UPM Annual Report 2024

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WE ARE UPM

GOVERNANCE

ACCOUNTS AND PERFORMANCE

Report of the Board of Directors

Sustainability Statement

Financial Statements

Auditor's Report

Sustainability Assurance Reports

4.2 Forest assets UPM is both a major forest owner and a purchaser of wood. The value of forest assets, i.e. standing trees, amounted to EUR 2,517 million (2,355 million) at the end of 2024.

Energy shareholdings

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 considering existing, sustainable harvesting plans and assessments regarding growth, timber prices, harvesting and silviculture costs and selling expenses. Forest renewal costs are capitalised during the growth cycle as part of the forest assets value. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy.

Number of shares

Group holding %

Carrying value, EURm 2024

2023

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

543

507

1,151

1,302

EURm

2024 2,355

2023 2,442

Kemijoki Oy

179,189 10,220

7.33

426 123

345 124

Carrying value, at 1 January

Länsi-Suomen Voima Oy

51.10

Additions Disposals

54 -21

50 -10

Other

—

Key estimates and judgements

Carrying value, at 31 December

2,247

2,283

Wood harvested

-218 299

-184

Net change in fair value Translation differences

81 -25

Fair valuation The valuation process of forest assets is complex and requires management estimates and judgement 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 150 years or until next regeneration cutting 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 costs related to future risks. 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 future forest growth and environmental restrictions. The pre-tax discount rate used to determine the fair value of the Finnish forests in 2024 was 9.7% (9.5%) and for Uruguayan plantations 11.2% (11.5%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 221 million (214 million). 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. Based on the shareholder agreements, 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 2,247 million (2,283 million) at the end of 2024. These energy companies supply electricity or both electricity 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 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. In 2020, UPM issued a shareholder loan of EUR 47 million without a maturity date to PVO. Embedded into the loan terms is a right to issue new shares in the PVO B2 series against the remaining, unpaid nominal of the loan starting from 2021. The loan is valued at fair value and is taken into account as a part of the total fair valuation of the PVO B2 series valuation.

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 three nuclear power plants (Olkiluoto 1, Olkiluoto 2 and Olkiluoto 3) in 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.

Carrying value, at 31 December

2,517

2,355

Key estimates and judgements

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 80 million (-103 million) in 2024. In 2024, the fair value of forest assets in Finland was impacted by higher long term stumpage price estimates. In 2023, the change in fair value of forest assets in Finland was impacted by higher discount rate which was partly offset by higher stumpage price estimates. Forest assets

Fair valuation and sensitivity Valuation of energy shareholdings requires management’s 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. Changes in regulatory environment or taxation may also have an impact on the value of the energy generating assets. The valuation process is carried out by UPM Energy and the results are reviewed by management. The electricity price estimate is based on future electricity forward prices and 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 250 (180) million. The discount rate of 8.07% (8.01%) used in the valuation model is determined using the weighted average cost of capital method. A change of 0.5% percentage points in the discount rate would change the estimated fair value of the assets by approximately EUR 180 (100) million. One of the main factors in the decrease in fair value during reporting period was the decrease in electricity forward market prices. Additionally, market price volatility’s impact on the value of hydropower assets has been updated, increasing the fair value of hydropower assets.

EURm

2024 1,695

2023 1,621

Forest assets in Finland Forest assets in Uruguay Forest assets in United States

807

720

Carrying value, at 31 December

2,517

2,355

Changes in energy shareholdings

Forest land Forest land is included in land and water areas within property, plant and equipment. » Refer Note 4.1 Property, Plant and equipment. At the end of 2024, carrying value of own forest land amounted to EUR 801 million (EUR 715 million) and leased forest land EUR 249 million (EUR 231 million). UPM's own and leased forest land areas are summarised in below table.

EURm

2024 2023

Carrying value, at 1 January

2,283

3,652

Disposals

-4

—

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

-32

-1,369 2,283

2,247

FOREST LAND

PRO-DUCTIVE FOREST LAND

FORESTED LAND

Accounting policies

1,000 ha

Finland Uruguay

522 318 174

428 189 140

416 178 130

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 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. The fair value of energy shareholdings is a level 3 measure in the fair value measurement hierarchy.

Uruguay, leased land

United States

Total

1,090

812

779

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. The group applies IAS 41 to account its forest assets. Own land is stated at cost whereas leased land is valued at cost less accumulated depreciation.