Metsä Board Annual review 2023

METSÄ BOARD Annual review 2023

Financial derivatives and hedge accounting

Derivatives 2023

Nominal value

Fair value

Fair value through other comprehensive income

Business operations and value creation 2 This is Metsä Board 4 CEO’s review 6

Fair value through profit and loss

Accounting principles Derivative contracts are initially recognised on the balance sheet at fair value at cost, and thereafter during their term-to-maturity revalued at their fair value at each reporting date. The fair value of derivatives is presented in non-interest-bearing receivables or liabilities. Gains and losses resulting from recognition at fair value are treated in accounting as required with regard to the intended use of the derivative contract in question. Derivatives are initially classified as either

Black–Scholes model. Interest rate swaps are measured at the current value of cash flows, with the calculation being based on the market interest rate yield curve. The fair values of derivatives are measured on the basis of publicly quoted market prices. Management of financial risks and hedge effectiveness The management of the Group’s currency, interest rate and com- modity risks is described in more detail in Note 5.6, Management of financial risks. Note 5.7., Fair values of financial assets and liabilities, includes the fair values and grouping of derivatives. Note 5.1, Equity, includes itemisations of hedge accounting entries in the fair value reserve. The hedging of the currency flow position is effective, given that there is a direct financial relationship between the hedged sale and the hedging derivative. The spot rate component of a forward contract or the reference value component of a currency option has been determined as the hedged item, and the forward points or the option’s time value are treated as hedging costs subject to amortisation based on the period. Currency flow forecasts are fairly stable, invoicing steady within quarters and months, and forward deals are allocated to each month, due to which the ineffectiveness of hedging usually remains very low. Changes in production or the structure of sales may sometimes lead to ineffectiveness during the validity of a hedging relationship, in which case the hedging is adjusted accordingly. The hedge accounting of the cash flow from interest rates is primarily effective, given that there is a direct financial relationship between the long-term loans subject to hedging and the hedging interest rate swaps. Ineffectiveness in the hedge relationship derives from any possible differences between the loans and the swaps’ interest rate periods as well as from differences in the reference rates of contract terms. The ineffective portion of interest rate hedging is recognised through profit and loss. Premature loan withdrawals or premature repayment of loans may result in a state of ineffectiveness, in which case the hedging interest rate swaps are reversed or derecognised from hedge accounting, and the change in fair value is recognised in financial items under income. The hedging of commodity purchases is effective, given that, in lieu of the total purchase price, the hedged item is the same, identical risk component of pricing applied in the hedging derivative. In the hedging of the price risk of electricity, the hedged item is what is referred to as the portion of the system price and the hedging takes place with a system-priced electricity swap. Correspondingly, the price compo- nents of the purchases and the hedging derivative in the hedging of natural gas, propane and fuel oil are identical. Commodity purchases are fairly steady and hedges are allocated to each month, due to which the ineffectiveness of the hedging usually remains low. Changes in the use of various commodities may sometimes lead to ineffectiveness during the validity of a hedging relationship, in which case the hedging is adjusted accordingly. Hedging for electricity, propane and liquefied natural gas (LNG) ended at the end of 2022.

Derivative liabilities

EUR million

Derivative assets

Fair value net

Interest rate swaps

50.0 50.0

1.5 1.5

Interest rate derivatives

Strategy and financial targets

Currency forward contracts Currency option contracts

1,138.3

27.7

5.7 0.3 6.0 0.6 3.5 4.1

21.9

0.9

21.0

Value creation

488.7

2.2

1.9

Currency derivatives

1,627.0

29.8

23.8

0.9

22.9

Financial development 10 Key figures 12

Oil derivatives

18.7 10.8 29.5

0.2

-0.5 -3.5 -4.0 21.4

-0.5 -3.5 -4.0 20.5

Natural gas and propane derivatives

1. Hedges of the exposure to changes in the fair value of receivables, liabilities or firm commitments;

Report of the Board of Directors

Commodity derivatives

0.2

Derivatives total

1,706.4

31.5

10.2

0.9

20 72

• Sustainability statement • Sustainability statement assurance report

2. Hedges of the cash flow from a highly probable forecast transaction;

Derivatives 2022

Consolidated financial statements

3. Hedges of a net investment in a foreign entity, or

Nominal value

Fair value

78 Notes to the consolidated financial statements 126 Parent company financial statements 129 Notes to the parent company financial statements 142 The Board’s proposal to the Annual General Meeting for the distribution of funds 143 Auditor’s Report 147 Shares and shareholders 151 Ten years in figures 152 Taxes 153 Production capacities 155 Calculation of key ratios and comparable performance measures Corporate governance 157 Corporate governance statement 165 • Board of Directors of Metsä Board 168 • Corporate Management Team of Metsä Board

Fair value through other comprehensive income

4. Derivatives to which it has been decided not to apply hedge accounting.

Fair value through profit and loss

Derivative liabilities

EUR million

Derivative assets

Fair value net

Metsä Board currently applies hedge accounting only to cash flow hedging. When applying hedge accounting at the inception of a hedg- ing relationship, the Group has documented the relationship between the hedged item and the hedging instruments, as well as the hedging strategy observed. To meet the requirements of hedge accounting, the Group has also continuously carried out effectiveness testing to verify that changes in the fair value of the hedging instrument for each hedging relationship cover any changes in the fair value of the hedged item effectively enough, with respect to the hedged risk. Changes in the fair value of the effective portion of derivative instruments that meet the criteria for cash flow hedging are recognised in other items of comprehensive income. The gains and losses recognised in equity are transferred to the income statement when the forecast sale or purchase is realised, and are recognised as an adjustment to the hedged item. If the forecast transaction is no longer expected to occur, the gain or loss accrued in equity is recognised immediately in the income statement. Derivatives not subject to hedge accounting, as well as the ineffective portion of derivatives subject to hedge accounting, are measured at fair value, and changes in the value of interest rate and currency deriv- atives are recognised in financial items and changes in the value of commodity derivatives are recognised in other income and expenses. Hedge accounting is applied as cash flow hedging to highly probable cash flows from sales denominated in foreign currencies and contractual cash flows from floating interest rates of loans. In the management of price risks related to commodities, hedge accounting is applied to cash flows from highly probable purchases of electricity, liquefied natural gas (LNG), natural gas, propane, light, heavy and 0.5% fuel oil. The fair values of forward foreign exchange contracts are based on the forward prices prevailing on the balance sheet date, and currency options are measured at fair value in accordance with the

Interest rate swaps

100.0 100.0

3.1 3.1

Interest rate derivatives

Currency forward contracts Currency option contracts

1,790.1

31.3

25.0

6.3 2.1 8.4

1.4

4.9 2.1 7.0

281.3

2.2

0.1

Currency derivatives

2,071.4

33.5

25.2

1.4

Oil derivatives

27.5 32.7 60.2

0.5 6.2 6.7

3.9 1.2 5.0

-3.3

Natural gas and propane derivatives

5.0

2.1 2.1 3.5

2.9

Commodity derivatives

1.7

-0.4

Derivatives total

2,231.5

43.4

30.2

13.2

9.7

Changes in the value of hedge accounting and the effects on profit or loss are presented in Note 5.1 Equity.

Economic effect of the net settlement of instruments under master netting agreements executed

2023

2022

Assets and liabilities related to master netting agreements

Financial derivatives on-balance sheet

Net risk

Derivative assets Derivative liabilities

31.5 -10.2

43.4

-30.2

170 Remuneration report 174 Investor relations and investor information

Metsä Board enters into derivative contracts only with Metsä Group Treasury Oy.

116

117

Consolidated financial statements | METSÄ BOARD ANNUAL REVIEW 2023