UPM annual report 2014

UPM Energy

RENEWABLE ENERGY FROM HARJAVALTA The Harjavalta hydropower plant reburbishment project will significantly increase the production of renewable and emission-free energy capacity, and it is scheduled for completion by the end of 2017. The construction work has begun, and the main equipment purchases were made in 2014. The total value of the investment is approximately EUR 40 million. The investment also provides new possibilities for managing the water flow rate in Kokemäen- joki and, as a result, decreasing the risk of flooding. The renewed plant will let more water flow through than before and enables minimum release more efficiently, which makes it easier to manage the foreseeable winter discharge volumes. The single largest flood risk area in Finland is located at the lower reaches of the river around the city of Pori, which has over 83,000 inhabitants.

OUR DIRECTION

OUR STRENGTHS

• Create value in the Nordic electricity market through generation and physical and financial trading • Profitable growth on the Nordic CO 2 emission-free electricity market

• Cost competitive, low-emission electricity generation portfolio

BUSINESSES 15–30

• Versatile asset base – nuclear power as base load capacity, hydropower as flexible capacity

and condensing power as reliable peak load capacity

KEY FIGURES

2013

2014

466 186

Sales, EURm

464 202

The renovation of the Harjavalta hydropower plant will increase generation capacity and adjustabil- ity, and improve the efficiency and environmental safety.

• Strong competencies and value creation track record in physical and financial electricity trading

Operating profit excl. special items, EURm Capital employed (average), EURm

2,882

2,903

6.5

ROCE excl. special items, %

7.0

92

Personnel on 31 Dec.

80

Top performance continued

Markets and drivers • Electricity consumption in the Nordic countries is expected to remain stable. • Demand is driven by household consump- tion and industrial activity. • In 2014, electricity consumption in the Nordic countries decreased slightly, primar- ily due to warmer than normal weather. • New capacity investments are driven by economics and influenced by regulatory issues and support schemes; capacity is mainly growing in renewables. • Power markets across Europe are becoming more integrated due to market coupling and new transmission lines. • Hydrological balance and wind in the Nor- dic countries impacts electricity supply and therefore electricity prices and price spreads between different price areas. • In the Nordic countries there are several different price areas; UPM Energy is cur- rently operating in the Finnish price area only.

With its competencies and generation assets, UPM Energy is well-positioned to generate good profitability and create additional value from the increased electricity price volatility in the market, through optimal use of its hydro- power assets. The share of weather-dependent (wind and solar) power production in the mar- ket is growing, increasing price volatility and calling for flexible generation to balance out the variations in the production and consumption of electricity. In 2014, UPM proceeded with efforts to upgrade its hydropower production assets. Through its ownership of Länsi-Suomen Voima Oy, UPM is participating in the expansion of the Harjavalta hydropower plant with provision of a new machine unit and refurbishment of the existing two turbines. When completed in 2017, the project will improve the efficiency, control and environmental safety of the plant, as well as responding to the increasing demand for flexible capacity. The total power output of the plant will increase from 72 MW to 110 MW.

Otsotuuli Oy, a wind power development joint venture company established with Ele- ment Power in 2013, continued to develop wind power production possibilities at a number of sites throughout Finland, primarily on land leased from UPM. Based on wind measure- ments, UPM has several land assets that are well-suited to wind energy production. The largest ongoing project is at Teolli- suuden Voima Oyj (TVO), which is building a third nuclear power reactor, OL3, at Olkiluoto, Finland. The new unit will have an annual nuclear power generation capacity of approxi- mately 1,600 MW. Through Pohjolan Voima Oy (PVO), UPM is entitled to approximately 500 MW of capacity. The commissioning phase for the building technology systems of the reactor and turbine plants is ongoing. Testing and planning, as well as documentation and licensing of the reactor plant automation are continuing. The plant supplier estimates that regular electricity gen- eration at the power plant should start in late 2018.

In June 2013, UPM announced that it is participating in the share issue from Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant project. UPM’s share of the issue is EUR 119 million, of which EUR 31 million was paid in Q2 2013 and another EUR 31 million was paid in Q4 2014. The remaining part of the share issue will be implemented during the coming years based on the financing needs of the project. In July 2010, the Finnish parliament ratified the government’s favourable decision-in-princi- ple concerning TVO’s application to construct OL4, its fourth nuclear power plant unit. UPM is participating in financing the bidding and engineering phase for OL4. In September 2014, TVO’s application for an extension to submit a construction licence application for OL4 plant unit was rejected by the Finnish Government. The deadline for the application is June 2015.

Business performance Operating profit increased due to lower costs as well as higher hydro and nuclear power produc- tion, more than offsetting the negative impact of lower average sales prices. Business development UPM Energy is a market-driven business and the second largest electricity generator in Fin- land. UPM Energy has developed wide compe- tencies in physical and financial electricity trading, supported by market analysis. Its own hydropower plants and shares in energy compa- nies provide UPM Energy with a versatile and cost competitive power generation portfolio with low emissions.

Operating profit *) EUR million

300

240

180

120

60

0

2012

2013

2014

*) excl. special items

UPM ENERGY VALUE CREATED

CAPITALS

OUTCOMES

VERSATILE GENERATION (from own hydropower plants and shareholdings in energy companies) HYDROPOWER o o Flexible o o Cost competitive o o Low emissions o o Renewable CONDENSING POWER o o Reliable peak load NUCLEAR

PHYSICAL POWER MARKET o o Physical value creation o o Mainly Nord Pool Spot market for day-ahead and intraday trading o o Members (buyers and sellers) agree on contracts for the delivery of power

TRANSMISSION

DISTRIBUTION

HOUSEHOLD CONSUMPTION

Low-emission electricity Work safety Energy supply security Flexible power supply Risk mitigation ROCE

Capital intensive utility business Low-emission energy sources, including water rights Fuels Engaged high performing people Organisational experience Energy trading platform Regulation

o o Efficient base load o o Cost competitive o o Low emissions

SMALL AND MEDIUM SIZED ENTERPRISES

INDUSTRIAL ELECTRICITY CONSUMPTION

FINANCIAL POWER MARKETS Derivative power contracts traded on Nasdaq Commodities o o Value protection and creation

CONTENTS

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UPM Annual Report 2014

UPM Annual Report 2014