UPM annual report 2014

UPM Annual Report 2014

119

120

CONTENTS

ACCOUNTS

38 Related party transactions

The Board of Directors and the Group Executive Team

There have not been any material transactions between UPM and its

members of the Board of Directors or the Group Executive Team (key

management personnel) or persons closely associated with these mem-

bers or organisations in which these individuals have control or signifi-

cant influence. There are no loans granted to any members of the Board

of Directors or the Group Executive Team at 31 December 2014 and

2013. Shares and share options held by members of the Board of Direc-

tors and members of the Group Executive Team are disclosed in pages

61 and 64. Remuneration to members of the Board of Directors and the

Group Executive Team are disclosed in Note 7.

Associated companies and joint ventures

The Group’s recovered paper purchases in 2014 from associated compa-

nies and joint ventures were close to 620,000 tonnes (610,000 tonnes). In

Finland, the Group organises its producer’s responsibility of recovered

paper collection through Paperinkeräys Oy, in which the Group has

33.1% interest. Austria Papier Recycling G.m.b.H purchases recovered

paper in Austria, in which the Group has a 33.3% equity interest. LCI

s.r.l. is an Italian recovered paper purchasing company in which the

Group has a 50.0% interest. The purchases from those three companies

represented approximately 62% (64%) of total recovered papers purchase

amount from associated companies and joint ventures. Recovered paper

purchases are based on market prices.

The balances with the Group's associated companies and joint ven-

tures are presented in Note 21.

Pension Funds

In Finland, UPM has a pension foundation, Kymin Eläkesäätiö, which

is a separate legal entity. Pensions for about 8% of the Group’s Finnish

employees are arranged through the foundation. In 2014 the contribu-

tions paid by UPM to the foundation amounted to EUR 7 million

(11 million). The foundation manages and invests the contributions paid

to the plan. The fair value of the foundation’s assets at 31 December

2014 was EUR 351 million (337 million), of which 48% was in the form

of equity instruments, 42% in the form of debt instruments and 10%

invested in property and money market.

In the UK, all UPM Pension Schemes now operate under a single

Trust which is independent from the Company. The Trust consists of

various Defined Benefit sections, all of which are closed to future accrual

and one common Defined Contribution section which is open to all

UPM employees in the UK. The Group made contributions of EUR

6 million (5 million) to the Defined Benefit sections of the Scheme in

2014 following completion of the triennial Actuarial Valuation in April

2013. The next UK actuarial valuation will be in April 2016. The fair

value of the UK Defined Benefit fund assets at 31 December 2014 was

EUR 363 million (305 million), of which 63% was invested in equity

instruments, 31% in debt instruments and 6% in property and money

market.

Deferred bonus plans

DBP 2011

DBP 2012

DBP 2013

DBP 2014

No. of participants (at grant)

520

580

560

395

No. of participants (31 Dec. 2014)

445

489

523

390

Max no. of shares to be delivered (at grant)

1,200,000

1,800,000

1,640,000

950,000

Estimated no. of shares to be delivered as at 31 Dec. 2014

333,000

613,000

253,000

343,000

Share delivery (year)

2014

2015

2016

2017

Earning criteria

Financial STI targets Financial STI targets

Group/Business Area

EBITDA

Group/Business Area

EBITDA

For DBP 2011 actual no. of shares earned.

The above indicated estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent the gross value of the

rewards of which the applicable taxes will be deducted before the shares are delivered to the participants. The amount of estimated payroll tax accruals

recognised as liabilities were EUR 9.9 million (6.9 million).

Subsidiaries and joint operations

The Group’s principal subsidiaries and joint operations are disclosed in

Note 36.

39 Commitments and contingencies

Contingent liabilities

The Group is a defendant or plaintiff in a number of legal proceedings

incidental to its operations. These lawsuits primarily involve claims

arising from commercial law issues.

Group companies

In 2011, Metsähallitus (a Finnish state enterprise which administers

state-owned land) filed a claim for damages against UPM and two other

Finnish forest companies. The claim relates to the Finnish Market Court

decision of 3 December 2009 whereby the defendants were deemed to

have breached competition rules in the Finnish roundwood market. In

addition to Metsähallitus, individuals and companies, as well as munici-

palities and parishes, have filed claims relating to the Market Court

decision. The capital amount of all of the claims totals EUR 196 million

in the aggregate jointly and severally against UPM and two other com-

panies; alternatively and individually against UPM, this represents

EUR 34 million in the aggregate. It is expected that the amounts claimed

will change as a result of new claims, which have not yet been served. In

addition to the claims on capital amounts, the claimants are also re-

questing compensation relating to value added tax and interests. UPM

considers all the claims unfounded in their entirety. No provision has

been made in UPM’s accounts for any of these claims.

In 2012 UPM commenced arbitration proceedings against Metsäli-

itto Cooperative and Metsä Board Corporation due to their breaches of

UPM’s tag-along right under the shareholders’ agreement concerning

Metsä Fibre Oy in connection with the sale of shares in Metsä Fibre to

Itochu Corporation. UPM claimed jointly from Metsäliitto and Metsä

Board a capital amount of EUR 58.5 million. Metsäliitto and Metsä

Board had sold a 24.9% holding in Metsä Fibre to Itochu Corporation

for EUR 472 million. In connection with the transaction with Itochu,

Metsäliitto had exercised a call option to purchase UPM’s remaining

11% shareholding in Metsä Fibre for EUR 150 million. The arbitral

tribunal rendered its final decision (arbitral award) in February 2014 and

ordered Metsäliitto and Metsä Board to pay UPM the capital amount

of EUR 58.5 million and penalty interest and compensate UPM for its

legal fees. As a result, UPM recorded an income of EUR 67 million as a

special item in Q1 2014. In May 2014 Metsäliitto and Metsä Board com-

menced litigation proceedings in the Helsinki District Court challenging

the arbitral award and requesting the District Court to set aside the arbi-

tral award or to declare it null and void. UPM considers Metsäliitto’s

and Metsä Board’s claims unfounded. At the moment, it is not known

when the District Court will give its decision.

Neste Oil Oyj, a Finnish company producing traffic fuels (Neste),

has filed an action for declaratory judgment against UPM in June 2013

with the Helsinki District Court. Neste seeks a declaration from the

court that Neste enjoys protection on the basis of its patent against the

technology that Neste alleges is being used at UPM’s Kaukas mill site

biorefinery. In March 2014 Neste filed an action with the Finnish Mar-

ket Court in which Neste requests the Market Court to prohibit UPM

from continuing the alleged infringement of Neste’s patent at UPM’s

Kaukas biorefinery in Finland. In June 2014 the Market Court dismissed

Neste’s demand for a preliminary injunction. Neste’s actions relate to the

same Neste patent concerning which UPM has filed an invalidation

claim in 2012. The invalidation claim was filed as a procedural precau-

tionary measure to avoid unfounded legal processes. UPM considers

Neste’s actions to be without merit.

Other shareholdings

In Finland, UPM is participating in a project to construct a new nuclear

power plant unit Olkiluoto 3 (OL3) through its shareholdings in Pohjo-

lan Voima Oy. Pohjolan Voima Oy is a majority shareholder of Teollisu-

uden Voima Oyj (TVO), holding 58.47% of its shares. UPM’s indirect

share of OL3 is approximately 31%. Originally the commercial electrici-

ty production of the OL3 plant unit was scheduled to start in April 2009.

The completion of the project, however, has been delayed. In September

2014 TVO announced that it had received additional data about the

schedule for the OL3 project from the AREVA-Siemens-Consortium

(Supplier), which is constructing OL3 as a fixed-price turnkey project.

According to this data, the start of regular electricity production of the

plant unit would take place in late 2018. According to TVO, detailed

evaluation of the received data is ongoing.

In December 2008 the Supplier initiated the International Chamber

of Commerce (ICC) arbitration proceedings and submitted a claim con-

cerning the delay at the OL3 project and related costs. According to

TVO, the Supplier updated its claim in 2014 which brings the total

amount claimed by the Supplier for events occurring during the con-

struction period ending June 2011 to approximately EUR 3.4 billion.

Among other things, this sum includes over EUR 1.2 billion in respect

of penalty interest (calculated until October 2014) and payments alleg-

edly delayed by TVO under the plant contract, as well as approximately

EUR 150 million of alleged lost profit. TVO has previously considered

the claims upon which the amounts demanded are based, and found

them to be without merit. TVO will scrutinize the Supplier's updated

claim, and respond to it in due course. According to TVO, the quantifi-

cation estimate of its costs and losses related to its claim in the arbitra-

tion proceedings is approximately EUR 2.3 billion until the end of 2018,

which is the estimated start of the regular electricity production of OL3

according to the schedule submitted by the Supplier in September 2014.

TVO´s updated estimate was submitted to the tribunal in the arbitration

proceedings in October 2014. The arbitration proceedings may continue

for several years, and the claimed amounts may change. No receivables

or provisions have been recorded by TVO on the basis of claims pre-

sented in the arbitration proceedings.

Commitments

In the normal course of business, UPM enters into various agreements

providing financial or performance assurance to third parties. The maxi-

mum amounts of future payments for which UPM is liable is disclosed

in the table below under “Other commitments”.

The Group has also entered into various agreements to provide

financial or performance assurance to third parties on behalf of certain

companies in which the Group has a non-controlling interest. These

agreements are entered into primarily to support or enhance the credit-

worthiness of these companies. The Group has no collateral or other

recourse provisions related to these guarantees. It is the Group’s policy

not to give guarantees on behalf of third parties.

Commitments

As at 31 December

EURm

2014

2013

On own behalf

Mortgages and pledges

289

357

On behalf of others

Guarantees

Other commitments, own

Operating leases, due within 12 months

Operating leases, due after 12 months

339

Other commitments

160

141

Total

853

899

Mortgages and pledges

289

357

Guarantees

Operating leases

399

396

Other commitments

160

141

Total

853

899

Property under mortgages given as collateral for own commitments

include property, plant and equipment, industrial estates and forest land.

In addition, UPM has committed to participate in the share issue

from Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant

project. UPM’s total commitment of the share issue is EUR 119 million,

of which EUR 31 million was paid in 2014 and EUR 31 million in 2013.

The remaining part of the share issue will be implemented during the

coming years based on the financing needs of the project.

Operating lease commitments,

where a Group company is the lessee

The Group leases office, manufacturing and warehouse space through

various non-cancellable operating leases. Certain contracts contain

renewal options for various periods of time.

The future aggregate minimum lease payments under

non-cancellable operating lease contracts

As at 31 December

EURm

2014

2013

No later than 1 year

1–2 years

2–3 years

3–4 years

4–5 years

Later than 5 years

187

202

Total

399

396

Capital commitments at the balance sheet date but not recognised

in the financial statements; major commitments under construction

listed below

EURm

Total

cost

Commitment

as at 31 December

2014 2013

Changshu PM3

277

212 268

Capacity increase/Kymi

160

118

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