1 950 000 Nominee 1.95% 10 Sundt AS 1 950 000 1.95% 11 Deutsche Bank AG 1 662 944 Nominee 1.66% 12 Fideuram Bank 1 644 204 Nominee 1.64% 13 JP Morgan Chase Bank 1 481 881 Nominee 1.48% 14 JP Morgan Chase Bank 1 437 125 Nominee 1.44% 15 State Street Bank 1 412 000 Nominee 1.41% 16 UBS AG 1 286 495 Nominee 1.29% 17 State Street Bank 1 105 000 Nominee 1.11% 18Verdipapirfondet DNB 1 075 000 1.08% 19 Centra Invest AS 1 015 000 1.02% 20 BNYM SA/NV 835 440 Nominee 0.84% Total shares 60 785 642 60.80%

1Owned by Orkla ASA

Treasury shares at 31 December 2012 Fair value Nominal value (NOK) Number of shares (NOK million) Shares owned by Borregaard ASA 0 0 0

Borregaard has purchased a total of 360,000 own shares in 2013. See Note 37. ANNUAL FINANCIAL STATEMENTS 2012 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 31 Non-controlling interests

Amounts in NOK million 2012 2011 Non-controlling interests share of: Depreciation and write-downs 1 1 Operating profit 2 3 Profit/loss before taxes 2 4 Taxes 0 -1

Changes in non-controlling interests: Non-controlling interests’ 1 January 14 16 Non-controlling interests’ share of profit/loss 2 3 Dividends to non-controlling interests -4 -4 Translation differences etc. -1 -1 Non-controlling interests 31 December 11 14

Note 32 Leases and leasing

Reported costs relating to operating leases reflect the minimum leasing cost during the term of notice.

Lessee Operating leases Rented/leased property, Land, building, plant and equipment Machinery/plant property Fixtures, vehichles etc. Other assets Total Amounts in NOK million 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Cost current year -16 -19 -12 -12 -5 -6 -9 -15 -42 -52 Cost next year -16 -18 -9 -7 -4 -5 -10 -7 -39 -37 Total costs 2–5 years -41 -45 -17 -19 -8 -11 -8 -8 -74 -83 Total costs after 5 years 0 0 -6 -7 0 0 0 0 -6 -7 Total future leasing costs -57 -63 -32 -33 -12 -16 -18 -15 -119 -127 Borregaard does not have any financial leases.

Note 33 Pledges and guarantees

Borregaard ASA has granted a corporate guarantee for Amounts in NOK million 2012 2011 Borregaard’s overdraft facility (70 million NOK) with Nordea Liabilities secured by mortgages 10 23 Bank Norge ASA. There are pledges on certain assets in the Mortgaged assets partly owned subsidiary LignoTech Ibérica and the joint ven- Machinery, vehicles, etc. 17 22 ture LignoTech South Africa for loans granted by DNB. Total book value 17 22 Guarantees Other guarantee commitments 0 0 Total guarantee commitments 0 0 ANNUAL FINANCIAL STATEMENTS 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65

Note 34 Related parties

Activity within the Group is reported in the segment information ownership interest. The Group’s share of internal balances and disclosed in Note 7. transactions relating to the joint venture has been eliminated in the combined financial statements. There are no other material Borregaard was owned 100% from Orkla ASA until the listing on transactions relating to this company. 18 October 2012. Since then Orkla has had a 19% ownership in Borregaard. Borregaard paid joint expenses to Orkla ASA up Internal trading within the Group is carried out in accordance until the IPO. with special agreements on an arm’s length basis, and joint expenses in Borregaard are distributed among the Group compa- Borregaard obtains services from Orkla Shared Services AS nies in accordance with distribution formulas, depending on the (IT and payroll), and obtained services from Orkla Insurance various types of expense. For further information on intercom- Company Ltd (insurance) until December 2012. Borregaard also pany transactions, see Note 7 “Segments”. received energy from Borregaard Industries Ltd. during 2012. There are also certain minor sales and purchases to other compa- The members of the Group Executive Board of Borregaard have nies within the Orkla group. been granted a total of 2,055,000 stock options in the Company. Further information regarding the Group Executive Board is Borregaard has one joint venture, Umkomaas Lignin (propri- disclosed in Note 9. etary) Limited t/a LignoTech South Africa (50%). This company is jointly owned with Sappi Saiccor. This is presented line by There have been no other transactions with related parties. line in the combined financial statements based on the Group’s

Note 35 Government grants

Borregaard recognised NOK 66 million in government grants in 2012. Of this amount, NOK 14 million was recognized as reduced costs, while NOK 52 million was recognised as a reduction of the acquisition cost of the asset concerned. ANNUAL FINANCIAL STATEMENTS 2012 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 36 Other matters

Eidsiva Vannkraft AS and Borregaard have entered into a long- allowances purchased for trading are measured and classified term hydroelctric power contract for the delivery of a total of as inventory. 6.1 billion kilowatt hours (6.1 Twh) in the period from 2013 to 2024. The agreement between Eidsiva and Borregaard secures Environmental issues. Sarpsborg municipality has established

power deliveries for Borregaard’s plants in Sarpsborg from 1 ambient air quality objectives for SO2. Borregaard’s produc- January 2013 to 31 December 2024. The deliveries constitute tion plant in Sarpsborg is regarded as the major emitter with

around 15% of Eidsiva’s total annual production of power. regard to SO2 in the area. Borregaard is obliged to produce an action plan to remedy its emissions from the plant. The invest-

Contracts. The Group at all times has various contracts for the ments and costs related to SO2 reduction are subject to further sale and purchase of goods and services. These contracts are evaluations and will likely be implemented over several years, regarded as part of Borregaard’s ordinary operating activities although current Borregaard estimates include scenarios with and are therefore not specified or indicated in any other way. investments/costs of NOK 100 million. The contracts are deemed to be strictly sale or purchase contracts with no embedded derivatives. The Opsund landfill, a historical waste disposal site used by Borregaard that is located north-east of the Sarpsborg site,

Emission rights. Government granted and purchased CO2 emis- was closed for further deposits in 2009. By the end of 2017, sion allowances expected to be used towards Borregaard’s own Borregaard is responsible for the closing of the landfill. As of emissions are recognized as intangible assets at nominal value today, it is uncertain whether a full impermeable capping of (cost). The amounts are not amortized but are tested for impair- the landfill would be needed and estimated costs related to the

ment at least annually. Actual CO2 emissions which exceed the closing of the landfill is therefore uncertain. Estimated costs level covered by emission rights are recognized as a liability. vary from limited to approximately NOK 50 million if a full

Sale of government granted CO2 emission rights are recog- impermeable capping is required, where current estimate from

nized at the time of sale at the transaction price. CO2 emission management is in the lower end of the range.

Note 37 Subsequent events

Borregaard has purchased a total of 360,000 own shares at an average price of NOK 23.49 per share in February 2013. The shares are for use in Borregaard’s employee share program. Borregaard has sold a total of 352,593 to employees with during February 2013. The share price was set at NOK 16.47 per share, including a 30% discount. ANNUAL FINANCIAL STATEMENTS 2012 67

Financial Statement for Borregaard ASA

Income Statement Statement of Financial Position

22.08.-31.12. Amounts in NOK thousand Note 2012 Amounts in NOK thousand Note 2012 Assets Other operating expenses 5 -1 635 Deferred tax assets 8 6 Operating profit -1 635 Shares in subsidiaries 7 1 158 347 Interest income from Group companies 9 6 505 Loans to Group companies 9 1 006 505 Finance income 6 1 436 Non-current assets 2 164 858 Profit/loss before taxes 6 306 Cash and cash equivalents 1 435 Taxes 8 -1 766 Current assets 1 435 Profit/loss for the year 4 540 Proposed dividend -100 000 Total assets 2 166 293

Equity and liabilities Share capital 10 100 000 Premium fund 1 758 347 Other paid in equity 204 540 Retained earnings 0 Total equity 2 062 887 Dividends 100 000 Income tax payable 8 1 771 Current liabilities to Group companies 9 1 090 Other liabilities 545 Current liabilities 103 406

Equity and liabilities 2 166 293

Jan A. Oksum Terje Andersen Kimberly Lein-Mathisen (chair)

Kristine Ryssdal Jan Erik Korssjøen Ragnhild Anker Eide

Roar Linder Per A. Sørlie Sarpsborg, 20 March 2013 (President and CEO) The Board of Directors of Borregaard ASA 68 ANNUAL FINANCIAL STATEMENTS 2012

Cash Flow

Amounts in NOK thousand 22.08.-31.12. 2012 Operating profit / loss -1 635 Changes in net working capital, etc. 1 635 Financial items, net 7 940 Cash flow from operating activities 7 940 Net change investments in subsidiaries -1 158 347 Total new paid in equity 2 157 347 Cash flow from investing activities 1 000 000 Change in interest-bearing receivables -1 006 505 Change in net interest-bearing liabilities -1 006 505 Cash flow from financing activities -1 006 505 Change in cash and cash equivalents 435

Cash and cash equivalents as of 22 August 1 000 Change in cash and cash equivalents 435 Cash and cash equivalents as of 31 December 1 435

Statement of Changes in Equity

Share pre- Other paid-in Retained Amounts in NOK thousand Share capital mium fund equity earnings Total equity Establishment of Borregaard ASA 22 August 2012 1 000 0 0 0 1 000

Profit/loss for the year – – – 4 540 4 540

Capital transactions 2012 99 000 1 758 347 300 000 – 2 157 347 Proposed dividend – – -95 460 -4 540 -100 000

Equity 31 December 2012 100 000 1 758 347 204 540 0 2 062 887 ANNUAL FINANCIAL STATEMENTS 2012 69

Notes to the Financial Statements

Note 1 General information

Borregaard ASA (“The Company”) was incorporated as a public limited liability company on 22 August 2012. On 17 September, The Company was inserted as a holding company of Borregaard AS.

Note 2 Accounting principles

The financial statements for Borregaard ASA have been are classified as non-current assets in the balance sheet and prepared and presented in accordance with the Norwegian entered at the lower of cost and market value. Accounting Act and generally accepted accounting principles in Norway (Norwegian GAAP). The annual accounts give a true Tax and fair view of assets and liabilities, financial status and result. Deferred tax shows the company’s tax liability assuming its assets and debt are realized at book value by year end. Posi- All amounts are in NOK thousand unless otherwise stated. The tive temporary differences state that book value is higher than functional currency of Borregaard ASA is NOK. taxable value, and vice versa for negative differences. The item “Tax income /(cost)” in the profit and loss statement, consists Classification of items in the financial statements of two elements: The tax payable, and the change in deferred An asset or liability is classified as current when it is part of a tax. Deferred tax/tax benefit is reflected as long term debt/non- normal operating cycle, when it is held primarily for trading current assets in the balance sheet. purposes, when it falls due within 12 months and when it consists of cash or cash equivalents on the statement of financial Cash flow position date. Other items are non-current. The cash flow statement has been prepared according to the indirect method and reflects cash flows from operating, invest- Shares and other securities ing and financing activities and explains changes in “Cash and Long term investments in subsidiaries, associated companies cash equivalents“ in the reporting period. and other shares and bonds, which are held to maturity date,

Note 3 Payroll and pensions

Borregaard ASA has no employees and therefore no pension plan. This meets the requirement of the Compulsory Service Pensions Act.

Note 4 Guarantees

Amounts in NOK thousand 2012 Guarantees to subsidiaries 1 060 000 Total guarantee commitments 1 060 000

Borregaard ASA is jointly and severally liable for the credit facility in Borregaard AS (990 million NOK). Borregaard ASA has granted a corporate guarantee for Borregaard’s overdraft facility (70 million NOK) with Nordea Bank Norge ASA. 70 ANNUAL FINANCIAL STATEMENTS 2012

Note 5 Remuneration and contractual arrangements

Remuneration to the Group Executive Board Shareholdings of CEO and members of the Board of Directors The executive management is employed in Borregaard AS. For

matters relating to the remuneration of the executive manage- Amounts in NOK Number of shares1 ment, reference is made to Note 9 to the Financial Statements President & CEO for Borregaard Group. Per A. Sørlie 47 619

Remuneration of the Board of Directors Shareholder-elected Board members No compensation has been paid to the Board Members for the Jan A. Oksum2 5 606 period from listing. Compensation to members of the Board Terje Andersen 3 571 of Directors for the period from the first day of listing and up to the date of the Ordinary General Meeting of the Company’s Total 56 796 shareholders in 2013 will be determined by the shareholders at such meeting. 1. Total share ownership including related parties 2. Ownership through the related company JAAG Consult AS 3. Terje Andersen is the CFO of Orkla ASA. Orkla ASA owns 19% of Borregaard ASA.

Fees to external auditor

Amounts in NOK thousand 2012 Statutory audit 300 Other attest services - Tax consultancy services - Other non-audit services - Total 300

Note 6 Finance income

Amounts in NOK thousand 2012 Interest income, external 1 436 Total finance income 1 436

ANNUAL FINANCIAL STATEMENTS 2012 71

Note 7 Shares in subsidiaries

Directly and the most important indirectly owned subsidiaries Group’s share of are included in the table. Borregaard ASA has direct ownership Company Book value capital only to Borregard AS, and indirect ownership in 17 subsidiar- Directly owned: ies and 1 joint venture, of which the profit/loss and equity are Borregaard AS 1 158 347 100% important in the valuation of the companies. All legal entities Indirectly owned: in the Borregaard Group are shown in the Group Directory at the end of the annual report. Borregaard Inc. 100% Nutracell AS 100% Biotech Lignosulphonate Handels GmbH 100% Borregaard UK Ltd 100% Borregaard Deutschland GmbH 100% Borregaard SEA, Pte Ltd 100% Borregaard Poland sp. z o.o 100% Borregaard France Sarl 100% Borregaard Iberica S.L. 100% LignoTech Iberica SA 60% Borregaard Middle East FZE 100% Indirectly owned joint venture: Umkomaas Lignin (Pte) Ltd 50%

Note 8 Taxes

Tax expense Deferred tax assets are only capitalised to the extent that it is probable that there will be sufficient future taxable profit Amounts in NOK thousand 2012 for the tax asset to be used, either because the unit recently Profit before tax 6 306 reported a profit or because assets with excess value have Current tax expense -1 771 been identified. If future profits are not likely to be sufficient to Change in deferred tax 6 absorb the tax reducing timing differences, deferred tax assets Total tax expense -1 766 are not recognised.

Deferred tax liabilities Reconciliation of the tax rate Deferred tax liability consists of the tax liabilities that are In the following table, reported taxes are reconciled with the payable in the future. The table below lists deferred tax assets tax charge based on the Norwegian tax rate of 28%. The main and liabilities relating to the timing differences between tax tax components are specified. accounting and financial accounting.

Amounts in NOK thousand 2012 Amounts in NOK thousand 2012 Provisions -20 28% of profit before taxes (tax rate in Norway) -1 766 Base deferred tax -20 The Group’s total tax expense -1 766 Deferred tax liabilities/assets -6 This years change in deferred tax 6 Change in deferred tax income statement 6 72 ANNUAL FINANCIAL STATEMENTS 2012

Note 9 Related parties

Intercompany relations with Borregaard AS

Amounts in NOK thousand 2012 Interest income 6 505 Loans to Group companies 1 006 505 Current liabilities to Group companies 1 090

Borregaard ASA has provided a loan of NOK 1 000 million to Borregaard AS for the repayment of external loans. The loan is interest bearing and the interest is calculated in accordance with market conditions.

Note 10 Other matters

Share Capital and shareholders Information of Borregaard ASA’s purchase of own shares in Feb- Information about the share capital and a list of the largest ruary 2013 is described in Note 37 to the Consolidatd Financial shareholders in Borregaard ASA is presented in Note 30 to the Statements. Financial Statements for Borregaard Group. ANNUAL FINANCIAL STATEMENTS 2012 73

Statement from the Board of Directors

We confirm that the financial statement for the period 1 January up to and including 31 December 2012, to the best of our knowledge, have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial positions and profit or loss of the Company and the Group as a whole. The Board of Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the Group as a whole, together with a description of the principal risks and uncertainties that they face.

Jan A. Oksum Terje Andersen Kimberly Lein-Mathisen (chair)

Kristine Ryssdal Jan Erik Korssjøen Ragnhild Anker Eide

Roar Linder Per A. Sørlie Sarpsborg, 20 March 2013 (President and CEO) The Board of Directors of Borregaard ASA

74 ANNUAL FINANCIAL STATEMENTS 2012

Auditor´s report

[UTKAST] ANNUAL FINANCIAL STATEMENTS 2012 75 76

Historical Key Figures

Definitions 2012 2011 2010 2009 Profit & loss Operating revenues (mill.NOK) 3 941 3 854 3 461 3 382 EBITA (mill.NOK) 542 536 289 253 Amortisation intangible assets (mill.NOK) -3 -6 -6 -6 Other income and expences (mill.NOK) -71 – 22 – Operating profit (mill.NOK) 468 530 305 247 EBITA-margin 1 (%) 13.8 13.9 8.4 7.5 Ordinary profit / loss before taxes (mill.NOK) 415 455 260 211 Profit / loss for the year (mill.NOK) 275 320 184 144

Cash flow Cash flow from operation activities 2 (mill.NOK) 700 659 528 547

Return Return on capital employed 3 (%) 19.2 % 20.4 % 11.3 % 9.5 %

Capital as of 31 December Booked value of total assets (mill.NOK) 3 543 3 704 3 561 3 434 Market capitalisation 4 (mill.NOK) 2 079 – – – Equity ratio 5 (%) 49.0 30.3 28.5 39.5 Net interest bearing liablities 6 (mill.NOK) 840 1 306 1 443 1 057 Leverage ratio 7 1.1 Interest coverage ratio 8 10.7 – – – Share of floating interest bearing liabilities 9 (%) 100 – – –

Shares Average number of shares outstanding diluted (x 1.000) 100 059 – – – Average number of shares outstanding (x 1.000) 100 000 – – –

Shares-related key figures Share price at 31 December (NOK) 20.79 – – – Earnings per share diluted 10 (NOK) 2.73 3.17 1.80 1.39 Ordinary dividend per share (proposed for 2012) (NOK) 1.00 – – – Payout ratio 11 (%) 36.63 – – – Price/earnings ratio 12 7.62 – – –

Personell Number of man-years as of 31 December 1 025 1 062 1 064 1 104

Definition: 1. EBITA/Operating revenues 2. Cash flow from operating activities + taxes paid + net financial items 3. EBITA/(Average net working capital + Average tangible assets + Average intangible assets at cost – Average net pension liabilities – Average deferred tax excess value) 4. Market capitalisation is calculated on the basis of number of shares outstanding x Average share price at year end 5. Book equity/Total assets 6. Total interest-bearing liabilities - Interest-bearing receivables and liquid assets (cash, bank deposits etc.) 7. Net interest bearing liabilities/EBITDA at year end 8. (Profit before tax + Net interest expenses)/(Net interest expenses) 9. Liabilities with remaining period of fixed interest of less than one year 10. Profit for the year after minority interests/Average number of shares outstanding diluted at year end 11. Ordinary dividend per share/Earnings per share diluted 12. Share price/Earnings per share diluted 77

Notes 78 GROUP DIRECTORY

GROUP DIRECTORY

1 - 4

10 8 18 5 23

22 11 14

6 12 17

19 13 16 9 21

15 20

7 GROUP DIRECTORY 79

Head Office IR Contacts Press Contact

1 Borregaard ASA 2 Jørn Syvertsen 3 Tone Horvei Bredal PO Box 162 Director Investor Relations Communication Manager 1701 Sarpsborg Telephone +47 958 36 335 Telephone +47 924 67 711 Norway E-mail: [email protected] E-mail: [email protected] Telephone +47 69 11 80 00 E-mail: [email protected] Lotte Kvinlaug www.borregaard.com Investor Relations Officer Telephone +47 922 86 909 E-mail: [email protected]

Production units & sales offices

4 SP Borregaard AS 5 SP LignoTech USA, Inc 6 SP Borregaard Deutschland GmbH Hjalmar Wessels vei 10 100 Grand Avenue LignoTech Werk Karlsruhe 1701 Sarpsborg, Norway Rothschild DEA-Scholven Strasse 9 Telephone +47 69 11 80 00 Wisconsin 54474, USA DE-76187 Karlsruhe, Germany E-mail: [email protected] Telephone +1 715 359 6544 Telephone +49 721 55 99 10

7 SP Umkomaas Lignin (Pty) Ltd t/a 8 SP Borregaard (UK) Ltd. 9 P LignoTech Ibérica SA LignoTech South Africa Clayton Road, Birchwood Ganzo s/n, Apartado 21 P.O. Box 743 Warringaton ES-39300 a, Spain Umkomaas 4170, South Africa Cheshire WA3 6QQ, England Telephone +34 942 89 27 00 Telephone +27 39 97 36000 Telephone +44 1925 82 45 11 E-mail: [email protected]

10 S Borregaard Poland sp. z o.o. 11 S LignoTech USA, Inc 12 S LignoTech USA, Inc ul. Ziebicka 2 1155 Dairy Ashford, Suite 804 721 Route 202/206 PL-60-164 Poznan, Poland Houston, TX 77079, USA Bridgewater, New Jersey 08807, USA Telephone +48 61 8615379 Telephone +1 281 4977824 Telephone +1 908 429 6660

13 S Borregaard Deutschland GmbH 14 S Borregaard Shanghai Company 15 S Borregaard South Asia Pvt.Ltd. Hansa Allee 201, Haus 2 Limited (BSCL) Plot No. A-80, T.T.C Industrial Area 1 - 4 DE-40549 a, Germany Room E, 12/F New Century Plaza Thane-Belapur Road, MIDC Khairane Telephone +49 211 59 51 90 188 Wujiang Road Navi Mumbai - 400 705,

Shanghai 200041, China Dist. Thane. (MS), India 10 Tel.: +86-21-62183260 Telephone + 91-22-41841750/59/65 18 23

22 16 S Borregaard Ibérica, S.L. 17 S Borregaard France SarL 18 S Biotech Lignosulfonate Handels-Gesmbh 14 Parc de Negocis Mas Blau 4 rue Balzac Lignosulfonate Handels-GesmbH C/ Garrotxa, 6-8 2º C FR-75 008 Paris, France Zahradní 762 6 08820.- El Prat de Llobregat, Barcelona, Spain Telephone +33 1 53 06 60 40 CZ-739 21 zaa, Czech Republic 17 Tel. +34 93 479 11 01 Tel: +420 558 671 741 19 16

21 19 S Borregaard Middle East FZE 20 S LignoTech Brasil Produtos de Lignina Ltda 21 S Borregaard S.E.A. Pte. Ltd. 15 P.O. Box 17601, Jebel Ali Rua Espártaco 685, conj 02-Lapa 111 C (4th floor) Telok Ayer Street, Dubai, UAE São Paulo – CEP 05045-000, Brazil Singapore 068580 Telephone +971 4 881 39 58 Telephone +55 11 3874 0915 Telephone +65 6778 0008 7

22 S Borregaard Japan 23 P Biotech Lignosulfonate Handels GmbH 3rd Fl.Dai-Ichi-Iwata Bld. Altenhofner Strasse 24 2-2-5 Higashi-Shinbashi AT-4300 St. Valentin, Austria Minato-ku, Tokyo 105-0021, Japan Telephone +43 7435 546110 Telephone +81 3 57 77 03 65

S SALES / P PRODUCTION ANNUAL REPORT 2012 ANNUAL REPORT

Borregaard ASA Postboks 162 1701 Sarpsborg, Norway Telephone (+47) 69 11 80 00 Fax (+47) 69 11 87 70 ANNUAL REPORT 2012 email: [email protected] www.borregaard.com 81 ANNUAL REPORT 2012 ANNUAL REPORT

Borregaard ASA Postboks 162 1701 Sarpsborg, Norway Telephone (+47) 69 11 80 00 Fax (+47) 69 11 87 70 ANNUAL REPORT 2012 email: [email protected] www.borregaard.com