UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

PVO’s share capital is divided into different series of shares. The B and B2 series relate to PVO’s shareholdings in Teollisuuden Voima Oyj (TVO). UPM has no direct shareholdings in TVO. TVO operates two nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and constructs one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland. The operation of a nuclear power plant is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility has a strict third-party liability in relation to nuclear accidents. Shareholders of power companies that own and operate nuclear power plants are not subject to the liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate level radioactive waste as well as nuclear power plant decommissioning are provided for by a state established fund (the Finnish State Nuclear Waste Management Fund). The contributions to the Fund are intended to be sufficient to cover estimated future costs. These contributions have been taken into consideration in the fair value of the related energy shareholdings.

Other uncertainties and risk factors relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project and the on-going arbitration proceedings between the plant supplier AREVA-Siemens Consortium and the plant owner Teollisuuden Voima Oyj (TVO). UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. The possible outcome of the arbitration proceedings has not been taken into account in the valuation. Changes in regulatory environment or taxation could also

4.2 Forest assets UPM is both a major forest owner and a purchaser of wood. Wood is a renewable material and the most important raw material for UPM’s businesses. At the end of 2016, UPM owned 640,000 hectares of forest in Finland and 75,000 hectares of forest in United States. The company additionally has 255,000 hectares of forest plantations in Uruguay. The value of forest assets amounted to EUR 1,734 million (1,738 million) at the end of 2016. In 2016, UPM sourced 27.8 (26.1) million cubic meters of wood from around the world.

Accounting policies The group divides all its forest assets for accounting purposes into growing forests, which are recognised as forest assets at fair value less costs to sell, and land, which is stated at cost. Any changes in the fair value of the growing forests are recognised in the operating profit in the income statement. The fair value is calculated on the basis of discounted future expected cash flows as there is a lack of a liquid market. Young saplings are valued at cost. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy. Fair valuation The valuation process of forest assets is complex and requires management estimates and judgment on assumptions that have a significant impact on the valuation of the group’s forest assets. Main factors used in the fair valuation of forest assets are estimates for growth and wood harvested, stumpage prices and discount rates. Stumpage price forecasts are based on the current prices adjusted by the management’s estimates for the full remaining productive lives of the trees, up to 100 years for forests in Finland and in the US and up to 10 years for plantations in Uruguay. The cash flows are adjusted by selling costs and risks related to the future growth. Felling revenues and maintenance costs are estimated on the basis of actual costs and prices, taking into account the group’s projection of future price and costs development. In addition, calculations take into account environmental restrictions. The pre-tax discount rate used to determine the fair value of the Finnish forests in 2016 was 7.0% (7.0%) and for Uruguayan plantations 10.0% (10.0%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 240 million (260 million). Key estimates and judgements

have an impact on the energy shareholdings’ value. » Refer Note 9.2 Litigation, for further information.

Forest assets

EURm

2016 1,738

2015 1,469

Carrying value, at 1 January

Additions Disposals

26

16

4.4 Goodwill and other intangible assets

–72

–72 –91 377

Wood harvested

–106

Energy shareholdings

Net change in fair value

133

The group’s goodwill mainly relates to pulp operations in Finland and Uruguay belonging to UPM Biorefining business area. to be updated

Reclassifications

–1 15

–

EURm

2016 2,085

2015 2,510

Translation differences

39

Carrying value, at 31 December

1,734

1,738

Carrying value, at 1 January

Additions

– 1

33

Goodwill by business area 2016 and 2015

Impairment charges

–

Change in fair value, change due to harvesting and gains or losses on sale of forest assets are recognised in the income statement as a net amount totalling to EUR 88 million (352 million) in 2016. In 2015, the fair value of forest assets in Finland was increased by EUR 265 million due to adjustment of long-term wood price estimates and change in discount rate. UPM continues to estimate a declining trend of real wood prices in Finland, although with a slightly slower rate than previously. In addition, the pre-tax discount rate used to determine the fair value of the Finnish forests was lowered from 7.5% to 7.0% in 2015.

Disposals

–6

–35

Reclassifications into level 3

–

1

Other operations 1%

UPM Plywood 5%

Changes in fair value recognised in other comprehensive income

UPM Biorefining 91%

UPM Raflatac 3%

–148 1,932

–424 2,085

Carrying value, at 31 December

Accounting policies Purchases of energy shareholdings are recognised on the settlement date initially at cost, including transaction costs, and subsequently measured at fair value through other comprehensive income, net of tax if applicable. When the investments are sold or impaired, the accumulated fair value adjustments in equity are recognised through the income statement. Significant or prolonged decline in the fair value of the security below its cost is considered when determining whether the investments are impaired. Any impairment losses recognised for these investments are not subsequently reversed. The fair value of energy shareholdings is a level 3 measure in terms of the fair value measurement hierarchy.

Goodwill by business area

EURm

2016

2015

UPM Biorefining UPM Raflatac UPM Plywood Other operations

223

220

4.3 Energy shareholdings UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is consumed at the group’s pulp and paper production. The production is mainly carried out by energy companies in which UPM has energy shareholdings. Energy shareholdings are unlisted equity investments. UPM does not have control or joint control of or significant influence in the said energy companies. The value of energy shareholdings amounted to EUR 1,932 million

7

7

13

13

(2,085 million) at the end of 2016. These energy companies supply energy or both energy and heat to their shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle energy and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned.

1

1

Total

245

241

Goodwill

Key estimates and judgements

EURm

2016

2015

Carrying value, at 1 January

241

230

Fair valuation and sensitivity Valuation of energy shareholdings requires management’s

Translation differences

3

11

Carrying value, at 31 December

245

241

assumptions and estimates of a number of factors that may differ from the actual outcome which could lead to significant adjustment to the carrying amount of the asset. Fair value is determined on a discounted cash flow basis and the main factors impacting the future cash flows include future electricity prices, price trends and discount rates. The electricity price estimate is based on a simulation of the Finnish area electricity price. A change of 5% in the electricity price used in the model would change the total value of the assets by EUR 333 million. The discount rate of 5.85% used in the valuation model is determined using the weighted average cost of capital method. A change of 0.5% in the discount rate would change the estimated fair value of the assets by approximately EUR 310 million.

Number of shares

Group holding %

Carrying value, EURm 2016

2015

Pohjolan Voima Oy, A series Pohjolan Voima Oy, B series Pohjolan Voima Oy, B2 series

8,176,191 4,140,132 2,414,940

61.24 58.11 51.13

315

324

1,036

1,166

179 297

169 314

Kemijoki Oy

179,189 10,220

7.33

Länsi-Suomen Voima Oy

51.10

92 13

92 20

Other

–

–

Carrying value, at 31 December

1,932

2,085

CONTENTS

ACCOUNTS

124

125

UPM Annual Report 2016

UPM Annual Report 2016