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 08:30 EET

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 ownership Type Fair value
(EUR million)
PVO A-shares 61.2% Hydro 387
PVO B-shares 58.1% Nuclear 1,264
PVO B2-shares 50.0% Nuclear under construction 311
Kemijoki shares 4.1%, 19% of hydropower Hydro 446
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

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