UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

9.

Unrecognised items

COUNTRY OF INCORPORATION

HOLDING % 2018

HOLDING % 2017

JOINT OPERATIONS

Oy Alholmens Kraft Ab (Pohjolan Voima Oyj, G series) EEVG Entsorgungs- und Energieverwertungsgesellschaft m.b.H.

FI

27.88 50.00 50.00 50.00 54.00 76.00 50.00 71.95

27.88 50.00 50.00 50.00 54.00 76.00 50.00 71.95

AT

EURm

2018

2017

Järvi-Suomen Voima Oy

FI FI FI FI

On own behalf Mortgages

Kainuun Voima Oy

9.1 Commitments and contingencies In the normal course of business, UPM enters into various agreements providing financial or performance assurance to third parties. The maximum amounts of future payments for which UPM is liable is disclosed in the table below under “Other commitments”. Property under mortgages given as collateral for own commitments include property, plant and equipment, industrial estates and forest land.

1

76

Kaukaan Voima Oy (Pohjolan Voima Oyj, G9 series) Kymin Voima Oy (Pohjolan Voima Oyj, G2 series)

On behalf of others Guarantees

2

2

Madison Paper Industries

US

Other own commitments Operating leases, due within 12 months Operating leases, due after 12 months

Rauman Biovoima Oy (Pohjolan Voima Oyj, G4 series)

FI

90

77

464

386

Other commitments

92

95

Total

649

636

8.3 Related party transactions The Board of Directors and the Group Executive Team There have not been any material transactions between UPM and its members of the Board of Directors or the Group Executive Team (key management personnel) or persons closely associated with these members or organisations in which these individuals have control or significant influence. There are no loans granted to any members of the Board of Directors or the Group Executive Team at 31 December 2018 and 2017. For information concerning shares held by members of the Board of Directors as well as remuneration to members of the Board of Directors and the Group Executive Team are disclosed in » Note 3.2. Key management personnel. Associates and joint ventures In Finland, the group organises its producer’s responsibility of recovered paper collection through Encore Ympäristöpalvelu Oy (until 1.1.2019 by name Paperinkeräys Oy). Austria Papier Recycling GmbH purchases recovered paper in Austria and L.C.I s.r.l. in Italy. ASD Altpapier Sortierung Dachau GmbH is a German recovered paper sorting company. The purchases from those four companies represented approximately 89% (81%) of total recovered paper purchase amount from associates and joint ventures. Transactions with associates and joint ventures are presented in the table below. The group has no individually material associates or joint ventures.

9.2 Litigation Group companies

Pension Funds In Finland, the group has the pension foundation, UPM Sellutehtaiden eläkesäätiö (former Kymin Eläkesäätiö), which is a separate legal entity. Pensions for about 18% (18%) of the group’s Finnish employees are arranged through the foundation. In 2018, the contributions paid by UPM to the Foundation amounted to EUR 23 million (14 million). The Foundation manages and invests the contributions paid to the plan. The fair value of the Foundation’s assets at 31 December 2018 was EUR 470 million (504 million), of which 50% was in the form of equity instruments, 42% in the form of debt instruments and 8% was invested in property and money market. In the UK, the single UPM Pension Scheme operates under a Trust which is independent from the group. The Trust consists of various defined benefit sections, all of which are closed to future accrual and one common defined contribution section which is open to all UPM employees in the UK. The group made contributions of EUR 8 million (25 million) to the defined benefit sections of the Scheme in 2018. The fair value of the UK defined benefit fund assets at 31 December 2018 was EUR 417 million (450 million), of which 47% was invested in equity instruments, 32% in debt instruments, 15% in property and money market and 6% in other investments.

Other shareholdings In Finland, UPM is participating in a project to construct a new nuclear power plant unit Olkiluoto 3 EPR (OL3) through its shareholdings in Pohjolan Voima Oyj. Pohjolan Voima Oyj is a majority shareholder of Teollisuuden Voima Oyj (TVO), holding 58.5% of its shares. UPM’s indirect share of OL3 is approximately 31%. According to TVO OL3 was procured as a fixed price turnkey project from a consortium formed by Areva GmbH, Areva NP SAS and Siemens AG (the Supplier). The consortium companies have under the plant contract joint and several liability for the contractual obligations. Originally the commercial electricity production of the OL3 was scheduled to start in April 2009. The completion of the project, however, has been delayed. As announced by TVO, in accordance with the schedule updated by the Supplier in November 2018, the regular electricity generation at the plant unit will commence in January 2020. According to TVO, the business restructuring plan announced by Areva Group in 2016 was implemented at the beginning of 2018. The restructuring involved a transfer of the majority of business of Areva NP to a company named Framatome of which 75.5% is owned by Electricité de France (EDF). According to TVO, the OL3 project and the means required to complete it, as well as certain other liabilities remained within Areva NP SAS and Areva GmbH, within the scope of Areva SA. In March 2018 TVO announced it had signed a comprehensive settlement agreement with the Supplier and Areva Group parent company, Areva SA, a company wholly owned by the French State. The settlement agreement concerns the completion of the OL3 project and related disputes and entered into force in late March. According to TVO, pursuant to the settlement agreement TVO and the Supplier jointly withdrew the pending arbitration proceedings under the International Chamber of Commerce (ICC) rules with respect to costs and losses incurred in relation to delays in the construction of the OL3 project. In July 2018 TVO announced that in June 2018 the ICC tribunal had confirmed the arbitration settlement by a consent award, and the arbitration proceedings had been terminated. The parties also withdrew the pending appeals in the General Court of the European Union. According to TVO the settlement agreement stipulates as follows: To provide and maintain adequate and competent technical and human resources for the completion of the OL3 project, Areva will source the necessary additional resources from Framatome S.A.S., whose majority owner is EDF. The supplier consortium companies undertake that the funds dedicated to the completion of the OL3 project will be adequate and will cover all applicable guarantee periods, including setting up a trust mechanism funded by Areva companies to secure the financing of the costs of completion of the OL3 project.

In 2011, Metsähallitus (a Finnish state enterprise, which administers state-owned land) filed a claim for damages against UPM and two other Finnish forest companies. The claim relates to the decision of December 2009 in which the Finnish Market Court held that the defendants had breached competition rules in the Finnish roundwood market. In addition to Metsähallitus, private forest owners, and companies, as well as municipalities and parishes, filed claims relating to the Market Court decision. In addition to the claims on capital amounts, the claimants are also requesting compensation relating to value added tax and interests. Private forest owners, companies, municipalities and parishes have waived their claims against UPM. Metsähallitus has requested for leave of appeal with the Supreme Court in relation to judgement passed by the Court of Appeal of Helsinki in May 2018. Court of Appeal had rejected the damages claim of Metsähallitus and ordered Metsähallitus to pay compensation for legal expenses. The principal amount of Metsähallitus claim is currently in total EUR 61.8 million, of which EUR 3 million is based on agreements between UPM and Metsähallitus. No provision has been made in UPM’s accounts for the claim. In January 2019 the Supreme Court rendered its decision denying Metsähallitus leave to appeal as a result of which the judgement of the Court of Appeal remains final. In 2012, UPM commenced arbitration proceedings against Metsäliitto Cooperative and Metsä Board Corporation due to their breaches of UPM’s tag-along right under the shareholders’ agreement concerning Metsä Fibre Oy in connection with the sale of shares in Metsä Fibre to Itochu Corporation. UPM claimed jointly from Metsäliitto and Metsä Board a capital amount of EUR 58.5 million. Metsäliitto and Metsä Board had sold a 24.9% holding in Metsä Fibre to Itochu Corporation for EUR 472 million. In connection with the transaction with Itochu, Metsäliitto had exercised a call option to purchase UPM’s remaining 11% shareholding in Metsä Fibre for EUR 150 million. The arbitral tribunal rendered its final decision (arbitral award) in February 2014 and ordered Metsäliitto and Metsä Board to pay UPM the capital amount of EUR 58.5 million and penalty interest and compensate UPM for its legal fees. As a result, UPM recorded an income of EUR 67 million as item affecting comparability in Q1 2014. In May 2014 Metsäliitto and Metsä Board commenced litigation proceedings in the Helsinki District Court challenging the arbitral award and requesting the District Court to set aside the arbitral award or to declare it null and void. In June 2015 the District Court rejected the actions by Metsäliitto and Metsä Board and following an appeal the Helsinki Court of Appeal rejected the actions by Metsäliitto and Metsä Board in October 2016. Metsäliitto and Metsä Board have filed a request for leave of appeal with the Supreme Court.

8.4 Assets held for sale

EURm

2018

2017

Dividends received

2

2

No assets were classified as held for sale at the end of 2018. Assets classified as held for sale at the end of 2017 amounting to EUR 1 million include hydro power assets located in Schongau and Ettringen mill sites in Germany.

Purchases of raw materials and services

87

94

Loan receivables

6 1 9

6 1 8

Trade and other receivables Trade and other payables

Subsidiaries and joint operations

Accounting policies Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell, if UPM will recover their carrying amount through a sale transaction which is considered highly probable. Non-current assets classified as held for sale, or included within a disposal group that is classified as held for sale, are not depreciated after the classification.

» Refer Note 8.2 Principal subsidiaries and joint operations.

170

171

CONTENTS

ACCOUNTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018