Future on Paper NORSKE SKOG ANNUAL07 REPORT MAIN FINANCIAL FIGURES DEFINITIONS 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Profit and loss account (NOK mill) Operating revenue 27 118 28 812 25 726 25 302 24 068 23 471 30 354 26 635 18 054 14 908 Gross operating earnings 1 8 395 3 932 4 220 4 303 4 686 5 198 8 419 6 599 3 818 3 103 Operating earnings 677 (2 527) 630 757 1 536 1 306 5 096 4 211 2 129 1 780 Earnings before financial expenses 2 785 (2 275) (51) 868 1 383 1 833 5 581 4 575 2 252 1 948 Earnings before taxation 235 (3 480) (1 004) 210 770 806 3 894 3 021 1 825 1 417 Earnings for the year (618) (2 809) (854) 621 402 1 162 2 494 1 958 300 1 020 Balance sheet (NOK mill) Fixed assets 29 307 37 577 43 740 36 861 39 219 38 197 45 417 43 717 18 828 17 586 Current assets 13 953 7 653 8 293 7 238 7 119 6 769 10 855 17 510 6 086 6 663 Total assets 43 260 45 230 52 033 44 099 46 338 44 966 56 272 61 227 24 914 24 249 Shareholder’s equity incl. minority int. 15 957 18 550 22 679 18 894 19 416 17 921 19 526 22 351 11 727 10 029 Long term debt 21 533 18 802 21 700 20 052 21 402 18 814 30 858 31 906 9 021 9 564 Current liabilities 5 770 7 878 7 654 5 153 5 520 6 210 5 888 6 970 4 166 4 656 Total liabilities and shareholder’s equity 43 260 45 230 52 033 44 099 46 338 42 945 56 272 61 227 24 914 24 249 Net interest bearing debt 16 409 17 321 19 063 16 871 17 759 18 204 22 820 20 535 7 618 7 082 Profitability Gross operating margin % 3 30.9 13.6 16.4 17.0 19.5 22.1 27.7 24.8 21.1 20.8 Net operating margin % 4 2.5 (8.8) 2.4 3.0 6.3 5.6 16.8 15.8 11.8 11.9 Net profit margin % 5 (2.3) (9.7) (3.3) 2.6 1.7 5.0 8.2 7.4 7.2 6.8 Return on assets % 6 1.8 (4.7) (0.1) 1.9 3.0 3.6 9.5 10.6 9.2 9.4 Return on equity % * 7 (3.6) (13.6) (4.1) 3.4 2.2 6.2 11.9 11.5 12.0 10.7 Equity ratio 8 36.9 41.5 43.6 42.8 41.9 39.9 34.7 36.5 47.1 41.4 Net interest bearing debt/equity 1.05 0.96 0.84 0.89 0.91 1.02 1.17 0.92 0.65 0.71 Return on capital employed % 9.15 3.0 3.6 2.8 2.5 3.6 3.2 13.7 13.1 11.0 11.7 Net earnings per share after tax (NOK) 10 (3.26) (14.84) (5.98) 4.95 3.04 8.79 20.68 19.17 14.01 11.36 Net earnings per share fully diluted (NOK) * 10 (3.26) (14.84) (5.98) 4.95 3.04 8.79 20.68 19.17 14.01 11.36 Cash flow per share after tax (NOK) 11 11.43 14.60 21.42 22.04 22.45 27.89 58.47 48.18 23.29 31.85 Cash flow per share fully diluted (NOK) * 11 11.43 14.60 21.42 22.04 22.45 27.89 23.29 48.18 23.29 31.85 Liquidity Liquid assets (NOK) 12 1 886 485 902 889 930 868 4 158 8 629 803 2 312 Cash flow (NOK) 13 2 166 2 763 3 061 2 948 2 973 3 687 7 052 4 922 2 162 2 859 Current ratio 14 2.42 0.97 1.08 1.40 1.29 1.09 1.84 2.51 1.46 1.43 Definitions main financial figures: 1. Gross operating earnings = operating earnings + ordinary depreciation + restructuring expenses 2. Earnings before financial expenses = operating earnings + interest income + share of profit in affiliated companies 3. Gross operating margin = gross operating earnings : operating revenue 4. Net operating margin = operating earnings : operating revenue 5. Net profit margin = earnings for the year : operating revenue 6. Return on assets = earnings before financial expenses : total assets (average) 7. Return on equity = earnings for the year : equity (average) 8. Equity ratio = equity : total assets 9. Return on capital employed = operating earnings before restructuring costs : capital employed (average) (see 15) 10. Net earnings per share after tax = earnings for the year : average number of shares *) 11. Cash flow per share after tax = cash flow : average number of shares *) 12. Liquid assets = cash and bank deposits + short term investments 13. Cash flow = net cash flow from operating activities (from statement of cash flow) 14. Current ratio = current assets : current liabilities 15. Capital employed = total assets less affiliates interest free current liabilities and interest bearing assets * When calculating financial ratios per share after full conversion net earnings and cash flow are rectified by interest expenses on subordinated convertible bonds. 2 NORSKE SKOG ANNUAL REPORT The World of Norske Skog 2 Skogn Follum Headquarters Saugbrugs Walsum Parenco Steti Golbey Cheongwon Bruck Hebei Jeonju Shanghai Singburi MNI Pisa Albury Tasman Bio Bio Boyer 3 NORSKE SKOG ANNUAL REPORT Contents INTRODUCTION 005 Events of 2007 002 006 A demanding year MARKET 008 The world is using ever 008 more publication paper 011 Norske Skog products PRODUCTION 012 More changes necessary 012 014 Turnaround on track 015 Energy strategy is key CAPITAL MARKET 016 A turbulent year in the financial markets 016 017 Financing 018 Financial risk management 024 Principal shareholders and key figures CORPORATE GOVERNANCE 026 Corporate governance in Norske Skog 026 030 The members of the board and corporate management 033 Articles of association for Norske Skogindustrier ASA ANNUAL REPORT 034 034 Restructuring of paper production ANNUAL ACCOUNTS 046 Annual accounts 2007 group 046 080 Annual accounts 2007 Norske Skogindustrier ASA 4 NORSKE SKOG ANNUAL REPORT INTRODUCTION Events of 2007 January September l Construction starts on the geothermal power station at Kawerau, l Norske Skog strengthens its supply of recovered paper by establishing a where Norske Skog Tasman and New Zealand’s Mighty River Power are trading arm. Headquartered in Oslo, the Reparco group will operate in cooperating on the project. Asia and grow existing operations in the United States and Europe. l Launch of the 3C ‘Combat Climate Change’ initiative. This project l As the European market for newsprint suffers from overcapacity, Norske is supported by 46 large companies from across the globe, and is a Skog decides to reduce production of newsprint in Europe by 200 000 roadmap for fighting climate change. Norske Skog is one of the original tonnes in 2008 to meet this situation. participants. l Norske Skog receives the first Farmand prize that has ever been awarded for a sustainability report. February l Norske Skog launches a Norwegian bond loan with five years maturity October and floating interest rate. The new loan is well received in the market. l Norske Skog and WWF cooperate on Young Readers and the environ- ment in Thailand, meeting with Thai teachers who will work on the March programme. Thai schoolchildren will receive newspapers and environ- l Norske Skog announces the de-merger of most of the properties in mental textbooks distributed at school from February 2008. Norway that are not related to paper production. The properties will be held by a wholly-owned subsidiary. The most important properties November are Klosterøya in Skien, the headquarters with surrounding property l The ‘asset review’ is started, where all of Norske Skog’s paper machines in Bærum outside of Oslo, and a farming and residential property are analysed for profitability and possible closure. in Trondheim. l Rune Gjessing is appointed new senior vice president, strategy. April l Andreas Enger is elected new chair of the board in Industrikraft l Kim Wahl steps in as new chair of the board for Norske Skog. Midt-Norge at the company’s extraordinary general meeting. l Norske Skog signs a long-term deal for delivery of newsprint to the May British media corporation News International Limited. l WWF (World Wide Fund for Nature) and Norske Skog join forces on a l Norske Skog and Canadian tax authorities agree on closure of a tax project that makes environmental information available in schools in issue concerning a subsidiary of what was then called Fletcher Thailand. For one year environmental issues will be put on the agenda, Challenge, acquired by Norske Skog in 2000. Norske Skog pays CAD including the climate, local issues and the environmental challenges 42.5 million as a final payment. surrounding the Mekong River. The project is called “Young Readers for the Environment.” December l Announcement of write-downs and an accelerated schedule for the June asset review process, where the profitability of all of the paper machines is to be analysed. l Norske Skog raises 500 million (approximately NOK 4 billion) in a l The new TMP plant at Norske Skog Follum starts production. Euro-denominated bond loan, with a maturity of 10 years. l The investor group Unionen AS demand an extraordinary general July meeting, which is their right as a shareholder owning more than 5 per cent of the shares.