UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Changes in consumer behaviour Demand for UPM’s products may be affected by the introduction of substitute or alternative products. The demand for graphic papers in the mature markets is forecast to continue to decline. This will likely increase the pressure on UPM’s graphic paper deliveries and sales prices as well as the scarcity of recycled fibre. Changes in demand could also cause overcapacity in some of UPM’s products, affecting the sales prices and deliveries of such products. Depending on the product area, the shifts in consumer demand may either have a positive or an adverse effect on the consumption of UPM’s products. For example, UPM expects that there will continue to be a growing need for renewable and recyclable solutions, which creates various opportunities for UPM and drive demand growth for most of UPM’s products. At the same time digitalisation and e-commerce have changed consumer behaviour and resulted in decline in demand for graphic papers for various end uses. Changes in legislation UPM is exposed to a wide range of laws and regulations globally. The performance of UPM’s businesses, for example the paper, energy, and biofuels businesses, are to a high degree dependent on the regulatory framework for these areas. Changes in regulation, direct and indirect taxation or subsidies, aid, grants or allowances could have a direct effect on UPM’s performance and its relative competitiveness, and structurally restrict or exacerbate UPM’s ability to compete for raw material. UPM also operates in industries that are subject to extensive environmental laws and regulations governing, among others, emissions, water quality, energy efficiency, as well as waste handling, recycling and disposal. Environmental laws and regulations have become more stringent and may continue to develop to be even more stringent due to various global, regional and national level regulatory initiatives. As these environmental laws and regulations are amended or as their application or enforcement is changed, additional costs in complying with new and more stringent regulations may be imposed on UPM. UPM’s operations require UPM to obtain multiple environmental permits and other licences from relevant authorities and comply with their terms and conditions. These permits and licences may be subject to modification, renewal or, subject to certain conditions, revocation by the issuing authorities. UPM monitors regulatory changes in order to UPM is a shareholder of Pohjolan Voima Oyj (PVO), which is the majority shareholder of Teollisuuden Voima Oyj (TVO). TVO owns and operates three nuclear power plant units at the Olkiluoto site (OL). PVO supplies electricity to its shareholders on a cost-price principle (so called ‘Mankala-principle’) that is widely applied in the Finnish energy industry. Under the Mankala principle, electricity 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. The newest plant unit, Olkiluoto 3 EPR (OL3), started regular commercial electricity production in 2023 and is expected to increase UPM’s electricity generation capacity significantly. In Finland, UPM indirectly owns approximately 31% of the new nuclear power plant unit 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. 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). As stipulated in the plant contract, the better adapt to the effects of such changes. Shareholdings in Pohjolan Voima Oyj

consortium companies have joint and several liability for the contractual obligations. According to TVO, under the plant contract, electricity production was scheduled to start at the end of April 2009. However, the completion of the project was delayed. On 20 April 2023, TVO announced that it had submitted to the OL3 plant supplier the Provisional Takeover Certificate. In addition, TVO confirmed that the commercial operation of OL3 starts at 1 May 2023. The final acceptance of OL3 will take place upon termination of the two-year warranty period. Even after that, the Supplier's liabilities under the warranty will remain in force to some extent for eight years at most. The shareholders’ right to electricity generated by OL3 and their liability for the annual costs incurred from electricity generation are determined in accordance with TVO’s Articles of Association. In March 2018, TVO announced that it had signed a Global Settlement Agreement (the GSA) with the Supplier and the Areva Group parent company, Areva SA, a company wholly owned by the French state, concerning the completion of the OL3 project and related disputes. According to TVO’s announcement, the GSA was amended with agreements signed in June 2021. In the GSA, the Supplier consortium companies committed to ensuring that the funds dedicated to the completion of the OL3 project are sufficient and cover all the applicable guarantee periods. Consequently, a trust mechanism was set up funded by the Areva companies to secure the funds required to cover Areva’s costs for the completion of the OL3 project. TVO announced in its Interim Report Q3 2023 that the final payment of approximately EUR 193 million in delay compensation agreed upon in 2018 was set off against the final payment installment of the Areva companies under the plant contract in May 2023. Long-term receivables include the additional delay compensation of EUR 56.7 million to TVO, agreed upon in 2021, will become due during the final takeover of OL3 in April 2025 at the earliest. According to TVO, all payments related to the settlement compensations have been recorded in the consolidated balance sheet as property, plant and equipment. TVO announced in its Interim Report Q3 2023 that total investment in the OL3 project was approximately EUR 5.8 billion. EUR 250.0 million was transferred from the OL3 investment to operating-time fuel (inventories) when the OL3 plant unit entered commercial operation. According to TVO, regular electricity production and commercial operation of the OL3 on 1 May, transferred the responsibility of the plant to TVO. The Supplier retains the responsibilities according to the plant contract for warranty periods and for that unfinished work, which has been agreed to be done later at the Supplier’s expense. According to TVO, the company will carefully follow the fulfilment of the conditions according to the 2018 settlement agreement and the amendment agreements signed in June 2021. The Supplier is obligated to complete OL3 in accordance with the plant contract and the amended GSA. TVO announced in its Interim Report Q3 2023 that Finnish grid operator Fingrid Oyj (Fingrid) has limited OL3’s production to a maximum of 1,570 MW. After reporting period on 12 January 2024, the Energy Authority issued a decision (1347/040200/2022) considering TVO’s investigation request on the main grid protection system for OL3. The decision states that Fingrid acted in breach of electricity market regulations when transferring obligations related to the maintenance of OL3’s operational reliability to TVO and when adopting terms and conditions and determination principles for fees without the Energy Authority’s confirmation. The Energy Authority requires that Fingrid submits the determination principles for fees related to system protection or a proposal for another mechanism for confirmation by 11 April 2024.

On 16 December 2020 TVO announced, that the shareholders of TVO, including PVO, had signed an additional shareholder loan commitment, comprising a total of EUR 400 million in new subordinated shareholder loan agreements. According to TVO, with the new shareholder loan commitment, TVO is preparing to maintain sufficient liquidity buffer and equity ratio to complete OL3. On 30 November 2022, TVO announced that the shareholder loan commitment of EUR 400 million, which was originally agreed in December 2020, had been extended by one year until the end of 2023. On 26 April 2023, TVO announced that S&P Global Ratings had upgraded its long-term credit rating from “BB+” to “BBB-” and affirmed its stable outlook. On 4 May 2023, TVO announced that Moody’s Investors Service had assigned a Baa3 long term issuer rating to TVO with a stable outlook. TVO maintains investment grade ratings from all three major credit rating agencies (Fitch Ratings Ltd BBB-/Stable, Moody ´s Baa3/Stable, S&P Global BBB-/ Stable). According to TVO, there are uncertainties related to the availability of OL3 during the first operating cycle by means of any possible unexpected events. Operational issues in power plants could have an adverse impact on TVO’s business and financial position, which could cause adverse impact on the fair value of UPM’s energy shareholdings and/or the cost of energy Climate change UPM is exposed to a variety of risks related to climate change. Strategic risks related to climate change include risks concerning competition, markets, customers, products and regulation. For example, unpredictable regulation, subsidies or EU policies and resulting national legislation in EU countries may distort raw material, energy and final product markets and changing costs of greenhouse gas emissions may influence UPM’s financial performance. Policies and regulations responding to Russia’s war in Ukraine and cutting Russian gas supply to Europe may temporarily emphasize energy supply security over climate targets and thus change the trajectory of climate change or slow down the achievement of emission reductions. UPM believes that forest, wood based products and low-carbon energy hold significant value creation potential with respect to renewable and recyclable products. Other risks related to climate change particularly concern UPM’s supply chain as well as the availability and price of major inputs, such as wood and electricity. Climate change may cause exceptional weather events, such as severe storms, floods and draughts, which could, for example, result in unpredictable hydropower availability and wood harvesting conditions. Exceptionally mild winter conditions with a reduced period of frozen soil in the Nordics could affect the harvesting and transport of wood, consequently undermining the stability of raw material supply and potentially increasing the cost of wood. These could also increase the risk of production limitations. Biodiversity loss Biodiversity refers to the diversity and variation of species and ecosystems on our planet. According to the UN, and despite ongoing efforts, biodiversity is deteriorating worldwide. Biodiversity loss is projected to worsen if no mitigation actions are taken. Mitigating climate change is in our view the single most important action to safeguard biodiversity. UPM’s operations are widely linked with biodiversity, and most significant impacts on biodiversity arise from wood sourcing activities. Biodiversity is instrumental in maintaining healthy forest growth and ensuring that forests adapt to the changing climate. Mitigating biodiversity loss also plays an important role in our hydropower plants and production units where we aim to improve living conditions for local fauna and flora with dedicated actions. Deteriorating biodiversity may cause significant adverse effect on the availability and

acceptability of wood raw material needed to produce UPM’s products such as pulp, paper, timber and biofuels. Loss of major customers and industry consolidation UPM has several major customers, and the largest customer in terms of sales represented approximately 2% of UPM’s sales in 2023, and the ten largest customers represented approximately 13% of such sales. Although UPM is not dependent on any specific customer or group of customers, the loss of its major customers, if not replaced on similar terms, could have a material effect on UPM’s business. Also, as the size of UPM’s customers could increase in connection with industry consolidation, such customers could exert increased bargaining power on all of their suppliers, including UPM. UPM is also exposed to risks related to any deterioration of a major customer group’s financial condition. Product development, innovation and intellectual property rights Research and product development are an important part of UPM’s strategy, particularly with regard to new businesses, such as wood based biofuels, biochemicals and biomedicals. The return on investment of new or enhanced existing products and solutions may not meet targets or improve UPM’s competitiveness. UPM has a broad patent portfolio that provides value creation potential in the future; however, it also exposes UPM to risks related to the protection and management of intellectual property, including patents and trademarks. Corporate acquisitions and divestments UPM’s strategy is to grow businesses with strong long-term fundamentals and sustainable competitive advantage. This may result in acquisitions of new businesses or divestments of existing businesses or parts thereof. Carrying out corporate mergers, acquisitions and divestments involves risks relating to the successful implementation of a divestment and the ability to integrate and manage acquired businesses, systems, culture and personnel successfully. In addition, the cost of an acquisition may prove high and/or the anticipated economies of scale or synergies may not materialise. Hidden liabilities of an acquired company (e.g., competition law liabilities) may also constitute a significant risk in relation to potential acquisitions. UPM may divest operations or assets to focus on strategic areas. Any future divestments may be affected by many factors that are beyond UPM’s control, such as the availability of financing to potential buyers, interest rates, acquirers’ capacity, and regulatory approval processes, and divestments may also expose UPM to indemnity claims. Furthermore, divestments may involve additional costs due to historical and unaccounted liabilities. The profitability of corporate acquisitions and divestments may differ from UPM’s expectations. Operational risks Fluctuations in the prices of major inputs as well as changes in their availability The main inputs required in the manufacturing of UPM’s products are wood, fibre, chemicals, energy and water. The prices for many of these major production inputs have been volatile in the recent years and are expected to remain volatile for the foreseeable future, which may have an effect on the general profitability of the industries in which UPM operates. Climate change may contribute to the increase of the price volatility of UPM’s major production inputs. Also, any changes in the current forestry practices and level of harvesting due to negative public opinion or regulatory restrictions towards harvesting could have an effect on the raw material supply and may increase the cost of wood.

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