UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

4.1 Property, plant and equipment

Accounting policies

Defined benefit pension plans Plan benefits depend on salary and length of service. The defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the term of the related pension liability. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The cost of providing pensions is charged to the income statement as employee costs so as to spread the cost over the service lives of employees. Changes in actuarial assumptions and actuarial gains and losses arising from experience adjustments are charged or credited in other comprehensive income in the period in which they arise. Past service costs and gains or losses on settlement are recognised immediately in income when they occur.

Defined contribution plans For defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. Other post-employment obligations Some group companies provide post-employment medical and other benefits to their retirees. The entitlement to healthcare benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.

LAND AND WATER

MACHINERY AND EQUIPMENT

OTHER TANGIBLE ASSETS

CONSTRUCTION IN PROGRESS

EURm

AREAS BUILDINGS

TOTAL

2017 Accumulated costs

759 –35 724 801

3,577 –2,532 1,044 1,131

14,150 –11,855

883

88 19,456 – –15,176

Accumulated depreciation and impairments

–753

Carrying value, at 31 December Carrying value, at 1 January

2,295 2,502

130 133

88 89

4,281 4,657

Additions Disposals

4

8

13 –5

3 –

261

289 –24

–16

–2

– – –

Depreciations

–

–80

–337

–18

–434

Impairment

–1

2

–4

–1 19 –6

–3 –2

Reclassifications

1

26

214 –88

–261

Translation differences

–65 724

–41

–2 88

–202 4,281

Carrying value, at 31 December

1,044

2,295

130

2016 Accumulated costs

836 –34 801 724

3,638 –2,506

14,326 –11,824

881

89 19,770 – –15,113

Accumulated depreciation and impairments

–748

Carrying value, at 31 December Carrying value, at 1 January

1,131 1,213

2,502 2,744

133 134

89 80

4,657 4,895

Additions Disposals

76

4

13 –8

4

222

319 –36

–17

–11 –84 –12

–1

– – –

Depreciations

– – 4

–377

–18

–478

Impairment

–21 168 –17

1

–32

Reclassifications

24 –4

13

–214

–4 –6

Translation differences

14

–

–

Carrying value, at 31 December

801

1,131

2,502

133

89

4,657

4. Capital employed UPM’s capital employed primarily relates to its production facilities and both forest and energy assets. UPM aims to capture growth opportunities in its existing business portfolio and invest in projects with attractive and sustainable returns.

Capitalised borrowing costs In 2017, the borrowing costs capitalised as part of non-current assets amounted to EUR 1 million (1 million). Amortisation of capitalised borrowing costs was EUR 2 million (4 million) and the average interest rate used 2.40% (1.56%), which represents the average costs to finance the projects. Capital expenditure Capital expenditure, excluding acquisitions and shares, amounted to EUR 303 million (325 million) in 2017. Following UPM Plywood business area growth investments in Finland and Estonia over the past few years, UPM announced in October 2017 it will expand its Chudovo plywood mill in Russia by investing EUR 50 million. The project is estimated to be completed by the end of 2019. In June 2017, UPM announced it will further improve the efficiency and competiveness of the UPM Kaukas pulp mill with EUR 30 million investment. Completion of the investment is scheduled for the spring 2018. In 2016, UPM’s major capital expenditures related to growth investments. The expansion of the Otepää plywood mill in Estonia and modernising UPM Kaukas pulp mill in Finland were finalised in 2016. In July 2016, UPM announced it will invest EUR 98 million in UPM Kymi pulp mill in Finland to further strengthen its position as a supplier of bleached chemical pulp for growing consumer and industrial end- use segments. The investment was completed in 2017. In October 2016, UPM announced a EUR 35 million investment in UPM Raflatac factory in Poland to meet the increasing label stock demand in Europe. The investment was completed in 2017.

Major capital commitments at 31 December

Capital employed

EURm

2017

2016

Capacity increase / Chudovo plywood mill Debottlenecking / Kaukas pulp mill Capacity increase / Kymi pulp mill Capacity increase / Raflatac Poland

42 21

– –

EURm

2017 4,281 1,600 1,974 1,552 –177 –652 525

2016 4,657 1,734 1,932 1,694 –145 –746 545

Property, plant and equipment

– –

80 33

Forest assets

Energy shareholdings

Goodwill and other intangible assets

Impairment losses In December 2017, UPM closed permanently paper machine 5 at UPM Blandin in Minnesota, USA, in response to overcapacities in the North American paper market. With the closure of the mill, UPM recognised impairment charges of EUR 4 million in UPM Paper ENA business area. In March 2016, UPM announced the closure of Madison Paper Industries paper mill in the US. Madison Paper Industries is a joint operation between UPM-Kymmene Inc. and Northern SC Paper Corp., a subsidiary of the New York Times Company. With the closure of the mill, UPM recognised impairment charges of EUR 9 million (EUR 20 million in UPM Paper ENA business area and the corresponding adjustment of EUR 11 million in eliminations and reconciliations) on property, plant and equipment. Hydropower assets located at the mill site were classified as assets held for sale at the end of 2016 and the sale was completed in 2017. In November 2016, UPM announced the plan to close of SC paper machine 3 at UPM Steyrermühl mill in Austria and SC paper machine 2 at UPM Augsburg mill in Germany. The impairment charges recognised amounted to EUR 23 million and EUR 1 million, respectively, and affected UPM Paper ENA business area.

Operating working capital

Provisions

Net retirement benefit assets and liabilities

Cash and cash equivalents Other assets and liabilities

716

992

–7

–3

Net deferred tax assets and liabilities Assets classified as held for sale

–36

–11

1

8

Total

9,777 10,657

CONTENTS

ACCOUNTS

130

131

UPM Annual Report 2017

UPM Annual Report 2017