UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

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SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

4.2 Forest assets

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 is constructing 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.

shareholdings are initially and subsequently measured at fair value through other comprehensive income, net of tax if applicable, with only dividend income recognised through profit and loss. Initial fair value is acquisition cost including transaction costs. Upon disposal of the investment, the accumulated fair value changes in equity are not recycled to the income statement but instead, are reclassified from the fair value reserve to retained earnings. In the prior financial year, energy shareholdings were designated as available-for-sale equity investments, for which accumulated fair value adjustments in equity were recognised through the income statement when the investments were sold or impaired. The fair value of energy shareholdings is a level 3 measure in the fair value measurement hierarchy.

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. 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 manage­ ment 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 2018 was 7.0% (7.0%) and for Uruguayan plantations 9.9% (9.5%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 260 million (220 million). Key estimates and judgements

UPM is both a major forest owner and a purchaser of wood. The value of forest assets, i.e. standing trees, amounted to EUR 1,945 million (1,600 million) at the end of 2018. UPM's own and leased forest land areas are summarised in below table.

PRODUCTIVE FOREST LAND

FORESTED LAND

1,000 ha Finland Uruguay

FOREST LAND

512 258 124

433 157 102

428 148

Uruguay, leased land

91 56

United States

76

56

Total

971

748

723

Key estimates and judgements

Forest assets

Energy shareholdings

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

EURm

2018

2017

Carrying value, at 1 January

1,600 1,734

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 350 million. The discount rate of 5.49% 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 300 million. Other uncertainties and risk factors in the value of the assets relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project. UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. Changes in regulatory environment or taxation could also have an impact on the value of the energy generating assets.

Additions Disposals

5

3

EURm

2018

2017

–32

–97

Carrying value, at 1 January

1,974 1,932

Wood harvested

–101

–117

Additions

– –

25 –3

Net change in fair value Translation differences

451

137 –59

Impairment charges

22

Disposals

–1

–

Carrying value, at 31 December

1,945 1,600

Changes in fair value recognised in other comprehensive income Carrying value, at 31 December

185

20

2,159

1,974

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 amounting to EUR 452 million (103 million) in 2018. The fair value of forest assets in Finland was increased by EUR 345 million mainly due to higher forest growth estimates. In addition, the company adjusted its long-term wood price estimates slightly.

Accounting policies Following the adoption of IFRS 9 in January 2018, the group has made an irrevocable election to designate its energy shareholdings as equity instruments where changes in fair value are recognised through OCI. The shareholdings are not held for trading as the group has an intention to hold the investments for the long term. Purchases of energy

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.

4.4 Goodwill and other intangible assets

The value of energy shareholdings amounted to EUR 2,159 million (1,974 million) at the end of 2018. 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.

Goodwill by business area

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

EURm

2018

2017

UPM Biorefining UPM Raflatac UPM Plywood Other operations

214

210

Goodwill by business area 2018

7

7

13

13

1

1

UPM Plywood 6%

Number of shares

Group holding %

Carrying value, EURm 2018

Total

236

231

UPM Raflatac 3%

2017

Pohjolan Voima Oyj, A series Pohjolan Voima Oyj, B series Pohjolan Voima Oyj, B2 series

8,176,191 4,140,132 2,869,819

61.24 58.11 51.22

340

343

Goodwill

1,185

1,063

226 290 110

181 276 102

EURm

2018

2017

Kemijoki Oy

179,189 10,220

7.33

Länsi-Suomen Voima Oy

51.10

UPM Biorefining 91%

Carrying value, at 1 January

231

245 –13 231

Other

–

–

7

9

Translation differences

5

Carrying value, at 31 December

2,159

1,974

Carrying value, at 31 December

236

146

147

CONTENTS

ACCOUNTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018