UPM-Kymmene - Company Announcement

CORRECTION: UPM changes Paper and Energy businesses’ asset values to reflect the fair values – Q4 2012 results broadly in line with outlook

UPM-Kymmene Corporation                  Stock exchange release             
January 17 2013 at 13:16 EET 



Correction under the section "Energy Business Area assets booked at fair value"

In valuing the PVO B2 shares, UPM has used the assumption that Olkiluoto 3
would start commercial electricity production in mid-2015 



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UPM-Kymmene Corporation                   Stock exchange release            
January 17  2013 at 08:30 EET 

UPM changes Paper and Energy businesses' asset values to reflect the fair
values - Q4 2012 results broadly in line with outlook 



UPM records an impairment charge in the Paper Business Area and adopts new IFRS
standards affecting the Energy Business Area and certain other energy
generating assets and employee benefits. The net impact of the actions on UPM's
equity is estimated to be neutral, net of deferred taxes. 



  -- UPM records an impairment charge of EUR 1,770 million in the Paper Business
     Area in Q4 2012, including EUR 783 million related to goodwill and EUR 987
     million related to fixed assets.



  -- UPM adopts new consolidation standards IFRS 10 and 11, resulting into a
     change in the accounting treatment of certain power generation assets as of
     Q1 2013. The reclassification will increase the asset values in the Energy
     Business Area by approximately EUR 1,950 million.
 UPM's interest bearing liabilities are estimated to increase by
     approximately EUR 200 million.



  -- UPM adopts new IFRS standard IAS 19 (Employee Benefits). The amendment
     related to accounting for pension liabilities will decrease UPM's equity by
     approximately EUR 315 million in Q1 2013.



“Energy has been the most profitable Business Area in UPM and is one of our
growth businesses. I am pleased that we are now able to show the fair value of
our Energy assets in our balance sheet,” says Tapio Korpeinen, CFO. 



“Paper, on the other hand, has been around operating profit break-even for two
years. The previous carrying value of the Paper Business Area implied a
significant improvement in the profitability in our European graphic paper
business. We could not achieve this by the end of 2012, despite successful
integration of Myllykoski and realisation of the targeted cost synergies. The
new accounting value of the Paper business reflects the current profitability
in the mature European paper business environment and is supported by the Paper
Business Area's solid cash flow generation.” 



“UPM's asset values will now better represent the fair values of the
businesses. I believe this will contribute to investors' confidence on our
balance sheet values.” 



“Over the past three years, a clear majority of UPM's EBITDA has originated
from our well performing growth businesses: Energy, Pulp, Label and the Asian
paper business. This will now be reflected also in the distribution of capital
- Paper will represent approximately 30% of our capital employed. Furthermore,
Paper's operating profit will no longer be burdened by high depreciation,”
concludes Tapio Korpeinen. 



Q4 2012 results broadly in line with the company's outlook



UPM's Q4 2012 results were broadly in line with the company's guidance.
Operating profit excluding special items was approximately EUR 138 million,
compared with EUR 147 million in Q4 2011, or EUR 122 million in Q3 2012. UPM
expected its Q4 2012 operating profit excluding special items to be about the
same or lower than in Q3 2012. 



Profitability of Paper Business Area continued at previous quarter's level with
reported operating loss excluding special items of EUR 10 million in Q4 2012. 



UPM will publish its Financial Statements release 2012, including outlook
statement on 31 January 2013 with analyst conference call as well as Finnish
press conference on the same day. 



Paper assets impaired to reflect the current profitability in the European
paper business 



The continuing challenges in European economy have significantly impacted the
consumption of paper, exacerbating the effect of structural changes in paper
end-uses and resulting in further decline in the demand of graphic papers in
Europe. High costs and significant overcapacity continue to challenge the
industry operators. 



In these circumstances, UPM has not been able to improve the profitability of
its European graphic paper business as much as targeted. As UPM management does
not expect significant enough improvement in its Paper business profitability
in the foreseeable future, the company records impairment charges in Q4 2012. 



UPM records an impairment charge of EUR 783 million of the goodwill related to
acquisitions made in 1997- 2001. After the charge, Paper Business Area has no
goodwill left. 



UPM records an impairment charge of EUR 987 million of the fixed assets related
to its mature European graphic paper operations. 



The total impact on UPM's Q4 2012 net profit is EUR 1,565 million.



After the charges, the total capital employed in the Paper business is
approximately EUR 3,400 million. The fixed asset impairment also reduces annual
depreciation in the Paper business. Depreciation is estimated to total EUR 320
million in the Paper business and EUR 550 million for UPM as a whole in 2013. 



Energy Business Area assets booked at fair value



UPM adopts new IFRS standards IFRS 10 (Consolidated Financial Statements), and
IFRS 11 (Joint Arrangements) from Q1 2013 onwards. 



In Energy Business Area, Pohjolan Voima Oy (PVO) hydropower (A) and nuclear
power (B, B2) shares as well as Kemijoki Oy and Länsi-Suomen Voima Oy (LSV)
shares will be recognised as financial assets (available-for-sale investments)
at fair value from Q1 2013 onwards. In other Business Areas, PVO's combined
heat and power plants (G shares) and some other investments will be
consolidated under IFRS 10 and 11. Previously, all PVO shares have been
accounted for as an associated company, using equity method. Kemijoki has been
accounted for as an available-for-sale investment at cost. LSV has been
accounted for as a subsidiary. 



The reclassification increases Energy Business Area's capital employed by
approximately EUR 1,950 million to approximately EUR 2,850 million. 



From Q1 2013 onwards, comparison financial figures for 2012 will be revised
according to the new standards. 



Principles for valuing Energy Business Area assets



Fair valuation of UPM's share ownerships in the Energy Business Area is based
on discounted cash flows model. 



The electricity price used in the model is based on the company's estimates. A
+/-5% change in the electricity price used in the model would change the total
value of the assets by +/- EUR 380 million. 



The discount rate of 5.7% used in the valuation model is determined using the
weighted average cost of capital method. A +/- 0.5% change in the discount rate
would change the total value of the assets by -/+ EUR 270 million. 







Fair values of Energy Business Area investments                                 
--------------------------------------------------------------------------------
- 
Asset            UPM's share of          Type                      Fair value   
                  ownership                                        (EUR million)
--------------------------------------------------------------------------------
PVO A-shares                      61.2%  Hydro                               387
--------------------------------------------------------------------------------
PVO B-shares                      58.1%  Nuclear                           1,264
--------------------------------------------------------------------------------
PVO B2-shares                     50.0%  Nuclear under                       311
                                          construction                          
--------------------------------------------------------------------------------
Kemijoki shares  4.1%, 19% of            Hydro                               446
                  hydropower                                                    
--------------------------------------------------------------------------------
Other (*                                 Hydro and other                     138
--------------------------------------------------------------------------------
*) Includes PVO C, H, M and V-shares and LSV shares                             
--------------------------------------------------------------------------------
- 



Other uncertainties and risk factors in the value of the assets relate to
start-up schedule of the fixed price turn-key Olkiluoto 3 nuclear power plant
project and the on-going arbitration proceedings between the plant supplier
AREVA-Siemens Consortium (Supplier) and the plant owner Teollisuuden Voima Oyj
(TVO). UPM's indirect share of the capacity of Olkiluoto 3 is approximately
30%, through its PVO B2 shares. 



In valuing the PVO B2 shares, UPM has used the start-up information made
available by TVO, according to which Olkiluoto 3 would start commercial
electricity generation in mid- 2015. 



Currently, the Supplier has submitted a claim of EUR 1.9 billion related to the
delay at Olkiluoto 3 and related costs. TVO has considered and found the
Supplier's claim to be without merit. In response, TVO has filed a counterclaim
of EUR 1.8 billion for the costs and losses that TVO is incurring due to the
delay and other defaults on the part of the Supplier. The possible outcome of
the arbitration proceedings has not been taken into account in the valuation. 



Changes in regulatory environment or taxation could also have an impact on the
value of the energy generating assets. 



***



For further information, please contact:

Tapio Korpeinen, CFO, available from 10:45 to 12:00 EET, tel. +358 204 150004



UPM leads the integration of bio and forest industries into a new, sustainable
and innovation-driven future. Our products are made of renewable raw materials
and are recyclable. UPM consists of three Business Groups: Energy and pulp,
Paper, and Engineered materials. The Group employs around 23,000 people and it
has production plants in 17 countries. UPM's annual sales exceed EUR 10
billion. UPM's shares are listed on the Helsinki stock exchange. UPM - The
Biofore Company - www.upm.com 





UPM-Kymmene Corporation

Pirkko Harrela

Executive Vice President, Corporate Communications





UPM, Corporate Communications

Media Desk, tel. +358 40 588 3284

media@upm.com

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