UPM annual report 2014

UPM Annual Report 2014

Top performance

continued

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.

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.

OUR STRENGTHS

•

Cost competitive, low-emission

electricity generation portfolio

•

Versatile asset base – nuclear

power as base load capacity,

hydropower as flexible capacity

and condensing power as

reliable peak load capacity

•

Strong competencies and value

creation track record in physical

and financial electricity trading

OUR DIRECTION

•

Create value in the Nordic

electricity market through

generation and physical and

financial trading

•

Profitable growth on the Nordic

emission-free electricity

market

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.

PHYSICAL POWER MARKET

Physical value creation

Mainly Nord Pool Spot market

for day-ahead and intraday

trading

Members (buyers and sellers)

agree on contracts for the

delivery of power

VERSATILE GENERATION

(from own hydropower plants and

shareholdings in energy companies)

HYDROPOWER

Flexible

Cost competitive

Low emissions

Renewable

CONDENSING POWER

Reliable peak load

NUCLEAR

Efficient base load

Cost competitive

Low emissions

UPM ENERGY VALUE CREATED

Capital intensive utility

business

Low-emission energy

sources, including

water rights

Fuels

Engaged high performing

people

Organisational experience

Energy trading platform

Regulation

Low-emission electricity

Work safety

Energy supply security

Flexible power supply

Risk mitigation

ROCE

TRANSMISSION

DISTRIBUTION

HOUSEHOLD

CONSUMPTION

SMALL AND MEDIUM

SIZED ENTERPRISES

INDUSTRIAL ELECTRICITY

CONSUMPTION

CAPITALS

OUTCOMES

FINANCIAL POWER MARKETS

Derivative power contracts traded on Nasdaq Commodities

Value protection and creation

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.

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.

The renovation of the Harjavalta

hydropower plant will increase

generation capacity and adjustabil-

ity, and improve the efficiency and

environmental safety.

300

240

180

120

2014

2013

2012

excl. special items

Operating profit

EUR million

KEY FIGURES

2014

2013

Sales, EURm

464

466

Operating profit excl. special items, EURm

202

186

Capital employed (average), EURm

2,903

2,882

ROCE excl. special items, %

7.0

6.5

Personnel on 31 Dec.

BUSINESSES 15–30

CONTENTS