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Stora Enso Oyj

Annual Report Feb 21, 2017

3239_10-k_2017-02-21_1b7a5bb5-7d4f-4cf8-acf1-6dad5da8bead.pdf

Annual Report

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Financial Report

Part of Stora Enso's Annual Report 2016

Everything that's made with fossil-based materials today can be made from a tree tomorrow.

Stora Enso is a leading provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Our aim is to replace fossil-based materials by innovating and developing new products and services based on wood and other renewable materials. We employ some 25 000 people and our shares are listed on the Helsinki (STEAV, STERV) and Stockholm (STE A, STE R) stock exchanges.

Stora Enso's Annual Report 2016 consists of four reports: Progress Book, Sustainability Report, Financial Report, and Corporate Governance Report.

The Progress Book explains Stora Enso's strategy, how we create value, and how our work is progressing. The publication is available in English, Finnish, and Swedish.

The Financial Report consists of Stora Enso in capital markets, a summary of our sustainability performance, the Report of the Board of Directors, and the financial statements.

The Sustainability Report covers Stora Enso's social, environmental, and economic sustainability performance.

The Corporate Governance Report covers Stora Enso's governance policy, practices, and actions as well as remuneration in 2016.

You can find the highlights of the year and the online Financial Report at storaenso.com/annualreport, where all reports can be downloaded.

Contents 1

Contents

Stora Enso in 2016 2
Stora Enso in capital markets4
Sustainability summary 13
Report of the Board of Directors 30
Consolidated financial statements51
Notes to the Consolidated financial statements59
Note 1 Accounting principles 59
Note 2 Critical accounting estimates and judgements 62
Note 3 Segment information 64
Note 4 Acquisitions and disposals 70
Note 5 Other operating income and expense 72
Note 6 Personnel expenses 74
Note 7 Board and executive remuneration 75
Note 8 Net financial items 79
Note 9 Income taxes 81
Note 10 Depreciation, amortisation and impairment charges 84
Note 11 Intangible assets and property, plant and equipment87
Note 12 Biological assets 91
Note 13 Equity accounted investments 93
Note 14 Available-for-sale investments 98
Note 15 Other non-current assets 100
Note 16 Inventories 101
Note 17 Receivables 102
Note 18 Shareholders' equity 104
Note 19 Non-controlling interests 105
Note 20 Post-employment benefits 108
Note 21 Employee variable compensation and equity incentive
schemes 114
Note 22 Other provisions 116
Note 23 Operative liabilities 118
Note 24 Financial risk management 119
Note 25 Fair values 125
Note 26 Debt129
Note 27 Derivatives132
Note 28 Cumulative translation adjustment and equity hedging 137
Note 29 Commitments and contingencies 140
Note 30 Principal subsidiaries and joint operations 143
Note 31 Related party transactions 145
Note 32 Earnings per share and equity per share 146

Extract from the parent company Stora Enso Oyj financial

statements 147
The Board of Directors' Proposal
for the distribution of dividend 150
Auditor's report 151
Capacities by mill in 2017 155
Information for shareholders 157

In this report:

This publication consists of both audited and unaudited contents. The audited parts include the financial statements and notes. The unaudited parts – such as Stora Enso in 2016, Stora Enso in capital markets, the Sustainability summary, and the Report of the Board of Directors – are marked with grey on the top of the page. The official audited Financial statements (in Finnish) can be found on the company's website:

storaenso.com/about/download-center

Stora Enso in 2016 – Why to invest in Stora Enso 4 Stora Enso in 2016 – Why to invest in Stora Enso 2

Stora Enso in 2016 Why to invest in Stora Enso Stora Enso in capital Unaudited Unaudited

Stora Enso is a leading provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Stora Enso is transforming from a traditional paper and board producer to a global renewable materials growth company. markets Stora Enso in 2016

Our key competitive differentiators are: Why to invest in Stora Enso

  • Faster profitable growth than relevant markets1
  • Successful transformation journey Stora Enso is a leading provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets.
  • Strong focus on customers and innovation Stora Enso is transforming from a traditional paper and board producer to a global renewable materials growth company.
  • Strong cash generation Stora Enso ensures that all material information that has an impact on Stora Enso's share price is available to the general public and financial community
  • Strong balance sheet simultaneously in order to ensure the right share price level in relation to the company's value, history and future prospects. In its communication with the Our key competitive differentiators are:
  • Sustainability in business focus capital markets Stora Enso's Investor Relations aims to support brand with accurate, consistent and credible financial communications. • Faster profitable growth than relevant markets1

• Sustainability in business focus

1Excluding Paper • Successful transformation journey

Stora Enso divisions are Consumer Board, Packaging Solutions, Biomaterials, Wood Products and Paper. In 2016, group sales totalled EUR 9.8 billion and operational EBIT EUR 884 million. Shares and shareholders • Strong cash generation • Strong balance sheet

Stora Enso shares are listed on Nasdaq Helsinki Oy (STEAV, STERV) and Nasdaq Stockholm AB (STE A, STE R). In addition, the shares are traded in the USA as ADRs (SEOAY). Shares and voting rights 1Excluding Paper

The shares of Stora Enso Oyj (hereafter the "Company" or "Stora Enso") are divided into A and R shares, which entitle holders to the same

dividend but different voting rights. Each A share and each ten R shares carry one vote at a shareholders' meeting. However, each shareholder has In 2016, group sales totalled EUR 9.8 billion and operational EBIT EUR 884 million.

Dividend proposal EUR 0.37 Dividend proposal

The Board of Directors' dividend proposal for the year 2016 Stora Enso shares are listed on the Nasdaq Helsinki and the Nasdaq Stockholm. Stora Enso shares are quoted in Helsinki in euros (EUR) and in EUR 0.37

Key figures The Company's shares are entered in the Book-Entry Securities System maintained by Euroclear Finland Oy, which also maintains the official share

register of Stora Enso Oyj. 2016 2015 Change Target
Sales, EUR million
On 31 December 2016, 105 066 591 of the Company's shares were registered in Euroclear Sweden AB and 15 452 802 of the Company's R shares
9 802 10 040 -2.4%
were registered in ADR form in Citibank, N.A.
Operational EBITDA1, EUR million
1 371 1 408 -2.6%
Key figures
Operational EBIT, EUR million
884 915 -3.4%
Operational EBIT margin
Distribution by book-entry system, 31 December 2016
2016
9.0%
2015
9.1%
Change Target
Sales, EUR million
Operating profit (IFRS), EUR million
9 802
783
10 040
1 059
-2.4%
-26.1%
Operational EBITDA1, EUR million
Number of shares
Net profit for the period, EUR million
1 371
Total
407
1 408
783
-2.6%
A shares
-48.0%
R shares
Operational EBIT, EUR million
Euroclear Finland Oy
Net interest-bearing liabilities, EUR million
884
668 100 594
2 726
915
3 240
-3.4%
165 330 870
-15.9%
502 769 724
Operational EBIT margin
Euroclear Sweden AB1
Operational ROCE
9.0%
105 066 591
10.2%
9.1%
10.6%
11 176 220 93 890 371
>13
Operating profit (IFRS), EUR million
Citi administered ADRs1
EPS (basic), EUR
783
15 452 802
0.59
1 059
1.02
-26.1%
-
15 452 802
Net profit for the period, EUR million
Total
Net debt/last 12 months' operational EBITDA, ratio1
407
788 619 987
2.0
783
2.3
-48.0%
176 507 090
612 112 897
<3.0x
Net interest-bearing liabilities, EUR million
1 Share registered in Euroclear Sweden and ADRs are both nominee registered in Euroclear Finland.
Debt/equity ratio
2 726
0.47
3 240
0.60
-15.9% <0.8
Operational ROCE
Fixed costs to sales
10.2%
25.3%
10.6%
25.0%
>13
<20%

1 The data for the comparative periods have been restated according to the new reporting structure, see Report of the Board of Directors. EPS (basic), EUR 0.59 1.02

Stora Enso in 2016 – Divisions in brief 4 Stora Enso in 2016 – Divisions in brief 3

Unaudited

Divisions in brief Stora Enso in capital Unaudited

Consumer Board division

Consumer Board division develops and provides consumer packaging boards for printing and packaging applications. A wide board and barrier coating selection is suitable for the design and optimisation of packaging for liquid, food, pharmaceutical and luxury goods. We serve brand owners globally and are expanding in growth markets such as China and Asia Pacific to meet rising demand. markets Divisions in brief Consumer Board division

Packaging Solutions division simultaneously in order to ensure the right share price level in relation to the company's value, history and future prospects. In its communication with the applications. A wide board and barrier coating selection is suitable for the design and optimisation of packaging for liquid, food, pharmaceutical and luxury goods. We serve brand owners globally and are

Packaging Solutions division develops fibre-based packaging, and operates at every stage of the value chain from pulp production, material and packaging production to recycling. Our solutions serve leading converters, brand owners and retailer customers helping to optimise performance, reduce total costs and enhance sales. capital markets Stora Enso's Investor Relations aims to support brand with accurate, consistent and credible financial communications. expanding in growth markets such as China and Asia Pacific to meet rising demand.

Biomaterials division Shares and voting rights chain from pulp production, material and packaging production to recycling. Our solutions serve leading converters, brand owners and retailer customers helping to optimise performance, reduce total costs

Biomaterials division offers a variety of pulp grades to meet the demands of paper, board, tissue, textile and hygiene product producers. We also develop new ways to maximise the value extractable from wood, as well as other kinds of lignocellulosic biomasses. Sugars and lignin hold potential for use in applications in the specialty chemical, construction, personal care and food industries. The shares of Stora Enso Oyj (hereafter the "Company" or "Stora Enso") are divided into A and R shares, which entitle holders to the same dividend but different voting rights. Each A share and each ten R shares carry one vote at a shareholders' meeting. However, each shareholder has at least one vote. On 31 December 2016, Stora Enso had 176 507 090 A shares and 612 112 897 R shares in issue, of which the Company held no A shares or R and enhance sales. Biomaterials division

Wood Products division Share listings Stora Enso shares are listed on the Nasdaq Helsinki and the Nasdaq Stockholm. Stora Enso shares are quoted in Helsinki in euros (EUR) and in and hygiene product producers. We also develop new ways to maximise the value extractable from wood, as well as other kinds of lignocellulosic biomasses. Sugars and lignin hold potential for use in

Wood Products division provides versatile wood-based solutions for building and housing. Our product range covers all areas of urban construction including massive wood elements, wood components and pellets. We also offer a variety of sawn timber goods. Our customers are mainly construction and joinery companies, merchandisers and retailers. Stockholm in Swedish crowns (SEK). American Depositary Receipts (ADRs) applications in the specialty chemical, construction, personal care and food industries. Wood Products division

Paper division Share registers range covers all areas of urban construction including massive wood elements, wood components and pellets. We also offer a variety of sawn timber goods. Our customers are mainly construction and joinery

Paper division provides best-in-class paper solutions for print media and office use. The wide selection covers papers made from recycled and fresh wood fibre. Our main customer groups include publishers, retailers, printing houses, merchants, converters and office suppliers. Three of the mills produce paper based on 100%-recycled fibre. The Company's shares are entered in the Book-Entry Securities System maintained by Euroclear Finland Oy, which also maintains the official share register of Stora Enso Oyj. On 31 December 2016, 105 066 591 of the Company's shares were registered in Euroclear Sweden AB and 15 452 802 of the Company's R shares companies, merchandisers and retailers. Paper division

Operational ROOC (2016)

12.7% (Target: >20%) Operational ROOC (2016)

7.6% (Target: >20%) (Target: >20%) Operational ROOC (2016)

Operational ROOC (2016) 7.6%

8.5% (Target: >15%) shares. The total number of Stora Enso shares in issue was 788 619 987 and the total number of votes was 237 718 380. (Target: >20%) Operational ROOC (2016)

Operational ROOC (2016) 16.8% (Target: >18%) Stora Enso has a sponsored Level I American Depositary Receipts (ADR) facility. Stora Enso ADRs are traded over-the-counter (OTC) in the USA. The ratio between Stora Enso ADRs and R shares is 1:1, i.e. one ADR represents one Stora Enso R share. Citibank, N.A. acts as the depositary 8.5% (Target: >15%) Operational ROOC (2016)

Cash flow after investing activities to sales (2016) 16.8% (Target: >18%)

activities to sales (2016)

8.5% (Target: >7%) Cash flow after investing

Stora Enso in capital markets

Stora Enso ensures that all material information that has an impact on Stora Enso's share price is available to the general public and financial community simultaneously in order to ensure the right share price level in relation to the company's value, history and future prospects. In its communication with the capital markets Stora Enso's Investor Relations aims to support brand with accurate, consistent and credible financial communications.

Shares and shareholders

Shares and voting rights

The shares of Stora Enso Oyj (hereafter the "Company" or "Stora Enso") are divided into A and R shares, which entitle holders to the same dividend but different voting rights. Each A share and each ten R shares carry one vote at a shareholders' meeting. However, each shareholder has at least one vote.

On 31 December 2016, Stora Enso had 176 507 090 A shares and 612 112 897 R shares in issue, of which the Company held no A shares or R shares. The total number of Stora Enso shares in issue was 788 619 987 and the total number of votes was 237 718 380.

Share listings

Stora Enso shares are listed on the Nasdaq Helsinki and the Nasdaq Stockholm. Stora Enso shares are quoted in Helsinki in euros (EUR) and in Stockholm in Swedish crowns (SEK).

American Depositary Receipts (ADRs)

Stora Enso has a sponsored Level I American Depositary Receipts (ADR) facility. Stora Enso ADRs are traded over-the-counter (OTC) in the USA. The ratio between Stora Enso ADRs and R shares is 1:1, i.e. one ADR represents one Stora Enso R share. Citibank, N.A. acts as the depositary bank for the Stora Enso ADR programme. The trading symbol is SEOAY and the CUSIP number is 86210M106.

Share registers

The Company's shares are entered in the Book-Entry Securities System maintained by Euroclear Finland Oy, which also maintains the official share register of Stora Enso Oyj.

On 31 December 2016, 105 066 591 of the Company's shares were registered in Euroclear Sweden AB and 15 452 802 of the Company's R shares were registered in ADR form in Citibank, N.A.

Distribution by book-entry system, 31 December 2016

Number of shares Total A shares R shares
Euroclear Finland Oy 668 100 594 165 330 870 502 769 724
Euroclear Sweden AB1 105 066 591 11 176 220 93 890 371
Citi administered ADRs1 15 452 802 - 15 452 802
Total 788 619 987 176 507 090 612 112 897

1 Share registered in Euroclear Sweden and ADRs are both nominee registered in Euroclear Finland.

Ownership distribution, 31 December 2016

% of shares % of votes % of shareholders
FAM AB 10.2% 27.3% 0.0%
Solidium Oy1 12.3% 25.1% 0.0%
Social Insurance Institution of Finland (KELA) 3.3% 10.1% 0.0%
Finnish institutions (excl. Solidium and KELA) 13.3% 11.8% 2.8%
Swedish institutions (excl. FAM) 6.6% 5.2% 2.0%
Finnish private shareholders 4.3% 2.6% 44.6%
Swedish private shareholders 3.7% 2.4% 47.9%
ADR holders 2.0% 0.7% 1.6%
Under nominee names (non-Finnish/non-Swedish shareholders) 44.3% 14.8% 1.1%

1 Entirely owned by the Finnish state.

FAM AB 10.2%
Solidium Oy 1 12:
Social Insurance
of Finland (KELA)
Finnish institutior
Solidium and KEI
Swedish institutio
FAM) 6.6%
Finnish private
shareholders 4.3
Swedish private
shareholders 3.7
ADR holders 2.09
Under nominee n
(non-Finnish/non
shareholders) 44.
Entirely owned by the Finnish state.

Share capital

On 31 December 2016, the Company's fully paid-up share capital entered in the Finnish Trade Register was EUR 1 342 million. The current accountable par of each issued share is EUR 1.70.

Conversion

According to the Articles of Association, holders of Stora Enso A shares may convert these into R shares at any time. The conversion of shares is voluntary. The conversions of a total of 25 000 A shares into R shares during the year were recorded in the Finnish Trade Register on 15 January 2016.

Changes in share capital 2009–2016

No. of A shares
issued
No. of R shares
issued
Total no. of
shares
Share capital
(EUR million)
Stora Enso Oyj, 1 Jan 2009 177 152 481 612 386 018 789 538 499 1 342
Conversion of A shares into R shares, Dec 2008–Nov 2009 -2 397 2 397 - -
Stora Enso Oyj, 31 Dec 2009 177 150 084 612 388 415 789 538 499 1 342
Conversion of A shares into R shares, Dec 2009–Nov 2010 -300 300 - -
Stora Enso Oyj, 31 Dec 2010 177 149 784 612 388 715 789 538 499 1 342
Conversion of A shares into R shares, Dec 2010–Nov 2011 -1 012 1 012 - -
Stora Enso Oyj, 31 Dec 2011 177 148 772 612 389 727 789 538 499 1 342
Conversion of A shares into R shares, Dec 2011–Nov 2012 -1 000 1 000 - -
Stora Enso Oyj, 31 Dec 2012 177 147 772 612 390 727 789 538 499 1 342
Cancellation of shares owned by the Company, 15 May 2013 -918 512 788 619 987 -
Conversion of A shares into R shares, Dec 2012–Nov 2013 -51 568 51 568 - -
Stora Enso Oyj, 31 Dec 2013 177 096 204 611 523 783 788 619 987 1 342
Conversion of A shares into R shares, Dec 2013–Nov 2014 -40 000 40 000 - -
Stora Enso Oyj, 31 Dec 2014 177 056 204 611 563 783 788 619 987 1 342
Conversion of A shares into R shares, Dec 2014–Nov 2015 -524 114 524 114 - -
Stora Enso Oyj, 31 Dec 2015 176 532 090 612 087 897 788 619 987 1 342
Conversion of A shares into R shares, Dec 2014–Nov 2015 -25 000 25 000 - -
Stora Enso Oyj, 31 Dec 2016 176 507 090 612 112 897 788 619 987 1 342

For more historical data about the share capital, please visit storaenso.com/investors

Stora Enso's activities in capital markets during 2016

Stora Enso's Investor Relations activities cover equity and fixed-income markets to ensure full and fair valuation of the Company, continual access to funding sources and stable bond pricing. Investors and analysts are met on a regular basis in Europe, North America, and parts of Asia and Latin America. In 2016, the IR team conducted a number of individual and group meetings with equity investors, whilst maintaining regular contact with equity research analysts at investment banks and brokerage firms. There were also meetings with fixed-income analysts and investors. In addition, Stora Enso arranged a webinar for ESG investors and analysts on its sustainability strategy and activities.

The group arranged site visits to mills in Scandinavia, Poland and Brazil for the members of the investment community. In addition, visits to innovation centres in Helsinki and Stockholm were arranged. Senior management and IR personnel also gave presentations at equity and fixedincome investor conferences in Scandinavia, Continental Europe, the United Kingdom and North America. During the year, the group arranged four large group presentations for private investor in Finland and Sweden.

Capital markets day (CMD) took place on 17 November 2016 in London. At the event, the CEO, CFO and the Divisional heads of Biomaterials and Wood Products gave their presentations, which were followed by break-out sessions with the CEO, CFO and divisional heads providing an opportunity for further discussion with the management. In addition, Intelligent Packaging, Microfibrillated Cellulose (MFC) and Lignin were shown on demo stations during the event. The CMD was attended by sell-and-buy side analysts, equity and fixed income investors, and relationship bank representatives.

In June, Stora Enso was ranked at best investor relations in Finland in Extel investor relations ranking.

Shareholdings of other group-related bodies at 31 December 2016

E.J. Ljungberg's Education Foundation owned 1 780 540 A shares and 2 336 224 R shares, E.J. Ljungberg's Foundation owned 39 534 A shares and 101 579 R shares, Mr. and Mrs. Ljungberg's Testamentary Foundation owned 5 093 A shares and 13 085 R shares and Bergslaget's Healthcare Foundation owned 626 269 A shares and 1 609 483 R shares.

Shareholders

At the end of 2016 the Company had approximately 83 854 registered shareholders, including about 42 462 Swedish shareholders and about 1 325 ADR holders. Each nominee register is entered in the share register as one shareholder.

The free float of shares excluding shareholders with holdings of more than 5% of shares or votes is approximately 570 million shares, which is 72% of the total number of shares issued. The largest single shareholder in the Company is FAM AB based in Sweden.

Major shareholders as at 31 December 2016

By voting power A shares R shares % of shares % of votes
1 FAM AB1 63 123 386 17 000 000 10.2% 27.3%
2 Solidium Oy2 55 595 937 41 483 501 12.3% 25.1%
3 Social Insurance Institution of Finland 23 825 086 2 275 965 3.3% 10.1%
4 Varma Mutual Pension Insurance Company 15 572 117 140 874 2.0% 6.6%
5 MP-Bolagen i Vetlanda AB, (Werner von Seydlitz dödsbo) 4 803 000 3 507 000 1.1% 2.2%
6 Ilmarinen Mutual Pension Insurance Company 3 492 740 13 781 189 2.2% 2.0%
7 Erik Johan Ljungberg's Education Foundation 1 780 540 2 336 224 0.5% 0.8%
8 Swedbank Robur Funds - 11 032 722 1.4% 0.5%
9 The State Pension Fund - 8 500 000 1.1% 0.4%
10 Bergslaget's Healthcare Foundation 626 269 1 609 483 0.3% 0.3%
11 Nordea Investment Funds - 6 879 179 0.9% 0.3%
12 Unionen (Swedish trade union) - 5 297 200 0.7% 0.2%
13 Keva (Local Government Pensions Institution) - 5 251 101 0.7% 0.2%
14 SEB Investment Management - 4 701 297 0.6% 0.2%
15 Investment Fund Nordea Suomi - 4 063 211 0.5% 0.2%
Total 168 819 075 127 858 946 37.8%3 76.4%3
Nominee-registered shares 74 514 851 442 620 022 65.6%3, 4 50%3, 4

1 As confirmed to Stora Enso.

2 Entirely owned by the Finnish State.

3 As some of the shareholdings on the list are nominee registered, the percentage figures do not add up to 100%.

4 According to euroclear Finland.

The list has been compiled by the Company on the basis of shareholder information obtained from Euroclear Finland, Euroclear Sweden and a database managed by Citibank, N.A (Citi). This information includes only directly registered holdings, thus certain holdings (which may be substantial) of shares held in nominee or brokerage accounts cannot be included. The list is therefore incomplete.

Share price performance and volumes

Helsinki

The Stora Enso R (STERV) share price increased by 22% during 2016 (13% increase in 2015). Over the same period, the OMX Helsinki Index increased by 4%, the OMX Helsinki Benchmark Index by 10% and the OMX Helsinki Basic Materials Index by 37%.

Stora Enso in capital markets – Shares and shareholders 8

Stockholm

The Stora Enso R (STE R) share price increased during 2016 by 28% (9% increase in 2015). Over the same period, the OMX Stockholm 30 Index increased by 5% and the OMX Stockholm Basic Materials Index increased by 32%.

OTC

Stora Enso ADR (SEOAY) share price increased by 17% during 2016 (3% increase in 2015). Over the same period, the Standard & Poor's Global Timber and Forestry Index increased by 10.6%.

Stora Enso in capital markets – Shares and shareholders 9

Share prices and volumes 2016

Helsinki, EUR Stockholm, SEK OTC, USD
A share 10.45 102.90 -
High R share 10.28 98.90 10.66
A share 6.56 62.50 -
Low R share 6.50 61.80 7.13
A share 10.40 101.20 -
Closing, 31 Dec 2016 R share 10.21 97.95 10.65
A share 24% 31.6% -
Change from previous year R share 22% 28% 17%
A share 1 254 108 1 504 057 -
Cumulative trading volume, no. of shares R share 765 122 056 142 426 460 6 375 341

The volume-weighted average price of R shares over the year was EUR 7.88 in Helsinki (EUR 8.70 in 2015), SEK 76.63 in Stockholm (SEK 81.43 in 2015) and USD 9.66 on the OTC in the USA (USD 9.62 in 2015). The percentage of R shares traded was 58.2% (56.1% in 2015) in alternative trading venues, 35.0% (37.1% in 2015) in Helsinki, 6.5% (6.7% in 2015) in Stockholm and 0.3% (0.1% in 2015) on the OTC in the USA. Total market capitalisation on the OMX Helsinki at year-end was EUR 8.1 billion.

Alternative trading venues

Stora Enso shares can be traded outside Nasdaq Helsinki and Nasdaq Stockholm, where the shares are listed. During 2016, the largest alternative trading venues included BATS OTC, BATS BXE, BATS CXE, Turquoise, BOAT, Posit, Paris, and UBS MTF. The alternative trading venues' market share of monthly turnover in Stora Enso shares varied between 38% and 67%. Of the alternative trading venues, BATS OTC had the biggest share of the volume with 23% on an annual basis (BATS OTC had the biggest share of the volume in 2015 with 31%).

Stora Enso is included in at least the following indices

OMX INDICES STOXX INDICES FTSE INDICES MSCI INDICES SUSTAINABILITY INDICES
OMX Helsinki STOXX Global 1800 FTSE RAFI All-World
3000
MSCI Finland CDP's Climate A list
OMX Helsinki 25 STOXX Europe 600 FTSE RAFI
Developed 1000
MSCI Europe FTSE4 Good Index
OMX Helsinki Large Cap STOXX Europe Mid
200
FTSE RAFI Europe MSCI World UN Global Compact 100 Stock Index
OMX Helsinki Benchmark STOXX Nordic FTSE Finland 25
Index
STOXX® Global ESG Leaders Indicies
OMX Helsinki Basic Materials EURO STOXX ECPI EMU Ethical Equity index
OMX Helsinki Basic Resources EURO STOXX Basic
Materials
OMX GES Sustainability Nordic Index
OMX Helsinki Forestry & Paper EURO STOXX Basic
Resources
Ethibel Sustainability Index (ESI) Excellence Europe
and Excellence Investment Register
OMX Stockholm Euronext Vigeo - Europe 120
OMX Stockholm Basic Materials
OMX Stockholm Forestry & Paper
OMX Nordic
OMX Nordic Large Cap

Read more about sustainability indeces in the Sustainability Report 2016.

In 2016, Stora Enso shifted its strategy regarding the provision of ESG information to its stakeholders. The emphasis is to keep sustainability information widely available on the group website to benefit and serve different stakeholders in equal manner. As a consequence, Stora Enso simultaneously reduces the number of sustainability index survey questionnaires in which it participates. The group is targeting its participation in those questionnaires and enquiries that it has assessed to be the most material. The Company continues with this chosen strategy also in 2017.

Trading codes and currencies

Helsinki Stockholm OTC
A share STEAV STE A -
R share STERV STE R -
ADRs - - SEOAY
Segment Large Cap Large Cap -
Sector Materials Materials -
Currency EUR SEK USD
ISIN, A share FI0009005953 FI0009007603
ISIN, R share FI0009005961 FI0009007611
CUSIP - - 86210M106
Reuters STERV.HE
Bloomberg STERV FH Equity

Key share data 2007-2016, total operations (for calculations see Calculation of Key figures)

According to Nasdaq Helsinki 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Earnings per share, EUR 0.59 1.02 0.13 -0.07 0.61 0.43 0.97 -1.12 -0.85 -0.27
– diluted, EUR 0.59 1.02 0.13 -0.07 0.61 0.43 0.97 -1.12 -0.85 -0.27
– excl. IAC, EUR 0.65 1.24 0.40 0.40 0.33 0.63 0.79 0.19 0.19 0.88
Equity/share, EUR 7.36 6.83 6.43 6.61 7.32 7.45 7.87 6.50 7.09 9.63
Dividend and distribution/share, EUR 0.371 0.33 0.30 0.30 0.30 0.30 0.25 0.20 0.20 0.45
Payout ratio, % 63 32 231 -429 49 70 26 -18 -24 -167
Dividend and distribution yield, %
A share 3.6 3.9 4.0 4.1 5.3 5.9 3.2 3.4 3.6 4.4
R share 3.6 3.9 4.0 4.1 5.7 6.5 3.3 4.1 3.6 4.4
Price/earnings ratio (P/E), excl. IAC
A share 16.0 6.8 18.7 18.3 17.3 8.0 10.0 30.8 29.6 11.6
R share 15.71 6.8 18.6 18.3 15.9 7.3 9.7 25.7 29.1 11.6
Share prices for the period, EUR
A share
– closing price 10.40 8.40 7.48 7.31 5.70 5.03 7.90 5.85 5.63 10.19
– average price 8.50 8.87 7.29 6.82 6.15 7.73 6.47 5.03 7.48 12.71
– high 10.45 11.01 8.35 7.49 7.15 9.80 7.94 7.55 11.20 14.65
– low 6.56 6.70 5.73 5.42 5.10 4.70 5.30 2.82 5.16 9.80
R share
– closing price 10.21 8.39 7.44 7.30 5.25 4.63 7.69 4.88 5.52 10.24
– average price 7.88 8.70 7.16 5.79 5.08 6.28 6.03 4.27 7.32 12.67
– high 10.28 10.95 8.38 7.54 5.95 8.99 7.79 6.16 10.44 14.56
– low 6.50 6.58 5.71 4.76 4.14 3.73 4.15 2.65 5.10 9.99
Market capitalisation at year-end, EUR million
A share 1 836 1 483 1 324 1 295 1 010 891 1 400 1 036 997 1 809
R share 6 250 5 135 4 547 4 464 3 212 2 835 4 709 2 989 3 381 6 267
Total 8 085 6 618 5 871 5 756 4 222 3 726 6 109 4 025 4 378 8 076
Number of shares at the end of period,
(thousands)
A share 176 507 176 532 177 056 177 096 177 148 177 149 177 150 177 150 177 152 177 479
R share 612 113 612 088 611 564 611 524 612 391 612 389 612 389 612 388 612 386 612 059
Total 788 620 788 620 788 620 788 620 789 538 789 538 789 538 789 538 789 538 789 538
Trading volume, (thousands)
A share 1 254 1 641 1 553 1 656 831 1 402 1 887 2 536 1 712 5 409
% of total number of A shares 0.7 0.9 0.9 0.9 0.5 0.8 1.1 1.4 1.0 3.1
R share 765 122 798 507 731 067 828 401 977 746 1 237 898 1 194 245 1 297 668 1 231 605 1 263 658
% of total number of R shares 125.0 130.5 119.5 135.5 159.7 202.1 195.0 211.9 201.1 206.5
Average number of shares (thousands)
basic 788 620 788 620 788 620 788 620 788 620 788 620 788 619 788 620 788 620 788 599
diluted 789 888 789 809 789 210 788 620 788 620 788 620 788 619 788 620 788 620 788 751

1 Board of Directors' proposal to the AGM for distribution of dividend.

IAC = Items affecting comparability

Read more about incentive programmes in Note 21 and management interests in Note 7 .

Stora Enso in capital markets – Debt investors 12

Debt investors

Funding strategy

Stora Enso's funding strategy is based on the group's financial targets. Stora Enso should have access to sufficient competitively priced funding at any time to be able to pursue its strategy and achieve its financial targets. In order to accomplish this, the emphasis is on capital markets funding. Stora Enso strives to build confidence and a track record with fixed-income investors by being informative and transparent.

The debt structure of Stora Enso is focused on capital markets, whereas banks are utilised primarily to provide back-up facilities. To balance exposures, funding is obtained in the currencies of the group's investments and assets (primarily USD, EUR and SEK). Commercial paper markets are used for short-term funding and liquidity management.

Debt structure as at 31 December 2016

EUR USD SEK
Public issues EUR 212 million 2018 USD 300 million 2036 SEK 480 million 2017
EUR 428 million 2019 SEK 2 060 million 2017
EUR 300 million 2023
Private placements EUR 175 million USD 50 million
Financial institutions EUR 430 million USD 990 million
Pension commitment loans EUR 6 million
Debt Programmes and Credit Facilities
Commercial paper programmes Finnish Commercial Paper
Programme EUR 750 million
Swedish Commercial Paper
Programme SEK 10 000 million
EMTN (Euro Medium-Term Note programme) EUR 4 000 million
Back-up facility EUR 700 million Syndicated
Revolving Credit Facility 20191

1 Undrawn committed credit facility EUR 700 million.

Rating strategy

The present ratings and outlooks from Moody's and Standard & Poor's (S&P) are shown below.

Ratings as at 31 December 2016

Rating agency Long/short-term rating Valid from
Standard & Poor's BB (positive)/B 23 August 2016
Moody's Ba2 (positive)/NP 4 August 2016

Stora Enso's goal is to ensure that rating agencies continue to be comfortable with Stora Enso's strategy and performance. The Company's strategy is to achieve liquidity well in line with the comfort level of the agencies. Review meetings are arranged with the Stora Enso management annually, and regular contact is kept with the rating analysts.

Read more about: Debt and loans in Note 26 storaenso.com/debt

Sustainability summary – Sustainability strategy and governance 13

Sustainability summary

This is an unaudited summary of sustainability topics material to Stora Enso's long-term success. The contents are derived from related sections of Stora Enso's Sustainability Report 2016. The full report can be downloaded from storaenso.com/sustainabilityreport

Sustainability strategy and governance

In 2016 Stora Enso introduced a new framework for the company's sustainability work, to build on all the work done over many years in this field. The new framework is based on the classic Triple Bottom Line model widely used in corporate responsibility work.

Stora Enso's Sustainability Agenda encompasses the social, environmental, and economic responsibility of Stora Enso's operations throughout the value chain. The agenda addresses ten sustainability topics identified as material to Stora Enso: Employees and wider workforce; Community; Business ethics; Materials, water, and energy; Carbon dioxide; Forests, plantations, and land use; Customers; Suppliers; and Investors. Human rights are considered to be so integral to Stora Enso's long-term success that these topics are progressed as an overarching theme.

In line with Stora Enso's Sustainability Agenda the group has set ambitious targets and selected key performance indicators (KPIs) for its work. Progress is monitored in group-level and division-level business reviews.

Consolidated results on all material sustainability indicators are reported annually in the Sustainability Report. Selected sustainability indicators are also reported quarterly in Interim Reports.

Stora Enso acknowledges the United Nations' Sustainable Development Goals as part of a global ambition to end poverty, protect the planet, and ensure prosperity for all. Stora Enso is in the process of assessing how best to reflect these long-term goals in its Sustainability Agenda.

Sustainability embedded in strategy

Stora Enso's sustainability strategy is incorporated into the wider company business strategy.

Stora Enso's Sustainability Policy describes the group's overall approach and governance model. At the same time, Stora Enso's Code of Conduct and other policies, guidelines, and statements on specific topics all further elaborate the group's approach, while also guiding employees in their everyday work. These documents are available at storaenso.com/sustainability. In order to ensure alignment with the group's Sustainability Agenda, Stora Enso conducted a comprehensive

review of the company's existing sustainability policies, guidelines, and statements in 2016. This alignment will continue in 2017.

Sustainability governance

Sustainability is a key element of Stora Enso's corporate governance, promoted by the Board of Directors, the CEO and the Group Leadership Team (GLT). The CEO carries the ultimate responsibility for the successful implementation of the sustainability strategy.

The Board of Directors' Sustainability and Ethics Committee oversees the implementation of Stora Enso's Sustainability Strategy and Ethics and Compliance Strategy. The committee met four times in 2016. It has reviewed the disclosures in Stora Enso's Sustainability Report 2016. The main focus areas of the committee in 2016 are described in Stora Enso's Corporate Governance Report.

Work on sustainability issues is led by the Executive Vice President, Sustainability, who reports directly to the CEO. Everyday sustainability topics are managed by the group Sustainability function together with the Legal, Human Resources, Sourcing and Logistics, and Wood Supply functions, and the divisions (Consumer Board, Packaging Solutions, Biomaterials, Wood Products, and Paper). Each of the business divisions has its own Head of Sustainability, who reports directly to the Executive Vice President of the division.

Other key units, such as Wood Supply, and Sourcing and Logistics, each have sustainability organisations to support their management teams. The everyday implementation of Stora Enso's Sustainability Agenda is the responsibility of line management supported by functional experts at all levels.

Stora Enso's sustainability work is steered by its Sustainability Council, whose members come from the five divisions, the Sourcing and Logistics function, and the group Sustainability team. Chaired by the Executive Vice President, Sustainability, the council met nine times in 2016. Their work involves sharing good practices and identifying longer-term opportunities and challenges that may require a groupwide response. The Group Leadership Team is periodically informed of developments, as is the Board of Directors, when appropriate, via its Sustainability and Ethics Committee.

Sustainability summary – Sustainability strategy and governance 14

Sustainability governance of joint ventures

Stora Enso's joint operations in Brazil (Veracel) and Uruguay (Montes del Plata) and the group's equity-accounted minority investment in Pakistan (Bulleh Shah Packaging) have their own sustainability teams, and sustainability topics are regularly discussed by their boards, which include representatives from their parent companies. Sustainability topics are also regularly discussed by Stora Enso's joint venture steering committees for Veracel and Montes del Plata. Stora Enso has a corresponding representation in the boards of the forestry companies Tornator and Bergvik Skog in Finland and Sweden, and one of the aims of the group's internal joint venture guidelines is to follow up on sustainability in the companies where Stora Enso acts as owners. The Board of Directors of Stora Enso's equity-accounted minority investment in Pakistan, Bulleh Shah Packaging, has a Sustainability Committee formed by representatives of top management and parent companies.

External assurance

Stora Enso's Sustainability Report 2016 contents have been assured by an independent third-party assurance provider with a level of Limited Assurance. For the second year running a level of Reasonable Assurance has been provided for Stora Enso's direct and indirect fossil CO2 emissions (scopes 1 and 2). Stora Enso is one of the few

companies in the world that assures its CO2 reporting for stakeholders at Reasonable Level. The company is developing a roadmap to help further improve the external assurance of its sustainability reporting.

About this summary

This summary is structured to reflect Stora Enso's Sustainability Agenda, with the agenda's ten elements addressed through a common four-level framework:

Opportunities and challenges: These sections examine the external factors and global trends currently affecting the topics included in Stora Enso's Sustainability Agenda. Please note that the group's corporate risk management assessment appears in the Report of the Board of Directors and in the parallel Progress Book.

Our policies: These sections set out the relevant strategies and policies the group uses to address key opportunities and challenges.

How we work: These sections describe the processes, procedures, and systems Stora Enso deploys to realise its strategies and policies.

Progress: These sections report on the group's progress on related topics during 2016.

Sustainability summary – Human rights 15

Human rights

Opportunities and challenges

When it comes to human rights, Stora Enso's operations extend to challenging markets such as China, Pakistan, Laos, and Brazil. Many of the human rights challenges the group faces are deeply rooted in local society, and can only be effectively addressed through long-term commitment and close cooperation with global and local stakeholders.

The UN Guiding Principles on Business and Human Rights emphasise that companies have an ongoing responsibility to respect human rights, even where government actions and regulatory frameworks are deficient. They encourage companies to implement human rights due diligence procedures that identify, assess, and address the human rights risks and impacts of their operations, products, and services.

Our policies

Stora Enso's human rights commitment extends from employees and on-site contractors, through external suppliers of materials and services and business partners, to communities living near the group's operations. In addition to Stora Enso's commitment to the UN Guiding Principles on Business and Human Rights the group's Sustainability Agenda is aligned with the ten principles of the UN Global Compact, including its principles on human rights. Stora Enso also respects and follows the legal reporting requirements of the UK Modern Slavery Act.

Relevant Stora Enso policies and statements on human rights include:

• Code of Conduct, which expresses respect for international human and labour rights

• Supplier Code of Conduct, which imposes strict contractual

requirements regarding human rights on suppliers

• Human Rights Statement, which expresses respect for international and regional human rights instruments including

» The UN International Bill of Human Rights

» The core labour rights conventions of the International Labour Organisation (ILO)

» ILO Convention no. 169 on the Rights of Indigenous Peoples, including the principle of Free, Prior, and Informed Consent and Participation

» The OECD's Guidelines for Multinational Enterprises

» The Children's Rights and Business Principles developed by UNICEF, the UN Global Compact, and Save the Children.

How we work

Human rights risks are taken into account across Stora Enso's operations from investment decisions onwards, including mergers, acquisitions, and divestments. The group's investment guidelines stipulate that environmental and social risks and impacts, including those related to human rights, must be duly identified, assessed, and addressed prior to any investments in projects with business critical risks. Business ethics risks and specific investments' compliance with Stora Enso's Code of Conduct and Business Practice Policy are also assessed.

Stora Enso's human rights due diligence procedures include:

• Environmental and social impact assessments (ESIAs)

• Human Rights Assessment conducted in cooperation with the Danish Institute for Human Rights and used to define related human rights action plans

• Appropriate grievance and remediation mechanisms

• Accountability through transparent reporting.

Stora Enso is currently developing a human rights strategy using a best practice methodology. The strategy will be further refined during 2017 and will define a set of prioritised human rights that are the most relevant for Stora Enso.

Progress

In 2016 Stora Enso's focus was on implementing the Human Rights Action Plan that resulted from the group-wide Human Rights Assessment conducted in 2014 and a related report published in 2015.

Progress on the implementation of preventive and remediation actions as of 31 Dec 2016

Completed On track Not on
track
Closed1 Regular
review2
Implementation
progress,
% of all
actions
86% 3% 1% 7% 3%

1 Issues that were identified in the Human Rights Assessment but closed following reassessment of their validity in specific local contexts.

2 Longer-term actions without a targeted end-date that require continuous review.

By the end of 2016 86% (69% at the end of 2015) of the preventive and remediation actions were completed. Actions were based on the UN Guiding Principles on Business and Human Rights and criteria created in collaboration with the Danish Institute for Human Rights. By the end of the year a small number of actions remained open. These will be progressed to an appropriate conclusion during 2017 and the reporting on Human Rights Action Plan progress will be stopped.

Child labour in supply chains in Pakistan remains a challenge for Stora Enso's equity-accounted minority investment Bulleh Shah Packaging (BSP). BSP does not employ children in its own operations, and does not accept child labour in its suppliers' operations. BSP has put processes in place to identify and eliminate child labour in the operations of its direct suppliers. BSP combats child labour through a rigorous supplier auditing programme, awareness-raising and sensitising measures, and BSP's Child Labour Remediation Policy. BSP also works with suppliers through its public-private partnership with the International Labour Organisation (ILO).

During 2016 BSP's audit team conducted a total of 108 supplier audits (395 during 2015). Out of these audits 56 (82) were audits of suppliers of recycled paper products (old corrugated cardboard). Out of all the

Sustainability summary – Human rights 16

audits 12 were follow-up audits. Due to a sufficient stockpile of biomass and less sourcing, suppliers of agricultural by-products were not audited during 2016. Mainly for this reason the audit coverage of the direct suppliers of domestic fibre and agricultural by-products was lower in 2016 compared to the previous year.

In addition to the audits conducted by BSP's in-house audit team, the external assurance provider SGS realised nine further third-party audits during 2016 (30).

Sustainability summary – Employees and wider workforce 17

Employees and wider workforce

Opportunities and challenges

Different demographics affect Stora Enso's workforce in different regions. In new markets where Stora Enso is growing, the group has a new, younger workforce, while in Europe Stora Enso's employees tend to be older on average. Carefully planned people management, starting with responsible leadership, is important wherever the group operates.

Differences in operating contexts, such as the availability of a suitable workforce, challenge Stora Enso's operations; but at the same time, the higher educational level of emerging middle classes in growing markets provides an expanding pool of potential employees. Increasing public awareness of health and well-being issues can help us to enhance employees' health and safety globally. Digitalisation also offers opportunities to make working conditions safer by using new applications and innovations.

Our policies

Stora Enso's Occupational Health and Safety (OHS) function works to realise the group's Health and Safety Policy and OHS Mode of Operation. These policies define how Stora Enso manages OHS topics in practice and integrates them into annual planning and reporting. Stora Enso's People Strategy guides efforts to provide employees with a safe work environment where they are engaged and able to perform. Other key policies applied in people and safety management include:

  • Code of Conduct
  • Supplier Code of Conduct
  • Minimum requirements for labour conditions
  • Diversity Policy.

How we work

In OHS Stora Enso's main goals are to have a workforce that is motivated, healthy and cabable; and to become a workplace free from accidents and work-related illness. Local OHS committees and working groups at Stora Enso's units provide forums for taking up safety-related topics. The country-level OHS networks in Finland, Sweden, Germany, and China also share good practices and organise training to enhance safety procedures and competencies. The OHS Management Team, consisting of division representatives, acts as a cross-functional body, developing and aligning group-wide OHS programmes. The OHS Steering Group directs strategic long-term planning at group-level, and steers the implementation of the OHS roadmap.

The units report monthly on safety performance data including lost-time accident (LTA) rates, absenteeism statistics, and the numbers of safety observations.

Leadership on topics such as safety management is a top priority for Stora Enso, since it is the strongest driver behind company performance and winning culture. Stora Enso measures its progress in this area using an overall Leadership Index, which measures employees' perceptions of their leaders.

Stora Enso makes every effort to hire locally wherever possible, especially for senior management positions. The group also has a set of minimum labour conditions to ensure that all employees are treated with respect and fairness.

Progress

Occupational health and safety

Stora Enso's short-term milestone for the LTA rate was 3.8 by the end of 2016. In 2016, the group-wide LTA rate decline further to 4.4 (4.7 in 2015). The milestone for 2017 will be communicated in the Q1 Interim Report. Since the beginning of 2016 Stora Enso has been measuring illness-related absenteeism. In 2016 the illness-related absenteeism was 2.9% (3.0%) of the total theoretical working hours. In 2016, Stora Enso's Total Recordable Incident (TRI) rate rose to 11.7 (11.0).

Human resources

Stora Enso's key performance indicator (KPI) for leadership, the Leadership Index, measures employees' perceptions of their leaders. The index is calculated based on the annual employee survey. The goal has been to reach an index of 80/100 by 2018. In 2016 this target was reached ahead of schedule, with a Leadership Index of 80 (79 in 2015).

20 _________
16 .
i2
.
.
, . .
the contract of the contract of the contract of
2012 2013 2014 2015 2016
$-$ Finland 147 10.5 93 78 50
Sweden 7.6 67 -69 66 84
- Central Europe - 6.0 54 6.4 5.0 4.0
China 16. 20 0.9 0.8 0.9
Group 6.0 5.2 44
25
20
15
.
10
.
5
.
0
2012 2013 2014 2015 2016
Finland 243 19.9 21.7 166 19.0
$-$ Sweden 228 19.9 19 2 17 4 19.4
- Central Europe 16.0 15.0 133 118 8.7
China 4.2 3.7 29 2.4 2.8
Group 167 14.0 12.5 11.0 11.7

Sustainability summary – Community 18

Community

Opportunities and challenges

Local communities living near Stora Enso's mills and forestry operations form one of the group's most important stakeholder groups. In many localities Stora Enso is a major employer, tax-payer, and partner for local entrepreneurs. To ensure that Stora Enso's production, raw material sourcing, and labour supply remain both sustainable and competitive, the communities which the group depends on must be able to thrive economically, socially, and environmentally.

Stora Enso's mills are heavily dependent on energy and raw materials, and they generate emissions that may impact adjoining communities. The group's tree plantations in China, Brazil, and Uruguay influence local land use, livelihoods, and ecosystems. The group's socioenvironmental impacts must be managed responsibly, in order to maximise their positive influence, maintain cooperative community relations, and ensure a long-term license to operate.

Our policies

  • Code of Conduct
  • Social Responsibility Guidelines
  • Stakeholder Guidelines
  • Business Practice Policy
  • Human Rights Statement
  • Tax Policy
  • Sponsorship and Donations Policy.

The group's joint operations have each developed formal procedures for their respective community investment work.

How we work

Stora Enso implements various precautionary management actions in response to the potential environmental and social impacts that the group´s activities may have on neighbouring communities. These include:

• Environmental and social impact assessments (ESIAs) for all new projects that could cause significant adverse effects in local communities

• Due diligence assessments invariably realised as part of Stora Enso's acquisition and investment processes. Conducted prior to any decision, these assessments cover relevant factors related to environmental, social, and business practices.

• Environmental management systems such as ISO 14001 for production units

• Sustainable forest management certification of Stora Enso's own forestry operations and suppliers

• Restructuring processes planned in cooperation with the authorities.

Contributing to the vitality of the communities around the company's operations is high on Stora Enso's agenda. This is done through various actions, including investments in capacity building, local nature

conservation, agroforestry programmes, and socio-economic development projects.

Progress

Building on the local community investment work the group has done over the years, Stora Enso has put in place a new group-level framework for community investments. The framework incorporates systematic monitoring and later careful evaluation of outcomes of the group's activities. This work started in 2016 with global baseline mapping, covering all production units and other key functions. During 2017 Stora Enso will implement the new corporate community investment framework and related guidelines.

Guangxi, China

Stora Enso's field staff and social engagement officers speak regularly with people living in areas impacted by Stora Enso's plantations and mill, as well as along the transportation routes, to inform them about Stora Enso's operations and to enable them to express their concerns and contribute ideas. During 2016 Stora Enso conducted socioeconomic profiling of local villages in order to better understand and address their gender and ethnic structures, opportunities for development, and other characteristics that can help Stora Enso to optimise the positive impacts of its operations, and mitigate any negative impacts.

During the year Stora Enso also worked to develop its Free, Prior, and Informed Consent (FPIC) system for use in relation to indigenous communities.

Veracel, Brazil

During 2016 Veracel continued to engage in dialogue with the Government of the State of Bahia, the National Institute of Colonisation and Agrarian Reform (INCRA), and the representatives of six officially recognised landless people's social movements. Through the Sustainable Settlement Initiative the social movements have pledged to leave areas occupied since July 2011, while Veracel has agreed not to seek to repossess areas occupied before that date. The initiative relates to a total of 16 500 hectares of Veracel's lands designated for the settlements. At the end of 2016, additional areas of Veracel's land totalling 3 499 hectares (5 461 ha at the end of 2015) were occupied by landless groups not involved in the Sustainable Settlement Initiative.

Veracel and the state government have continued the Pact for the Development of the Discovery Coast. By the end of 2016 this pact had resulted in investments benefiting local communities amounting to EUR 660 000 (EUR 490 000 by the end of 2015). The pact's projects contribute to the sustainable development of family farming by forming associations for small producers and indigenous communities.

During 2016, Veracel has also continued supporting local livelihoods by making some of its land available for family farmers for cultivation and beekeeping. Altogether 229 family farmers are supported through the Agrovida and Roça do Povo family farming programmes.

Sustainability summary – Community 19

Montes del Plata, Uruguay

Montes del Plata has continued to create strategic alliances with local rural producers through the Alianzas cooperation. By the end of the year 350 farmers with lands totalling approximately 54 939 hectares, of which 43 857 are planted with eucalyptus, had joined the programme, enabling forestry plantations on their lands to be leased and managed by Montes del Plata. By the end of the year, 170 farmers wer e keeping cattle on Montes del Plata's lands while 31 farmers produced honey .

Montes del Plata also finances local projects targeting increased cohesion, social participation, and local development in nearby communities. During 2016, Montes del Plata supported 22 projects (19 in 2015) focusing on heritage conservation, sports, social integration, health, and education.

In 2016 Montes del Plata also continued its long-term strategy for the sustainable transportation of wood, including annual action plans involving truck drivers, transport companies, and local communities.

Bulleh Shah Packaging, Pakistan

Stora Enso supports six local schools in cooperation with the Pakistani non-governmental organisation Idara-e-Taleem-o-Aagahi. Since 2015 these schools have been providing education for children previously identified as child workers in Bulleh Shah Packaging´s (BSP) supply chain. The schools have the capacity to educate up to 640 children. The pupils also receive free school uniforms and medical checks. BSP is additionally providing vocational training for the children's parents, to improve their life skills and ability to find work.

Laos

In Laos Stora Enso has continued to develop an agroforestry model that enables local farmers to grow rice and cash crops between the trees. The company has also established a village development fund to share benefits among local villagers, and to further support local development and livelihoods. Most of the funding allocated during 2016 was directed to infrastructure projects such as electricity and water supply connections, road upgrading, and purchases of livestock to enhance food security .

Chennai, India

In June 2015 Stora Enso announced the permanent closure of the group's corrugated packaging converting unit in Chennai, India, due to its long-term unprofitability and declining demand. Stora Enso provided support during 2015–2016 for Save the Children's local work. This aims to improve children's quality of life and improve water sanitation and hygiene. The project resulted in several outcomes, such as improving the personal hygiene of 3 000 children.

Sustainability summary – Business ethics 20

Business ethics

Opportunities and challenges

For Stora Enso, business ethics means much more than merely complying with regulations. Stora Enso operates in locations including high-risk emerging markets which offer good business opportunities, but may also entail exposure to serious risks relating to corruption or fraud, for instance. Various governments and authorities have shaped effective legislation to combat corruption, such as the UK Bribery Act and the US Foreign Corrupt Practices Act.

New legislation such as the EU Data Protection Regulation additionally sets requirements concerning the processing of personal data, with heavy fines imposed for infringements. In this context Stora Enso also increasingly needs to acknowledge and address the emerging threat of cybercrime.

Our policies

The Stora Enso Code of Conduct is a single set of values defined for all employees in all locations. Other policies relevant to ethics and compliance include:

  • Business Practice Policy
  • Stora Enso Data Privacy Policy
  • Supplier Code of Conduct.

How we work

Stora Enso's Ethics and Compliance function is a sub-function operating under the Legal team, headed by the General Counsel, who reports directly to the CEO. Stora Enso's Ethics and Compliance Board, a governance body appointed by the CEO, monitors Stora Enso's legal compliance and ethical business conduct by following up on the Ethics and Compliance Action List.

Stora Enso's Ethics and Compliance Strategy forms the basis for annual action plans. The strategy has five focus areas:

  • Top level commitment
  • Improved communication and training
  • Intensified efforts in countries with heightened concerns
  • Developing grievance channels
  • Ethics and compliance as a competitive edge.

Progress

Stora Enso has developed an index that enables the group to monitor and evaluate employees' perceptions on topics covered by Stora Enso's Code of Conduct. The index is based on employees' responses to related questions in the annual employee survey. In 2016 this index improved to 81 (801 in 2015). The goal is to maintain this positive trend.

1Restated (+1)

During 2016 Stora Enso has continued to intensify communications efforts to make ethics and compliance topics more visible among employees, while also enhancing internal and external grievance mechanisms. In order to restructure, clarify, and simplify various internal policies and guidelines on ethics and compliance, eight related policies were merged into a single Business Practice Policy (BPP). To protect personal data throughout the group's operations and ensure compliance with all applicable laws, the new Stora Enso Data Privacy Policy was launched in April 2016.

In 2016 a total of 58 reports received through Stora Enso's various grievance channels were identified as potential non-compliance cases (67 in 2015). Proven misconduct leading to disciplinary and/or legal actions was identified in 18 of the completed investigations (10), while five further complaints were found to be valid without involving misconduct. None of the proven misconduct cases were related to child labour, forced labour, or discrimination.

Breakdown of potential non-compliance cases

2016 2015
Fraud 5 8
Corruption 20 26
Anti-trust 2 2
Conflict of interest 7 6
General human
resources
13 17
Health and safety 0 0
Miscellaneous 11 8
Total 58 67

Sustainability summary – Materials, water, and energy 21

Materials, water, and energy

Opportunities and challenges

Replacing the use of fossil-based resources with renewable raw materials is the foundation for a sustainable bioeconomy. Stora Enso's products also contribute to a low-carbon circular economy, in which materials are reused and recycled, while waste is minimised, to maximise environmental and financial added value.

The European Commission (EC) has adopted a Circular Economy Package containing proposals for legislation designed to reduce waste, as well as an action plan aiming to optimise product life cycles through recycling and re-use. The benefits of sustainably sourced renewable materials are recognised by the EC, providing great business opportunities for Stora Enso.

Water plays a central role in Stora Enso's production, heating, cooling and cleaning processes, and in the generation of the renewable hydroelectricity that Stora Enso purchases. The group's forests and plantations also need rainwater. Though most of Stora Enso's production units are located in regions where water is relatively abundant, global water scarcity may still impact the group's operations in the long term through supply chains, and as controls on pollution, recycling, and water pricing are toughened. At the same time, such developments give Stora Enso opportunities to reduce costs by using water more efficiently.

The EU's 2020 Climate and Energy Package and 2030 Climate and Energy Framework, currently under revision, map out the way forward for industrial energy. The forthcoming revisions may include changes in the Emissions Trading System and tougher requirements on industrial energy efficiency. An increase in the global demand for biomass can additionally be expected.

Most of Stora Enso's mills use substantial amounts of biomass in their internal energy production. This renewable energy is generated from by-products and residuals from their own production processes, harvesting residues, recovered wood, and wastes.

Our policies

  • Code of Conduct
  • Supplier Code of Conduct
  • Practical Instructions for Stora Enso's Suppliers
  • Purchasers' Instructions
  • Policy on Wood and Fibre Sourcing, and Land Management
  • Statement on Water and Water Use
  • Energy Guidelines.

How we work

The environmental work realised at Stora Enso's mills, including water and energy management and resource efficiency, is supported by thirdparty certified environmental management systems. All Stora Enso's board, pulp, and paper mills are certified to the ISO 14001 environmental management system standard. All Stora Enso´s sawmills and corrugated packaging facilities are certified or are in the process of being certified under ISO 14001. By the end of 2016, 33 of Stora Enso's production units were certified to the ISO 50001 energy efficiency management system standard (36 in 2015), corresponding to 92% of the group's total energy consumption in 2016 (90%). In addition, seven units are expected to be certified to the ISO 50001 standard in early 2017.

The emissions generated by Stora Enso's mills are regulated by the relevant authorities, with limits set through environmental permit processes taking into account local conditions and legislation.

Stora Enso continuously works to improve resource efficiency by driving material, waste, water, and energy efficiency, and by developing new business opportunities from residuals and by-products. Residuals and by-products are used in internal bioenergy generation and pulp production, or supplied to partners for use in agriculture, brick manufacturing, or road construction, for instance.

While Stora Enso handles relatively large amounts of water, of this water only around 4% is consumed in the production processes and almost 96% is returned to the local environment. Process water is discharged after being purified by Stora Enso's treatment plants, whereas cooling and other non-contact water can be safely released without treatment.

Stora Enso's energy supply is managed under long-term contracts, direct market access through energy exchanges, efficient combined heat and power production, and shareholdings in power generation companies such as Pohjolan Voima Oy and Teollisuuden Voima Oy in Finland.

The EU's Best Available Techniques (BAT) Reference Documents – which include BAT conclusions with limits for effluents and emissions to air, as well as BAT conclusions for large combustion plants – will apply to Stora Enso's board, pulp, and paper mills in Europe. The related investment needs are being proactively planned as part of group investment processes. These investments fit into the group's normal CAPEX framework and policy.

Progress

During 2016, a review of Stora Enso's sustainability strategy involved reassessing how the group manages materials, water, and energy.

After reviewing the group's approach to material efficiency during 2016, Stora Enso has outlined a set of key performance indicators focusing on internal operational efficiency and external factors such as beneficial use and revenues derived from by-products and residuals. Related work will continue in 2017 with the goal of measuring Stora Enso´s progress and contributions towards a low-carbon and resource efficient circular bioeconomy.

In 2016, the group's revenues derived from residuals and by-products, including tall oil, amounted to EUR 70 million (EUR 83 million in 2015).

Sustainability summary – Materials, water, and energy 22

The utilisation rate for residuals and by-products across the group was 98% (98%), covering internal and external use.

Stora Enso's target to reduce chemical oxygen demand (COD) levels in discharged water per saleable tonne of pulp, paper, and board by 7% from the 2007 benchmark level was achieved and completed in 2016, following a reduction of 9% during the year (3% in 2015).

The group's target to reduce normalised process water discharges by 6% from the 2005 benchmark level was not achieved. In 2016 the reduction was 3% (2% in 2015). Stora Enso will continue to follow this key performance indicator (KPI) as part of the new approach to water and energy efficiency. The group will also introduce total water use at its board, pulp, and paper mills as a new KPI in 2017.

Stora Enso's group-wide target is to reduce specific electricity and heat consumption per tonne of pulp, paper, and board production by 15%

by 2020, compared with the baseline year of 2010. In 2016 this indicator was 4.5% lower than the 2010 benchmark level (4.7% in 2015).

During 2016 Stora Enso introduced a new KPI on the group's carbon intensity (fossil CO2 emissions per total energy consumption). For more information see the section on Carbon dioxide.

In 2016 the group's total energy self-sufficiency figure was 63% (64%) and electricity self-sufficiency level 43% (42%). The share of biomass in internal energy production was 82% (82%). Existing contracts and internal electricity generation capacity are estimated to cover around 81% of the group's electricity needs for the next five years (80%). Energy accounted for 10% of Stora Enso's variable costs in 2016 (10%).

Sustainability summary – Carbon dioxide 23

Carbon dioxide

Opportunities and challenges

The use of renewable materials enables us to contribute to the development of a low-carbon economy. Trees in sustainably managed forests absorb carbon dioxide (CO2) from the atmosphere, and together with wood-based products act as carbon sinks. Stora Enso's products help customers and society at large to reduce CO2 emissions by providing low-carbon alternatives to solutions based on fossil fuels and other non-renewable materials.

The first truly global climate agreement was approved at the Paris Climate Conference (COP21) in December 2015, and entered into force in November 2016. Stora Enso welcomes this agreement as an important milestone in sustainable global development.

The EU's Emissions Trading System (ETS) is the biggest mandatory international system for trading greenhouse gas emission allowances, and a major element of the EU's efforts to combat global warming. The ETS grants "carbon leakage" status to industries where it is considered that costs related to climate policies might cause businesses to transfer production to countries with less demanding requirements to reduce greenhouse gas emissions. The forest industry currently has carbon leakage status for the period 2015–2019. Plans for the period beyond 2020 are under consideration within the EU, with possible implications for the forest industry.

Our policies

During 2016 Stora Enso finalised a carbon strategy and continued to work on related policies. It is the group's firm intention to drive down its fossil fuel use even more over the next ten years, so that it gets as close to zero as possible using technically and commercially feasible means. Relevant policies steering the group's efforts to combat global warming include the Statement on Climate Change, and Supplier Code of Conduct and Practical Guide for Suppliers, which give guidance on how CO2 emissions can be reduced in the supply chain.

How we work

The most effective ways to reduce Stora Enso's direct fossil CO2 emissions are to further improve the group's energy efficiency, and to keep increasing the usage of biomass fuels. Significant investments in previous years, particularly in multi-fuel boilers, successfully generated large reductions in the group's fossil CO2 intensity.

A new key performance indicator (KPI) focusing on the carbon intensity of the energy used by all Stora Enso's production units was launched in 2016. Starting from 2017 Stora Enso will measure its progress based on fossil CO2 emissions (kg) in relation to energy consumption (MWh).

Stora Enso evaluates risks and opportunities related to global warming through the annual Enterprise Risk Management (ERM) process, which forms an integral part of the group's management approach. Stora Enso also routinely calculates the financial impacts of potential cost increases in relation to emission allowances, including the financial

impacts on the business of possible consequent increases in energy prices.

Stora Enso's production units systematically work to meet their environmental regulatory requirements and to improve their energy efficiency. Their work is supported by international third-party-certified systems such as the environmental management standard ISO 14001 and the energy management standard ISO 50001.

Stora Enso's board, pulp, and paper mills report quarterly on their direct and indirect carbon emissions, while sawmills and converting facilities report their carbon emissions annually (scopes 1 and 2 as defined by the Greenhouse Gas Protocol of the World Resource Institute and the World Business Council for Sustainable Development). A group-level estimate for other indirect emissions along the value chain (scope 3) is updated biannually. In 2016 Stora Enso continued to have its direct and indirect fossil CO2 emissions (scopes 1 and 2) externally assured to a Reasonable Level, as one of the few companies in the world to do so.

Progress

Since 2007, Stora Enso's target has been to reduce its fossil CO2 emissions per saleable tonne of board, pulp, and paper by 35% from 2006 levels by the end of 2025. This target is periodically adjusted to take into account the changing shape of the company. This CO2 intensity target covers both emissions generated directly by Stora Enso's own facilities (scope 1), and indirect emissions produced during the generation of purchased electricity and heat (scope 2).

In 2016 Stora Enso's CO2 emissions per saleable tonne of board, pulp, and paper were 39% lower than the 2006 benchmark level (38% lower in 2015). The target was reached, but the group's CO2 intensity will in the future be adversely affected by the use of coal for energy production at Beihai Mill in China. Stora Enso has begun to investigate long-term options to gradually move away from coal to biomass and other non-fossil fuels.

During 2016 the group's fossil CO2 emissions per saleable tonne were reduced by applying more accurate CO2 factors for energy suppliers, and due to the closure of Suzhou paper mill in China, and the divestment of Kabel paper mill in Germany. The updated, more accurate market-based CO2 factor and grid energy-mix information obtained from the authorities for electricity purchased in Finland also reduced the emissions figure for 2015, by approximately 0.25 million tonnes. The total direct and indirect fossil CO2 emissions from Stora Enso's board, pulp, and paper mills amounted to 3.08 million tonnes in 2016 (3.03 million tonnes). Direct fossil CO2 emissions decreased both in absolute terms and per unit of sales production. Direct fossil CO2 emissions per unit of sales production were 12% lower than in 2006.

Carbon neutral CO2 emissions are fossil-free emissions generated during the combustion of biomass-based fuels coming from sustainably managed forests1 . Stora Enso's operations utilise renewable biomass-based fuels to a large extent, so the share of carbon neutral

Sustainability summary – Carbon dioxide 24

CO2 emissions in Stora Enso's total emissions is high. In 2016 80% (79%) of the total CO2 emissions from Stora Enso's own operations were carbon neutral.

Direct emissions from Stora Enso's operations account for 23% (21% in 2015) of the group's carbon footprint, while emissions related to the electricity and heat Stora Enso purchases for use in its operations account for 9% (15%) of the total carbon emissions. The majority of the emissions in the group's carbon footprint – 68% (64%) – are according to the group's estimates generated elsewhere along the value chain: in the sourcing and manufacturing of raw materials and services (41% of the total scope 3 emissions); in the further processing of products by

customers (34%); and in the transportation of raw materials to the mills and the final products to the customers (25%).

In 2016, CDP (formerly known as the Carbon Disclosure Project) included Stora Enso on its Climate A List and Supplier Climate A List, in recognition of the company's long-term actions and strategy to reduce emissions. Stora Enso was also the only Nordic company to be included in CDP's Supplier Engagement Leaderboard for driving change in its supply chain.

1 Recommendations on Biomass Carbon Neutrality, WBCSD 2015.

Sustainability summary – Forests, plantations, and land use 25

Forests, plantations, and land use

Opportunities and challenges

As a renewable natural resource, wood represents a favourable alternative to materials based on fossil fuels. Trees absorb carbon dioxide (CO2) from the atmosphere, and together with wood-based products act as carbon sinks. Global warming entails physical challenges and opportunities in relation to forests and plantations, due to changing patterns of temperature, wind, and rainfall, which can all be expected to impact Stora Enso's operational environment. Wellmanaged forests can make entire ecosystems more resilient to negative impacts, and benefit from positive ones.

Global challenges such as population growth, increasing demand for agricultural land, and the widening gap between supply and demand for wood, all require Stora Enso to use natural resources even more efficiently, and to produce larger amounts of raw materials from less land.

Our policies

Stora Enso's policy on Wood and Fibre Sourcing, and Land Management covers the entire cycle of forest and plantation management. Key goals include ensuring that the group can trace the origin of all the wood it uses. The group also aims to maintain open dialogues with all stakeholders. Other Stora Enso policies that promote sustainable forestry include Stora Enso's Code of Conduct and Supplier Code of Conduct.

How we work

Stora Enso's approach to responsible forest and tree plantation management and related actions duly take into account the economic, social, and environmental aspects of sustainability. All the roundwood, chips, sawdust, and externally purchased pulp supplied to Stora Enso's mills come from sustainable sources. To guarantee this, Stora Enso has a regionally organised wood procurement process in place covering the entire forest management cycle.

In 2016 the total amount of wood (including roundwood, wood chips, and sawdust) delivered to Stora Enso mills was 37.6 million m3 (solid under bark) (36.2 million m3 in 2015).

In 2016, 90% (89%) of Stora Enso's wood came from managed seminatural forests in Europe where most forests are privately owned, while 10% (11%) originated from plantations. The group uses various tools to optimise wood procurement and land use efficiency without compromising sustainability. These tools include the definition of sustainable land use practices for each location, forest certification, third-party traceability systems, and different forms of monitoring. Stora Enso always makes sure that harvested trees will be replaced by new growth.

Progress

Progress on responsible forestry is followed with a key performance indicator (KPI) that measures the percentage of the lands owned and managed by Stora Enso covered by certification systems. The target is to reach 96% coverage by the end of 2017. In 2016 coverage amounted to 90% (90%). The share of certified wood in the group's total wood supply was 83% (80%).

Until 2016, Stora Enso kept track of progress on land use efficiency through a group-level KPI measuring the increase in the average volume of fibre produced per hectare in certified tree plantations owned and managed by Stora Enso. Stora Enso plans instead to monitor the sustainable intensification of production separately at each plantation, taking into account different local operating conditions, as this enables the group to assess progress more accurately than a global average.

Managing land contracts in Guangxi, China

Stora Enso has been reviewing and correcting land lease contracts in Guangxi since 2009, when irregularities in the contract chains of social lands were first discovered. By the end of 2016, 66% of the contracts were found to be free from contractual defects (63% by the end of 2015).

In irreconcilable cases Stora Enso terminates leases in a responsible manner. In 2016 the company terminated identified irreconcilable contracts covering a total area of 1 719 hectares. The target for the end of 2016 was to terminate all remaining irreconcilable or economically

Sustainability summary – Forests, plantations, and land use 26

unviable contracts. At the year-end irreconcilable or economically unviable contracts corresponding to 382 hectares remained in effect. These remaining contracts will be terminated by mid-2017.

As announced on 19 January 2017, Stora Enso is reconsidering its plans to build a chemical pulp mill in Beihai. As a consequence of the

Forests, plantations, and lands owned by Stora Enso1 as of 31 December 2016

Unit Area Certification coverage
Montes del Plata plantations and lands, Uruguay
(joint operation with Arauco)
190 279 ha, of which 102 312 ha planted PEFC and FSC2
for 190 279 ha
Veracel plantations and lands, Bahia, Brazil (joint operation
with Fibria)
214 963 ha, of which 73 082 ha planted CERFLOR (PEFC) for 179 411 ha;
FSC for 179 411 ha
Plantations and lands, Rio Grande do Sul, Brazil 43 412 ha, of which 20 810 ha planted
Wood Supply, Estonia 137 ha, of which 124 ha planted

free of contractual defects.

1 Including operations where Stora Enso's shareholding is at least 50% and size of the area exceeds 100 hectares. In addition to the forest and plantation areas listed above, Stora Enso owns: 49% of Bergvik Skog, which owns 2.3 million hectares of land in Sweden and 0.1 million hectares in Latvia; and 41% of Tornator, which owns 0.6 million hectares of forestland in Finland, 53 000 hectares in Estonia, and 12 000 hectares in Romania.

2 Stora Enso Communications' FSC® trademark license number is FSC-N001919.

Forests and plantations leased and managed by Stora Enso1 as of 31 December 2016

Unit Area Certification coverage
Wood Supply, Russia 369 422 ha FSC group certificate
Plantations and lands, Guangxi, China 83 560 ha, of which approximately 69 940 ha planted
with eucalyptus and 13 620 ha with other species
Chinese Forest Certification Council
certificate (PEFC) for 83 560 ha; FSC
for 83 560 ha
Montes del Plata 54 939 ha, of which 43 857 ha planted PEFC and FSC for 44 193 ha
Veracel 12 209 ha, of which 5 999 ha planted FSC for 10 965 ha;
PEFC for 10 965 ha
Trial plantations, Laos 3 900 ha, of which 2 995 ha planted

1 Including operations where Stora Enso's shareholding is at least 50% and size of the area exceeds 100 hectares.

change in scope, Stora Enso would decrease the area of its leased forest lands in the Guangxi region. The scope and schedule for this reduction will be decided later. As a part of this process, all contracts will be evaluated, and Stora Enso aims to have only land leased that is Sustainability summary – Customers 27

Customers

Opportunities and challenges

Consumers' awareness of the scarcity of natural resources and their sense of social responsibility are increasing, putting pressure on brand owners to focus more on environmental and social responsibility throughout supply chains. Combined with new legislation, this is also driving Stora Enso's customers to use renewable and recyclable raw materials to create more sustainable products.

In the long run, the world is looking to replace fossil-based materials with renewable alternatives. Stora Enso's various fibre-based products, including future bio-based chemicals, are well-positioned to respond to these demands.

Our policies

The Stora Enso Code of Conduct constitutes a single set of values, expectations, and ambitions related to Stora Enso's global approach to ethical business practices, environmental values, and human and labour rights. These values are applied wherever Stora Enso operates, and in all dealings with customers.

How we work

Stora Enso develops its expertise in renewable materials to meet customers' needs through products with high sustainability performance. Stora Enso works actively together with its customers to improve the material efficiency and environmental impact of its products and the related production processes. Stora Enso also regularly measures customer satisfaction.

Stora Enso's products covered by specific safety regulations include food contact materials, material for toys, packaging for pharmaceuticals, and construction materials. Stora Enso's in-house product safety and quality control systems cover processes from product development and raw material sourcing all the way to the delivery of the finished products.

Stora Enso's units producing sensitive packaging materials follow Good Manufacturing Practice, a set of widely recognised guidelines also incorporated into EU regulations. All Consumer Board mills and most Packaging Solutions mills are additionally certified according to recognised hygiene management standards. The units' ISO 22000, FSSC 22000, and FDA product safety certificates ensure that they apply a systematic approach to food safety issues.

Stora Enso's experts collect product-specific life cycle inventory data (LCI) for use in life cycle assessments (LCAs), which are in practice mostly conducted by customers or brand owners. The environmental performance of Stora Enso's paper and consumer board products is reported in line with the voluntary Paper Profile initiative.

More than 90% of Stora Enso's Paper division's brands are covered by one or more recognised ecolabels, including the EU Ecolabel, the Nordic Ecolabel, and the Blue Angel (Blauer Engel). Many of Stora

Enso's graphical board brands are also available with the EU Ecolabel. Many Stora Enso products are also sold as FSC or PEFC certified.

Progress

In 2016 Stora Enso's pellet production and supply chains at Näpi and Imavere sawmills in Estonia and Nebolchi Sawmill in Russia obtained Sustainable Biomass Partnership (SBP™) certifications. SBP certification is used to verify the legal and sustainable sourcing of wood and to track greenhouse gas emissions along the supply chain.

During 2016 Stora Enso issued environmental product declarations (EPD) for one liquid packaging board, one cupstock product, and Cross Laminated Timber (CLT).

By the end of 2016, 26 of Stora Enso's mills were registered with the Supplier Ethical Data Exchange (Sedex). Sedex gives Stora Enso a platform to share information with customers on the group's compliance with the Ethical Trading Initiative's base code and other key sustainability topics through the supply chain. By the end of 2016, all Consumer Board mills were also third-party audited according to the Sedex Members' Ethical Trading Audit (SMETA) guidelines which sets standards on labour, health and safety, business ethics, and the environment, while also facilitating reporting and auditing.

Sustainability summary – Suppliers 28

Suppliers

Opportunities and challenges

Stora Enso sources a wide range of raw materials, products, and services for the group's business globally. In 2016, purchases of materials, goods, and services represented 48% of Stora Enso's total variable costs and fibre procurement accounted for 52%. The concept of responsible sourcing is relatively new in some markets, and local suppliers may not be familiar with sustainability requirements and audits. However, Stora Enso believes that demonstrating sustainability ultimately benefits the group's suppliers, while helping to promote more sustainable sourcing around the world.

Although Stora Enso works in various regulatory environments around the world, it also consistently responds to stakeholder demands concerning transparency and sustainability performance of the group's suppliers. Imposing sustainability requirements on direct suppliers also encourages them to build up their capacity to meet such stricter demands, and creates a larger pool of more sustainable suppliers.

Our policies

Stora Enso strives to identify and address the impacts of its operations in its supply chain. The Stora Enso Supplier Code of Conduct (SCoC) is a legally binding document that imposes minimum supplier sustainability requirements on suppliers. Other policies that support responsible sourcing include the group's Sourcing Guideline, Sourcing Strategy, Practical Instructions for Stora Enso Suppliers, Instructions for Purchasers, and Policy on Wood and Fibre Sourcing, and Land Management.

How we work

For Stora Enso, responsible sourcing means drawing on a deep commitment to sustainability, addressing the concerns of key stakeholders, complying with regulatory frameworks, adhering to best practices, and managing supply risks. Stora Enso's approach to responsible sourcing has become more deeply embedded in purchasing and supplier management since the group's more centrallyled sourcing organisation was established in 2014.

Materials and products sourced by Stora Enso include wood and fibrebased materials such as pulp and paper for recycling (PfR), as well as chemicals, fillers, energy, fuels, spare parts, and maintenance, logistics, and IT services. Any supplier who wishes to do business with Stora Enso must first pre-qualify, before being awarded with a contract.

In addition to enforcing its Supplier Code of Conduct, Stora Enso actively engages with suppliers to help them improve their sustainability performance. Stora Enso also conducts supplier assessments and audits based on risk evaluations to ensure adherence to the SCoC. Non-conformances found during audits are followed up with supplier discussions and corrective action plans. In cases where suppliers are not willing to improve their performance, relationships are terminated.

Progress

Stora Enso's related key performance indicator (KPI) measures the proportion of total supplier spend covered by the group's SCoC, including all categories and regions. By the end of 2016, 92% of Stora Enso's total spending on materials, goods, and services was duly covered (90% at the end of 2015), exceeding the group's target of 90% by the end of 2016. In 2016, the indicator was broadened to also cover the group's Wood Supply units. The target for 2017 will be communicated in the Interim Report for Q1/2017.

During 2016, Stora Enso provided extensive training for its purchasers on a variety of topics, including supplier pre-qualification, and business principles.

Stora Enso continued to conduct third-party supplier audits in 2016 with a focus on high-risk suppliers in China. In 2016 a total of 36 suppliers were third-party audited in China (39 in 2015). These audits conducted revealed non-conformances primarily related to occupational safety, wages, working hours, and basic workers' rights, as defined in Stora Enso's SCoC. During 2016 third-party audits were also conducted on 11 suppliers in countries other than China.

In 2016 Stora Enso worked on identifying the most sustainable sourcing solution of coal for the group's new Beihai Mill. This involved evaluating seven local coal suppliers against Stora Enso's supplier selection procedures. Two Stora Enso sustainability audits and three third-party audits of the preferred supplier were conducted in 2016. Stora Enso was able to audit the whole coal supply chain, excluding shipping, and a social impact assessment was also conducted in villages neighbouring the mine as well as along the logistics chain.

Sustainability summary – Investors 29

Investors

This is a summary of Stora Enso's sustainability approach with shareholders. For more information about Stora Enso in capital markets, see the related section in this report.

Opportunities and challenges

The global pool of socially responsible investors (SRIs) is growing, and the incorporation of environmental, social, and governance (ESG) analysis into mainstream investment decision-making is accelerating. Both of these trends encourage companies to be more sustainable in their operations. At the same time, shareholders expect financial profits from their investments. Stora Enso believes that only truly sustainable operations can ensure long-term financial success.

Our policies

  • Disclosure Policy
  • Code of Conduct.

How we work

Various aspects of sustainability are important to Stora Enso's investors, including human rights and global warming. Stora Enso's main shareholders are long-term investors, and sustainable business practices are high on their agenda. They constantly follow the group's sustainability performance and reporting.

Timely and transparent communications with shareholders are a top priority for Stora Enso. Stora Enso actively maintains open dialogue with its investors on ESG matters through face-to-face meetings, conference calls, seminars, and webcasts. The group also regularly shares updated information on its sustainability performance with shareholders in Interim and Annual reports, stakeholder letters, web updates, and investor newsletter. Stora Enso also regularly participates in sustainability events of interest to investors.

Progress

In 2016 Stora Enso's Investor Relations function organised 13 investor meetings focusing on ESG-related topics. In total, approximately 60 investor representatives participated in these meetings. The meetings also included a webinar for ESG investors and analysts focusing on Stora Enso´s sustainability strategy and activities. During the year Stora Enso revised its strategy for providing ESG information to shareholders, aiming to make sustainability information more widely available on the group's website to benefit and serve all different stakeholder groups. This also involved further prioritising Stora Enso's participation in questionnaires and assessments for the ESG index and ratings schemes that are most material for the group's investors.

Report of the Board of Directors

Stora Enso introduction

Stora Enso (the group or the company) is a leading provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Our customers include publishers, retailers, brand owners, print and board producers, printing houses, merchants, converters and joinery and construction companies. Our aim is to replace fossil-based materials by innovating and developing new products and services based on wood and other renewable materials. We believe that everything that is made with fossil-based materials today can be made from a tree tomorrow. Our focus is on fibre-based packaging, plantation-based pulp, innovation in biomaterials, and sustainable building solutions.

The group has some 25 000 employees in more than 35 countries, and is publicly listed on the Helsinki and Stockholm stock exchanges. Our sales in 2016 were EUR 9.8 billion, with an operational EBIT of EUR 884 million. Stora Enso shares are listed on Nasdaq Helsinki Oy (STEAV, STERV) and Nasdaq Stockholm AB (STE A, STE R). In addition, the shares are also traded in the USA as American depositary receipts (ADRs), (SEOAY). The shares were also traded in the USA as ADRs (SEOAY) on the OTCQX until end of 2016.

At Stora Enso we use and develop our expertise in renewable materials to meet the needs of our customers and many of today's global raw material challenges. Our products provide a low-carbon alternative to many products made from non-renewable materials. Being sustainable – doing good for the people and the planet – underpins our thinking and our approach in every aspect of business.

Markets and deliveries

Demand for cartonboard increased slightly in Western Europe, but it accelerated significantly in Eastern Europe reaching 3% growth in 2016. Demand for cartonboard in North America increased by almost 2% in 2016 after slight decline in the previous year. Strong demand in Asia Pacific continued and consumption increased by 4%.

Containerboard demand remained healthy in 2016. The growth rate decreased slightly due to overall uncertainty in economic environment. Demand growth for corrugated board remained stable in our European focus countries and China in 2016.

World chemical market pulp demand increased around 3% during 2016 compared to a year ago. Softwood pulp demand was up by 3.5%, and hardwood pulp by 2.5% (eucalyptus +5.7%) compared to 2015. Global demand decreased in North and Latin America, Western Europe and Japan, but increased in all other regions driven by China growth of

+11.1%. The global increase in supply was concentrated on the hardwood segment.

Global market pulp capacity rose around 3.7% compared to a year ago. Expansions were focused in Latin America and Western Europe. Hardwood capacity accounted just over half of the gain in 2016 with growth concentrated in Latin America. Softwood was spread between North America, Latin America and Western Europe. The overall global demand-capacity balance stood at 91.3%, down 0.7 percent points from 2015.

Softwood sawn demand remained on good level in 2016, decreasing slightly in Europe but more than compensated by increases in North America and Asia. The Middle East and North African markets were oversupplied with depressed prices. Imports to Egypt continued to suffer from deficit of hard currencies and devaluation of local Pound. Australian sawn wood market remained active with prices stabilizing during the year. Japanese housing market was active and stronger yen supported improved prices. There were no major structural changes in Europe and softwood sawn industry is focusing on replacement investments rather than on adding capacity.

Structural erosion of paper demand continued unchanged in Europe and North America during 2016. Paper demand in 2016 was 4% weaker than in 2015 in Europe and North America. Demand in Asia declined by 2% compared with 2015. Global paper consumption was 3% lower in 2016 than 2015. However, variation between paper grades is wide. Uncoated fine paper declined globally less than 1% whereas coated mechanical declined 8% compared with 2015.

Deliveries and production

2016 2015 Change %
2016–2015
Board deliveries, 1 000 tonnes 3 376 3 045 10.9%
Board production, 1 000 tonnes 3 775 3 394 11.2%
Corrugated packaging deliveries,
million m2
1 082 1 112 -2.7%
Market pulp deliveries,
1 000 tonnes
2 068 1 873 10.4%
Wood product deliveries, 1 000
m3
4 814 4 490 7.2%
Paper deliveries, 1 000 tonnes 5 141 5 778 -11.0%
Paper production, 1 000 tonnes 5 155 5 794 -11.0%

Estimated consumption of board, pulp, sawn softwood, and paper in 2016

Tonnes, million Europe North
America
Asia and
Oceania
Consumer board 10.6 9.3 27.8
Containerboard 30.6 31.4 77.7
Corrugated board (billion m2
)
1
9.6 n/a 70.4
Chemical market pulp 18.0 7.7 28.9
Sawn softwood (million m3
)
86.6 91.6 n/a
Newsprint 6.5 3.4 11.0
Uncoated magazine paper 3.2 1.5 0.3
Coated magazine paper 4.9 2.7 3.3
Coated fine paper 5.3 3.8 11.9
Uncoated fine paper 7.5 7.9 20.5

1 European focus markets (Baltics, FI, PL, RU, SE) and China.

Source: Pöyry, ICCA, RISI, Euro-Graph, PPPC, Stora Enso, UNECE

The group's board deliveries totalled 3 376 000 tonnes in 2016, which is 331 000 tonnes higher compared to a year ago mainly due to ramp-up of Varkaus kraftliner mill, Beihai board mill and higher deliveries from Ostrołęka board mill, only partly offset by lower volumes due to divested Barcelona board mill. Corrugated board deliveries decreased slightly to 1 082 000 m2 . Market pulp deliveries increased by 195 000 tonnes or 10% to 2 068 000 tonnes mainly due to increase in Oulu integrated pulp mill, Sunila pulp mill and Montes del Plata pulp mill. Wood products deliveries increased by 324 000 m3 to 4 814 000 m3 . Paper deliveries totalled 5 141 000 tonnes, down 637 000 tonnes or -11% from 2015 mainly due to divestments of Kabel Mill, Arapoti Mill and Suzhou Mill site and conversion of Varkaus Mill from office paper to kraftliner in autumn 2015.

Financial results – Group

Sales at EUR 9 802 (10 040) million were 2.4% lower than a year earlier, mainly due to structural changes in Paper division and clearly lower hardwood pulp prices in Biomaterials division. Higher volumes in Consumer Board and Packaging Solutions divisions increased sales. Sales excluding the structurally declining paper businesses, and divested Barcelona Mill, increased by 3.1%, primarily due to the rampups at Varkaus kraftliner and Beihai consumer board mills.

Stora Enso announced the divestment of the Arapoti Paper Mill in Brazil in late 2015 and the divestment was completed in March 2016, Divestment of the Suzhou mill site in China was announced and paper production ceased in June 2016. Stora Enso's 33.33% ownership of the Swedish recycled materials company IL Recycling AB was divested in June 2016. Divestment of the Kabel coated magazine paper mill in Germany was completed in September 2016.

Operational EBIT at EUR 884 (915) million decreased 3.4%, mainly due to significantly lower hardwood pulp sales prices in Biomaterials division and higher fixed costs. Foreign exchange rate movements and lower variable costs had a favourable impact.

Operational EBIT margin at 9.0% (9.1%) remained almost on the previous year level. Lower variable costs mainly in energy and wood improved operational EBIT by EUR 48 million. The impact of exchange rates on sales and costs increased operational EBIT by EUR 76 million after hedges. Higher volumes mainly in Consumer Board and Packaging Solutions divisions increased operational EBIT by EUR 29 million and closed units by EUR 11 million. Lower sales prices in local currencies decreased the operational EBIT by EUR 94 million. Higher fixed costs decreased the operational EBIT by EUR 89 million, main reasons being the investments in innovation activities in Biomaterials division, higher maintenance costs and ramp up's of new production sites, mainly Beihai consumer board mill, Varkaus Kraftliner mill, Varkaus LVL mill and Murow sawmill. Depreciation was EUR 12 million higher, primarily due to the ramp-ups at Varkaus kraftliner and Beihai consumer board mills.

The share of the operational results of equity accounted investments amounted to EUR 80 (EUR 80) million, with the main contributions from Bergvik Skog and Tornator.

IFRS operating profit includes a negative net effect of fair valuations of EUR 5 (negative EUR 11) million from the accounting of share-based compensation, Total Return Swaps (TRS) and CO2 emission rights. In addition, IFRS operating profit includes a negative net effect of EUR 121 (negative EUR 15) million from IAS 41 forest valuation from subsidiaries and joint operations and also a positive net effect of EUR 59 (positive EUR 404) million from Stora Enso's share of net financial items, taxes and IAS 41 forest valuations of equity accounted investments. The biological asset fair value in the group's equity accounted investments was increased approximately by EUR 52 million at Bergvik Skog and EUR 83 million at Tornator.

At the end of 2016, the closing fair value of biological assets in the Consumer Board Division's forest operations in Guangxi China was EUR 174 million, compared to EUR 356 million at the end of 2015. The decrease is mainly due to reduced inventory as a result of a higher than previously estimated portion of over mature trees. The decrease is split into two components, a negative item affecting comparability (IAC) of EUR 77 million due to reduction of biological asset value below the cost base value and a fair value decrease of EUR 105 million.

Annual impairment testing resulted in a net impairment of EUR 90 (EUR 236) million in Paper and Packaging Solutions divisions. The impairments in Paper division Newsprint Europe unit was EUR 78 million on fixed assets and related mainly to the further weakened long term earnings expectations due to a declining European paper market. There was an impairment of EUR 12 million in Packaging Solutions Corrugated China unit. EUR 11 million of the amount is due to goodwill impairment and EUR 1 million is a fixed asset impairment. The main

reason for the impairment is the challenging market situation and a change in the customer base.

The group reported a positive IAC of EUR 181 million in Paper division related to the divestment of Suzhou Mill site in China. The rest of asset restructurings and disposals related IAC's are the divestments of Arapoti Mill in Brazil, completed during the first quarter of 2016 (a negative IAC of EUR 28 million), the Kabel Mill in Germany (a negative

IAC of EUR 5 million), IL Recycling 33.33% ownership (a positive IAC of EUR 16 million) and the planned restructuring of corrugated operations in Finland (a negative net impact of EUR 9 million). In addition there is a negative IAC of EUR 22 million due to increases of environmental provisions at several sites in Paper division and the segment Other.

IFRS operating profit was EUR 783 (EUR 1 059) million.

Segment share of operational EBIT, IAC, fair valuations and non-operational items and operating profit/loss

Year Ended 31 December
Operational EBIT IAC, Fair Valuations and Non
Operational items
Operating Profit/Loss
EUR million 2016 2015 2016 2015 2016 2015
Consumer Board 254 290 -187 -32 67 258
Packaging Solutions 64 90 -22 -10 42 80
Biomaterials 224 313 -13 -5 211 308
Wood Products 88 81 - -1 88 80
Paper 211 77 78 -256 289 -179
Other 43 64 43 448 86 512
Total 884 915 -101 144 783 1 059
Net financial items -242 -245
Profit before Tax 541 814
Income tax expense -134 -31
Net Profit 407 783

Operational EBIT comprises the operating profit excluding IAC and fair valuations of the segments and Stora Enso's share of the operating profit excluding IAC and fair valuations of its equity accounted investments (EAI).

IAC = Items affecting comparability. These are exceptional transactions that are not related to normal business operations. The most common IAC's are capital gains, additional writedowns or reversals of write-downs, provisions for planned restructuring and penalties. Items affecting comparability are normally disclosed individually if they exceed one cent per share.

Fair valuations and non-operational items include equity incentive schemes and related hedges, CO2 emission rights, valuations of biological assets and the group's share of tax and net financial items of EAI.

Items affecting comparability, fair valuations and non-operational items

Year Ended 31 December
EUR million 2016 2015
Impairments and reversals of intangible asset and property, plant and equipment and biological assets -133 -266
Restructuring costs excluding fixed asset impairments -19 7
Disposals 144 -
Other -26 25
Items affecting comparability -34 -234
Fair valuations and non-operational items -67 378
Total -101 144

Segment share of operative assets, operative liabilities and operating capital

Year Ended 31 December
Operative Assets Operative Liabilities Operating Capital
EUR million 2016 2015 2016 2015 2016 2015
Consumer Board 2 486 2 527 513 512 1 973 2 015
Packaging Solutions 1 027 1 054 173 221 854 833
Biomaterials 2 880 2 760 195 171 2 685 2 589
Wood Products 766 723 235 204 531 519
Paper 1 629 1 999 653 795 976 1 204
Other and eliminations 2 267 2 089 636 449 1 631 1 640
Total 11 055 11 152 2 405 2 352 8 650 8 800

Key figures

2016 2015 2014
Sales, EUR million 9 802 10 040 10 213
Operational EBIT1
, EUR million
884 915 810
Operational EBIT margin 9.0% 9.1% 7.9%
Operating profit (IFRS), EUR million 783 1 059 400
Operating margin (IFRS) 8.0% 10.5% 3.9%
Return on equity (ROE) 7.2% 14.6% 1.7%
Operational ROCE 10.2% 10.6% 9.5%
Debt/equity ratio 0.47 0.60 0.65
EPS (basic), EUR 0.59 1.02 0.13
EPS excluding IAC2
, EUR
0.65 1.24 0.40
Dividend and distribution per share
3
, EUR
0.37 0.33 0.30
Payout ratio, excluding IAC2 56.9% 26.6% 75.0%
Payout ratio (IFRS) 62.7% 32.4% 230.8%
Dividend and distribution yield, (R share) 3.6% 3.9% 4.0%
Price/earnings (R share), excluding IAC2 15.7 6.8 18.6
Equity per share, EUR 7.36 6.83 6.43
Market capitalisation 31 Dec, EUR million 8 085 6 618 5 871
Closing price 31 Dec, A/R share, EUR 10.40/10.21 8.40/8.39 7.48/7.44
Average price, A/R share, EUR 8.50/7.88 8.87/8.70 7.29/7.16
Number of shares 31 Dec (thousands) 788 620 788 620 788 620
Trading volume A shares (thousands) 1 254 1 641 1 553
% of total number of A shares 0.7% 0.9% 0.9%
Trading volume R shares (thousands) 765 122 798 507 731 067
% of total number of R shares 125.0% 130.5% 119.5%
Average number of shares, basic (thousands) 788 620 788 620 788 620
Average number of shares, diluted (thousands) 789 888 789 809 789 210

1 Operational EBIT see chapter non-IFRS measures at the end of the Report of the Board of Directors.

2 Items affecting comparability (IAC) see chapter non-IFRS measures at the end of the Report of the Board of Directors.

3 See Board of Directors' proposal for dividend distribution.

Net financial expenses at EUR 242 million were EUR 3 million lower than a year ago. The net interest expenses decreased by EUR 26

million due to smaller and improved debt portfolio. Other net financial expenses were EUR 23 million higher mainly due to fair valuation of

interest rate derivatives and higher expenses with bonds repurchases. The net foreign exchange impact in 2016 in respect of cash, interestbearing assets and liabilities and related hedges was a loss of EUR 43 (loss EUR 43) million mainly due to the revaluation of foreign currency loans in subsidiaries and joint-operations.

The net tax charge totalled EUR 134 (EUR 31) million, equivalent to an effective tax rate of 25% (4%), as described in more detail in Note 9, Income taxes, to the group Consolidated Financial Statements.

The loss attributable to non-controlling interests was EUR 56 (EUR 24) million, leaving a profit of EUR 463 (EUR 807) million attributable to Company shareholders.

Earnings per share excluding items affecting comparability were EUR 0.65 (EUR 1.24) and including items affecting comparability EUR 0.59 (EUR 1.02). Operational return on capital employed was 10.2% (10.6%).

Group capital employed was EUR 8 594 million on 31 December 2016, a decrease of EUR 159 million on a year earlier.

Breakdown of Capital Employed Change

Capital Employed
31 Dec 2015, EUR million 8 753
Capital expenditure less
depreciation
90
Impairments and reversal of
impairments
-53
Fair valuation of biological assets -120
Costs related to growth of biological
assets
-141
Available-for-sale: operative (mainly
PVO)
122
Equity accounted investments 68
Net liabilities in defined benefit plans -61
Operative working capital and other
interest-free items, net
-119
Net tax liabilities -16
Translation difference 76
Other changes -5
31 Dec 2016, EUR million 8 594

Financing

Cash flow from operations improved further at EUR 1 633 (EUR 1 556) million and cash flow after investing activities was EUR 834 (EUR 599) million. Working capital decreased by EUR 283 (EUR 141) million mainly due to EUR 170 million higher trade payables and EUR 87 million lower short-term receivables. Payments related to restructuring actions and environmental provisions were EUR 47 million.

Operative Cash Flow

EUR million 2016 2015
Operational EBITDA1 1 371 1 408
IAC on operational EBITDA -77 -24
Dividends received from equity accounted
investments
58 32
Other adjustments -2 -1
Change in working capital 283 141
Cash Flow from Operations 1 633 1 556
Cash spent on fixed and biological assets -798 -956
Acquisitions of equity accounted investments -1 -1
Cash Flow after Investing Activities 834 599

1 Restated according to the new reporting structure. See chapter Change in the reporting of costs related to growth of biological assets at the end of the Report of the Board of Directors.

At the end of the period, net interest-bearing liabilities of the group were EUR 2 726 (EUR 3 240) million. Cash and cash equivalents net of bank overdrafts amounted to EUR 949 (EUR 807) million.

Total unutilised committed credit facilities at the year-end 2016 were unchanged at EUR 700 million. The EUR 700 million committed credit facility agreement with a syndicate of 13 banks matures in January 2019. The facility will be used as a backup for general corporate purposes. In addition, Stora Enso has access to various long-term sources of funding up to EUR 1 000 (EUR 850) million.

The debt/equity ratio at 31 December 2016 was 0.47 (0.60). The currency effect on equity was positive EUR 115 (EUR 2) million net of the hedging of equity translation risks mainly due to strengthening of the Brazilian real, US dollar and Russian ruble. Chinese renminbi and Swedish crown had a negative impact on equity.

The fair valuation of cash flow hedges and available-for-sale investments recorded in other comprehensive income increased equity by EUR 148 (decrease EUR 282) million mainly due to increased electricity prices resulting to higher fair value of group's shareholding in Pohjolan Voima.

At the end of the year, the ratings for Stora Enso's rated bonds were as follows:

Ratings as at 31 Dec 2016

Rating agency Long/short-term
rating
Valid from
Standard & Poor's BB (positive) / B 23 August 2016
Moody's Ba2 (positive) / NP 4 August 2016

Financial results – Segments

Consumer Board division

EUR million 2016 2015
Sales 2 342 2 340
Operational EBITDA1 447 466
Operational EBITDA margin1 19.1% 19.9%
Operational EBIT2 254 290
Operational EBIT margin 10.8% 12.4%
Operational ROOC3 12.7% 15.5%
Cash flow from operations2 453 481
Cash flow after investing activities2 40 21
Board deliveries, 1 000 tonnes 2 507 2 458
Board production, 1 000 tonnes 2 554 2 490

1 Restated according to the new reporting structure. See chapter Change in the reporting of costs related to growth of biological assets at the end of the Report of the Board of Directors.

2 See chapter non-IFRS measures at the end of the Report of the Board of Directors.

3 Operational ROOC = 100% x Operational EBIT/Average operating capital.

Consumer Board division sales at EUR 2 342 (EUR 2 340) million were on the same level as previous year. Sales grew by 3.9% excluding the divestment of Barcelona Mill in Spain in autumn 2015, mainly due to the ramp up of the Beihai consumer board mill and higher sales in Skoghall and Fors mills.

Operational EBIT at EUR 254 (EUR 290) million was 12% down from previous year. Operational EBIT was positively impacted by higher volumes in the European mills and lower variable costs. Operational EBIT was negatively impacted by slightly higher fixed costs and the Beihai consumer board mill ramp up in the Guangxi region, China.

Packaging Solutions division

EUR million 2016 2015
Sales 1 044 913
Operational EBITDA 129 147
Operational EBITDA margin 12.4% 16.1%
Operational EBIT1 64 90
Operational EBIT margin 6.1% 9.9%
Operational ROOC2 7.6% 11.1%
Cash flow from operations1 132 138
Cash flow after investing activities1 63 20
Board deliveries, 1 000 tonnes 869 587
Board production, 1 000 tonnes 1 221 904
Corrugated packaging deliveries, million m2 1 082 1 112
Corrugated packaging production, million m2 1 073 1 093

1 See chapter non-IFRS measures at the end of the Report of the Board of Directors. 2 Operational ROOC = 100% x Operational EBIT/Average operating capital.

Packaging Solutions division sales were EUR 1 044 (EUR 913) million, up 14% compared to 2015. The increase is mainly due to the ramp up of the Varkaus kraftliner mill. Sales growth excluding Varkaus would have been 3%.

Operational EBIT at EUR 64 (EUR 90) million was 29% down from the previous year mainly due to the ramp up of the Varkaus kraftliner mill and the challenges with the corrugated China operations. Operational EBIT would have grown by EUR 3 million excluding Varkaus kraftliner mill and corrugated China operations.

Biomaterials division

EUR million 2016 2015
Sales 1 376 1 484
Operational EBITDA1 361 444
Operational EBITDA margin1 26.2% 29.9%
Operational EBIT2 224 313
Operational EBIT margin 16.3% 21.1%
Operational ROOC3 8.5% 12.4%
Cash flow from operations2 419 385
Cash flow after investing activities2 278 187
Pulp deliveries, 1000 tonnes 2 508 2 499

1 Restated according to the new reporting structure. See chapter Change in the reporting of costs related to growth of biological assets at the end of the Report of the Board of Directors.

2 See chapter non-IFRS measures at the end of the Report of the Board of Directors. 3 Operational ROOC = 100% x Operational EBIT/Average operating capital.

Biomaterials division sales were EUR 1 376 (EUR 1 484) million, down 7% on 2015 due to significantly lower hardwood pulp sales prices and also lower softwood pulp prices.

Operational EBIT at EUR 224 (EUR 313) million was 28% down from previous year mainly due to lower hardwood and softwood pulp sales prices in local currencies and higher fixed costs due to investments into innovation activities. Foreign exchange rates had a positive impact on operational EBIT.

Wood Products division

EUR million 2016 2015
Sales 1 595 1 603
Operational EBITDA 118 111
Operational EBITDA margin 7.4% 6.9%
Operational EBIT1 88 81
Operational EBIT margin 5.5% 5.1%
Operational ROOC2 16.8% 15.7%
Cash flow from operations1 142 118
Cash flow after investing activities1 75 59
Deliveries, 1 000 m3 4 643 4 334

1 See chapter non-IFRS measures at the end of the Report of the Board of Directors.

2 Operational ROOC = 100% x Operational EBIT/Average operating capital.

Wood Products division sales were EUR 1 595 (EUR 1 603) million, down EUR 8 million from 2015, mainly due to conscious decision to lower the trading business volumes. The Building components sales has increased by 15%.

Operational EBIT at EUR 88 (EUR 81) million was 9% up from previous year. Operational EBIT was positively impacted by higher volumes of own products and lower volumes from the low margin trading business. Operational EBIT was negatively impacted by higher fixed costs related to the ramp up of new investments mainly at Murów sawmill and Varkaus LVL mill.

Paper division

EUR million 2016 2015
Sales 3 245 3 630
Operational EBITDA 324 231
Operational EBITDA margin 10.0% 6.4%
Operational EBIT1 211 77
Operational EBIT margin 6.5% 2.1%
Operational ROOC2 19.4% 5.5%
Cash flow from operations1 351 286
Cash flow after investing activities1 277 201
Cash flow after investing activities to sales
(non-IFRS)
8.5% 5.5%
Paper deliveries, 1 000 tonnes 5 141 5 778
Paper production, 1 000 tonnes 5 155 5 794

1 See chapter non-IFRS measures at the end of the Report of the Board of Directors. 2 Operational ROOC = 100% x Operational EBIT/Average operating capital.

Paper division sales were EUR 3 245 (EUR 3 630) million, down 11% from 2015 due to restructuring and disposals. Stora Enso divested the Arapoti Paper Mill in Brazil in late 2015 and the divestment was completed in March 2016. Divestment of the Suzhou Mill site in China was announced and paper production ceased in June 2016. Stora Enso's 33.33% ownership of the Swedish recycled materials company IL Recycling AB was divested in June 2016. Divestment of the Kabel coated magazine paper mill in Germany was completed in September 2016. Paper production ended in August 2015 at the Varkaus office paper mill which was converted into kraftliner mill.

Operational EBIT at EUR 211 (EUR 77) million was 174% up from 2015 due to lower variable costs and tight fixed costs management. The foreign exchange rate impact including the hedging result was positive.

Other

EUR million 2016 2015
Sales 2 477 2 478
Operational EBITDA -8 9
Operational EBITDA margin -0.3% 0.4%
Operational EBIT1 43 64
Operational EBIT margin 1.7% 2.6%
Cash flow from operations1 136 148
Cash flow after investing activities1 101 111

1 See chapter non-IFRS measures at the end of the Report of the Board of Directors.

Sales of the segment Other at EUR 2 477 (EUR 2 478) million were on the same level as previous year.

Operational EBIT at EUR 43 (EUR 64) million was EUR 21 million down from previous year mainly due to lower market prices for energy.

Acquisitions and capital expenditure

Additions to fixed and biological assets including interest and internal costs capitalised in 2016 totalled EUR 729 (EUR 989) million. The total amount includes additions in biological assets, EUR 91 (EUR 77) million.

The group continued to further invest in strategic focus areas and transformation. The ramp-up of Beihai Mill is proceeding ahead of plan. The consumer board machine is expected to reach full production within 18-24 months from the start-up in May 2016. The capital expenditure at Beihai Mill during 2016 totalled approximately EUR 199 (EUR 394) million, excluding forestry and the on-going EUR 31 million polyethylene (PE) coating investment.

The investment of EUR 43 million in a new line for wooden building components (LVL) at Varkaus Mill started operations in June and is ramping up as planned. Full production is expected in mid-2018. The estimated yearly capacity of the production line will be around 100 000 m3 .

Investment in a Xylose Demo Plant in Raceland, Louisiana, USA is proceeding at commissioning phase and is estimated to start operations by the end of the second quarter of 2017. At Ala Sawmill in Sweden, the investment in the new boiler and pellet production is estimated to start during the first quarter of 2017. At Honkalahti Sawmill in Finland, the new boiler is estimated to be in operation during the third quarter of 2017.

In March, Stora Enso announced investment of EUR 16 million in a new chemical plant at the consumer board mill in Skoghall, Sweden, to further improve the environmental performance of the mill. In the Biomaterials division, Stora Enso announced an investment of EUR 16 million to improve the environmental performance by reducing sulphur emissions of its mill in Skutskär, Sweden. These investments are expected to be completed by the end of 2017.

In May Stora Enso announced a EUR 70 million investment in a new polyethylene (PE) extrusion coating plant and an automated roll warehouse (ARW) at Imatra mills in Finland. The investment will enhance Stora Enso's ability to meet increasing customer demand for food service board and liquid packaging board. The investment is expected to be completed during the fourth quarter of 2017.

In June, Stora Enso announced an investment of approximately EUR 27 million in Skutskär pulp mill in Sweden to increase its fluff capacity to meet the growing demand in the hygiene market. The investment supports Stora Enso's strategy of transforming into a customer-focused renewable materials growth company. The aim is to develop further the current market pulp business and to focus more on growth segments. The total fluff pulp capacity of the mill after the investment will amount to 415 000 tonnes. The investment is expected to be completed during the second quarter of 2018.

In September, Stora Enso announced plans to consolidate corrugated packaging production in Finland. Stora Enso's corrugated packaging plant in Heinola will be closed permanently and packaging manufacturing transferred to the Lahti plant. Stora Enso will invest approximately EUR 19 million in new machinery and supporting infrastructure in Lahti, where the most important individual investment item is a new corrugator. The project is expected to be finalised by the end of the first quarter of 2018.

Research and development

Stora Enso's expenditure on research and development (R&D) in 2016 was EUR 132 (EUR 124) million, equivalent to 1.3% (1.2%) of sales.

The company focuses on five R&D themes ('Biobased chemistry', 'Materials sciences', 'Process solutions', 'Forestry and Renewable Feedstock' as well as 'Internet of Things (IoT) and Industrial Digitalisation'). Examples of activities within the R&D themes are biobased barriers, micro materials, composites, biotechnology (biochemistry), printed intelligence and wood-based building solutions.

Intellectual Property is important for protecting, defending and creating value to Stora Enso's business. During 2016 Stora Enso continued to strengthen its patent portfolio, with 50 priority founding patent applications filed and over 300 patents granted worldwide. This is an all-time high when it comes to priority patent filings for Stora Enso Oyj.

The strong effort to replace fossil-based chemicals and polymers with high performing bio-based chemicals continued during 2016, with the focus on developing customer value in selected entry segments. The demo plant at Raceland for converting biomass into highly refined sugar is making progress and will deliver Xylose in the beginning of 2017.

The Innovation Centre in Stockholm is another important step on the road towards Stora Enso's transformation into a renewable materials company. It helps to build on the company's long, worldwide tradition in forestry, which – when coupled with access to sustainable raw materials and our expertise in fibres – gives us an excellent starting point for creating solutions that will benefit our customers and endusers in various industries and markets.

In May 2016, Stora Enso signed a joint technology development and license agreement with Rennovia. The two companies will cooperate to develop processes for biobased chemicals of interest to Stora Enso, employing Rennovia's high-throughput catalyst discovery infrastructure and expertise in process development.

The Innovation Centre for packaging, located at the group's head office in Helsinki, has turned out to be an excellent venue for innovation and R&D work. At the centre Stora Enso, together with customers and other stakeholders, can develop innovative and sustainable packaging concepts. The centre offers, among other things, a packaging design

lab and, presentation areas with advanced touch screen technology and virtual reality retail technology. More than 200 events were organised at the Innovation Centre for Packaging within one year.

Stora Enso's priority in 2016 was aligning the R&D Innovation process within the whole organisation, focusing on the different ideation platforms. Now, the target is having a common tool for the whole company.

Stora Enso has established new funds for CAPEX and Innovation and Digitalisation, from which the Consumer Board has been allocated capital expenditure for the further development of micro-fibrillated cellulose (MFC) and Intelligent Packaging. Also the Packaging Solutions division was allocated funds from the Digitalisation fund. The new MFC investments announced for Imatra and Fors mills are supported by the fund, as well as pilot cases of Intelligent Packaging and investments to accelerate commercialisation. In addition, Hylte Mill has received support for the biocomposite granule investment.

Development of the pre-commercial micro-fibrillated cellulose (MFC) plant at Imatra continued in 2016. The first commercial board with significantly reduced grammage thanks to MFC is well accepted on the market. Development and testing of MFC applications outside the field of paper and board are also in progress.

Development of intelligent packaging solutions is still continuing, targeting the integration of Radio Frequency Identification (RFID) into packages for consumer engagement and supply chain purposes as well as brand protection and tamper evidence applications. The first pilot cases with brand owners are in place.

Forest biology and biotechnology continue to be a major area of R&D, partly in collaboration with SweTree Technologies Ltd, but also with other research organisations.

As a founder member of the European Union's Bio-based Industries Consortium (BIC), Stora Enso has been strongly involved in preparation of the Strategic Research and Innovation Agenda and the annual work programmes of the newly established Bio-Based Industries Initiative Joint Undertaking, a new public-private partnership within the EU Horizon 2020 research programme. Stora Enso is partner in two running projects and active in several Confederation of European Paper Industries (CEPI) groups as well as in FTP (Forest Technology Platform) to strengthen our voice towards European and national policy makers and research funding organisations.

As a part of the announced strategic partnerships with the three leading Nordic Technical Universities research workshops were set up at Chalmers TU in Gothenburg (Sweden) and at Aalto University in Espoo (Finland) in autumn 2016. The aim was to build clearer understanding of how our needs and the universities' capabilities can meet, first and foremost in the research arena around the Stora Enso Research themes and the long-term research needs in the divisions. The second target was to widen the contact network. The third target was to identify topics where we have a special interest regarding the universities' Bachelor and Master programs, as well as also for recruiting talents to mills and research/innovation centres.

Personnel

On 31 December 2016, there were 25 447 (25 680) employees in the group. The average number of employees in 2016 was 26 269, which was 514 lower than the average number in 2015. The numbers include 50% of employees at Veracel in Brazil and Montes del Plata in Uruguay.

In April 2016, the group completed the earlier announced divestment of Arapoti Mill in Brazil, employing approximately 320 people. In June, the group announced the divestment of Kabel Mill in Germany, employing approximately 540 people. The divestment of Kabel Mill was completed in September. Also in June, the group closed the Suzhou paper mill in China, affecting approx. 500 people. In September, the group announced to close the Heinola corrugated plant in Finland and the consolidation of the manufacturing of corrugated packaging to its Lahti plant in Finland. The co-determination negotiations were finalised in November and are expected to affect approx.50 people.

Personnel expenses totalled EUR 1 334 (EUR 1 313) million or 13.6% of sales. Wages and salaries were EUR 1 006 (EUR 987) million, pension costs EUR 165 (EUR 160) million and other employer costs EUR 163 (EUR 166) million.

At the end of 2016, the groups' top three countries in respect to number of employees were Finland, Sweden and China. 26% (24%) of employees were women.

Personnel turnover in 2016 was 22.9% (17.9%). The high personnel turnover is mainly due to the Corrugated Packaging units in China where the competition in the local market has resulted in high annual employee turnover. The group absenteeism rate due to sickness and accidents was 3.0% (3.1%) of total theoretical working hours.

Employee-related information including personnel strategy is discussed in more detail in the group's Sustainability Report 2016 and the Progress Book 2016.

Remuneration to the Board of Directors and key management is described in Note 7 of the Financial Report.

Sustainability

Stora Enso's Sustainability policy describes the group's overall approach to this important topic. It focuses on areas which Stora Enso has identified as priorities. Stora Enso's sustainability strategy is incorporated into the wider company business strategy.

During 2016 Stora Enso introduced a new framework for the group's sustainability work, to build on all the work done over many years in this field. The new agenda builds a framework based on the classic Triple Bottom Line model widely used in corporate responsibility work. Stora Enso's Sustainability Agenda encompasses the social, environmental, and economic responsibility of the group's operations throughout the value chain. The agenda addresses ten topics of sustainability that are material to Stora Enso: Human Rights; Employees and wider workforce; Community; Business Ethics; Materials, water, and energy; Carbon dioxide; Forests, plantations, and land use; Customers; Suppliers; and Investors.

In line with the Sustainability Agenda the group has set ambitious targets and selected key performance indicators (KPIs) for its work. Progress is monitored in group-level and division-level business reviews. Consolidated results on all material sustainability indicators are reported annually.

Sustainability is the responsibility of line management supported by subject matter experts throughout the group. Each business division also has its own Head of Sustainability who reports directly to the Executive Vice President of the division. Stora Enso's sustainability work is steered by the Sustainability Council, whose members come from the group's five divisions, Sourcing and Logistics, and group Sustainability team. The CEO carries ultimate responsibility for successful implementation of Stora Enso's Sustainability Agenda.

More information on Stora Enso's approach to sustainability and consolidated results on all material sustainability key performance indicators are published in the separate Sustainability Report 2016. The report contents have been assured by an independent third-party assurance provider with a level of limited assurance. A level of reasonable assurance has been provided for Stora Enso's direct and indirect fossil CO2 emissions. The Board of Directors' Sustainability and Ethics Committee has reviewed the disclosures in the Sustainability Report.

Environmental investments and liabilities

In 2016 Stora Enso's environmental investments amounted to EUR 41 (EUR 41) million. These investments were mainly to improve the quality of air and water, to enhance resource efficiency and energy selfsufficiency, and to minimise the risk of accidental spills.

Stora Enso's environmental costs in 2016 excluding interest and including depreciation totalled EUR 172 (EUR 183) million. These costs include taxes, fees, refunds, permit-related costs, and repair and maintenance costs, as well as waste water treatment chemicals and certain materials.

Provisions for environmental remediation amounted to EUR 100 (EUR 91) million at 31 December 2016, details of which are in Note 22, Other Provisions. There are currently no active or pending legal claims concerning environmental issues that could have a material adverse effect on Stora Enso's financial position. Cost related to environmental remediation measures amounted to EUR 9 (6) million.

Risks and risk management

Our approach to risk management

Risk is an integral component of business, and it is characterised by both threat and opportunity. Stora Enso is committed to ensuring that systematic and holistic management of risks and opportunities is a core capability and an integral part of all group activities, and that a risk aware corporate culture is fostered in all decision making. Through consistent application of dynamic risk analysis, we manage risk in order to enhance opportunities and reduce threats to achieve competitive advantage.

Risk governance

Stora Enso defines risk as events or developments that may adversely affect the achievement of company values, objectives and goals. The

Group Risk Policy, which is approved by the Board of Directors, sets out the overall approach to governance and management of risks in accordance with the COSO (Committee of Sponsoring Organizations) framework and in line with the ISO 31000 standard.

The Board retains the ultimate responsibility for the overall risk management process and for determining what an appropriate and acceptable level of risk is. The Board has established the Financial and Audit Committee to provide support to the Board in relation to the monitoring of the adequacy of the risk management process within Stora Enso, and specifically regarding the management and reporting of financial risks. The Sustainability and Ethics Committee is responsible for overseeing the company's sustainability and ethical business conduct, its' strive to be a responsible corporate citizen, and its contribution to sustainable development.

The head of Enterprise Risk Management is responsible for the design, development and monitoring of the top-down implementation of the group risk management framework. Each division head, together with their respective management teams, are responsible for process execution and cascading the framework and guidelines further down in the organisation. Internal Audit evaluates the effectiveness and efficiency of the Stora Enso Risk Management Process.

Risk management process

In connection with the annual strategy process, business divisions and group service and support functions conduct a holistic baseline risk assessment, linked to their key objectives. Specific guidance regarding the Risk Management Process is outlined in the Enterprise Risk Management instructions, distributed with annual Strategy Guidelines.

Business entities and functions identify the sources of risk, events including changes in circumstances and their causes and potential consequences thereof. Stora Enso's Risk Model outlines the overall risk universe which is used to support holistic risk identification and risk consolidation, while also providing taxonomy as well as consistency to risk terminology. Risk appetite is determined across main risk categories on the business division level.

Risk analysis involves developing an understanding of the risk to provide an input to risk evaluation. The purpose of risk evaluation is to determine risk priorities and to support decision making to determine which risks need treatment/actions. Risks are assessed in terms of impact and likelihood of occurrence. Pre-defined impact scales consider financial, people and reputational impacts, on both a quantitative and qualitative basis.

Risk treatment involves selecting one or more risk management option, such as avoidance, reduction, sharing and retention. Additional risk mitigation actions are determined for risks which exceed perceived risk tolerance incorporating assignment of responsibility, schedule and timetable of the risk treatment actions.

Following the annual baseline assessment, prioritised and emerging risks, the evaluation as well as the corresponding risk mitigation and business continuity plans related to those risks, are reviewed in divisional business review meetings on a quarterly basis.

Despite the measures taken to manage risks and mitigate the impact of risks, and while some of the risks remain beyond the direct control of management, there can be no absolute assurance that risks, if they occur, will not have a materially adverse effect on Stora Enso's business, financial condition, operating profit or ability to meet financial obligations.

Main risk factors

Macroeconomic, geopolitical and foreign currency risks

The group operates in more than 35 countries and is affected by the global economy. Changes in broad economic conditions, sharp market corrections, increasing volatility in foreign exchange rates and chronic fiscal imbalances could have negative and material impact on our profit, cash flows and financial position. Prolonged global recession, may materially and adversely affect Stora Enso's performance and financial condition. A recession may also materially affect our customers, suppliers and other parties with which we do business. Exchange rate fluctuations may have a material impact on the reported results through transaction and translation risk impact.

A significant and sustained economic downturn, or any similar event, could have a material adverse effect on the group's operational performance and financial condition. The group's reported results may fluctuate as average exchange rates change, and reported net assets may fluctuate as the period-end exchange rate changes.

The group has a diversified portfolio of businesses that mitigates exposure to any one country or product segment. We monitor the external environment continuously and our planning assumptions take account of important near- to medium-term and long-term drivers related to key macro-economic factors. We closely monitor the Boardapproved risk appetite measures for specific financial metrics and actively manage cash flow and liquidity. We hedge 50% of the highly probable 12 months net foreign exchange flows in main currency pairs. Fx translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset. Financial risks are discussed in detail in Note 24. The divisions regularly monitor their order flows and other leading indicators, where available, so that they may respond quickly to deterioration in trading conditions. In the event of a significant economic downturn, the Group would identify and implement cost reduction measures to offset the impact on margins from deterioration in sales.

Ethics and compliance

Stora Enso operates in highly regulated business and is thereby exposed to risks related to breach of applicable laws and regulations (e.g capital markets regulation, company and tax laws, customs regulation and safety regulation) and breach of group policies such as Code of Conduct, Supplier Code of Conduct and Business Practice Policy regarding fraud, anti-trust, corruption, conflict of interests and

other misconduct. Stora Enso may face high compliance and remediation costs under environmental laws and regulations. See also Information systems and information security.

Potential impacts include prosecution, fines, penalties, and contractual, financial and reputational damage.

Stora Enso's Ethics and Compliance Programme, including policy setting, value promotion, training and knowledge sharing and grievance mechanisms is kept continuously up to date and developed. Other compliance mechanisms include Stora Enso group's internal control system and Internal Audit assurance, Supplier Code of Conduct in supplier contracts, supplier risk assessments, supplier trainings, supplier audits and black-listing procedures.

In response to capital markets regulations, Stora Enso's Disclosure Policy emphasises the importance of transparency, credibility, responsibility, proactivity and interaction.

Environmental risks are minimised through environmental management systems and environmental due diligence for acquisitions and divestments, and indemnification agreements where effective and appropriate remediation projects are required. Special remediation projects related to discontinued activities and mill closures are executed based on risk assessments.

Strategic investments

Stora Enso's business strategy is to transform from a traditional paper and board producer to a customer-focused renewable materials growth company. The success of this transformation depends on our ability to understand the needs of the customer and find the best way to serve them with the right offering and with the right production asset portfolio. Failure to complete strategic projects in accordance with the agreed schedule, budget or specifications can have serious impacts on our financial performance. Significant, unforeseen changes in costs or an inability to sell the envisaged volumes or achieve planned price levels may prevent us from reaching our business goals.

Risks are mitigated through profound and detailed pre-feasibility and feasibility studies which are prepared for each large investment. Group investment guidelines stipulate the process, governance, risk management and monitoring procedures for strategic projects. Environmental and Social Impact Assessments (ESIAs) are conducted for all new projects that could cause significant adverse effects in local communities. Post completion audits are carried out for all significant investments.

Global warming

Changes in precipitation patterns, typhoons and severe frost periods in the subtropics could cause damage to tree plantations. Increases in the temperature could lead to changes in the tree species composition of forests, accelerated by insect outbreaks. Milder winters and shorter periods of frozen soils could impact harvesting and transport of wood and thus affect the stability of raw material supply and increase costs. Additional demand for bioenergy and agricultural land may limit the availability of land for fibre production, affecting the price of biomass. The increasing global demand for water may in the long-term impact our operations through our supply chains.

Stora Enso is committed to contribute and mitigate the effects of climate change by actively seeking opportunities to reduce the group's carbon footprint. Risks related to climate change are managed via activities related to finding clean, affordable and safe energy sources for production and transportation, and reducing energy consumption. Additional measures include energy efficiency initiatives, use of carbonneutral biomass fuels, maximising utilisation of combined heat and

power, and sequestration of carbon dioxide in forests and products. Diligent plantation planning is ensured to avoid frost sensitive areas and non-controversial tree breeding and R&D programmes are applied to increase tolerance of extreme temperatures. Stora Enso maintains a diversity of forest types and structures and enforces diversification in wood sourcing. Wood harvesting in soft soils involves implementation of best practices guidelines. Agroforestry concepts are introduced to integrate the different land use forms and to mitigate the competition on land and the effects of raising food prices.

Regulatory changes and political risks

The group's businesses may be affected by political or regulatory developments in any of the countries and jurisdictions in which the group operates, including changes to fiscal, tax, environmental or other regulatory regimes. Potential impacts include higher costs and capex to meet new environmental requirements, expropriation of assets, imposition of royalties or other taxes targeted at our industry, and requirements for local ownership or beneficiation. In particular, the EU energy and carbon policies may impact upon the availability and price of wood fibre. Also political instability can result in civil unrest, nullification of existing agreements, harvesting permits or land leases. Unpredicted changes in forest certification schemes could limit the availability of certified raw material.

Stora Enso follows and actively participates in the development of environmental and other legislation to minimise any adverse effects on its business. Forest management certification and chain-of-custody certification are tools for managing risks related to the acceptability of wood.

Mergers, acquisitions, divestures and restructuring

Failure to achieve the expected benefits from any acquisition or value from assets or businesses sold can have serious financial impacts. The group could find itself liable for past acts or omissions of the acquired business, without any adequate right of redress. Failure to achieve expected values from the sales of assets or deliveries beyond expected receipt of funds may also impact the group's financial position.

In connection with an acquisition, past practices by the target such as in relation to pollution, competition law compliance or corruption could result in additional costs for Stora Enso and cause reputational damage. Divestments may involve additional costs due to historical and unaccounted liabilities. Business restructuring may involve reputational impacts.

Rigorous M&A guidelines, including due diligence procedures are applied to the evaluation and execution of all acquisitions that require the approval of the Board. Structured governance and policies such as policy for responsible right- sizing, are followed when taking restructuring decisions.

Information technology and information security

The group is dependent on information technology systems for both internal and external communications and for the day-to-day management of its operations. The group's information systems, personnel and facilities are subject to cyber security risk. Failure to capitalise on digitalisation and cognitive technologies could impair Stora Enso's competitiveness. Other IT related risks relate to potential unavailability of IT services due to human error in operations, damaged hardware in data rooms and data centres, network connection issues and suppliers' failure to follow service level agreements.

Accidental disclosure of confidential information due to failure to follow information handling guidelines or accident or criminal act resulting in financial damage, penalties, disrupted or delayed launch of new lines of business or ventures, loss of customer and market confidence, loss of research secrets and other business critical information. Loss of backup media and violation of data privacy regulations.

Management of risks is actively pursued within the Information Risk Management System and best practice change management and project methodologies are applied. A number of security controls have been implemented to strengthen the protection of confidential information and to facilitate compliance with international regulations. Specific measures include thorough request for proposal (RfP) process in supplier selection for business-critical services, supplier audits, annual controls and audit, data centres located in low-risk areas, backup connections for critical services, disaster recovery plans, targeted scanning and investigation activities, encryption of communication, information and devices, remote management of security on devices and information security awareness training.

Health and safety

Failure to maintain high levels of safety management can result in harm to the group's employees or contractors, and also to communities near our operations and the environment.

Impacts in addition to physical injury, health effects and environmental damage could include liability to employees or third parties, impairment of the group's reputation, or inability to attract and retain skilled employees. Government authorities could additionally enforce the closure of our operations on temporary basis.

Stora Enso measures its performance in health and safety through lag indicators on accidents and near-misses, and lead indicators on safety observations. The target in safety is zero accidents, but demanding milestones have also been set for accident and incident rates. Stora Enso has adopted a common model for safety management, establishing a set of safety tools that all units must implement in their operations. Implementation of the tools is followed up and reported monthly, and support is offered to units through training, coaching and best-practice sharing. The main responsibility for identifying and managing safety risks remains with the units. At mill level, safety and health risks are assessed jointly, in co-operation with the occupational health service providers. Global health and safety risks are monitored and assessed by group Occupational Health and Safety function.

Product safety

Some of our products are used to package liquids and food consumer products, so any defects could affect health risks or packaging functions, and result in costly product recalls. Our wood products are incorporated into buildings, and this may involve product liability resulting from failures in structural design, product selection or installation.

Failure to ensure product safety could result in product recalls involving significant costs including compensation for indirect costs of customers, and reputational damage.

The mills producing food and drink contact products have established certified hygiene management systems based on risk and hazard analysis. To ensure the safety of its products, Stora Enso actively participates in CEPI (Confederation of European Paper Industry) working groups on chemical and product safety. In addition, all Stora Enso mills have certified ISO quality management systems. Also, contractual liability limitation and insurance protection are used to limit the risk exposure to Stora Enso.

Competition and market demand

Continued competition and supply and demand imbalances in the paper, packaging, pulp and wood products markets may have an impact on profitability. The paper, pulp, packaging and wood products industries are mature, capital intensive and highly competitive. Stora Enso's principal competitors include a number of large international forest products companies and numerous regional and more specialised competitors. Customer demand for products is influenced by general economic conditions and inventory levels, and affects product price levels. Product prices, which tend to be cyclical in this industry, are affected by capacity utilisation, which decreases in times of economic slowdowns. Changes in prices differ between products and geographic regions.

The table below shows the operating profit sensitivity to a +/- 10% change in either price or volume for different segments based on figures for 2016.

Operating Profit: Impact of Changes +/- 10%, EUR million

Segments Price Volume
Consumer Board 220 84
Packaging Solutions 97 37
Biomaterials 131 59
Wood Products 156 37
Paper 301 83

The ability to respond to changes in product demand and consumer preferences and to develop new products on a competitive and economic basis calls for innovation capabilities, continuous capacity management and structural development. The risks related to factors such as demand, price, competition and customers are regularly monitored by each division and unit as a routine part of business management. These risks are also continuously monitored and evaluated on group level to get a perspective of the group's total asset portfolio and overall long-term profitability potential.

Community relations and social responsibility

Social risks may harm existing operations and the execution of investments, especially in growth markets. Failure to successfully manage relationships with local communities and non-governmental organisations (NGOs) could disrupt our operations and adversely affect the group's reputation. The group operates in certain countries where land and resource ownership rights remain unclear, and where related disputes may arise.

Potential impacts include reputational impacts and negative media coverage, harm to communities and rights holders, disruption of operations, losing the licence to operate.

Stora Enso strives to identify and minimise risks related to social issues in good time, in order to guide decision-making in its investment processes as well as in ongoing operations. Tools such as sustainability risk assessment, human rights due diligence and Environmental and Social Impact Assessments (ESIA) help ensure that no unsustainable projects Fare initiated and all related risks and opportunities are fully understood in all operations. They also enable project plans and operating practices to be adapted to suit local circumstances. More

information on community engagement is presented in Stora Enso's Sustainability report.

Sourcing

Increasing input costs of energy, fibre, chemicals, other raw materials, transportation and labour may adversely affect Stora Enso's profitability. Securing access to reliable low-cost supplies and proactively managing costs and productivity are of key importance. Reliance on outside suppliers for natural gas, oil and coal, and for peat and nearly half of the electricity consumed, leaves the group susceptible to changes in energy market prices and disturbances in the supply chain.

The next table shows Stora Enso's major cost items.

Composition of Costs in 2016

Operative Costs % of Costs % of Sales
Logistics and
commissions
11 10
Manufacturing Costs
Fibre 34 31
Chemicals and fillers 9 9
Energy 7 6
Material 6 6
Personnel 15 14
Other 12 11
Depreciation 6 5
Total Costs and Sales 100 92
Total operative Costs
and Sales in EUR
million
8 998 9 802
Equity accounted
investments (EAI),
operational
80
Operational EBIT 884

In many areas Stora Enso is dependent on suppliers and their ability to deliver a product or a service at the right time and of the right quality. The most important products are fibre, chemicals and energy, and machinery and equipment in capital investment projects. The most important services are transport and various outsourced business support services. For some of these inputs, the limited number of suppliers is a risk.

Input cost volatility is closely monitored at business unit, divisional and group level. The group applies consistent long-term energy risk management. The price and supply risks are mitigated through increased own generation, shareholding in competitive power assets such as PVO/TVO, physical long-term contracts and financial derivatives. The group hedges price risks in raw material and endproduct markets, and supports development of financial hedging markets. The group uses a wide range of suppliers and monitors them to avoid situations that might jeopardise continued production, business transactions or development projects.

Suppliers and subcontractors must also comply with Stora Enso's sustainability requirements as they are part of Stora Enso's value chain, and their weak sustainability performance could harm Stora Enso and its reputation. Stora Enso's sustainability requirements for suppliers and audit schemes cover its raw materials, and other goods and services procured. Suppliers are assessed for risks related to their environmental, social and business practices through self-assessment questionnaires and supplier audits. Findings from such assessments are continuously followed up and progressive blacklisting procedures are applied as necessary.

Environmental and social responsibility in wood procurement and forest management is a prime requirement of stakeholders. Failing to ensure that the origin of wood used by the group is acceptable could have serious consequences in markets. Stora Enso manages this risk through its policies for sustainable sourcing of wood and fibre, and for land management, which set the basic requirements for all Stora Enso wood procurement operations. Traceability systems are used to document that all wood and fibre come from legal and acceptable sources.

People and empowerment

Recruiting, retaining and developing a competent workforce and managing key talent throughout Stora Enso's global organisation are crucial to the success of the group. Competition for personnel is intense and the group may not be successful in attracting or retaining qualified personnel. A significant portion of Stora Enso employees are members of labour unions and there is a risk that the group may face labour market disruptions especially at a time of restructuring and redundancies due to divestments and mill closures.

The loss of key employees, the group's inability to attract new or adequately trained employees, or a delay in hiring key personnel could seriously harm the Group's business and impede the group and its' business divisions from reaching their strategic objectives. Labour market disruptions and strikes could have material adverse effects on the business, financial conditions and profitability.

Stora Enso manages the risks and loss of key talents through a combination of different actions. Some of the activities aim at providing a better overview of the whole workforce of the group, making the Stora Enso employer brand better known both internally and externally, globalising some of the remuneration practices and intensifying the efforts to identify and develop talents. Finally, the group actively focuses on talent and management assessments, including succession planning for key positions. The majority of employees are represented by labour unions under several collective agreements in different countries where Stora Enso operates, thus relations with unions are of high importance to manage labour disruption risks.

Litigation

The international nature of the group's operations exposes it to the potential for litigation from third parties. Material levels of litigation may arise from many of the group's activities. Significant levels of litigation in our industry sector have in the past related mainly to major contracts and shareholder agreements. Acquisitions and disposals and the restructuring of under-performing businesses may also give rise to litigation. For more information on specific litigation and legal cases affecting the group, see Note 29, Commitments and contingencies. Secure best expertise in contract formulation, the assessment of litigation risk when entering into agreements.

Property and business disruption

Protecting production assets and business results is a high priority for Stora Enso to achieve the target of avoiding any unplanned production stoppages. This is done by structured methods of identifying, measuring and controlling different types of risk and exposure. Divisional risk specialists manage this process together with insurance companies and other loss prevention specialists. Each year a number of technical risk inspections are carried out at production units. Risk mitigation programmes and cost-benefit analysis of proposed investments are managed by internal reporting and risk assessment tools. Internal and external property loss prevention guidelines, fire loss control assessments, key machinery risk assessments and specific loss prevention programmes are also utilised.

Planned stoppages for maintenance and other work are important in keeping machinery in good condition. Formal computerised preventive maintenance programmes and spare part criticality analysis are utilised to secure a high availability and efficiency of key machinery. Striking a balance between accepting risks and avoiding, treating or sharing risks is a high priority. Risk managers are responsible for ensuring that divisions have adequate insurance cover and support units in their loss prevention and loss control work.

Personnel security risks

Personnel security can never be compromised and thus Stora Enso must be aware of potential security risks and give adequate guidelines to people for managing risks related to, for example, travel, work and living in countries with security or crime concerns. Focusing on the security of key personnel is also important from a business continuity perspective. Stora Enso constantly monitors risks related to personnel security, including health issues, and information is available on the Intranet and delivered directly to travelling employees. An external service provider takes care of action in medical or security crises, under guidance from Stora Enso's crisis management team. The crisis management team is chaired by the Head of Human Resources, who is a Group Leadership Team member.

Natural catastrophe risks

Stora Enso has to acknowledge that natural catastrophes such as storms, flooding, earthquakes or volcanic activity may affect the group's premises and operations. However, most of the group's assets are located in areas where the probability of flooding, earthquakes and volcanic activity is low. The outcome of such catastrophes can be diminished by emergency and business continuity plans that have been proactively designed together with the relevant authorities.

Financial market

Stora Enso is exposed to several financial market risks that the group is responsible for managing under policies approved by the Board of Directors. The objective is to have cost-effective funding in group companies and manage financial risks using financial instruments to decrease earnings volatility. The main exposures for the group are interest rate risk, currency risk, funding risk, commodity price risk and credit risk.

Financial risks are discussed in detail in Note 24, Financial risk management.

Financial reporting and critical accounting judgements

Critical accounting judgements are described in Note 2 Critical accounting estimates and judgements. Internal control over financial reporting is discussed in the Corporate Governance Report.

Corporate governance in Stora Enso

Stora Enso' complies with the Finnish Corporate Governance Code 2015 issued by the Securities Market Association (the "Code"). The Code is available at www.cgfinland.fi. Stora Enso's Corporate Governance also complies with the Swedish Corporate Governance Code ("Swedish Code"), which has been applicable to Stora Enso as a foreign company from 1 January 2011, with the exception of the deviations that are listed in Appendix 1 of the Corporate Governance Report. The deviations are due to differences between the Swedish and Finnish legislation, governance code rules and practices, and in these cases Stora Enso follows the practice in its domicile. The Swedish Code is issued by the Swedish Corporate Governance Board and is available at www.corporategovernanceboard.se.

Legal proceedings in Finland

In December 2009, the Finnish Market Court fined Stora Enso for competition law infringements in the market for roundwood in Finland from 1997 to 2004. Stora Enso did not appeal against the ruling. In March 2011 Metsähallitus of Finland initiated legal proceedings against Stora Enso, UPM and Metsäliitto claiming compensation for damages allegedly suffered due to competition law infringements. The total claim against the defendants amounted to approximately EUR 160 million and the secondary claim against Stora Enso to approximately EUR 87 million. In its ruling issued in June 2016, the Helsinki District Court dismissed Metsähallitus' claim for damages against Stora Enso, Metsäliitto and UPM. Metsähallitus has appealed this ruling. In addition, certain Finnish municipalities and private forest owners initiated similar legal proceedings. The total amount claimed from the defendants amounts to approximately EUR 25 million, the secondary claims solely against Stora Enso amount to approximately EUR 6 million. Stora Enso denies that the plaintiffs suffered any damages whatsoever and will forcefully defend itself. No provisions have been made in Stora Enso's accounts for these lawsuits.

Legal proceedings in Latin America

Veracel

Fibria and Stora Enso each own 50% of Veracel, and the joint ownership is governed by a shareholder agreement. In May 2014, Fibria initiated arbitration proceedings against Stora Enso claiming that Stora Enso was in breach of certain provisions of the shareholder agreement. Fibria has estimated that the interest to be paid regarding the dispute should be approximately USD 54 (EUR 51) million. Stora Enso denies any breach of contract and disputes the method for calculating the interest to be paid. No provisions have been made in Stora Enso's accounts for this case.

On 11 July 2008, Stora Enso announced that a federal judge in Brazil had issued a decision claiming that the permits issued by the State of Bahia for the operations of Stora Enso's joint operations company Veracel were not valid. The judge also ordered Veracel to take certain actions, including reforestation with native trees on part of Veracel's plantations and a possible fine of BRL 20 (EUR 6) million. Veracel disputes the decision and has filed an appeal against it. Veracel operates in full compliance with all Brazilian laws and has obtained all the necessary environmental and operating licences for its industrial and forestry activities from the relevant authorities. In November 2008, a Federal Court suspended the effects of the decision. No provisions have been recorded in Veracel's or Stora Enso's accounts for the reforestation or the possible fine.

Legal proceedings in Sweden

Insurance claim

Stora Enso was informed in July that six Swedish Insurance companies are filing lawsuits against Stora Enso. The claimed amount is approximately SEK 300 (EUR 31) million attributable to insurance compensation paid to injured parties in connection with the forest fire in Västmanland, Sweden in 2014. Stora Enso denies liability and will respond within the frame of the legal proceedings.

Changes in organisational structure and group management

Changes in group management

On 31 October 2016 Stora Enso announced the appointment of Annica Bresky as Executive Vice President, Consumer Board division and new member of the Group Leadership Team. She will join Stora Enso at the latest by 1 May 2017.

On 1 November 2016 Malin Bendz started as Executive Vice President, Human Resources and became a new member of the Group Leadership Team.

Jari Latvanen, Executive Vice President, Consumer Board division was a member of the Group Leadership Team until 28 October 2016.

Lars Häggström, Executive Vice President, Human Resources was a member of the Group Leadership Team until 31 October 2016.

Share capital

Stora Enso Oyj's shares are divided into A and R shares. The A and R shares entitle holders to the same dividend but different voting rights. Each A share and each ten R shares carry one vote at a shareholders' meeting. However, each shareholder has at least one vote.

During 2016, a total of 25 000 A-shares converted into R-shares were recorded in the Finnish Trade Register. On 31 December 2016, Stora

Enso had 176 507 090 A shares and 612 112 897 R shares in issue. The company did not hold its own shares. The total number of Stora Enso shares in issue was 788 619 987 and the total number votes at least 237 718 380.

The Board of Directors is not currently authorised to issue, acquire or dispose of shares in the Company.

Major shareholders as at 31 December 2016

By voting power A shares R shares % of shares % of votes
1 FAM AB1 63 123 386 17 000 000 10.2% 27.3%
2 Solidium Oy2 55 595 937 41 483 501 12.3% 25.1%
3 Social Insurance Institution of Finland 23 825 086 2 275 965 3.3% 10.1%
4 Varma Mutual Pension Insurance Company 15 572 117 140 874 2.0% 6.6%
5 MP-Bolagen i Vetlanda AB, (Werner von Seydlitz dödsbo) 4 803 000 3 507 000 1.1% 2.2%
6 Ilmarinen Mutual Pension Insurance Company 3 492 740 13 781 189 2.2% 2.0%
7 Erik Johan Ljungberg's Education Foundation 1 780 540 2 336 224 0.5% 0.8%
8 Swedbank Robur Funds - 11 032 722 1.4% 0.5%
9 The State Pension Fund - 8 500 000 1.1% 0.4%
10 Bergslaget's Healthcare Foundation 626 269 1 609 483 0.3% 0.3%
11 Nordea Investment Funds - 6 879 179 0.9% 0.3%
12 Unionen (Swedish trade union) - 5 297 200 0.7% 0.2%
13 Keva (Local Government Pensions Institution) - 5 251 101 0.7% 0.2%
14 SEB Investment Management - 4 701 297 0.6% 0.2%
15 Investment Fund Nordea Suomi - 4 063 211 0.5% 0.2%
Total 168 819 075 127 858 946 37.8%3 76.4%3
Nominee-registered shares 74 514 851 442 620 022 65.6%3, 4 50.0%3, 4

1 As confirmed to Stora Enso.

2 Entirely owned by the Finnish State.

3 As some of the shareholdings on the list are nominee registered, the percentage figures do not add up to 100%.

4 According to Euroclear Finland.

The list has been compiled by the Company on the basis of shareholder information obtained from Euroclear Finland, Euroclear Sweden and a database managed by Citibank, N.A (Citi). This information includes only directly registered holdings, thus certain holdings (which may be substantial) of shares held in nominee or brokerage accounts cannot be included. The list is therefore incomplete.

Share Distribution, 31 December 2016

By size of holding, A share Shareholders % Shares %
1–100 3 192 41.52% 164 628 0.09%
101–1 000 3 844 50.00% 1 433 398 0.81%
1 001–10 000 618 8.04% 1 440 590 0.82%
10 001–100 000 28 0.36% 560 881 0.32%
100 001–1 000 000 0 0.00% 0 0.00%
1 000 001– 6 0.08% 172 907 593 97.97%
Total 7 688 100.00% 176 507 090 100.00%
By size of holding, R share Shareholders % Shares %
1–100 7 301 21.51% 454 230 0.07%
101–1 000 19 317 56.92% 8 552 753 1.40%
1 001–10 000 6 648 19.60% 17 873 618 2.92%
10 001–100 000 569 1.68% 15 667 168 2.56%
100 001–1 000 000 73 0.21% 24 741 284 4.04%
1 000 001 – 28 0.08% 544 823 844 89.01%
Total 33 936 100.00% 612 112 897 100.00%

According to Euroclear Finland.

Ownership Distribution, 31 December 2016

% of shares % of votes
FAM AB 10.2% 27.3%
Solidium Oy1 12.3% 25.1%
Under nominee names (non-Finnish/non-Swedish shareholders) 44.3% 14.8%
Finnish institutions (excl. Solidium and KELA) 13.3% 11.8%
Social Insurance Institution of Finland (KELA) 3.3% 10.1%
Swedish institutions (excl. FAM) 6.6% 5.2%
Finnish private shareholders 4.3% 2.6%
Swedish private shareholders 3.7% 2.4%
ADR holders 2.0% 0.7%
Total 100.0% 100.0%

1 Entirely owned by the Finnish State.

Near-term outlook and short term risks

Q1/2017 sales are estimated to be similar to the amount of EUR 2 438 million and operational EBIT is expected to be in line with the EUR 191 million recorded in Q4/2016. The Q1/2017 operational EBIT estimate includes the negative impacts of the ramp-up of Beihai operations and the power generator failure at Enocell Mill of EUR 34 million and EUR 10 million, respectively. There are no major scheduled annual maintenance shutdowns during Q1/2017.

Stora Enso will start a profit improvement programme targeting to decrease the annual costs by EUR 50 million with full annualised impact in 2018.

Increasing competition and supply and demand balances in the paper, pulp, packaging, wood products and roundwood markets may have an impact on our market share and profitability. Changes in global economic and political environment, sharp market corrections, increasing volatility in foreign exchange rates and deteriorating economic conditions in our main markets could all have impacts on Stora Enso's profits, cash flows and financial position.

Energy sensitivity analysis: the direct effect of a 10% increase in electricity, heat, oil and other fossil fuel market prices would have a negative impact of approximately EUR 8 million on operational EBIT for the next 12 months, after the effect of hedges.

Wood sensitivity analysis: the direct effect of a 10% increase in wood prices would have a negative impact of approximately EUR 183 million on operational EBIT for the next 12 months.

Pulp sensitivity analysis: the direct effect of a 10% increase in pulp market prices would have a positive impact of approximately EUR 110 million on operational EBIT for the next 12 months.

Chemical and filler sensitivity analysis: the direct effect of a 10% increase in chemical and filler prices would have a negative impact of approximately EUR 46 million on operational EBIT for the next 12 months.

A decrease of energy, wood, pulp or chemical and filler prices would have the opposite impact.

Foreign exchange rates sensitivity analysis for the next twelve months: the direct effect on operational EBIT of a 10% strengthening in the value of the US dollar, Swedish crown and British pound against the euro would be about positive EUR 129 million, negative EUR 87 million and positive EUR 32 million annual impact, respectively. Weakening of the currencies would have the opposite impact. These numbers are before the effect of hedges and assuming no changes occur other than a single currency exchange rate movement.

The group incurs annual unhedged net costs worth approximately EUR 150 million in Brazilian real (BRL) in its operations in Brazil. For these flows, a 10% strengthening in the value of BRL would have a EUR 15 million negative impact on operational EBIT.

Events after the balance sheet date

In January 2017, Stora Enso announced that it reconsiders the plans to build a chemical pulp mill in Beihai, China, and has initiated a process with the Government of Guangxi with the target to remove the authorisation for the hardwood chemical pulp mill from its investment permit. The Memorandum of Understanding has been signed.

In January 2017, Stora Enso announced that it is investing a total of EUR 9.1 million into its consumer board mills in Imatra and Ingerois, Finland, and Fors, Sweden, to continue the commercialisation of microfibrillated cellulose (MFC) and to accelerate product development.

In January 2017, Stora Enso announced that it will invest EUR 12 million to build a new production line manufacturing biocomposite granules with an annual capacity of approximately 15 000 tonnes at Hylte Mill in Sweden. Production is scheduled to begin during the first quarter of 2018.

Stora Enso has divested on 2 January 2017 its 100% shareholding in its Finnish subsidiary Formeca Oy, a provider of high-quality machines for automated packaging lines, to Amitec Oy, a specialised engineering and machine construction company based in Finland.

Proposal for the distribution of dividend

The Board of Directors proposes to the AGM that a dividend of EUR 0.37 per share be distributed for the year 2016.

The dividend would be paid to shareholders who on the record date of the dividend payment, 2 May 2017, are recorded in the shareholders' register maintained by Euroclear Finland Ltd. or in the separate register of shareholders maintained by Euroclear Sweden AB for Euroclear Sweden registered shares. Dividends payable for Euroclear Sweden registered shares will be forwarded by Euroclear Sweden AB and paid in Swedish crown. Dividends payable to ADR holders will be forwarded by Citibank N.A. and paid in US dollars.

The Board of Directors proposes to the AGM that the dividend be paid on or about 9 May 2017.

Annual General Meeting

The Annual General Meeting (AGM) will be held at 16.00 (Finnish time) on Thursday 27 April 2017 at Marina Congress Center, Katajanokanlaituri 6, Helsinki, Finland.

Non-IFRS measures

In 2016, Stora Enso changed the terminology in its reporting in accordance with the new guidelines from the European Securities and Markets Authority (ESMA) concerning Alternative Performance Measures. The term "Non-recurring items" (NRI) was changed to "Items affecting comparability" (IAC), but the definition remains the same. There are no changes in definitions and calculations of key figures.

The group's key non-IFRS performance metric is operational EBIT, which is used to evaluate the performance of its operating segments and to steer allocation of resources to them. Operational EBIT comprises the operating profit excluding items affecting comparability (IAC) and fair valuations from the segments and Stora Enso's share of the operating profit of equity accounted investments (EAI), also excluding Items affecting comparability and fair valuations.

Items affecting comparability are exceptional transactions that are not related to recurring business operations. The most common items affecting comparability are capital gains, additional write-downs or reversals of write-downs, provisions for planned restructuring and penalties. Items affecting comparability are normally disclosed individually if they exceed one cent per share.

Fair valuations and non-operational items include equity incentive schemes and related hedges, CO 2 emission rights, valuations of biological assets and the group's share of income tax and net financial items of EAI.

Operational EBITDA comprises the operating profit excluding operational decrease in the value of biological assets, fixed asset depreciation and impairment, share of results of equity accounted investments, IAC and fair valuations.

Cash flow from operations (non-IFRS) is a group specific way to present operative cash flow without hedging result from OCI and starting from Operational EBITDA instead of operating profit.

Cash flow after investing activities (non-IFRS) is calculated Cash flow from Operations (non-IFRS) excluding Cash spent on Intangible assets, Property, Plant and Equipment and biological assets and acquisitions of EAIs.

Change in the reporting of costs related to growth of biological assets

Stora Enso changed its reporting regarding the costs related to the growth of biological assets (i.e. growing trees) starting from the fourth quarter of 2016.

Costs related to the development of biological assets are capitalised on the balance sheet during the growth cycle (i.e. until the time of harvesting). At harvesting, the capitalised costs are transferred from biological assets to inventory. Prior to the change, Stora Enso has included the costs related to the growth of biological assets in its operational EBITDA.

From the fourth quarter of 2016 onwards, these growth costs ar e excluded from operational EBITDA and presented as Operational decrease in the value of biological assets. This change affects the following non-IFRS key figures: operational EBITDA, operational EBITDA margin, and net debt to last 12 months' operational EBITDA ratio. The historical figures are restated according to the new reporting structure. Restated figures are presented in Stora Enso Oyj stock exchange release, published on 8 December 2016.

There is no impact on operational EBIT, the subtotals of the official Condensed Consolidated Income Statement or the group's other IFRS figures.

Report of the Board of Directors 50

Operational EBIT margin Capital expenditure Capital employed

Calculation of key figures

Operational return on capital employed, operational Operational EBIT
ROCE (%) 100 x Capital employed1, 2
Operational return on operating capital, operational Operational EBIT
ROOC (%) 100 x Operating capital1, 2
Net profit/loss for the period
Return on equity, ROE (%) 100 x Total equity 2
Net interest-bearing net liabilities Interest-bearing liabilities – interest-bearing assets
Net interest-bearing net liabilities
Debt/equity ratio Equity3
Net profit/loss for the period3
EPS Average number of shares
Dividend distribution / share
Payout ratio, excl. IAC, % 100 x EPS excl. IAC
Dividend distribution / share
Dividend and distribution yield, % 100 x Closing price of share
Price/earnings ratio (P/E), excl. IAC Closing price of share
EPS excl. IAC
Operational EBIT Operating profit/loss excluding items affecting comparability (IAC) and fair
valuations of the segments and Stora Enso's share of operating profit/loss
excluding IAC and fair valuations of its equity accounted investments (EAI)
Operational EBITDA Operating profit/loss excluding operational decrease in the value of biological
assets, fixed asset depreciation and impairment, share of results of equity
accounted investments, IAC and fair valuations.
Last 12 months (LTM) 12 months prior to the reporting date
1 Capital employed = Operating capital – Net tax liabilities
2 Average for the financial period
3 Attributable to owners of the Parent
List of non-IFRS measures
Operational EBITDA
Operational EBITDA margin
Operational EBIT
Operational ROCE
Earnings per share (EPS), excl. IAC
Operational ROOC

Cash flow from operations Cash flow after investing activities Consolidated financial statements – Consolidated income statement 51

Consolidated financial statements

Consolidated income statement

Year Ended 31 December
EUR million
Note
2016 2015
Sales 3 9 802 10 040
Other operating income 5 123 128
Changes in inventories of finished goods and work in progress 9 18
Materials and services -5 833 -6 008
Freight and sales commissions -920 -970
Personnel expenses 6 -1 334 -1 313
Other operating expenses 5 -561 -503
Share of results of equity accounted investments 13 156 519
Change in net value of biological assets 12 -261 -89
Depreciation, amortisation and impairment charges 10 -398 -763
Operating Profit 3 783 1 059
Financial income 8 44 25
Financial expense 8 -286 -270
Profit before Tax 541 814
Income tax 9 -134 -31
Net Profit for the Year 407 783
Attributable to:
Owners of the Parent 18 463 807
Non-controlling Interests 19 -56 -24
Net Profit for the Year 407 783
Earnings per Share
Basic and diluted earnings per share, EUR 32 0.59 1.02

Consolidated financial statements – Consolidated statement of comprehensive income 52

Consolidated statement of comprehensive income

Year Ended 31 December
EUR million Note 2016 2015
Net profit for the year 407 783
Other Comprehensive Income (OCI)
Items that will Not be Reclassified to Profit and Loss
Actuarial losses/gains on defined benefit plans 20 -62 77
Income tax relating to items that will not be reclassified 9 15 -36
-47 41
Items that may be Reclassified Subsequently to Profit and Loss
Share of OCI of equity accounted investments that may be reclassified 27 - 5
Currency translation movements on equity net investments (CTA) 28 124 28
Currency translation movements on non-controlling interests 19 -3 6
Net investment hedges 28 -11 -33
Cash flow hedges 27 13 60
Non-controlling interests' share of cash flow hedges 19 - 1
Available-for-sale investments 14 138 -327
Income tax relating to items that may be reclassified 9 -1 -8
260 -268
Total Comprehensive Income 620 556
Attributable to:
Owners of the Parent 679 573
Non-controlling interests 19 -59 -17
Total Comprehensive Income 620 556

The accompanying Notes are an integral part of these Consolidated financial statements.

Consolidated financial statements – Consolidated statement of financial position 53

Consolidated statement of financial position

EUR million Note 2016 2015
Assets
Goodwill O 11 238 248
Other intangible assets O 11 180 185
Property, plant and equipment O 11 5 611 5 598
11 6 029 6 031
Biological assets O 12 489 640
Emission rights O 14 20
Equity accounted investments O 13 1 594 1 570
Available-for-sale investments: listed securities I 14 42 28
Available-for-sale investments: operative O 14 253 131
Non-current loan receivables I 17 7 68
Deferred tax assets T 9 214 246
Other non-current assets O 15 57 63
Non-current Assets 8 699 8 797
Inventories O 16 1 346 1 373
Tax receivables T 9 9 6
Operative receivables O 17 1 273 1 324
Interest-bearing receivables I 17 46 53
Cash and cash equivalents I 953 808
Current Assets 3 627 3 564
Total Assets 12 326 12 361
Equity and Liabilities
Share capital 18 1 342 1 342
Share premium 77 77
Fair value reserve 27 136 -12
Cumulative translation adjustment 28 -32 -147
Invested non-restricted equity fund 633 633
Retained earnings 3 187 2 688
Net profit for the year 463 807
Equity Attributable to Owners of the Parent 5 806 5 388
Non-controlling Interests 19 62 125
Total Equity 5 868 5 513

Consolidated financial statements – Consolidated statement of financial position 54

Post-employment benefit provisions O 20 436 378
Other provisions O 22 114 112
Deferred tax liabilities T 9 203 252
Non-current debt I 26 2 655 3 342
Other operative liabilities O 23 61 49
Non-current Liabilities 3 469 4 133
Current portion of non-current debt I 26 552 228
Interest-bearing liabilities I 26 563 626
Bank overdrafts I 26 4 1
Other provisions O 22 20 48
Other operative liabilities O 23 1 774 1 765
Tax liabilities T 9 76 47
Current Liabilities 2 989 2 715
Total Liabilities 6 458 6 848
Total Equity and Liabilities 12 326 12 361

Items designated "O" comprise Operating Capital, items designated "I" comprise Interest-bearing Net Liabilities, items designated "T" comprise Net Tax Liabilities. The accompanying Notes are an integral part of these Consolidated financial statements.

Consolidated financial statements – Consolidated cash flow statement 55

Consolidated cash flow statement

Year Ended 31 December
EUR million
Note
2016 2015
Cash Flow from Operating Activities
Net profit for the year 407 783
Result from the Statement of Other Comprehensive Income -1 -11
Adjustments and reversal of non-cash items:
Taxes
9
134 31
Depreciation and impairment charges
10
398 763
Change in value of biological assets
12
261 89
Change in fair value of share awards and TRS -1 6
Share of results of equity accounted investments
13
-156 -519
Profits and losses on sale of fixed assets and investments
5
15 1
Net financial items
8
242 245
Other adjustments -8 -16
Dividends received from equity accounted investments
13
58 32
Interest received 12 18
Interest paid -144 -191
Other financial items, net -48 -78
Income taxes paid
9
-92 -78
Change in net working capital, net of businesses acquired or sold 283 141
Net Cash Provided by Operating Activities 1 360 1 216
Cash Flow from Investing Activities
Acquisition of shares in equity accounted investments
13
-1 -1
Acquisition of available-for-sale investments
14
-2 -14
Capital expenditure
3, 11
-707 -879
Investment in biological assets
12
-91 -77
Proceeds from disposal of subsidiary shares and business operations, net of disposed cash
4
40 -10
Proceeds from disposal of shares in equity accounted investments
13
26 -
Proceeds from disposal of available-for-sale investments
14
10 -
Proceeds from disposal of intangible assets and property, plant and equipment
11
220 27
Income taxes paid on disposal of property -13 -
Proceeds from non-current receivables, net 64 5
Net Cash Used in Investing Activities -454 -949

Consolidated financial statements – Consolidated cash flow statement 56

Cash Flow from Financing Activities
Proceeds from issue of new long-term debt 368 435
Repayment of long-term debt -781 -1 181
Change in short-term borrowings -46 46
Dividends paid -260 -237
Buy-out of interest in subsidiaries from non-controlling interests
19
-46 -
Equity injections from, less dividends to, non-controlling interests
19
-2 10
Purchase of own shares -2 -6
Net Cash Used in Financing Activities -769 -933
Net Change in Cash and Cash Equivalents 137 -666
Translation adjustment 5 29
Net Cash and cash equivalents at beginning of year 807 1 444
Net Cash and Cash Equivalents at Year End 949 807
Cash and Cash Equivalents at Year End1 953 808
Bank Overdrafts at Year End -4 -1
Net Cash and Cash Equivalents at Year End 949 807

1 Cash and cash equivalents comprise cash-in-hand, deposits held at call with banks and other liquid investments with original maturity of less than three months. Bank overdrafts are included in current liabilities.

The accompanying Notes are an integral part of these Consolidated financial statements.

Consolidated financial statements – Consolidated cash flow statement, Supplemental cash flow information 57

Consolidated cash flow statement

Supplemental cash flow information

Year Ended 31 December
EUR million Note 2016 2015
Change in Net Working Capital consists of:
Change in inventories -11 18
Change in interest-free receivables:
Current 56 95
Non-current 11 18
Change in interest-free liabilities:
Current 184 59
Non-current 43 -49
Change in Net Working Capital, Net of Businesses Acquired or Sold 283 141
Non-Cash Investing Activities
Total capital expenditure 638 912
Amounts paid -707 -879
Non-Cash Part of Additions to Intangible Assets and Property, Plant and Equipment -69 33
Disposals
Cash Flow on Disposals
Cash part of the consideration 4 41 15
Cash and cash equivalents in divested companies 4 -1 -25
Net Cash Flow from Disposal 40 -10
Non-cash part of the consideration 4 7
Total Consideration, net of Cash and Cash Equivalents in Divested Companies 44 -3
Net Assets Sold
Cash and cash equivalents 1 25
Other intangible assets and property, plant and equipment 11 39 12
Working capital 6 -14
Interest-bearing assets and liabilities 3 -1
Non-controlling interests 19 -4 -
45 22
Gain on sale 4 - -
Total Net Asset Sold 45 22

The accompanying Notes are an integral part of these Consolidated financial statements.

Statement of changes in equity

Fair Valuation Reserve
EUR million Share
Capital
Share
Premium and
Reserve Fund
Invested
Non
Restricted
Equity Fund
Treasury
Shares
Step Acquisition
Revaluation
Surplus
Available for
Sale
Investments
Cash Flow
Hedges
OCI of Equity
Accounted
Investments
CTA and Net
Investment
Hedges
Retained
Earnings
Attributable to
Owners of the
Parent
Non-controlling
Interests
Total
Balance at 31 December 2014 1 342 77 633 - 4 354 -69 -24 -149 2 902 5 070 167 5 237
Profit/loss for the year - - - - - - - - - 807 807 -24 783
OCI before tax - - - - - -327 60 5 -5 77 -190 7 -183
Income tax relating to components of OCI - - - - - - -15 - 7 -36 -44 - -44
Total Comprehensive Income - - - - - -327 45 5 2 848 573 -17 556
Dividend - - - - - - - - - -237 -237 -2 -239
Acquisitions and disposals - - - - - - - - - - - -39 -39
Loss on NCI buy-in - - - - - - - - - -16 -16 16 -
Purchase of treasury shares - - - -6 - - - - - - -6 - -6
Share-based payments - - - 6 - - - - - -2 4 - 4
Balance at 31 December 2015 1 342 77 633 - 4 27 -24 -19 -147 3 495 5 388 125 5 513
Profit/loss for the year - - - - - - - - - 463 463 -56 407
OCI before tax - - - - - 138 13 - 113 -62 202 -3 199
Income tax relating to components of OCI - - - - - -3 - - 2 15 14 - 14
Total Comprehensive Income - - - - - 135 13 - 115 416 679 -59 620
Dividend - - - - - - - - - -260 -260 - -260
Acquisitions and disposals - - - - - - - - - -1 -1 -4 -5
Purchase of treasury shares - - - -2 - - - - - - -2 - -2
Share-based payments - - - 2 - - - - - - 2 - 2
Balance at 31 December 2016 1 342 77 633 - 4 162 -11 -19 -32 3 650 5 806 62 5 868

CTA = Cumulative Translation Adjustment, NCI = Non-controlling Interests, OCI = Other Comprehensive Income, EAI= Equity Accounted Investments

Notes to the Consolidated financial statements – Note 1 Accounting principles 59

Notes to the Consolidated financial statements

Note 1 Accounting principles

Principal activities

Stora Enso Oyj ("the company") is a Finnish public limited liability company organised under the laws of the Republic of Finland and with its registered address at Kanavaranta 1, 00160 Helsinki. Its shares are currently listed on Nasdaq Helsinki and Stockholm. The operations of Stora Enso Oyj and its subsidiaries (together "Stora Enso" or the "group") are organised into the following divisions: Consumer Board, Packaging Solutions, Biomaterials, Wood Products, Paper and the segment Other. Segment Other includes the Nordic forest equity accounted investments, Stora Enso's shareholding in Pohjolan Voima, operations supplying wood to the Nordic mills and group shared services and administration. The group's main market is Europe, with an expanding presence in Asia and South America.

The Financial Statements were authorised for issue by the Board of Directors on 3 February 2017.

Basis of preparation

The Consolidated Financial Statements of Stora Enso Oyj have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, including International Accounting Standards (IAS) and Interpretations issued by the IFRS Interpretations Committee (IFRIC). The Consolidated Financial Statements of Stora Enso Oyj have been prepared under the historical cost convention, except as disclosed in the accounting policies. The detailed accounting principles are explained in the related notes, with a few exceptions where accounting principles are presented in this note. The Consolidated Financial Statements are presented in euro, which is the parent company's functional currency.

New and amended standards and interpretations adopted in 2016

The group has applied the following amendments effective from 1 January 2016:

• IAS 19 Defined Benefit Plans Employee Contributions (amendment). The amendment clarifies the accounting for contributions made by employees or third parties to defined benefit plans. The amendment does not have a significant effect on the group financial statement. • Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants. The amendments define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment. These amendments have no effect on the group financial statements.

• Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation. The amendments prohibit using a revenue-based depreciation method for items of property, plant and equipment and introduce a rebuttable presumption that revenue is

not an appropriate basis for amortisation of an intangible asset. These amendments have no effect on the group financial statements.

• IFRS 11 Accounting for Acquisition of Interests in Joint Operations (amendment) provides guidance on how to account for the acquisition of a joint operation that constitutes a business. The amendment has no effect on the group financial statements.

• IAS 27 Equity Method in Separate Financial Statements (amendment) reinstates the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. This change is not relevant to the group.

• Amendments to IAS 1: Disclosure Initiative clarifies the presentation principles. The amendments do not have material effect on the group financial statement.

Presentation change

Presentation of Consolidated Income Statement has been changed from the previous year. Row 'Change in net value of biological assets' has been moved above 'Depreciation, amortisation and impairment charges'. Previously it was presented above 'Materials and service'. This change is not impacting the subtotals of Consolidated income statement or the group's other IFRS figures.

Consolidation principles

The Consolidated financial statements include the parent company, Stora Enso Oyj, and all companies controlled by the group. Control is achieved when the group:

  • » has power over the investee,
  • » is exposed, or has rights, to variable returns from its involvement with the investee; and
  • » has the ability to use its power to affect its returns.

If facts and circumstances indicate that there are changes to the three elements of control listed above the group reassess whether or not it controls an investee. Acquired companies are accounted for under the purchase method whereby they are included in the Consolidated Financial Statements from the date when the control over the subsidiary is obtained, whereas, conversely, divestments are included up to their date when the control is lost. The principal subsidiaries and joint operations are listed in Note 30 Principal subsidiaries and joint operations.

All intercompany transactions, receivables, liabilities and unrealised profits, as well as intragroup profit distributions, are eliminated. Accounting policies for subsidiaries, joint arrangements and all equity accounted investments are adjusted where necessary to ensure consistency with the policies adopted by Stora Enso. Non-controlling interests are presented as a separate component of equity.

Notes to the Consolidated financial statements – Note 1 Accounting principles 60

Associated companies over which Stora Enso exercises significant influence are accounted for using the equity method, which involves recognising in the Consolidated Income Statement the group's share of the equity accounted investment profit or loss for the year less any impaired goodwill. These companies are undertakings in which the group has significant influence, but which it does not control. Significant influence is the power to participate in the financial and operating policy decisions of the company without control or joint control over those policies. The most significant of such companies are listed in Note 13 Equity accounted investments.

The group's interest in an associated company is carried in the Consolidated Statement of Financial Position at an amount that reflects its share of the net assets of the associate together with any remaining goodwill on acquisition. When the group share of losses exceeds the carrying amount of an investment, the carrying amount is reduced to zero and any recognition of further losses ceases unless the group is obliged to satisfy obligations of the investee that it has guaranteed or to which it is otherwise committed.

Joint operations are joint arrangements whereby the partners that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. The interpretations as joint operations are based on shareholders' agreements which give Stora Enso rights to share of the returns and make the group liable indirectly for the liabilities, as our ability to pay for the pulp is used to finance the debts. Joint control is the contractually agreed sharing of the control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the partners sharing control.

The group has two joint operations: Veracel and Montes del Plata. The group as a joint operator recognises in relation to its interest in a joint operation assets, liabilities, revenues and expenses using the line-byline method.

• Veracel is a jointly (50%/50%) owned company of Stora Enso and Fibria located in Brazil. The pulp mill produces 1.1 million tonnes of bleached Eucalyptus hard wood pulp per year and both owners are entitled to half of the mill's output. The eucalyptus is sourced mostly from the company's own forestry plantations. The mill commenced production in May 2005 and the group's part of the pulp shipments are sent primarily to Stora Enso mills in Europe and China.

• Montes del Plata is a jointly (50%/50%) owned company of Stora Enso and Arauco located in Uruguay. The Montes del Plata Pulp Mill's annual capacity is 1.3 million tonnes of bleached Eucalyptus hard wood pulp and Stora Enso's part, 650 000 tonnes, is to be sold entirely as market pulp. The eucalyptus is sourced mostly from the company's own forestry plantations. The mill started in June 2014.

Joint venture is a joint arrangement whereby the partners that have joint control of the arrangement have rights to the net asset of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decision about the relevant activities require unanimous consent of the parties sharing control. The group has a joint venture Bulleh Shah Packaging (Private) Limited.

Revenue recognition

Sales comprise products, raw materials and services less indirect sales tax and discounts, and are adjusted for exchange differences on sales in foreign currency. Sales are recognised after Stora Enso has transferred the risks and rewards of ownership to the buyer and the Group retains neither a continuing right to dispose of the goods, nor effective control of those goods; usually, this means that sales are

recorded upon delivery of goods to customers in accordance with the agreed terms of delivery.

Stora Enso terms of delivery are based on Incoterms 2010, which are the official rules for the interpretation of trade terms as issued by the International Chamber of Commerce (ICC). The main categories of terms covering group sales are:

• "D" terms, under which the group is obliged to deliver the goods to the buyer at the agreed place in the manner specified in the chosen rule, in which case the Point of Sale is the moment of delivery to the buyer.

• "C" terms, whereby the group arranges and pays for the external carriage and certain other costs, though the group ceases to be responsible for the goods once they have been handed over to the carrier in accordance with the relevant term. The Point of Sale is thus the handing over of the goods to the carrier contracted by the seller for the carriage to the agreed destination.

• "F" terms, being where the buyer arranges and pays for the carriage, thus the Point of Sale is the handing over of goods to the carrier contracted by the buyer at the agreed point.

Where local rules may result in invoices being raised in advance of the above, the effect of this revenue advancement is quantified and an adjustment is made for it.

Revenues from services are recorded when the service has been performed.

Shipping and handling costs

When Stora Enso is responsible for arranging transport for its sales, such costs are not billed separately but are included in revenue in the value of the goods billed to customers; the shipping costs incurred are shown in materials and services.

Foreign currency transactions

Transactions in foreign currencies are recorded at the rate of exchange prevailing at the transaction date, but at the end of the month, foreigncurrency-denominated receivables and liabilities are translated using the month-end exchange rate. Foreign exchange differences for operating items are recorded in the appropriate income statement account within operating profit, and, for financial assets and liabilities, are entered in the financial items of the Consolidated Income Statement, except when deferred in equity as qualifying net investment hedges. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale, are included in equity.

Foreign currency translations – subsidiaries

The group operates internationally and is thus exposed to currency risk arising from exchange rate fluctuations on the value of its net investment in non-euro area foreign subsidiaries and equity accounted investments. The Income Statements of subsidiaries with functional and presentational currencies other than the euro are translated into the group reporting currency using the average exchange rates for the year, whereas the Statements of Financial Position of such subsidiaries are translated using the exchange rates at the reporting date. Exchange differences arising from the retranslation of the net investments in foreign entities that are non-euro foreign subsidiaries, joint arrangements or equity accounted investments, and of financial instruments that are designated as and are hedges of such investments, are recorded directly in shareholders' equity in the cumulative translation adjustment (CTA), as shown in the Consolidated Statement of Comprehensive Income and Note 28 Cumulative

Notes to the Consolidated financial statements – Note 1 Accounting principles 61

translation adjustments and equity hedging. The cumulative translation differences of divestments and liquidations are combined with their gain or loss on disposal. The CTA is also recycled in the Consolidated Income Statement upon the repayment of share capital, return of investment and any partial disposal of a business unit.

Future standard changes endorsed by the EU but not yet effective in 2016

• Amendments to IFRS 10, IFRS 12 and IAS 28: Investment entities – Applying the consolidation Exception, effective for annual periods beginning on or after 1 January 2016. The amendment was endorsed by the EU on September 2016, resulting in the adoption being transferred to 1 January 2017. The amendments provide an exemption from consolidation of subsidiaries for entities that meet the definition of investment entity. This change is not relevant to the group.

• IFRS 15 Revenue from Contracts with Customers. The new standard specifies how and when revenue is recognised and increases the disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. The standard is effective 1 January 2018.

Stora Enso is a leading provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Our customers include publishers, retailers, brand owners, print and board producers, printing houses, merchants, converters and joineries and construction companies. Stora Enso's customer contracts can typically be clearly identified based on the customer orders. Performance obligations are normally explicitly defined as the products and services are delivered based on the customer contracts.

The main customer contracts of each division have been reviewed and not such additional separate performance obligations have been identified in the contracts with customers that would materially change the timing of the revenue recognition under IFRS 15 standard compared to the current revenue recognition practises. Hence, we do not expect that IFRS 15 standard would have a significant impact on Stora Enso group.

• IFRS 9 Financial Instruments is the replacement of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The version of IFRS 9 issued on July 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).

The adoption of IFRS 9 is not expected to have a significant impact on group figures but will require certain changes to disclosure tables and notes of the consolidated financial statements. The Group intends to classify its equity investments in Pohjolan Voima shares, currently classified as available-for-sale investments (AFS) under IAS 39, as at fair value through other comprehensive income (FVTOCI) under IFRS 9. The main difference between AFS and FVTOCI is that gains and losses resulting from changes in the fair value of equity investments accounted for at FVTOCI are not recycled to Income Statement upon impairment or disposal, with only dividend income recognized in Income Statement.

Under IFRS 9, the changes in the time value of currency options used as hedges of foreign currency sales shall be recognised in Other Comprehensive Income to the extent that they relate to the hedged items, and will be reclassified from equity to profit or loss in the same period or periods during which the expected future cash flows

affect profit or loss. This will reduce Income Statement volatility as compared to IAS 39.

Future standard changes not yet effective and not yet endorsed by the EU in 2016

• IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account for "regulatory deferral account balances" in accordance with its previous GAAP. The EU endorsement process has been stopped for this interim standard. The standard is not relevant to the group.

• IFRS 16 Leases provides a single lessee accounting model, requiring the balance sheet recognition of assets and liabilities for all leases with a certain exceptions. The effective date for this standard is 1 January 2019. The effects of this standard on the group financial statements are under investigation. Please refer to Note 29 Commitments and Contingencies for more details about the value of current operating lease agreements.

• Amendments to IFRS 10 and IAS 28: Sale or contribution of Assets between an Investor and its Associate or Joint Venture. The amendments to the standards clarify the accounting in different types of transactions between an investor and its associate in joint ventures. The EU endorsement process has been postponed.

• Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses. The diversity in practice around the recognition of a deferred tax asset that is related to a debt instrument measured at fair value is mainly attributable to uncertainty about the application of some of the principles in IAS 12. The amendments effective date is 1 January 2017. This amendment is not relevant to the group.

• Amendments to IAS 7: Disclosure Initiative. The amendments are intended to clarify IAS 7 'Statement of Cash Flows' to improve information provided to users of financial statements about an entity's financing activities, and to enable users of financial statements to evaluate changes in liabilities arising from financing activities. The effective date for these amendments is 1 January 2017. The amendment does not have a significant effect on the group financial statement.

• Clarifications to IFRS 15 Revenue from Contracts with Customers. The effective date for these clarifications is 1 January 2018.

• Amendments to IFRS 2: Classification and Measurement of Sharebased Payment Transactions. These narrow-scope amendments clarify how to account for certain types of share-based payment transactions. The effective date for these amendments is 1 January 2018. The amendment does not have a significant effect on the group financial statement.

• Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. The amendments address concerns arising from implementing the new financial instruments Standard, IFRS 9, before implementing the replacement Standard that the Board is developing for IFRS 4. The effective date for these amendments is 1 January 2018. This amendment is not relevant to the group.

• Amendments to IAS 40: Transfers of Investment Property..Amendments clarify transfers of property to, or from, investment property. The effective date for these amendments is 1 January 2018.

Notes to the Consolidated financial statements – Note 2 Critical accounting estimates and judgements 62

Note 2 Critical accounting estimates and judgements

Use of estimates

The preparation of Consolidated financial statements conforming to IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the Financial statements and the reported amounts of revenues and expenses during the period. The estimates are based on historical experience and various other assumptions that are believed to be reasonable, though actual results and timing could differ from the estimates. Management believes that the accounting policies below represent those matters requiring the exercise of judgement where a different opinion could result in the greatest changes to reported results.

Intangible assets and property, plant and equipment

For material intangible assets and property, plant and equipment in an acquisition, an external advisor makes a fair valuation of the acquired intangible assets and property, plant and equipment and assists in determining their remaining useful lives. Management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable, though different assumptions and assigned lives could have a significant impact on the reported amounts.

The carrying amounts of Intangible assets and property, plant and equipment are reviewed at each reporting date or whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. The recoverable amount of an asset is estimated as the higher of fair value less cost of disposal and the value in use, with an impairment charge being recognised whenever the carrying amount exceeds the recoverable amount. The value in use is calculated using a discounted cash flow model which is most sensitive to the discount rate as well as the expected future cash flows. The key assumptions used in the impairment testing, including sensitivity analysis, are explained further in Note 10 Depreciation, amortisation and impairment charges.

Goodwill

Goodwill is tested by Cash Generating Unit (CGU) or by group of CGUs at least on an annual basis and any impairment is measured using the discounted cash flow valuation method. This method uses future projections of cash flows from each of the reporting units in a CGU or group of CGUs and includes, among other estimates, projections of future product pricing, production levels, product costs, market supply and demand, projected maintenance capital expenditures and an assumption of the weighted average cost of capital. A pre-tax discount rate used for the net present value calculation of projected cash flows reflects the weighted average cost of capital.

The group has evaluated the most sensitive estimates which when changed could have a material effect on the fair value of the assets or goodwill and therefore could lead to an impairment. These estimates are expected sales prices of the products, expected inflation rate of the product costs and discount rate. The key assumptions used in the impairment testing, including sensitivity analysis, are explained further in Note 10 Depreciation, amortisation and impairment charges.

Control assessment of joint operations and associates

Note 1 Accounting principles describes Veracel and Montes del Plata as joint operations. In both companies Stora Enso's ownership is 50%. The interpretations as joint operations are based on shareholders' agreements which give Stora Enso rights to share of the returns and make the group liable indirectly for the liabilities, as our ability to pay for the pulp is used to finance the debts. Joint operations are consolidated with the proportionate line-by-line method.

The forest holding companies Bergvik Skog Ab and Tornator Oyj are equity accounted investments. Stora Enso does not control the companies alone or jointly with other parties and thus retains its significant minority interest as equity accounted investments. Equity accounted investments are accounted for using the equity method. These companies are presented in Note 13 Equity accounted investments.

Fair value of financial instruments

Where the fair value of financial assets and liabilities cannot be derived directly from publicly quoted market prices, other valuation techniques such as discounted cash flow models, transaction multiples, the Black and Scholes model and the Gordon model are employed. The key judgements include future cash flows, credit risk, volatility and changes in assumptions about these factors which could affect the reported fair value of the financial instruments. Investments in debt and equity securities of unlisted entities, such as Pohjolan Voima Oy (PVO), represent a significant portion of the group's assets and require significant management judgement, as explained in more detail in Notes 14 Available-for-sale investments and 24 Financial risk management.

Income taxes

Tax assets and liabilities are reviewed on a periodic basis and balances are adjusted as appropriate. Management considers that adequate provision has been made for future tax consequences based upon current facts, circumstances and tax law. However, should any tax positions be challenged and not prevail, different outcomes could result and have a significant impact on the amounts reported in the consolidated financial statements.

Post-retirement benefits

The determination of the group pension obligation and expense is subject to the selection of certain assumptions used by actuaries in calculating such amounts, including, among others, the discount rate, the expected rate of return on plan assets, the annual rate of increase in future compensation levels and estimated lifespans. Amounts charged in the Income statement are determined by independent actuaries, however, where actual results differ from the initial estimates, together with the effect of any change in assumptions or other factors, these differences are recorded directly in equity, as disclosed in the Statement of comprehensive income. See Note 20 Post-employment benefits for detailed information on the assumptions used in the pension liability calculations.

Notes to the Consolidated financial statements – Note 2 Critical accounting estimates and judgements 63

Biological assets

The group has biological assets in equity accounted investment companies, joint operation companies and in subsidiaries. Biological assets, in the form of standing trees, are accounted for under IAS 41, which requires that the assets be measured at fair value less costs to sell. Fair value is determined using discounted cash flows from continuous operations based on sustainable forest management plans taking into account the growth potential of one cycle. These discounted cash flows require estimates of growth, harvest, sales price and costs, and changes in these premises are included in the Consolidated income statement, for directly owned interests and for joint operations, on the line for Change in Net Value of Biological assets. For those assets shown in the Consolidated statement of financial position of equity accounted investments changes are included on the line for Share of results of equity accounted investments. It is therefor e important that the management of the group, joint operation companies and the equity accounted investments make appropriate estimates of future price levels and trends for sales and costs, and undertakes regular surveys of the forest to establish the volumes of wood available for cutting and their current growth rates. See Note 12 Biological assets for more detailed information.

Environmental provisions

The group has made provisions for known environmental liabilities where legal or constructive obligation exists, based on management' s best estimate of the remediation costs. There is uncertainty regarding the timing and amount of these costs and therefore the final liability could differ significantly from the original estimate.

Notes to the Consolidated financial statements – Note 3 Segment information 64

Note 3 Segment information

Stora Enso's reportable segments are formed by five divisions, Consumer Board, Packaging Solutions, Biomaterials, Wood Products and Paper as well as segment Other.

The activities of the reportable segments are:

Consumer Board

Consumer Board division develops and provides consumer packaging boards for printing and packaging applications. A wide board and barrier coating selection is suitable for the design and optimisation of packaging for liquid, food, pharmaceutical and luxury goods. We serve brand owners globally and are expanding in growth markets such as China and Asia Pacific to meet rising demand.

Packaging Solutions

Packaging Solutions division develops fibre-based packaging, and operates at every stage of the value chain from pulp production, material and packaging production to recycling. Our solutions serve leading converters, brand owners and retail customers helping to optimise performance, reduce total costs and enhance sales.

Biomaterials

Biomaterials division offers a variety of pulp grades to meet the demands of paper, board, tissue, textile and hygiene product producers. We also develop new ways to maximise the value extractable from wood, as well as other kinds of lignocellulosic biomasses. Sugars and lignin hold potential for use in applications in the specialty chemical, construction, personal care and food industries. We have a global presence with operations in Brazil, Finland, Laos, Sweden, Uruguay and the USA.

Wood Products

Wood Products division provides versatile wood-based solutions for building and housing. Our product range covers all areas of urban construction including massive wood elements, wood components and pellets. We also offer a variety of sawn timber goods. Our customers are mainly construction and joinery companies, merchandisers and retailers. Wood Products operates globally and has more than 20 production units in Europe.

Paper

Paper division provides best-in-class paper solutions for print media and office use. The wide selection covers papers made from recycled and fresh wood fibre. Our main customer groups include publishers, retailers, printing houses, merchants, converters and office suppliers. Our mills are located predominantly in Europe, with one mill in China. Three of the mills produce paper based on 100%-recycled fibre.

Other

The segment Other includes the Nordic forest equity accounted investments, Stora Enso's shareholding in the energy company Pohjolan Voima, operations supplying wood to the Nordic mills and group shared services and administration.

Notes to the Consolidated financial statements – Note 3 Segment information 65

Sales by segment

Year Ended 31 December
External Internal Total External Internal Total
EUR million 2016 2015
Consumer Board 2 331 11 2 342 2 331 9 2 340
Packaging Solutions 1 019 25 1 044 888 25 913
Biomaterials 981 395 1 376 1 001 483 1 484
Wood Products 1 488 107 1 595 1 497 106 1 603
Paper 3 175 70 3 245 3 526 104 3 630
Other 808 1 669 2 477 797 1 681 2 478
Elimination of internal sales - -2 277 -2 277 - -2 408 -2 408
Total 9 802 - 9 802 10 040 - 10 040

Sales include external service income of EUR 76 (EUR 71) million.

Segment share of operating profit/loss

Year Ended 31 December
Operating Profit/Loss
EUR million 2016 2015
Consumer Board 67 258
Packaging Solutions 42 80
Biomaterials 211 308
Wood Products 88 80
Paper 289 -179
Other 86 512
Total 783 1 059
Net financial items -242 -245
Profit before Tax 541 814
Income tax expense -134 -31
Net Profit 407 783

Intangible asset and property, plant and equipment (PPE), depreciations, impairments and reversals, disposal gains and losses and capital expenditure by segment

Year Ended 31 December
Depreciations/Impairments/
Reversals/Disposal gains and
Intangible Assets and PPE
losses
Capital Expenditure
EUR million 2016 2015 2016 2015 2016 2015
Consumer Board 1 639 1 526 158 144 312 487
Packaging Solutions 746 782 85 60 56 128
Biomaterials 2 108 2 028 109 107 92 115
Wood Products 403 361 30 29 72 63
Paper 945 1 163 -7 404 73 84
Other 188 171 23 19 33 35
Total 6 029 6 031 398 763 638 912

Notes to the Consolidated financial statements – Note 3 Segment information 66

Goodwill by segment

Year Ended 31 December
Goodwill Impairment
EUR million 2016 2015 2016 2015
Consumer Board - - - -
Packaging Solutions 19 30 11 -
Biomaterials 32 31 - -
Wood Products 104 104 - -
Paper 83 83 - -
Other - - - -
Total 238 248 11 -

Average personnel

Year Ended 31 December Year Ended 31 December
Segment 2016 2015 Location 2016 2015
Consumer Board 4 118 4 239 Austria 912 890
Packaging Solutions 7 372 7 141 Baltic States 1 203 1 177
Biomaterials 1 797 1 655 Belgium 536 536
Wood Products 3 937 3 824 Czech Republic 810 736
Paper 5 786 6 810 Finland 6 667 6 589
Other 3 259 3 114 France 45 71
Total 26 269 26 783 Germany 1 465 1 711
Poland 1 930 1 856
Russia 1 093 1 086
Spain 15 190
Sweden 5 091 4 975
Other Europe 221 291
Total Europe 19 988 20 108
Brazil 475 714
China (incl.
Hong Kong)
5 156 5 114
India - 234
USA 88 52
As at 31 December Uruguay 344 334
2016 2015 Other countries 218 227
Year-End Personnel 25 447 25 680 Total 26 269 26 783

Notes to the Consolidated financial statements – Note 3 Segment information 67

External sales by destination and origin

Year Ended 31 December
Sales by Destination Sales by Origin Balance of Trade
EUR million 2016 2015 2016 2015 2016 2015
Austria 279 250 357 348 78 98
Baltic States 237 224 266 264 29 40
Belgium 160 146 257 255 97 109
Czech Republic 146 161 243 250 97 89
Denmark 138 133 21 17 -117 -116
Finland 730 647 3 694 3 653 2 964 3 006
France 467 474 8 10 -459 -464
Germany 1 378 1 454 626 726 -752 -728
Italy 326 338 - - -326 -338
Netherlands 240 257 23 14 -217 -243
Poland 498 468 421 375 -77 -93
Russia 280 266 180 175 -100 -91
Spain 295 342 - 87 -295 -255
Sweden 981 995 2 704 2 613 1 723 1 618
UK 510 575 18 21 -492 -554
Other Europe 808 810 101 139 -707 -671
Total Europe 7 473 7 540 8 919 8 947 1 446 1 407
Australia / New Zealand 175 208 21 25 -154 -183
Brazil 72 140 276 423 204 283
China (incl. Hong Kong) 712 694 272 302 -440 -392
Japan 284 282 - - -284 -282
Middle East 240 269 - - -240 -269
Uruguay 28 23 306 336 278 313
USA 128 112 2 2 -126 -110
Other countries 690 772 6 5 -684 -767
Total 9 802 10 040 9 802 10 040 - -

Notes to the Consolidated financial statements – Note 3 Segment information 68

Total assets, capital employed and shareholders' equity by location

As at 31 December
Total Assets Capital Employed Shareholders' Equity
EUR million 2016 2015 2016 2015 2016 2015
Austria 169 172 99 114 104 123
Baltic States 106 115 76 91 160 143
Belgium 276 313 182 214 208 298
Czech Republic 150 151 122 125 108 109
Finland 3 663 3 228 2 169 2 078 1 358 1 068
Germany 406 523 31 109 77 100
Poland 548 583 450 473 267 275
Russia 178 130 99 81 133 77
Sweden 2 783 3 013 1 814 2 089 879 854
Other Europe 110 52 46 -5 211 -11
Total Europe 8 389 8 280 5 088 5 369 3 505 3 036
Brazil 530 574 502 517 462 406
China (incl. Hong Kong) 1 386 1 562 1 143 1 114 480 730
Uruguay 1 781 1 750 1 703 1 630 1 181 1 087
USA 145 99 114 84 127 85
Other countries 95 96 44 39 51 44
Total 12 326 12 361 8 594 8 753 5 806 5 388

Total capital employed represents operating capital less net tax liabilities

Reconciliation of operating capital to total assets

As at 31 December
EUR million 2016 2015
Operating Capital 8 650 8 800
Operative liabilities 2 405 2 352
Interest-bearing receivables 1 048 957
Tax receivables 223 252
Total Assets 12 326 12 361

Operating capital ("O" items) is designated thus on the Balance Sheet and represents the sum of Intangible Asset and Property, Plant and Equipment and biological assets, emission rights, unlisted shares, other non-current assets, inventories, current operative receivables and liabilities, provisions and other non-current operative liabilities.

Notes to the Consolidated financial statements – Note 3 Segment information 69

Intangible asset and property, plant and equipment (PPE), capital expenditure and depreciations, impairments and reversals, disposal gains and losses by location

Year Ended 31 December
Depreciations/Impairments/
Intangible Assets and PPE Reversals/Disposal gains and
losses
Capital Expenditure
EUR million 2016 2015 2016 2015 2016 2015
Austria 107 109 6 6 5 23
Baltic States 45 49 6 8 4 3
Belgium 222 260 50 113 12 8
Czech Republic 111 113 5 4 3 5
Finland 1 227 1 190 175 149 214 262
Germany 314 377 35 89 12 14
Poland 409 430 27 27 21 34
Russia 67 54 7 8 7 5
Sweden 765 898 181 224 82 61
Other Europe 12 4 -6 7 -1 1
Total Europe 3 279 3 484 486 635 359 416
Brazil 306 255 24 58 11 14
China (incl. Hong Kong) 890 782 -157 27 218 407
Uruguay 1 426 1 419 41 40 15 42
USA 126 89 3 2 35 33
Other countries 2 2 1 1 - -
Total 6 029 6 031 398 763 638 912

Notes to the Consolidated financial statements – Note 4 Acquisitions and disposals 70

Note 4 Acquisitions and disposals

Accounting principles

Acquired companies are accounted for under the purchase method whereby they are included in the Consolidated Financial Statements from the date when the control over the subsidiary is obtained, whereas, conversely, divestments are included up to their date when the control is lost.

Stora Enso has not acquired companies or business operations in 2015 or 2016.

Disposal of group companies and business operations

Year Ended 31 December
EUR million 2016 2015
Net Assets Sold
Cash and cash equivalents 1 25
Intangible assets and Property, plant and equipment 39 12
Working capital 6 -14
Interest-bearing assets and liabilities 3 -1
Non-controlling interest -4 -
Net Assets in Divested Companies and Businesses 45 22
Total Disposal Consideration Received in Cash and Kind 45 22
Impairment of assets recognised in 20151 -34 -
Impairment of assets recognised in 20162 -11 -
CTA release -22 -4
Transaction costs -4 -2
Total Net Gain/loss -71 -6
Attributable to the owners of the parent -64 -6
Attributable to the non-controlling interest holders -7 -

1 Relates to disposal of Arapoti Mill on 31 March 2016. Impairment was recognised at signing in December 2015.

2 Relates to disposals of Arapoti and Kabel Mills.

On 1 June 2016 Stora Enso signed an agreement to divest its Kabel coated magazine paper mill in Germany, to Kabel Premium Pulp & Paper GmbH, owned by a German based investor group. The transaction was structured as an asset deal and the cash consideration for the sold assets was EUR 30 million. After closing adjustments the loss on disposal amounted to EUR 9 million consisting of a EUR 5 million operational and a EUR 4 million tax expense. The divestment was completed on 1 September 2016. Majority of Kabel Mill's approximately 540 employees were transferred to the new owner. Kabel mill was part of the Paper division.

On 31 December 2015, Stora Enso signed an agreement to divest its entire 80% shareholding in the Arapoti magazine paper mill in Paraná, Brazil, to Papeles Bio Bio, a Chilean paper producer. The final consideration for the divestment of the shares was EUR 15 million resulting in a loss of EUR 62 million including cumulative translation adjustments (CTA) and transaction costs. EUR 7 million of the total negative impact was allocated to the non-controlling interest holders. The disposal of Arapoti mill was completed in the first quarter of 2016. EUR 34 million of the total loss was recognised at signing in the fourth quarter of 2015 while EUR 4 million was recorded as customary purchase price adjustments during the first three quarters of 2016. The cumulative translation adjustment loss amounted to EUR 22 million. Transaction costs amounted to EUR 2 million. Arapoti Mill was part of the Paper division.

On 1 October 2015, Stora Enso divested its Barcelona Mill, which produces recycled-fibre based consumer board, to the private equity fund Quantum. The cash consideration for the divestment of the shares was EUR 10 million. The transaction resulted in a loss of EUR 2 million including transaction costs of EUR 1 million. Barcelona was part of the Consumer Board division.

Notes to the Consolidated financial statements – Note 4 Acquisitions and disposals 71

On 30 September 2015, Stora Enso divested its offset printed micro-flute packaging plant in Komárom to Van Genechten Packaging International S.A., a leading Belgian packaging company. The cash consideration for the divestment of the shares was EUR 12 million. The transaction resulted in a loss of approximately EUR 4 million, mainly due to cumulative translation adjustments. Komárom plant was part of the Packaging Solutions division.

In December 2014 Stora Enso signed an agreement to divest Uetersen specialty and coated fine paper mill in Germany to Perusa Partners Fund 2. Following the agreement, the group recorded a EUR 30 million fixed asset and inventory write down in its 2014 Financial Statements. The transaction was completed in February 2015. The impact on the group's 2015 net result was immaterial. Uetersen mill was part of the Paper division.

Notes to the Consolidated financial statements – Note 5 Other operating income and expense 72

Note 5 Other operating income and expense

Accounting principles

Research and development

Research costs are expensed as incurred in other operating expenses in the Consolidated Income Statement. Development costs are also expensed as incurred unless it is probable that future economic benefits will flow to the group, in which case they are capitalised as intangible assets and depreciated over the period of the income streams.

Government grants

Government grants relating to the purchase of property, plant and equipment are deducted from the carrying value of the asset, the net cost being capitalised. Other government grants are recognised as income on a systematic basis over the periods necessary to match them with the related costs which they were intended to compensate.

Emission rights and trading

The group's participation in the European Emissions Trading Scheme, in which it has been allocated allowances to emit a fixed tonnage of carbon dioxide in a fixed period of time, gives rise to an intangible asset for the allowances, a government grant and a liability for the obligation to deliver allowances equal to the emissions that have been made during the compliance period. Emission allowances recorded as intangible assets are recognised when the group is able to exercise control and are measured at level 1 fair value at the date of initial recognition. If the market value of emission allowances falls significantly below the carrying amount, and the decrease is considered permanent, then an impairment charge is booked for allowances which the group will not use internally. The liability to deliver allowances is recognised based on actual emissions; this liability will be settled using allowances on hand, measured at the carrying amount of those allowances, with any excess emissions being measured at the market value of the allowances at the period end.

In the Consolidated Income Statement, the group will expense, under materials and services, emissions made at the fair value of the rights at their grant date, together with purchased emission rights at their purchase price. Such costs will be offset under other operating income by the income from the original grant of the rights used at their fair value at the grant date, together with income from the release or sale of surplus rights. The Consolidated Income Statement will thus be neutral in respect of all rights consumed that were within the original grant. Any net effect represents the costs of purchasing additional rights to cover excess emissions, the sale of unused rights, in the case realised emissions are under allowances received free of charge or the impairment of allowances not required for internal use.

Other Operating Income and expense

Year Ended 31 December
EUR million 2016 2015
Other Operating Income
Emission rights granted and disposal gains 13 19
Sale of Green Certificates 36 42
Capital gains on sale of Intangible Assets and Property, Plant and Equipment 3 4
Dividend and gain on sale of unlisted shares 6 -
Freight sales, rent and other 54 54
Government grants 11 9
Total 123 128
Other Operating Expenses include
Rents paid 102 105
Research and development 80 66
Credit losses 11 7
CTA release 23 4
Materials and Services include
Emissions rights to be delivered and disposal losses 12 15
Notes to the Consolidated financial statements – Note 5 Other operating income and expense 73

The group has recorded Other Operating Income of EUR 13 (EUR 19) million related to Emissions. Under Material and Services an expense of EUR 12 (EUR 15) million has been booked related to the cost of CO2 emissions from production. Actual realised profits amounted to EUR 5 (EUR 10) million on the disposal of surplus rights and EUR 1 (EUR 6) million is the value of excess emission rights held at the year end.

The group also generates income from its renewable power generation in Belgium and Poland. The power is produced from biomass, so the group is entitled to Green Certificates for onward sale to electricity retailers for fulfilling their renewable power quota obligations. The income from the sale of green certificates amounted to EUR 36 (EUR 42) million.

In 2016 the group recorded cumulative translation adjustment loss of EUR 23 million mainly relating to divestment of Arapoti Mill in Brazil.

Total sales of excess freight capacity in 2016 amounted to EUR 43 (EUR 40) million.

Principal independent auditor's fees and services

Year Ended 31 December
EUR million 2016 2015
Audit fees 4 4
Audit-related - -
Tax fees - -
Other fees 1 1
Total 5 5

Aggregate fees for professional services rendered to the group principal auditor Deloitte amounted to EUR 5 (EUR 5) million. Audit fees relate to the audit of the annual financial statements or ancillary services normally provided in connection with statutory and regulatory filings. Audit-related fees are incurred for assurance and associated services that are reasonably related to the performance of the audit or review of the financial statements.

Notes to the Consolidated financial statements – Note 6 Personnel expenses 74

Note 6 Personnel expenses

Personnel expenses

Year Ended 31 December
EUR million 2016 2015
Wages and salaries 1 006 987
Pensions (see below) 165 160
Share-based remuneration (Note 21 ) 6 8
Total return swaps -6 -4
Other statutory employer costs 141 140
Other voluntary costs 22 22
Total 1 334 1 313

Pensions

Year Ended 31 December
EUR million 2016 2015
Defined benefit plans 12 12
Defined contribution plans 153 150
Other post-employment benefits - -2
Total 165 160

Total personnel expenses totalled EUR 1 334 million in 2016 compared with EUR 1 313 million in 2015. The average number of employees in 2016 amounted to 26 269 compared with 26 783 in 2015. Pension costs are discussed further in Note 20 Post-employment benefits.

In 2016, the expense of the share-based remuneration was EUR 6 (EUR 8) million. The expense of share-based remuneration net of Total Return Swaps (TRS) in 2016 amounted to zero compared with an expense of EUR 4 million in 2015. This was due to the increase in the Stora Enso R share price from EUR 8.39 at 31 December 2015 to EUR 10.21 at 31 December 2016 and an income of EUR 6 million was recorded in respect of TRS.

The group hedges its share awards programme by using (TRS) shown under personnel costs alongside the share awards expenses to which they relate, so that both the risk and the result from hedging of that risk appear in the same section of the Income Statement. The TRS are not designated under hedge accounting.

Share-based remuneration comprising of share awards and related hedges are described in more detail in Note 21 Employee variable compensation and equity incentive schemes.

Group Leadership Team and Board remuneration are described in Note 7 Board and executive remuneration.

Notes to the Consolidated financial statements – Note 7 Board and executive remuneration 75

Note 7 Board and executive remuneration

Board remuneration and committee memberships

Year Ended 31 December
2016 2015
EUR thousand Cash Shares Total Total Committee Memberships
Board Members at 31 December 2016
Gunnar Brock, Chairman 126 68 194 194 Remuneration, Nomination2,3, Financial and
Audit
Jorma Eloranta, Vice Chairman 66 40 106 - Remuneration, Nomination2,3
Anne Brunila 52 28 80 80 Sustainability and Ethics
Elisabeth Fleuriot 48 28 76 76 Sustainability and Ethics
Hock Goh 42 28 70 70
Mikael Mäkinen 56 28 84 84 Financial and Audit
Richard Nilsson 68 28 96 90 Financial and Audit, Sustainability and Ethics
Hans Stråberg 48 28 76 76 Remuneration
Former Board members
Juha Rantanen (until 28 April 2016) - - - 126
Total Remuneration as Directors1 506 276 782 796

1 40% of the Board remuneration in 2016 was paid in Stora Enso R shares purchased from the market and distributed as follows: to Chairman 9 092 R shares, Vice Chairman 5 348 R shares, and members 3 744 R shares each. The Company has no formal policy requirements for the Board members to retain shares received as remuneration.

2 Stora Enso's Nomination Board is appointed by the shareholders at the Annual General Meeting. Gunnar Brock and Jorma Eloranta were appointed thereto in their roles as Chairman and

Vice Chairman of the Board of Directors. A member of the Board of Directors may not be Chairman of the Nomination Board.

3 Kari Järvinen appointed by Solidium Oy is Chairman of the Nomination Board. Marcus Wallenberg is the member of the Nomination Board appointed by FAM AB.

Shareholders at the Annual General Meeting (AGM) have appointed a Shareholders' Nomination Board to prepare proposals for the AGM's approval concerning the number of members of the Board of Directors, the members of the Board, remuneration for the Chairman, Vice Chairman and members of the Board and the remuneration for the Chairman and members of the committees of the Board.

Board share interests at 31 December 2016

Shares held1
A R
Board Members at 31 December 2016
Gunnar Brock, Chairman - 78 000
Jorma Eloranta, Vice Chairman 150 5 648
Anne Brunila - 15 909
Elisabeth Fleuriot - 15 909
Hock Goh - 21 692
Mikael Mäkinen - 28 585
Richard Nilsson - 14 042
Hans Stråberg - 31 470
Total Shares Held 150 211 255

1 Board members' related parties hold no Stora Enso shares.

Notes to the Consolidated financial statements – Note 7 Board and executive remuneration 76

The following Board members also Served in 2016

Shares Held
when Board
Membership
Ended
Effective
Date of
Board
Membership
Ending
Juha Rantanen
9 918
28 April 2016

Group Leadership Team (GLT) remuneration and share interests

The table below includes the remuneration paid to GLT members during the year, including the share awards that vested in that year. The Company recommends and expects the CEO and GLT members to hold Stora Enso shares at a value corresponding to at least one annual base salary. Stora Enso shares received as remuneration are therefore recommended not to be sold until this level has been reached.

The aggregate cost of GLT remuneration in 2016 amounted to EUR 9.9 (EUR 11.0) million. The total number of GLT members was twelve (thirteen) at year end 2016. Malin Bendz joined GLT at 1 November, and two GLT members left during the year, Jari Latvanen on 28 October and Lars Häggström on 31 October.

In accordance with their respective pension arrangements, GLT members may retire at sixty-five years of age with pensions consistent with local practices in their respective home countries. Contracts of employment provide for notice of six months prior to termination with severance compensation of twelve months basic salary if the termination is at the Company's request.

The outcome of the financial targets relating to the Short Term and Long Term Incentive programmes for performance year 2015 were reviewed and confirmed by the Remuneration Committee in the ordinary annual salary review in March.

Shown in Note 21 Employee variable compensation and equity incentive schemes are details of share awards programmes and incentive schemes for the management and staff of Stora Enso.

Group Leadership Team remuneration

Year Ended 31 December
2016 2015
EUR thousand CEO Others1 GLT Total CEO Others GLT Total
Remuneration
Annual salary4 934 3 964 4 898 932 3 846 4 778
Local housing (actual costs) - 119 119 - 132 132
Other benefits 20 581 601 25 605 630
Termination benefits - - - - 475 475
Short Term Incentive programme3 499 924 1 423 232 650 882
Long Term Incentive programme3 151 424 575 371 1 493 1 864
1 604 6 012 7 616 1 560 7 201 8 761
Pension Costs
Mandatory Company plans 64 1 044 1 108 61 983 1 044
Stora Enso voluntary plans 5502 625 1 175 537 629 1 166
614 1 669 2 283 598 1 612 2 210
Total Compensation 2 218 7 681 9 899 2 158 8 813 10 971

1 The amounts include payments related to Jari Latvanen until 28 October and Lars Häggström until 31 October. Payments related to the new GLT member Malin Bendz are included from 1 November.

2 The CEO participates in the Swedish Executive Pension Plan where pension accruals are unfunded for all participants, the liability is calculated and insured in accordance with Swedish legislation. The unfunded liability for the CEO amounts to EUR 1 579 thousand.

3 Disclosed amounts for Short and Long term Incentives include amounts for executives who were GLT members at the time of the payment in March 2016.

4 Annual salary for executives is disclosed only for the period during which they were GLT members.

Notes to the Consolidated financial statements – Note 7 Board and executive remuneration 77

Executives other than CEO

Short Term Incentive (STI) programmes for management

GLT members have STI programmes with up to a maximum 40% or 50% of their annual fixed salary, payable the year after the performance period. The STI for 2016 was based 70% on financial measures and 30% on Individual Key Targets.

Long Term Incentive (LTI) programmes for management

Since 2014 the LTI programmes have three year targets and vest in only one portion after three years and the absolute maximum vesting level is 100% of the number of shares awarded. Three quarters (75%) of the awards under the 2016 programme is in Performance Shares, where shares will vest in accordance with performance criteria proposed by the Remuneration Committee and approved by the Board of Directors. One quarter (25%) of the award under the 2016 programme is in Restricted Shares, for which vesting is subject to continued employment.

Under the 2016 LTI programme, GLT members (in GLT at year end) potentially can receive 248 888 shares assuming the maximum vesting level during the three-year vesting period (2016–2018) is achieved.

The fair value of employee services received in exchange for share-based compensation payments is accounted for in a manner that is consistent with the method of settlement either as cash-settled or equity settled as described in more detail in Note 21 . For the equity settled part, it is possible that the actual cash cost does not agree with the accounting charges as the share price is not updated at the time of the vesting. The figures in the Group Leadership Team Remuneration table refer to individuals who were executives at the time of settlement.

During the year 30% of the 2013 programme vested, in comparison to 2015 when 30% of both 2012 and 2013 programmes vested. The number of shares settled on executives (GLT members at settlement date) from previous awards derived from Restricted Share programmes and Performance Share programmes amounted to 55 681 shares having a cash value at the 1 March 2016 settlement date of EUR 424 289 based on the share price at that date. Next year, in March 2017, the 2014 programme vests in only one portion after three years, dependent on Economic Value Added (EVA) for the Stora Enso Group.

Chief Executive Officer (CEO) - Karl-Henrik Sundström

The CEO has been employed since 1 August 2012 and assumed the position as CEO on 1 August 2014. He has a notice period of six months with a severance payment of twelve months salary on termination by the company but with no contractual payments on any change of control. Benefits include pension provisions. The CEO's pension plan consists of collectively agreed pension plan in Sweden (ITP2) and a defined contribution (DC) top up pension plan. Contributions to the DC plan in the interval 20–30 Income Base Amounts (IBA; one IBA was 59 300 SEK in 2016) is 23%, contributions above 30 IBA is 35% for the salary the CEO had prior to assuming this position and 39% on the salary increase amount received when assuming the position as CEO. The retirement age is sixty-five years.

Short Term Incentive (STI) programmes for CEO

The CEO is entitled to a STI programme decided by the Board each year giving a maximum of 75% of annual fixed salary. The STI for 2016 was based 70% on financial measures and 30% on Individual Key Targets.

Long Term Incentive (LTI) programmes for CEO

The CEO participates in 2014, 2015 and 2016 share based LTI programmes. The programmes have three year targets and vest in only one portion after three years. Three quarters (75%) of the awards are in Performance Shares, where shares will vest in accordance with performance criteria proposed by the Remuneration Committee and approved by the Board of Directors. One quarter (25%) of the awards are in Restricted Shares, for which vesting is only subject to continued employment.

The CEO has the potential to receive up to 78 799 shares under the 2016 LTI programme. The grant value EUR 600 448 is based on the share price at grant date and assuming maximum vesting level during the three-year vesting period is achieved. The CEO received shares from previous awards of Restricted Share programmes and Performance Share programmes, which amounted to 19 751 shares having a cash value at the 1 March 2016 settlement date of EUR 150 503 based on the share price of EUR 7.62 at that date.

Notes to the Consolidated financial statements – Note 7 Board and executive remuneration 78

Group Leadership Team share interests

Performance
Share
Restricted
Share
Executives in Office at the Year End R Shares
Held1
Opportunity
2017–20192
Opportunity
2017–20192
Juan Carlos Bueno - 94 734 31 578
Johanna Hagelberg 1 626 43 672 14 557
Kati ter Horst 11 779 72 402 24 135
Malin Bendz 10 647 25 408 8 469
Ulrika Lilja 13 355 37 251 12 417
Per Lyrvall3 37 954 63 580 21 193
Markus Mannström 20 951 35 651 11 884
Noel Morrin 11 940 38 534 24 453
Gilles van Nieuwenhuyzen - 60 979 20 326
Seppo Parvi 7 253 65 329 21 776
Karl-Henrik Sundström4 91 794 200 901 66 967
Jari Suominen 16 836 56 459 18 819
Total, Serving Officers5 224 135 794 900 276 574

1 None of the GLT members holds A shares.

2 Potential shares to GLT members listed here are gross of taxes

3 Spouse holds 1 257 shares.

4 41 700 of the shares are held by a related party (Alma Patria AB).

5 The Company recommends and expects GLT members to hold Stora Enso shares at a value corresponding to at least one annual base salary. Stora Enso shares received as

remuneration are therefore recommended not to be sold until this level has been reached.

The following executive officers also served in 2016

Shares Held
when GLT
Membership
Ended
Performance
Share
Opportunity
when GLT
Membership
Ended1
Restricted
Share
Opportunity
when GLT
Membership
Ended1
Effective
Date of GLT
Membership
Ending
Lars Häggström 23 095 66 227 22 075 31 October
2016
Jari Latvanen - 58 991 19 664 28 October
2016

1 Unvested Performance and Restricted share awards were forfeited when employment ended.

Notes to the Consolidated financial statements – Note 8 Net financial items 79

Note 8 Net financial items

Accounting principles

Net financial items comprise of net interest expenses, foreign exchange gains and losses and other financial income and expenses mainly arising from interestbearing assets and liabilities.

Financial income and expense

Year Ended 31 December
EUR million 2016 2015
Net Financial Expense in the Income Statement
Financial income 44 25
Financial expense -286 -270
Total -242 -245
Represented by
Interest expense
Borrowings -163 -189
Net interest from interest rate derivatives 1 -7
Finance leases -1 -2
Interest capitalised 12 12
Interest income on loans and receivables 10 18
Net interest on net defined benefit liabilities -7 -9
Exchange gains and losses
Currency derivatives 30 1
Borrowings and deposits -73 -44
Other financial income 3 5
Other financial expense
Fair value hedges - -1
Other fair value changes -4 1
Others -50 -30
Total -242 -245

Gains and losses on derivative financial instruments are shown in Note 27 Derivatives.

In 2016, the net interest expense on borrowings decreased due to a lower and further improved debt portfolio. The amount of borrowing costs capitalised during the year amounted to EUR 12 (EUR 12) million. In 2016, these are mainly related to the Beihai Mill project in Guangxi, China which commenced production during the second quarter of 2016. The average interest rate used for capitalisation was 4.5% (4.9%). Costs on long-term debt issues capitalised as part of non-current debt amounted to EUR 25 (EUR 32) million in the Statement of Financial Position. During the year EUR 8 (EUR 7) million was amortised through interest expense by using the effective interest rate method.

Exchange gains and losses for currency derivatives mainly relate to non-hedge accounted instruments fair valued through the Income Statement as well as time value of options under hedge accounting.

The other fair value changes included under other financial expenses are mainly related to the change in the fair value of interest rate derivatives not under hedge accounting. At the end of 2016, the group did not have any non-hedge accounted interest-rate derivatives outstanding.

Notes to the Consolidated financial statements – Note 8 Net financial items 80

In 2016 the group recorded a net expense of EUR 34 (EUR 20) million due to repurchases of bond notes with the impact being under other financial expense. The transactions are explained in more detail in Note 26 Debt. During 2015, the group closed majority of its non-hedge accounted interest rate swaps and all of its non-hedge accounted interest rate options and interest rate collars. The net impact of the closures on Income Statement amounted to nil. The net cash paid of EUR 38 million excluding accrued interest to settle the derivative liabilities are presented for 2015 period in the other financial items section of the Cash Flow Statement.

During 2015, Pohjolan Voima Oy (PVO) related shareholder loans to finance the Olkiluoto 4 (OL4) project were written off as a result of TVO's General Meeting's decision not to apply for a construction licence for the Olkiluoto 4 nuclear power plant. The write-off of the loan receivables had a negative impact of EUR 5 million that is shown in other financial expense on others line for the year 2015.

The rest of the amount reported under other financial expense mainly relates to net financial fees for unused committed credit facilities, guarantees and rating agencies.

Total foreign exchange gains and losses in the income statement excluding hedges

Year Ended 31 December
EUR million 2016 2015
Sales 4 64
Costs and expenses -7 -13
Borrowings and deposits -73 -44
Total -76 7

Notes to the Consolidated financial statements – Note 9 Income taxes 81

Note 9 Income taxes

Accounting principles

The group income tax expense/benefit includes taxes of group companies based on taxable profit/loss for the period, together with tax adjustments for previous periods and the change in deferred income taxes.

Deferred income taxes are provided using the liability method, as measured with enacted, or substantially enacted, tax rates, to reflect the net tax effects of all temporary differences between the tax bases and the accounting bases of assets and liabilities. No deferred tax is recognised for the initial recognition of goodwill and the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction it affects neither accounting profit nor taxable profit. Deferred tax assets reduce income taxes payable on taxable income in future years. The deferred tax assets, whether arising from temporary differences or from tax losses, are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised.

Tax expense

Year Ended 31 December
EUR million 2016 2015
Current Tax -131 -84
Deferred Tax -3 53
Total Tax -134 -31

Income tax rate reconciliation

Year Ended 31 December
EUR million 2016 2015
Profit before tax 541 814
Tax at statutory rates applicable to profits in the country concerned1 -131 -149
Non-deductible expenses and tax exempt income2 -16 -
Valuation of deferred tax assets -4 12
Taxes from prior years 2 -5
Changes in tax rates and tax laws -2 -
Impairment of goodwill -2 -
Profits from equity accounted investments 30 114
Other -11 -3
Total Tax -134 -31
Effective Tax Rate 24.8% 3.8%
Statutory Tax Rate (blended) 24.1% 18.3%

1 Includes impact of EUR -25 million from countries with tax holidays and tax benefits in 2016 and impact of EUR 6 million from tax holidays and other tax benefits in 2015.

2 The tax value of non-deductible expenses of EUR 45 million has been netted against tax exempt income of EUR 29 million in 2016, and the tax value of non-deductible expenses of EUR 25 million has been netted against tax exempt income of EUR 25 million in 2015.

The statutory tax rate is a weighted average of the statutory tax rates prevailing in jurisdictions where Stora Enso operates.

Notes to the Consolidated financial statements – Note 9 Income taxes 82

Change in deferred taxes in 2016

EUR million Value at
1 Jan 2016
Income
Statement
OCI Acquisitions/
Disposals
Translation
difference
Value at
31 Dec
2016
Fixed assets -168 -16 - 2 6 -176
Financial instruments -2 - -3 - - -5
Untaxed reserves -42 9 - - 3 -30
Pensions and provisions 17 19 15 -6 1 46
Tax losses and tax credits carried forward 207 -15 - - 1 193
Other deferred taxes -18 2 - 4 -5 -17
Total -6 -1 12 - 6 11
Equity hedges (CTA) - -2 2
Change in Deferred Tax -6 -3 14 - 6 11
Assets1 246 214
Liabilities1 -252 -203

1 Deferred tax assets and liabilities have been offset in accordance with IAS 12.

OCI = Other Comprehensive income, CTA = Cumulative Translation Adjustment

Change in deferred taxes in 2015

EUR million Value at
1 Jan 2015
Income
Statement
OCI Acquisitions/
Disposals
Translation
difference
Value at
31 Dec
2015
Fixed assets -208 53 - -9 -4 -168
Financial instruments 14 - -15 - -1 -2
Untaxed reserves -40 - - - -2 -42
Pensions and provisions 54 2 -36 -2 -1 17
Tax losses and tax credits carried forward 188 19 - - - 207
Other deferred taxes -13 -21 - 11 5 -18
Total -5 53 -51 - -3 -6
Equity hedges (CTA) - -7 7 - - -
Change in Deferred Tax -5 46 -44 - -3 -6
Assets1 259 246
Liabilities1 -264 -252

1 Deferred tax assets and liabilities have been offset in accordance with IAS 12.

The recognition of deferred tax assets is based on the group's estimations of future taxable profits available from which the group can utilise the benefits.

Tax losses

As at 31 December
Tax losses carried
forward
Recognised tax values
Unrecognised tax values
EUR million 2016 2015 2016 2015 2016 2015
Expiry within five years 431 524 70 84 40 25
Expiry after five years 580 592 102 118 24 14
No expiry 1 185 1 037 20 5 249 260
Total 2 196 2 153 192 207 313 299

Notes to the Consolidated financial statements – Note 9 Income taxes 83

Tax losses of EUR 801 (EUR 887) million relate to Finland.

Non-recognised deferred tax assets on deductible temporary differences amounted to EUR 59 (EUR 98) million. There is no expiry date for these differences. Taxable temporary differences in respect of investments in subsidiaries, branches and associates and interests in joint ventures for which deferred tax liabilities have not been recognised amounted to EUR 237 (EUR 248) million.

Note 10 Depreciation, amortisation and impairment charges

Accounting principles

Depreciation, amortisation and impairment charges

Depreciation or amortisation of an asset begins when it is available for use in the location and condition necessary for it to be operated in the manner intended by management. Depreciation or amortisation ceases when the asset is derecognised or classified as held for sale in accordance with IFRS 5. Depreciation or amortisation does not cease when the asset becomes idle. Tangible and intangible assets are depreciated and amortised on a straight-line basis over their useful lives. Useful lives are reviewed periodically. In case an asset is disposed, proceeds exceeding the carrying value of the asset up to its historical cost are netted against depreciation, amortisation and impairment charges. Only disposal proceeds exceeding the historical cost of an asset are presented as other operating income (note 5). If the asset's book value is higher than the disposal proceeds, the difference is recognised as an impairment in the period when a binding sales contract is signed.

The carrying amounts of intangible assets and property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment, whereas goodwill is tested annually. If any such indication exists, the recoverable amount is estimated as the higher of the fair value less costs of disposal and the value in use, with an impairment loss being recognised whenever the carrying amount exceeds the recoverable amount.

A previously recognised impairment loss on property, plant and equipment is reversed if there has been a change in the estimates used to determine the recoverable amount, however, not to an extent higher than the carrying amount that would have been had no impairment loss been recognised in prior years. For goodwill, however, a recognised impairment loss is not reversed.

Whilst intangible assets and property, plant and equipment are subject to impairment testing at the cash generating unit (CGU) level, goodwill is subject to impairment testing at the level of CGU or groups of CGUs, which represents the lowest level within the group at which goodwill is monitored for internal management purposes.

Depreciation, amortisation and impairment charges

Year Ended 31 December
EUR million 2016 2015
Depreciation and Amortisation
Intangible assets 18 17
Buildings and structures 85 89
Plant and equipment 389 404
Other tangible assets 12 12
Total 504 522
Impairment and Disposal Gains/Losses
Goodwill 11 -
Intangible assets - -
Land - 3
Buildings and structures 25 32
Plant and equipment 60 204
Other tangible assets 7 7
Gain on sale of fixed assets -159 -
Total -56 246
Reversal of Impairment
Buildings and structures -9 -3
Plant and equipment -41 -2
Total -50 -5
Depreciation, Amortisation and Impairment Charges 398 763

Notes to the Consolidated financial statements – Note 10 Depreciation, amortisation and impairment charges 85

Depreciation and amortisation

The total depreciation and amortisation charge amounted to EUR 504 million and was EUR 18 million less than in 2015. A breakdown of depreciation, amortisation and impairment charges by divisions is set out in Note 3 Segment information.

Disposal gains and losses

On 6 June 2016 Stora Enso announced the divestment of key assets of its Suzhou Mill in China, including the land-use rights and buildings, to the local government of Suzhou National New & Hi-tech Industrial Development Area (SND). The cash consideration for the assets was EUR 240 million. According to Stora Enso's accounting policy, disposal proceeds exceeding the carrying value of the asset but not its historical cost are netted against depreciation, amortisation and impairment charges. In 2016, the depreciation, amortisation and impairment charges included a disposal profit of EUR 159 million as well as a reversal of previous impairment charges of EUR 41 million. Suzhou Mill was part of the Paper division.

Impairment testing

The recoverable amount of CGUs has been determined based on a value-in-use calculation using cash flow projections from financial budgets approved by the Board of Directors and management. The pre-tax discount rates are calculated for each cash generating unit taking into account the tax and risk profile of the country in which the cash flow is generated. The table in the goodwill impairment testing section below sets out the pre-tax discount rates used for goodwill impairment testing, which are similar to those used in the impairment testing of other intangible assets and property, plant and equipment.

Impairments were calculated with a value-in-use method for each CGU based on the following main assumptions:

  • Sales price estimates in accordance with internal and external specialist analysis
  • Inflation estimates of approximately 2% per year
  • Current cost structure to remain unchanged

• For goodwill testing a four-year future period was used after which the perpetuity value was based on zero growth rates, whereas for intangible assets, property, plant and equipment testing the period was the remaining expected economic life of the assets.

Other intangible assets and property, plant and equipment impairment

The total impairment charges on other intangible assets and property, plant and equipment in 2016 amounted to EUR 92 million (EUR 248 million) and resulted from impairment testing and restructurings. The impairments are mostly attributable to:

• EUR 78 million (EUR 216 million) resulted from impairment testing in Newsprint Europe CGU in Paper division. The result is explained in more detail in the following paragraphs.

• EUR 6 million for idle machinery relating to the consolidation of corrugated packaging production in Finland.

Newsprint Europe CGU in Paper division was tested for impairment in 2016 due to the further weakened long-term earnings expectations resulting from decline in the European paper markets. The recoverable amount was based on the value-in-use and amounted to EUR 233 million. The pretax discount rate used for impairment testing was 6.8% (7.3%). The group recorded an impairment charge of EUR 78 million (EUR 120 million) in Newsprint Europe CGU in 2016.

Uncoated Magazine Paper Europe CGU in Paper division was not tested for impairment in 2016. In 2015, the impairment test for Uncoated Magazine Paper resulted in a value-in-use of EUR 301 million with a discount rate of 7.3% The group recorded an impairment charge of EUR 93 million in Uncoated Magazine Paper Europe CGU in 2015.

Goodwill impairment testing

In 2016 the total goodwill impairment charge amounted to EUR 11 million and was fully related to Corrugated China operations in Packaging Solutions division. The main reason for the impairment is the challenging market situation and a change in the customer base. Stora Enso recognises goodwill only to the extent of its interest in the net assets acquired (the partial goodwill method). As such, the impairment of goodwill is fully allocated to the owners of the parent. After the impairment no Goodwill was left in Corrugated China CGU.

There was no goodwill impairment in 2015.

Notes to the Consolidated financial statements – Note 10 Depreciation, amortisation and impairment charges 86

Groups of cash generating units containing goodwill

Year Ended 31 December
2016 2015
EUR million Goodwill
at Year
End
Intangible
Assets
and
Property,
Plant and
Equipment
at Year
End
Recoverable
Amount at
Year End
Impairment
Charge
Pre-tax
Discount
Rate
Goodwill
at Year
End
Intangible
Assets
and
Property,
Plant and
Equipment
at Year
End
Recoverable
Amount at
Year End
Impairment
Charge
Pre-tax
Discount
Rate
Packaging Solutions -
Europe
19 671 1 529 - 10.0% 19 686 1 461 - 10.6%
Packaging Solutions -
Corrugated China
- 56 56 11 8.0% 11 66 145 - 8.6%
Biomaterials - Innovation
and Nordic Operations
32 343 769 - 7.5% 31 321 930 - 8.0%
Wood Products - Central
Europe
104 160 713 - 6.8% 104 163 672 - 7.3%
Paper - Newsprint and Book
Paper
43 261 542 - 6.8% 43 359 679 - 7.3%
Paper - Uncoated Magazine
Paper
40 290 774 - 6.8% 40 314 529 - 7.3%
Goodwill 238 1 781 4 383 11 248 1 909 4 416 -

Segment impairment and disposal losses less reversals

Year Ended 31
December
EUR million 2016 2015
Consumer Board - 2
Packaging Solutions 18 -1
Biomaterials - 1
Wood Products -1 -4
Paper 32 243
Other 4 -
Total (impairment + / reversal -) 53 241

The calculation of value-in-use is most sensitive to discount rate, sales price and costs. The Sensitivity Analysis table summarises what effect a 1% change in the discount rate, 1% decrease in sales prices and 1% increase in costs would have had on the recoverable amounts of group of CGUs carrying the most of the group's total goodwill.

Goodwill testing sensitivity analysis, impact on recoverable amount

EUR million Wood
Products -
Central
Europe
Paper -
Newsprint
and Book
Paper -
Uncoated
Magazine
Paper
1% increase in the discount rate -113 -78 -123
1% annual decrease in the sales price -117 -89 -71
1% annual increase in the costs -106 -81 -62

Note 11 Intangible assets and property, plant and equipment

Accounting principles

Computer software development costs

The cost of development or acquisition of new software clearly associated with an identifiable and unique product that will be controlled by the group and has probable benefit exceeding its cost beyond one year is recognised as an intangible asset and amortised over the expected useful life of the software. Website costs are expensed as incurred.

Goodwill

Goodwill represents future economic benefits arising from assets that are not capable of being individually identified and separately recognised by the group on an acquisition. Goodwill is computed as the excess of the cost of an acquisition over the fair value of the group's share of the fair value of net assets of the acquired subsidiary at the acquisition date, and is allocated to those groups of cash generating units expected to benefit from the acquisition for the purpose of impairment testing. In compliance with IFRS 3, the cost of an acquisition is equal to the sum of the consideration transferred, the value of the non-controlling interest in the acquisition and the fair value of the previously held interest in the acquired subsidiary. Goodwill arising on the acquisition of non-euro foreign entities is treated as an asset of the foreign entity denominated in the local currency and translated at the closing rate.

Goodwill is not amortised but tested for impairment on an annual basis, or more frequently if there is an indication of impairment. Gains and losses on the disposal of a group entity include any goodwill relating to the entity sold.

Goodwill arising upon the acquisition of an equity accounted investment or joint arrangement is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the group's share of the net fair value over the cost of the acquisition, after reassessment, is recognised immediately in the income statement.

Intangible assets

Intangible assets are stated at historical cost and amortised on a straight-line basis over their expected useful lives, which usually vary from 3 to 10 years and up to 20 years for patents. An adjustment is made for any impairment. Intangible items acquired must be recognised as assets separately from goodwill if they meet the definition of an asset, are either separable or arise from contractual or other legal rights, and their fair value can be measured reliably.

Intangible assets recognised separately from goodwill in acquisitions consist of marketing and customer-related or contract and technology-based intangible assets. Typical marketing and customer-related assets are trademarks, trade names, service marks, collective marks, certification marks, customer lists, order or production backlogs, customer contracts and the related customer relationships. The contract and technology-based intangible assets are normally licensing and royalty agreements or patented technology and trade secrets such as confidential formulas, processes or recipes. The fair value determination of customer contracts and related relationships is derived from expected retention rates and cash flow over the customers' remaining estimated lifetime. The value of trademarks is derived from discounted cash flow analysis using the relief from royalty method.

Property, plant and equipment

Property, plant and equipment acquired by group companies are stated at historical cost, augmented where appropriate by asset retirement costs. Assets arising on the acquisition of a new subsidiary are stated at fair value at the date of acquisition. Depreciation is computed on a straight-line basis, as adjusted for any impairment and disposal charges. The Consolidated Statement of Financial Position value represents cost deducted by received grants and subsidies and less accumulated depreciation and any impairment charges. Interest costs on borrowings to finance the construction of these assets are capitalised as part of the cost during the construction period when requirements are fulfilled.

Land is not depreciated as it is deemed to have an indefinite life, but otherwise depreciation is based on the following expected useful lives:

Asset Class Depreciation Years
Buildings, industrial 10-50
Buildings, office & residential 20-50
Groundwood mills 15-20
Hydroelectric power 40
Paper, board and pulp mills, main machines 20
Heavy machinery 10-20
Converting factories 10-15
Sawmills 10-15
Computers 3-5
Vehicles 5
Office equipment 3-5
Railway, harbours 20-25
Forest roads 10-35
Roads, fields, bridges 15-20

Ordinary maintenance and repair charges are expensed as incurred, but the costs of significant renewals and improvements are capitalised and depreciated over the remaining useful lives of the related assets. Retirements, sales and disposals of property, plant and equipment are recorded by deducting the cost and accumulated depreciation from the accounting records with any resulting terminal depreciation adjustments reflected in impairment charges in the Consolidated Income Statement. Capital gains are shown in other operating income.

Spare parts are accounted for as property, plant and equipment if they are major and used over more than one period, or if they are used only in connection with an item of property, plant and equipment. In all other cases, spare parts are carried as inventory and recognised in profit or loss as consumed.

Intangible assets

Year Ended 31 December
EUR million Computer
Software
Other Intangible
Assets
Goodwill Total
Acquisition Cost
At 1 January 2015 231 241 1 184 1 656
Translation difference -1 26 12 37
Reclassifications 4 28 - 32
Additions 4 2 - 6
Disposals2 -13 - - -13
At 31 December 2015 225 297 1 196 1 718
Translation difference - -2 -3 -5
Reclassifications 3 8 - 11
Additions 9 3 - 12
Disposals2 -9 -131 - -140
At 31 December 2016 228 175 1 193 1 596
Accumulated Amortisation and Impairment
At 1 January 2015 203 112 942 1 257
Translation difference - 18 6 24
Disposals2 -13 - - -13
Amortisation 9 8 - 17
At 31 December 2015 199 138 948 1 285
Translation difference 1 2 -4 -1
Disposals2 -9 -126 - -135
Amortisation 9 9 - 18
Impairment - - 11 11
At 31 December 2016 200 23 955 1 178
Net Book Value at 31 December 2016 28 152 238 418
Net Book Value at 31 December 2015 26 1591 248 4331

1 The presentation of Intangible assets and Tangible assets has been further specified with regard to the comparison period in Parent company statement. Due to this change, the amount of Groups Intangible assets increased by EUR 29 million and the amount of Groups Property, plant and equipment decreased respectively.

2 Company disposals are included Disposals line. Company disposals are discussed in more detail in Note 4 Acquisitions and disposals.

Property, plant and equipment

Year Ended 31 December
EUR million Land and Water Buildings and
Structures
Plant and
Equipment
Other Tangible
Assets
Assets in
Progress
Total
Acquisition Cost
At 1 January 2015 432 3 402 14 780 448 431 19 493
Translation difference -5 16 83 -6 11 99
Reclassifications - 62 126 6 -225 -31
Reclassifications to biological assets - - -2 - - -2
Additions 22 34 256 7 587 906
Disposals2 -39 -110 -1 166 -5 -10 -1 330
At 31 December 2015 410 3 404 14 077 450 794 19 135
Translation difference 23 31 -83 5 -17 -41
Reclassifications - 21 410 9 -451 -11
Reclassifications to biological assets - - -2 - - -2
Additions 1 281 339 5 - 626
Disposals2 -39 -195 -905 -27 -12 -1 178
At 31 December 2016 395 3 542 13 836 442 314 18 529
Accumulated Depreciation and Impairment
At 1 January 2015 62 2 159 11 474 365 14 14 074
Translation difference - -12 32 -5 -1 14
Disposals2 -26 -101 -1 156 -5 -9 -1 297
Depreciation - 89 404 12 - 505
Impairment 3 29 202 3 4 241
At 31 December 2015 39 2 164 10 956 370 8 13 537
Translation difference - 6 -109 5 1 -97
Disposals2 -33 -175 -810 -27 -5 -1 050
Depreciation - 85 389 12 - 486
Impairments and reversals - 16 19 6 1 42
At 31 December 2016 6 2 096 10 445 366 5 12 918
Net Book Value at 31 December
2016
389 1 446 3 391 76 309 5 611
Net Book Value at 31 December
2015
371 1 240 3 1211 80 786 5 5981

1 The presentation of Intangible assets and Tangible assets has been further specified with regard to the comparison period in Parent company statement. Due to this change, the amount of Groups Intangible assets increased by EUR 29 million and the amount of Groups Property, plant and equipment decreased respectively. 2 Company disposals are included in Disposals line. Company disposals are discussed in more detail in Note 4 Acquisitions and disposals.

Intangible assets and property, plant and equipment additions

Total capital expenditure for the year in Stora Enso Oyj and its subsidiaries amounted to EUR 638 (EUR 912) million. Details of ongoing projects and future plans are discussed in more detail in the Report of the Board of Directors .

Notes to the Consolidated financial statements – Note 12 Biological assets 91

Note 12 Biological assets

Accounting principles

The biological assets of Stora Enso are standing trees to be used as raw material in pulp and mechanical wood production and as bio fuels.

IAS 41 Agriculture requires that biological assets are shown in the Consolidated Statement of Financial Position at fair value. Group forests are thus accounted for at level 3 fair value less estimated point-of-sale costs at harvest, there being a presumption that fair values can be measured for these assets.

The valuation of forest assets is based on discounted cash flow models whereby the fair value of the biological assets is calculated using cash flows from continuous operations, that is, based on sustainable forest management plans taking into account growth potential. The yearly harvest from the forecast tree growth is multiplied by wood prices and the cost of fertiliser and harvesting is then deducted. The fair value of the biological asset is measured as the present value of the harvest from one growth cycle based on the productive forestland, taking into consideration environmental restrictions and other reservations. Young standing timber less than two years old (less than three years in Montes del Plata) is considered to be immature assets and accounted at cost. At harvesting, biological assets are transferred to inventory.

Fair value is deemed to approximate the cost when little biological transformation has taken place or the impact of the transformation on price is not expected to be material, which varies according to the location and species of the assets.

Stora Enso also ensures that the group's share of the valuation of forest holdings in equity accounted investments and joint operations are consistent with group accounting policies.

The group has biological assets in its own subsidiaries in China, Brazil and Laos, in joint operations in Brazil and Uruguay and in equity accounted investments in Finland, Sweden and Brazil.

The amount directly disclosed in the group Consolidated Statement of Financial Position from subsidiary companies and from joint operations amounts to EUR 489 (EUR 640) million as shown below. The group's indirect share of biological assets held by equity accounted investments amounts to EUR 2 897 (EUR 2 841) million.

Biological assets

Year Ended 31 December
EUR million 2016 2015
Subsidiaries and Joint Operations
Fair Value at 1 January 640 643
Translation differences 17 7
Change in fair value -120 -13
Additions (cost based) 91 77
Harvesting -62 -51
Other operative changes -79 -5
Other changes - -20
Reclassification from Property, plant and equipment 2 2
Fair Value of biological assets at 31 December 489 640
Equity accounted investments
Bergvik Skog Ab (49%) 2 360 2 397
Tornator Oyj (41%) 515 428
Arauco Florestal Arapoti S.A. (20%) 22 16
Fair value of biological assets of Associated companies at 31 December 2 897 2 841

Subsidiaries and joint operations:

At the end of 2016, the fair value of the biological assets in Guangxi, China was EUR 174 (EUR 356) million, which included young standing timber

Notes to the Consolidated financial statements – Note 12 Biological assets 92

with a value of EUR 36 (EUR 25) million. The decrease is mainly due to reduced inventory as a result of a higher than previously estimated portion of over mature areas with accumulated wood losses. The discount rate of 9.2% (9.6%) used in the DCF is determined using the weighted average cost of capital method. The amount of land area is 84 (86) thousand hectares. As announced on 19 January, Stora Enso is reconsidering its plans to build a chemical pulp mill in Beihai. As a consequence of the change in scope, Stora Enso would decrease the area of its leased forest lands in the Guangxi region. The scope and schedule for the reduction of fibre base will be decided later. As a part of this process, all contracts will be evaluated and Stora Enso aims to have only land leased that is free of contractual defects.

Veracel Celulose S.A. (Veracel), a 50% joint operation company in Brazil, had biological assets fair valued at EUR 202 (EUR 172) million, of which Stora Enso's share was EUR 101 (EUR 86) million. The biological assets included young standing timber with a value of EUR 22 (EUR 0) million. The discount rate of 7.87% (7.6%) used in the DCF is determined using the weighted average cost of capital method. Stora Enso's share (50%) of the land area is 114 (114) thousand hectares.

Montes del Plata (MdP), a 50% joint operation company in Uruguay, had biological assets with a fair value of EUR 380 (EUR 356) million, of which Stora Enso's share was EUR 190 (EUR 178) million. The biological assets included young standing timber with a value of EUR 41 (EUR 39) million. The discount rate of 8.0% (8.0%) used in the DCF is determined using the weighted average cost of capital method. Stora Enso's share (50%) of the land area is 123 (117) thousand hectares.

Sensitivities of significant assumptions of a +/- 10% movement

Wood market prices Growth rate
Guangxi +/-36 +/-17
Veracel +/-11 +/-11
Montes del Plata +18/-17 +/- 6

At 31 December 2016 biological assets were located by value, in China 36% (56%), Brazil 22% (14%), Uruguay 39% (28%) and other areas 3% (2%). The amount of land area is 366 (365) thousand hectares of which 30% (31%) of the land is leased and 5% (2%) restricted. The harvested wood amounted to 4 (4) million m3 . The MdP and Veracel amounts are taken into account at ownership share and hectares.

Equity accounted investments:

The group has three equity accounted investments holding biological assets:

• Bergvik Skog Ab (Bergvik Skog), the 49% owned Swedish associate company, had biological assets with a fair value of EUR 4 816 (EUR 4 892) million, of which Stora Enso's share was EUR 2 360 (EUR 2 397) million. The fair value change for Bergvik is due to a decrease in discount rate, an adjustment to the price curve, and a correction in the model from last year.

• Tornator Oyj (Tornator), a 41% owned Finnish associate company, had biological assets with a fair value of EUR 1 257 (EUR 1 045) million, of which Stora Enso's share was EUR 515 (EUR 428) million. The change in Tornator's fair value is due to an increase in felling plan and a decrease in the discount rate.

• Arauco Florestal Arapoti S.A., the 20% owned southern Brazilian associate company, had biological assets with a fair value of EUR 109 (EUR 79) million, of which Stora Enso's share was EUR 22 (EUR 16) million.

For information about the amount of wood delivered to Stora Enso mills and share of wood sourced from plantations, please see Stora Enso Sustainability Report 2016, section Forests, plantations, and land use. Stora Enso Sustainability Report 2016 is available online at storaenso.com/ annualreport .

Notes to the Consolidated financial statements – Note 13 Equity accounted investments 93

Note 13 Equity accounted investments

Accounting principles

Consolidation principles

Associated companies over which Stora Enso exercises significant influence are accounted for using the equity method, which involves recognising in the Consolidated Income Statement the group's share of the equity accounted investment profit or loss for the year. The group's interest in an associated company is carried in the Consolidated Statement of Financial Position at an amount that reflects its share of the net assets of the associate.

The group's share of results in equity accounted investments is reported in operating profit to reflect the operational nature of these investments, especially those in wood supply. There is no material goodwill in the Statements of Financial Position of equity accounted investments.

Principal equity accounted investments

As at 31 December
Proportion of ownership
interest/voting rights held %
EUR million
Company Reportable
segment
Domicile and
principal
place of
operations
2016 2015 2016 2015
Bergvik Skog AB: forest Other Sweden 49.00/36.701 49.00/36.701 1 265 1 300
Tornator Oyj: forest Other Finland 41.00 41.00 246 186
Bulleh Shah Packaging (Private) Limited: packaging
goods
Consumer
Board
Pakistan 35.00 35.00 34 33
Arauco Florestal Arapoti S.A.: plantation Paper Brazil 20.00 20.00 26 19
1 571 1 538
Others 23 32
Carrying Value at 31 December 1 594 1 570

1 The group's shareholding in Bergvik Skog AB is 49%, however, the voting rights are limited to 36.7%.

Group share of equity accounted investment income statements

Year Ended 31 December
EUR million 2016 2015
Sales 297 345
Net operating expenses -200 -229
IAS 41 valuation 136 575
Operating Profit 233 691
Net financial items -53 -34
Net Profit before Tax 180 657
Income tax -24 -138
Net Profit for the Year 156 519

All of the above companies are accounted for using the equity method in these Consolidated financial statements.

In April 2016, Stora Enso divested its 33.33% shareholding in the Swedish recycled materials company IL Recycling AB for SEK 239 (EUR 26) million. Related to the transaction Stora Enso recorded a capital gain of EUR 16 million in Division Paper second quarter 2016 results.

The average number of personnel in the equity accounted investments was 2 797 in 2016, compared with 3 460 in 2015.

Notes to the Consolidated financial statements – Note 13 Equity accounted investments 94
--------------------------------------------------------------------------------------- ----

Summarised financial information in respect of the group's material associates, Bergvik Skog AB and Tornator Oyj, is set out below. The group's share of these associated companies is reported under segment Other and covers the majority of the group's total share of results of equity accounted investments. The summarised financial information below represents amounts shown in the associate's financial statements prepared in accordance with IFRS.

Bergvik Skog AB

EUR million 2016 2015
Current assets 43 53
Non-current assets 5 074 5 149
Current liabilities 362 299
Non-current liabilities 1 111 1 160
Tax liabilities 1 072 1 102
Sales 234 214
Net profit for the year 127 1 015
Other comprehensive income -6 6
Total comprehensive income 121 1 021
Dividends received from the associate during the financial year 44 22
Net assets of the associate 2 572 2 641
Proportion of the Group's ownership interest in Bergvik Skog AB 49.00% 49.00%
Goodwill 5 6
Carrying amount of the Group's interest in Bergvik Skog AB 1 265 1 300

In 2004, 56.7% of Stora Enso's Swedish forest holding company Bergvik Skog was divested to institutional investors leaving the group with a minority shareholding of 43.26%. In May 2014 the group spent SEK 891 million (EUR 97 million) to increase its shareholding in Bergvik Skog to 49%. As part of the acquisition the group recorded goodwill of EUR 5 million.

Stora Enso's shareholding in the company was valued at EUR 1 265 (EUR 1 300) million at the year-end 2016. In 2016, the group's share of Bergvik Skog's net profit was EUR 62 (EUR 498) million, including a forest valuation gain of EUR 52 (gain EUR 581) million. The fair value change of Bergvik Skog's forest holdings was mainly due to the decrease of discount rate used in the discounted cash flow based valuation of the biological assets, an adjustment to the price curve, and a correction in the model from last year. In 2015, the fair value change of Bergvik Skog's forest holdings was mainly due to the decrease of discount rate used in the discounted cash flow based valuation of the biological assets. Fair value change in 2015 increased income tax approximately EUR 128 million.

During the fourth quarter of 2015 Bergvik Skog had material land disposal transactions. The arrangements resulted in a gain in Bergvik Skog's income statement of which Stora Enso's share amounted approximately to EUR 33 million.

Notes to the Consolidated financial statements – Note 13 Equity accounted investments 95

Tornator Oyj

EUR million 2016 2015
Current assets 26 37
Non-current assets 1 355 1 143
Current liabilities 69 78
Non-current liabilities 579 553
Tax liabilities 132 96
Sales 97 114
Net profit for the year 173 39
Other comprehensive income 5 4
Total comprehensive income 178 43
Dividends received from the associate during the financial year 12 9
Net assets of the associate 601 453
Proportion of the Group's ownership interest in Tornator Oyj 41.00% 41.00%
Carrying amount of the Group's interest in Tornator Oyj 246 186

Stora Enso's Finnish forest holdings were divested into an equity accounted investment, Tornator, in 2002. The group's 41% residual interest was worth EUR 246 (EUR 186) million at the year-end 2016. In 2016, the group's share of Tornator's net profit was EUR 71 (EUR 16) million, including a forest valuation gain of EUR 83 (loss EUR 7) million.

During the fourth quarter of 2015 Tornator had a material land disposal transaction which resulted in a gain in Tornator's income statement of which Stora Enso's share amounted approximately to EUR 3 million.

Notes to the Consolidated financial statements – Note 13 Equity accounted investments 96

Aggregate information of equity accounted investments that are not individually material

As at 31 December
EUR million 2016 2015
PPE1
, goodwill and other intangible assets
74 92
Biological assets 22 16
Operative receivables:
Non-current - 1
Current 24 26
Inventories 17 22
Cash 9 10
Total Assets 146 167
Operative Liabilities:
Non-current 5 8
Current 22 36
Debt:
Non-current 18 25
Current 10 8
Tax liabilities 8 6
Total Liabilities 63 83
Net Equity in the Group Statement of Financial Position 83 84
Represented by
Capital and Reserves 83 84
OCI - -
Equity Accounting Value 83 84
Equity Accounting Value for Bergvik Skog AB 1 265 1 300
Equity Accounting Value for Tornator Oyj 246 186
Total Equity Accounting Value 1 594 1 570

1 PPE = Property, Plant and Equipment

Notes to the Consolidated financial statements – Note 13 Equity accounted investments 97

Equity accounted investment company balances

As at 31 December
EUR million 2016 2015
Receivables from Equity Accounted Investments
Non-current loan receivables 5 5
Trade receivables 3 6
Current loan receivables - 3
Liabilities due to Equity Accounted Investments
Trade payables 40 32

Equity accounted investment transactions

Year Ended 31 December
EUR million 2016 2015
Sales to equity accounted investments 53 49
Purchases from equity accounted investments 202 182

The group engages in transactions with equity accounted investments such as sales and purchases of wood. All agreements are negotiated at arm's length and are conducted on terms that the group considers customary in the industry and generally no less favourable than would be available from independent third parties.

Total loans including interest receivable to equity accounted investments at the year-end 2016 amounted to EUR 5 (EUR 8) million.

Notes to the Consolidated financial statements – Note 14 Available-for-sale investments 98

Note 14 Available-for-sale investments

Accounting principles

The group classifies its investments into three categories: trading, held-to-maturity and available-for-sale. At the reporting date, the group held only available-forsale investments. All available-for-sale investments are considered to be non-current assets, unless they are expected to be realised within twelve months.

Available-for-sale investments are initially recognised at fair value and subsequent gains and losses are booked to equity's fair valuation reserve in other comprehensive income (OCI) and, when they are sold, the accumulated fair value adjustments are then included in the Consolidated Income Statement. Available-for-sale investments are assessed for indicators of impairment at the end of each reporting period. A significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. The part of the fair value reserve (OCI) represented by the impairment is transferred to the Consolidated Income Statement.

Summary of values

Year Ended 31 December
EUR million 2016 2015
Acquisition cost at 1 January
Listed securities 4 4
Operative securities 123 111
Investments classified as available-for-sale 127 115
OCI in opening balance 32 359
Available-for-Sale Investments at 1 January 159 474
Translation difference -1 1
Additions 2 14
Change in fair values accounted for as OCI 140 -328
Disposals -10 -
Income Statement - gains and losses 5 -2
Carrying Amount at 31 December 295 159

Unrealised gains and losses on securities

Year Ended 31 December
EUR million 2016 2015
Net unrealised holding gains (OCI) 170 32
Cost 125 127
Fair Value 295 159
Net unrealised holding gains (OCI) 170 32
Deferred tax -8 -5
Net Unrealised Holding Gains Shown in Equity as OCI 162 27
Change in Net Unrealised Holding Gains Shown in Equity as OCI 135 -326

Notes to the Consolidated financial statements – Note 14 Available-for-sale investments 99

PVO shares

The group holds a 15.5% (15.2%) interest in Pohjolan Voima Oy (PVO), a privately-owned group of companies in the energy sector that produces electricity and heat for its shareholders in Finland. Each subsidiary of the PVO group has its own class of shares that entitle the shareholder to the energy produced in proportion to its ownership of that class of share. The shareholders then have an obligation to cover the costs of production, which are generally lower than market prices. The holding is fair valued quarterly using an average of two methods: the discounted cash flow model and trading multiples. The valuation is categorised at level 3 in the fair value hierarchy.

The electricity prices in the model are based on Nordpool prices. Liquid future derivative prices are used for the available years in the model and thereafter increased by an inflation factor. The historical financial statements provide the basis for the cost structure for each of the power assets, which are adjusted by the inflation factor in future years. The discount rate of 3.29% used in the DCF is determined using the weighted average cost of capital method. The trading multiples are derived from a peer group of European companies operating power assets similar to PVO's. A +/- 5% change in the electricity price used in the DCF would change the valuation by EUR 42 million and EUR -42 million, respectively. A +/- 1% absolute change in the discount rate would change the valuation by EUR -28 million and EUR 37 million, respectively.

Other uncertainties in the valuation of PVO's share of Olkiluoto 3 nuclear power plant project relate to on-going arbitration proceedings between the plant supplier AREVA-Siemens Consortium and the plant owner Teollisuuden Voima Oyj (TVO). Stora Enso's indirect share of the capacity of Olkiluoto 3 is approximately 8.9%, through its PVO B2 shares. The possible outcome of the arbitration proceedings has not been taken into account in the valuation.

PVO shareholding at 31 December 2016

EUR million Share Series % Holding Asset Category Fair Value
2016
Fair Value
2015
PVO-Vesivoima Oy A 20.6 Hydro 121 74
Teollisuuden Voima Oyj B 15.7 Nuclear 114 39
Teollisuuden Voima Oyj B2 14.8 Nuclear under construction 0 0
Other C,C2,V,M Various Various 7 10
Total 242 123

The valuation in 2016 amounted to EUR 242 (EUR 123) million against cost value of EUR 110 (EUR 115) million, with the revaluation of EUR 132 (EUR 8) million being taken to other comprehensive income. The change in PVO's value is mainly caused by increase in electricity prices. No deferred tax is appropriate as under Finnish tax regulations holdings above 10% are exempt from tax on disposal proceeds.

During 2015, an impairment of EUR 2 million was taken to Income Statement in respect of the investment in C-shares series of PVO. This relates to the decision to discontinue electricity production in all the coal and oil-fired power plants of PVO-Lämpövoima Oy.

For information on the amount of electricity generated, purchased and sold, please see Stora Enso Sustainability Report 2016, section Environment and Efficiency (Energy).

Principal available-for-sale investments

As at 31 December 2016
EUR million Holding % Number of Shares Acquisition
Cost
Fair Value
Packages Ltd, Pakistan - listed security 5 396 650 4 42
Total Listed Securities 4 42
Pohjolan Voima Oy - unlisted security 15.5 4 943 707 110 242
Others - unlisted securities 11 11
Total Operative Securities 121 253
Total Available-for-Sale Investments at 31 December 2016 125 295
Total Available-for-Sale Investments at 31 December 2015 127 159

The difference of EUR 170 (EUR 32) million between the initial fair value at acquisition and reporting date market value of the available-for-sale investments represents the OCI reserve as shown in the Statement of Changes in Equity. Euro-denominated assets comprise 85.9% (82.7%) of available-for-sale investments.

Notes to the Consolidated financial statements – Note 15 Other non-current assets 100

Note 15 Other non-current assets

As at 31 December
EUR million 2016 2015
Prepaid expenses and accrued income 24 20
Tax credit 13 13
Barcelona disposal receivable 2 3
Other non-current operative assets 18 27
Total 57 63

Notes to the Consolidated financial statements – Note 16 Inventories 101

Note 16 Inventories

Accounting principles

Inventories are reported at the lower of cost and net realisable value with cost being determined by the first-in first-out (FIFO) method or, alternatively, weighted average cost where it approximates FIFO. The cost of finished goods and work in progress comprises raw material, direct labour, depreciation, other direct costs and related production overhead but excludes interest expenses. Net realisable value is the estimated selling price in the ordinary course of business, less costs of completion and sale.

Where market conditions result in the manufacturing costs of a product exceeding its net realisable value, a valuation allowance is made. Valuation allowances are also made for old, slow moving and obsolete finished goods and spare parts. Such valuation allowances are deducted from the carrying value of the inventories in the Consolidated statement of financial position.

As at 31 December
EUR million 2016 2015
Materials and supplies 332 343
Work in progress 77 81
Finished goods 651 664
Spare parts and consumables 282 283
Other inventories 15 13
Advance payments and cutting rights 102 108
Obsolescence allowance - spare parts and consumables -98 -106
Obsolescence allowance - finished goods -9 -9
Net realisable value allowance -6 -4
Total 1 346 1 373

EUR 14 (EUR 10) million of inventory write-downs have been recognised as an expense. EUR 7 (EUR 6) million have been recognised as a reversal of previous write-downs.

Notes to the Consolidated financial statements – Note 17 Receivables 102

Note 17 Receivables

Accounting principles

Trade receivables

Trade receivables are recognised initially at fair value and subsequently at their anticipated realisable value, an estimate being made for doubtful receivables based on an objective review of all outstanding amounts at the year end. Losses relating to doubtful receivables are recorded in the Consolidated Income Statement within other operating expenses. Trade receivables are included in current assets under current operative receivables.

Stora Enso is using factoring arrangements as one of the working capital management tools. Sold trade receivables are derecognised when the significant related risks and rewards of ownership have been transferred.

Loan receivables

Loan receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recorded initially at fair value and subsequently measured at amortised cost which is subject to regular and systematic review as to collectability. If any loan receivable is estimated to be unrecoverable, an allowance is made for the shortfall between the carrying amount and the present value of the expected cash flows. Interest income on loan receivables is included in financial income. Loan receivables with a maturity of less than 12 months are included in current assets under interest-bearing receivables and those with maturities greater than 12 months, in non-current loan receivables.

Current operative receivables

As at 31 December
EUR million 2016 2015
Trade receivables 922 1 040
Allowance for doubtful debts -51 -53
Prepaid expenses and accrued income 121 127
TRS Hedges 3 -
Other receivables 278 210
Total 1 273 1 324

As at 31 December 2016, EUR 116 (EUR 104) million of trade receivables were overdue, for which no allowance has been made. These relate to a number of different countries and unrelated customers that have no recent history of default. The age analysis of these trade receivables, net of allowance for doubtful debts, is as follows:

Age analysis of trade receivables, net of allowance for doubtful debts

As at 31 December
EUR million 2016 2015
Less than 30 days overdue 44 57
31 to 60 days overdue 10 10
61 to 90 days overdue 48 24
91 to 180 days overdue 3 -
Over 180 days overdue 11 13
Total: Overdue Accounts 116 104
Trade Receivables within their credit terms 755 883
Total 871 987

Credit losses amounted to EUR 11 (EUR 7) million, which resulted in a net decrease in the allowance for doubtful debts of EUR 2 (decrease EUR 7) million – see Note 24 Financial risk management for details of customer credit risk management. All allowances are made on an individual basis and are regularly reviewed for changes in the financial positions of customers. If the group has concerns as to the financial state of a customer, an advance payment or a letter of credit that must be irrevocable and drawn on a bank is required. At the year end, the letters of credit awaiting

Notes to the Consolidated financial statements – Note 17 Receivables 103

maturity totalled EUR 37 (EUR 36) million.

At 31 December 2016, allowances related to overdue trade receivables totalled EUR 51 (EUR 53) million. The age analysis of the receivables under the doubtful accounts is shown in the table below.

Age analysis of doubtful accounts

As at 31 December
EUR million 2016 2015
Less than 90 days 2 -
91 to 180 days 3 1
Over 180 days 46 52
Total 51 53

Stora Enso has entered into factoring agreements to sell trade receivables in order to accelerate cash conversion. These agreements resulted in full derecognition of receivables of a nominal value of EUR 368 (EUR 287) million as at the end of the year. The continuing involvement of Stora Enso in the sold receivables was estimated as being insignificant.

Interest-bearing receivables

As at 31 December
EUR million 2016 2015
Derivatives (see Note 27 ) 41 41
Loans to equity accounted investments 5 8
Other loan receivables 7 72
Total 53 121
Current Assets: Receivable within 12 months
Non-current Assets: Receivable after 12 months
46
7
53
68
Total 53 121

Annual interest rates for loan receivables at 31 December 2016 ranged from 0% (0%) to 8% (8%). Current interest-bearing receivables did not include any accrued interest at 31 December 2016. In the end of 2015 the amount of accrued interest was EUR 5 million, of which EUR 3 million related to interest rate derivatives.

On 1 October 2013, the vendor loan note issued by Papyrus Holding AB, with the nominal value of EUR 54 million, has been classified in the balance sheet as a non-current loan receivable. The note was fair valued on receipt at EUR 47 million and it accrued interest which was added in arrears to the principal of the note. The note was subordinate to senior debt but having priority over equity holders and maturing on 7 May 2017, unless voluntarily prepaid. The fair value of the note at 31 December 2015 was EUR 62 million against a carrying value of EUR 59 million. During November 2016, Papyrus Holding AB has voluntarily prepaid the full note balance and related interests.

During 2012 and 2013, Stora Enso participated, proportionally with its share of ownership in Teollisuuden Voima Oyj (TVO) through Pohjolan Voima Oy, in the financing of the bidding and engineering phase of the Finnish Olkiluoto 4 (OL4) nuclear power plant unit of TVO by granting a shareholder loan of EUR 5 million. TVO's General Meeting decided in June 2015 not to apply for a construction license for OL4 during the validity of the decision-in-principle given by the Finnish Parliament which had a term limit of 30 June 2015. As a result, the shareholder loan-receivable of EUR 5 million was written off during the second quarter of 2015.

Notes to the Consolidated financial statements – Note 18 Shareholders' equity 104

Note 18 Shareholders' equity

Accounting principles

Dividend and capital repayments

Any dividend or capital repayment proposed by the Board is not deducted from distributable shareholders' equity until approved by the shareholders at the Annual General Meeting.

At 31 December 2016 shareholders' equity amounted to EUR 5 806 (EUR 5 388) million, compared with market capitalisation on Nasdaq Helsinki of EUR 8 085 (EUR 6 618) million. The market values of the shares were EUR 10.40 (EUR 8.40) for A shares and EUR 10.21 (EUR 8.39) for R shares.

The A shares entitle the holder to one vote per share, whereas R shares entitle the holder to one vote per ten shares with a minimum of one vote, though the accountable par of both shares is the same. A shares may be converted into R shares at any time at the request of a shareholder. At 31 December 2016 the company's fully paid-up share capital as entered in the Finnish Trade Register was EUR 1 342 million (EUR 1 342 million). The current accountable par of each issued share is EUR 1.70 (EUR 1.70).

At the end of 2016, Directors and Group Leadership Team members owned 150 (zero) A shares and 435 390 (391 870) R shares representing 0.02% of the total voting rights of the company. Full details of Director and Executive interests are shown in Note 7 Board and executive remuneration. A full description of company share award programmes is shown in Note 21 Employee variable compensation and equity incentive schemes. However, none of these have any impact on the issued share capital.

Change in share capital and number of shares

A shares R shares Total
At 1 January 2015 177 056 204 611 563 783 788 619 987
Conversion of A shares to R shares 15 Jan -25 300 25 300 -
Conversion of A shares to R shares 16 Feb -25 000 25 000 -
Conversion of A shares to R shares 15 May -1 090 1 090 -
Conversion of A shares to R shares 15 Jun -400 000 400 000 -
Conversion of A shares to R shares 15 Jul -7 000 7 000 -
Conversion of A shares to R shares 15 Sep -390 390 -
Conversion of A shares to R shares 16 Nov -25 000 25 000 -
Conversion of A shares to R shares 15 Dec -40 334 40 334 -
At 31 December 2015 176 532 090 612 087 897 788 619 987
Conversion of A shares to R shares 15 Jan -25 000 25 000 -
At 31 December 2016 176 507 090 612 112 897 788 619 987
Number of votes as at 31 December 2016 176 507 090 61 211 2901 237 718 380
Share Capital at 31 December 2016, EUR million 300 1 042 1 342
Share Capital at 31 December 2015, EUR million 300 1 042 1 342

1 R share votes are calculated by dividing the number of R shares by 10.

The shares in issue at 13 April 2017 will represent the total shares eligible to vote at the forthcoming Annual General Meeting.

Notes to the Consolidated financial statements – Note 19 Non-controlling interests 105

Note 19 Non-controlling interests

Accounting principles

Non-controlling interests are presented within the equity of the group in the Consolidated Statement of Financial Position . The proportionate shares of profit or loss attributable to non-controlling interests and to equity holders of the parent company are presented in the Consolidated Income Statement after the profit for the period. Transactions between non-controlling interests and group shareholders are transactions within equity and are thus shown in the Statement of changes in equity . The measurement type of non-controlling interests is decided separately for each acquisition.

Non-controlling interests

Year Ended 31 December
EUR million 2016 2015
At 1 January 125 167
Acquisitions - -46
Disposals -4 -
Loss on NCI buy-out - 16
Equity injections - 7
Share of profit for the period -56 -24
Share of other comprehensive income -3 7
Dividends - -2
At 31 December 62 125

Principal non-controlling interests

As at 31 December
2016 2016 2015
Company Principal Place of
Business
Proportion of
Ownership Interests
Held by Non
controlling Interests,
%
EUR million
Stora Enso Pulp and Paper Asia AB Group1 Sweden and China See separate table
below
54 114
Stora Enso Inpac Packaging Group China and India 10.00 7 11
Stora Enso Arapoti Industria de Papel SA Brazil Disposed in 2016 - 5
Stora Enso Huatai Paper Co Ltd China 40.00 -7 -9
Others - 8 4
62 125

1 Consist of non-controlling interests in Guangxi Integrated Project and Operations

Notes to the Consolidated financial statements – Note 19 Non-controlling interests 106

Non-controlling interests in Stora Enso Pulp and Paper Asia AB Group

As at 31 December 2016 As at 31 December 2015
Company Principal
Place of
Business
Direct-
% of
NCI
Indirect-
% of
NCI
Total-% of NCI Direct-% of NCI Indirect-% of NCI Total-% of NCI
Stora Enso Pulp and Paper Asia
AB
Sweden
and
China
5.79 - 5.79 5.79 - 5.79
Guangxi Stora Enso Forestry Co
Ltd
China 5.00 5.50 10.50 5.00 5.50 10.50
Stora Enso (Guangxi) Packaging
Company Ltd
China 15.00 4.92 19.92 15.00 4.92 19.92
Stora Enso (Guangxi) Forestry
Company Ltd
China 15.00 4.92 19.92 15.00 4.92 19.92

On 31 March 2016, Stora Enso completed the divestment of its 80% shareholding in the Arapoti magazine paper mill in Paraná, Brazil, to Papeles Bio Bio, a Chilean paper producer. The final consideration for the shares was EUR 15 million. The transaction reduced the share of non-controlling interests in the group by EUR 4 million.

In 2015, Inpac Group, the non-controlling interest holder of Stora Enso Inpac Packaging Co. Ltd, used its option to sell a 39% share in Stora Enso Inpac Packaging Co. Ltd to Stora Enso for EUR 46 million (CNY 329 million). The transaction with the non-controlling interest holder resulted in a loss of EUR 16 million, which was recorded as a reduction of shareholders' equity. After the transaction Stora Enso owns 90% of the shares in Stora Enso Inpac Packaging Co. Ltd.

In 2015, Stora Enso acquired the 26% direct non-controlling interest in Inpac India for a price of 1 euro.

Summarised financial information in respect of the subsidiaries that have material non-controlling interests is set out below.

Notes to the Consolidated financial statements – Note 19 Non-controlling interests 107

Stora Enso Pulp and Paper Asia AB Group

EUR million 2016 2015
Non-current assets 1 007 1 020
Current assets 180 269
Shareholders' equity attributable to the owners of the parent 202 510
Non-controlling interests1 54 114
Total Equity 256 624
Non-current liabilities 553 461
Current liabilities 378 204
Sales 114 68
Net loss for the year -347 -87
Attributable to:
Owners of the parent -291 -70
Non-controlling interests -56 -17
Net Loss for the Year -347 -87
Other comprehensive income -21 46
Total Comprehensive Income Attributable to:
Owners of the parent -308 -33
Non-controlling interests -60 -8
Total Comprehensive Income -368 -41
Net cash outflow from operating activities -110 -12
Net cash outflow from investing activities -324 -373
Net cash inflow from financing activities 279 291
Net Cash Outflow/Inflow -155 -94

1 No dividends were paid to non-controlling interests in 2016 or 2015.

Notes to the Consolidated financial statements – Note 20 Post-employment benefits 108

Note 20 Post-employment benefits

Accounting principles

Employee benefits

The group operates a number of defined benefit and defined contribution plans throughout the world, the assets of which are generally held in separate trustee administered funds. Such pension and post-retirement plans are generally funded by payments from employees and by the relevant group companies, taking into account the recommendations of independent qualified actuaries. Employer contributions to the defined contribution pension plans are charged to the Consolidated Income Statement in the year to which they relate.

For defined benefit plans, accounting values are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the Consolidated Income Statement so as to spread the regular cost over the service lives of employees in accordance with the advice of qualified actuaries who carry out a full valuation of the plan every year in all major pension countries. The pension obligation is measured as the present value of estimated future cash outflows using interest rates of highly rated corporate bonds or government securities, as appropriate, that match the currency and expected duration of the related liability.

The group immediately recognises all actuarial gains and losses arising from defined benefit plans directly in equity, as disclosed in its Consolidated Statement of Comprehensive Income. Past service costs are identified at the time of any plan amendments and are recognised immediately in the Consolidated Income Statement regardless of vesting requirements. In the group's Consolidated Statement of Financial Position, the full liability for all plan deficits is recorded.

The group has established a number of pension and other benefit plans for its operations throughout the world, the cost of which amounted to EUR 165 (EUR 160) million in 2016, as shown in Note 6 Personnel expenses. The majority of plans are defined contribution schemes, the charge for which amounted to EUR 153 (EUR 150) million.

The retirement age for members of the Group Leadership Team is 65. The retirement age for the management of group companies follows local law, though some management team members have agreements to retire between 60 and 65 years. The retirement age for other staff either follows national retirement ages or is determined by local labour agreements. In the latter case, there may be certain pre-retirement liabilities accruing to the Company to cover the income of the early retirees between the age at which they ceased working and the national retirement age.

Stora Enso's total defined benefit obligations to current and former members of staff amount to EUR 1 223 (EUR 1 203) million though assets of EUR 787 (EUR 825) million have been put aside in various pension schemes to cover these liabilities. The net funding position of the defined benefit plans is shown in full in the Statement of financial position and amounts to EUR 436 million in 2016, an increase of EUR 58 million on the previous year's liability of EUR 378 million. The increase is mainly caused by the actuarial losses which result from the change in financial assumptions regarding the present value of the defined benefit obligations. Interest costs are in financial costs. The 2016 defined benefit expense in the Income Statement amounts to EUR 20 million and the actuarial losses recorded in other comprehensive income amount to EUR 62 million. The 2015 defined benefit expense in the Income Statement amounted to EUR 19 million and the actuarial gains recorded in other comprehensive income amounted to EUR 77 million.

Actuarial gains/losses recognised directly in equity

Year Ended 31 December
Total Operations
EUR million 2016 2015
Actuarial gains/losses -62 77
Deferred tax thereon 15 -36
Total -47 41

Group policy for funding deficits is intended to satisfy local statutory funding requirements for tax deductible contributions together with adjusting the discount factors used in the actuarial calculations to market rates. However, the emphasis of the group is to provide defined contribution schemes for its post-employment benefits, thus all aspects of the provision and accounting for defined benefit schemes are being evaluated. The net liability in the group Statement of Financial Position reflects the actual deficits in the defined benefit plans. Details of the pension arrangements, assets and investment policies in the group's main operating countries are shown below.

Notes to the Consolidated financial statements – Note 20 Post-employment benefits 109

Finland

The group funds its Finnish pension obligations mainly through defined contribution schemes, the charge in the Income Statement being EUR 72 (EUR 68) million. By contrast, the remaining obligations covered by defined benefit schemes resulted in a charge of EUR 1 (EUR 1) million excluding finance costs. Pension cover since 2001 has been organised entirely through local insurance companies. The total defined benefit obligation amounts to EUR 342 (EUR 348) million and the assets to EUR 323 (EUR 329) million, leaving a net liability of EUR 19 (EUR 19) million. As state pensions in Finland provide by far the greatest proportion of pensions, group liabilities are proportionately much smaller than in comparable countries.

Plan assets in Finland are managed by insurance companies. Details of the exact structure and investment strategy surrounding plan assets are not available to participating employers as the assets actually belong to the insurance companies themselves. The assets are managed in accordance with EU regulations, and also national requirements, under which there is an obligation to pay guaranteed benefits irrespective of market conditions.

Germany

German pension costs amounted to EUR 9 (EUR 13) million, of which EUR 8 (EUR 11) million related to defined contribution schemes and EUR 1 (EUR 2) million to defined benefits excluding finance costs. The total defined benefit obligation is EUR 284 (EUR 280) million, nearly all of which is unfunded as total assets come to only EUR 7 (EUR 7) million. The net liability increased from EUR 273 million to EUR 277 million. The increase in net liability arose from a decrease in discount rate and changes in financial assumptions and experience. Defined benefit pension plans are mainly accounted for in the Statement of Financial Position through book reserves with some minor plans using insurance companies or independent trustees. Retirement benefits are based on years worked and salaries received during the pensionable service and the commencement of pension payments being co-ordinated with the national pension scheme retirement age. Pensions are paid directly by the companies themselves to their former employees, this amounting to cash costs of EUR 1 (EUR 18) million; the security for the pensioners is provided by the legal requirement that the book reserves held in the Statement of Financial Position are insured up to certain limits.

Sweden

In Sweden, most blue-collar workers are covered by defined contribution schemes, the charge in the Income Statement being EUR 54 (EUR 51) million, with defined benefit schemes covering mainly white-collar staff.

Total defined benefit obligations amounted to EUR 378 (EUR 360) million and assets to EUR 295 (EUR 319) million, leaving a net liability of EUR 83 million at the year end, compared with a net liability of EUR 41 million the year before. This increase in net liability arose from a decrease in discount rate and changes in financial assumptions and experience. Stora Enso has undertaken to pay over all local legal pension liabilities for the main ITP scheme to the foundation, thus the remaining liability relates to other small schemes.

The long-term investment return target for the foundation is a 3% real return after tax, with investment policy defining long-term strategic allocation targets as property up to 15%, equity up to 30%, alternative investments up to 20% and the balance in debt. Stora Enso's Swedish pension fund conducts an annual asset/liability study to optimise its risk parameters.

Other countries

Total defined benefit obligations in the remaining countries amounted to EUR 219 (EUR 215) million and the assets to EUR 162 (EUR 170) million. The net liability came to EUR 57 (EUR 45) million. Obligations and assets were material only in the United Kingdom, at EUR 150 (EUR 154) million and EUR 127 (EUR 139) million, respectively, leaving a net liability of EUR 23 (EUR 15) million at the end of 2016. The increase in net liability arose from a decrease in discount rate and changes in actuarial assumptions.

Notes to the Consolidated financial statements – Note 20 Post-employment benefits 110
----------------------------------------------------------------------------------- -- -----

Group

Net defined benefit obligation reconciliation

Year Ended 31 December
EUR million 2016 2015
Present Value of Defined Benefit Obligation
Defined benefit obligation at 1 January 1 203 1 319
Translation difference -35 17
Interest on liabilities 28 36
Current service cost 12 13
Past service cost - -3
Actuarial gains and losses on defined benefit obligation arising from changes in demographic assumptions - -21
Actuarial gains and losses on defined benefit obligation arising from changes in financial assumptions 118 -39
Actuarial gains and losses on defined benefit obligation arising from experience adjustments -19 -28
Benefit payments -64 -77
Net disposals/acquisitions -20 -29
Other - 15
Defined benefit obligation at 31 December 1 223 1 203
Fair Value of Plan Asset
Fair value of plan asset at 1 January -825 -836
Translation difference 33 -15
Expected return on plan assets -20 -26
Actuarial gain/loss on plan assets -37 11
Employer contributions 14 -22
Benefit payments 47 77
Other - -14
Net disposals/acquisitions 1 -
Fair value of plan asset at 31 December -787 -825
Net Defined Benefit Obligation 436 378

Amounts Recognised on the Statement of Financial Position – Defined Benefit Plans

As at 31 December
Total Defined Benefit Plans Defined Benefit Pension Plans Other Post-Employment Benefits
EUR million 2016 2015 2016 2015 2016 2015
Present value of funded obligations 909 893 908 893 1 -
Present value of unfunded obligations 314 310 289 286 25 24
Defined benefit obligations (DBO) 1 223 1 203 1 197 1 179 26 24
Fair value of plan assets 787 825 786 825 1 -
Net Liability in Defined Benefit Plans 436 378 411 354 25 24

Notes to the Consolidated financial statements – Note 20 Post-employment benefits 111

Amounts Recognised in the Income Statement

Year Ended 31 December
Total Defined Benefit Plans Defined Benefit Pension Plans Other Post-Employment Benefits
EUR million 2016 2015 2016 2015 2016 2015
Operating costs
Current service cost 12 13 12 12 - 1
Past service cost - -3 - - - -3
Finance cost
Net interest on net defined benefit
liability
8 9 7 8 1 1
Cost recognised in Income
Statement
20 19 19 20 1 -1

Statement of Actuarial Gains and Losses

Year Ended 31 December
EUR million 2016 2015
Gain/loss on pension scheme assets 37 -11
Loss/gain arising on pension scheme liabilities -99 88
Total Loss/gain -62 77

Defined Benefit Plans: Country Assumptions Used in Calculating Benefit Obligations

Year Ended 31 December
Finland Germany Sweden
2016 2015 2016 2015 2016 2015
Discount rate % 1.2 2.0 1.2 2.0 2.2 2.75
Future salary increase % 1.2 1.4 2.5 2.5 2.5 2.5
Future pension increase % 1.5 1.6 1.8 1.8 1.6 1.6
Average current retirement age 63.9 63.8 63.0 63.0 65.0 65.0
Weighted average life expectancy 89.0 88.8 85.0 85.0 89.3 89.3

Sensitivity of the Defined Benefit Pension Obligation

Impact on Defined Benefit Obligation
Change in
assumption
Increase in
assumption
Decrease in
assumption
Discount rate 0.50% Decrease by
6.8%
Increase by 7.6%
Salary growth rate 0.50% Increase by 1.5% Decrease by
1.3%
Pension growth rate 0.50% Increase by 5.9% Decrease by
5.4%
Increase by 1
year in
assumption
Decrease by 1
year in
assumption
Life expectancy Increase by 3.4% Decrease by
3.3%
Notes to the Consolidated financial statements – Note 20 Post-employment benefits 112

Interest rate risk: The obligations are assessed using market rates of high-quality corporate or government bonds to discount the obligations and are therefore subject to any volatility in the movement of the market rate. The net interest income or expense recognised in profit and loss is also calculated using the market rate of interest.

Mortality risk: In the event that members live longer than assumed, the obligations may be understated originally and a deficit may emerge if funding has not adequately provided for the increased life expectancy.

Duration of Pension Plans

Years Finland Sweden Germany UK
At 31 December 2015 10.0 15.2 13.5 17.8
At 31 December 2016 10.0 15.8 13.5 18.5

Defined Benefit Plan Summary by Country as at 31 December 2016

As at 31 December 2016
EUR million Finland Germany Sweden Other Total
Present value of funded obligations 342 19 356 192 909
Present value of unfunded obligations - 265 22 27 314
Defined benefit obligations (DBO) 342 284 378 219 1 223
Fair value of plan assets 323 7 295 162 787
Net liability in the defined benefit plans 19 277 83 57 436
Net Liability in the Balance Sheet 19 277 83 57 436
Represented by
Defined benefit pension plans 19 277 83 32 411
Other post-employment benefits - - - 25 25
Net Liability in the Balance Sheet 19 277 83 57 436

Defined Benefit Plan Summary by Country as at 31 December 2015

As at 31 December 2015
EUR million Finland Germany Sweden Other Total
Present value of funded obligations 348 17 338 190 893
Present value of unfunded obligations - 263 22 25 310
Defined benefit obligations (DBO) 348 280 360 215 1 203
Fair value of plan assets 329 7 319 170 825
Net liability in the defined benefit plans 19 273 41 45 378
Net Liability in the Balance Sheet 19 273 41 45 378
Represented by
Defined benefit pension plans 19 273 41 22 355
Other post-employment benefits - - - 23 23
Net Liability in the Balance Sheet 19 273 41 45 378

Notes to the Consolidated financial statements – Note 20 Post-employment benefits 113

Plan Assets

As at 31 December
2016 2015
EUR million Value % Value %
Equity 268 34.0 301 36.4
Government bonds 82 10.4 79 9.6
Corporate bonds 258 32.8 273 33.1
Debt 340 43.2 352 42.7
Property 68 8.7 60 7.3
Cash 53 6.8 47 5.7
Others 58 7.3 65 7.9
Total Pension Fund Assets 787 100.0 825 100.0

Plan assets do not include any real estate or other assets occupied by the group or the Company's own financial instruments. The breakdown of Finnish pension assets EUR 323 (329) million is not disclosed separately as actual asset allocations can only be estimated based on known target values published by the insurance companies concerned.

The two main financial factors affecting group pension liabilities are changes in interest rates and inflation expectations, so the aim of asset investment allocations is to neutralise these effects and maximise returns

In 2017 contributions of EUR 22 million are expected to be paid.

In 2016 reimbursements of EUR 14 (contributions EUR 22) million were paid.

Notes to the Consolidated financial statements – Note 21 Employee variable compensation and equity incentive schemes 114

Note 21 Employee variable compensation and equity incentive schemes

Share awards

The costs of all employee-related share-based payments are charged to the Consolidated Income Statement as personnel expenses over the vesting period. The share programmes are hedged by Total Return Swaps (TRS) which are settled with cash payments, allowing the Company to receive cash compensation to partially offset any change in the share price between the grant and settlement dates.

The fair value of employee services received in exchange for share awards is accounted for in a manner that is consistent with the method of settlement. The group will withhold from an employee's compensation, by reducing the number of shares issued to the employee, an amount to satisfy the employee's tax liability incurred as a result of the transaction. That tax-related amount is accounted for as a cash-settled share-based compensation. The amount of shares delivered to the employee is accounted for as an equity-settled transaction.

Short Term Incentive (STI) programmes

Salaries for senior management are negotiated individually. Stora Enso has incentive plans that take into account the performance, development and results of both business units and individual employees. This performance-based variable compensation system is based on profitability as well as on attaining key business targets.

Group Executives, division and business unit management have STI programmes in which the payment is calculated as a percentage of annual base salary with a maximum level ranging from 7% to 75%. Non-management employees participate in a STI programme with a maximum incentive level of 7%. All incentives are discretionary. These performance-based programmes cover most employees globally, where allowed by local practice and regulations. For performance year 2016, the annual incentive programmes were based on financial targets as well as individually set key targets. The financial success metrics in the STI programme are Operational EBITDA and Operative Working Capital to sales.

Long Term Incentive (LTI) programmes

Starting in 2004, the Board approved the implementation of two share-based programmes (Restrictive and Performance Share programmes). From 2005 to 2016, new share-based programmes have been launched each year. Since 2009, new long-term incentive programmes for executives have been mainly performance share programmes. The 2009 to 2013 Performance Share programmes vest in portions over three years, based on annually defined targets set by the Remuneration Committee. The 2014 to 2016 programmes have three year targets and vest in only one portion after three years. Previous programmes, launched in 2009 to 2011 vested up to an absolute maximum vesting level of 150% of the number of shares awarded, provided that the result of the performance criterion exceeded the target. In programmes since 2012, the absolute maximum vesting level is 100% of the number of shares awarded.

Three quarters (75%) of the awards under the 2014 to 2016 programmes are in Performance Shares, where shares will vest in accordance with performance criteria proposed by the Remuneration Committee and approved by the Board of Directors. The financial success metric in the 2016 Performance Share Plan is 3-year Economic Value Added (EVA) for the Stora Enso Group. One quarter (25%) of the awards under the 2014 to 2016 programmes are in Restricted Shares, for which vesting is only subject to continued employment.

The fair value of employee services received in exchange for share awards is accounted for in a manner that is consistent with the method of settlement. The group will withhold from an employee's compensation, by reducing the number of shares issued to the employee, an amount to satisfy the employee's tax liability incurred as a result of the transaction. That tax-related amount is accounted for as a cash-settled share-based compensation. The amount of shares delivered to the employees is accounted for as an equity-settled transaction.

The resulting cash-settled liability related to expected tax to be paid is remeasured at each reporting date to its fair value using estimates of the number of share awards that are expected to be issued and the latest fair valuations by using the Stora Enso R share year-end closing price of EUR 10.21 (EUR 8.39), adjusted for the present value of expected dividends, with all changes recognised immediately in the Income Statement. The equity-settled share awards, net of tax, are measured at the fair value of the equity instruments at the grant date, adjusted for the present value of expected dividends. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the estimate of equity instruments that will eventually vest, with a corresponding increase in equity.

The outstanding restricted and performance share awards are shown below.

Notes to the Consolidated financial statements – Note 21 Employee variable compensation and equity incentive schemes 115

Share awards at 31 December 2016

Estimated Delivery of Outstanding Restricted and Performance Share Awards at
Year End
Number of shares 2017 2018 2019 Total
2014 programme 1 015 271 - - 1 015 271
2015 programme 11 608 1 391 479 - 1 403 087
2016 programme - - 1 164 989 1 164 989
Total 1 026 879 1 391 479 1 164 989 3 583 347

The costs of the Stora Enso Share-based Programmes are recognised as costs over the vesting period, being the period between grant and award. The total impact of share-based programmes in the income statement amounted to an expense of EUR 6 (EUR 8) million, all related to restricted and performance share awards, of which the expense of EUR 2 (EUR 4) million relates to equity-settled share awards programmes. The year end liability of EUR 8 (EUR 5) million is shown in non-current operative liabilities and is all related to the restricted and performance share awards.

The share programmes are hedged by Total Return Swaps (TRS) which are settled with cash payments, allowing the Company to receive cash compensation to partially offset any change in the share price between the grant and settlement dates. Group TRS instruments do not qualify for hedge accounting and therefore periodic changes to their fair value are recorded in the Income Statement in operative costs alongside the sharebased programme costs to which they relate.

At the year end, there were TRS instruments outstanding covering 2 700 000 (2 900 000) underlying Stora Enso Oyj R shares recorded at a net fair value asset of EUR 3 (liability EUR 3) million. The change from a net liability of EUR 3 million to a net asset of EUR 3 million is due to a fair value change of EUR 6 million due to the increase in share price from EUR 8.39 at 31 December 2015 to EUR 10.21 at 31 December 2016.

Notes to the Consolidated financial statements – Note 22 Other provisions 116

Note 22 Other provisions

Accounting principles

Provisions

Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Environmental provisions for site reinstatement are made when a project starts production, with the capitalised cost of the provision being depreciated over the useful life of the asset. Provisions are discounted back to their current net present value if the effect of the time value of money is material.

Environmental obligations

Environmental expenditures resulting from the remediation of an existing condition caused by past operations, and which do not contribute to current or future revenues, are expensed as incurred. Environmental liabilities are recorded when it is probable, based on current interpretations of environmental laws and regulations, that a present obligation has arisen and the amount of such liability can be reliably estimated.

Restructuring obligations

A restructuring provision is recognised in the period in which the group becomes legally or constructively committed to the plan. The relevant costs are those that are incremental to, or incurred as a direct result of, the exit plan, are the result of a continuing contractual obligation with no ongoing economic benefit, or represent a penalty incurred to cancel the obligation.

Other obligations

Other obligatory provisions are recognised regarding different legal or constructive obligations as guarantees to customers, ongoing lawsuits, claims or similar.

Other provisions

EUR million Environmental Restructuring Other Obligatory Total Provisions
Carrying Value at 1 January 2016 91 55 14 160
Translation difference -2 - 4 2
Company disposed -7 -6 -7 -20
Charge in Income Statement
New provisions 11 13 1 25
Increase in existing provisions 17 1 3 21
Reversal of existing provisions -1 -3 -3 -7
Payments -9 -36 -2 -47
Carrying Value at 31 December 2016 100 24 10 134
Allocation between Current and Non-current Liabilities
Current liabilities: Payable within 12 months 3 16 1 20
Non-current liabilities: Payable after 12 months 97 8 9 114
Total at 31 December 2016 100 24 10 134

Notes to the Consolidated financial statements – Note 22 Other provisions 117

Environmental obligation

Provisions for environmental remediation amounted to EUR 100 million at 31 December 2016, a net increase of EUR 9 million compared with 31 December 2015, mainly due to increase of the Kopparberg mine related provision by EUR 13 million. Other provision increases are related to closed operation sites and old landfill areas. The Kabel Mill divestment decreased the provision by EUR 4 million and Arapoti Mill divestment by EUR 3 million.

Details of the principal provisions are:

• Following an agreement between Stora Enso and the City of Falun, the group is obliged to purify runoff from the Kopparberg mine before releasing the water into the environment. The provision at year end amounted to EUR 47 (EUR 41) million.

• Skoghall Mill site contains ground pollutants that must be removed. The provision at year end amounted to EUR 16 (EUR 17) million.

• The total environmental provision in Finland amounted to EUR 11 (EUR 8) million. The increase of EUR 3 million compared with 31 December 2015 is mainly caused by the dismantling provision of EUR 5 million related to a closed operation at Oulu Mill. The largest provision relates to the cleaning of aerated water basin at closed Kemijärvi Pulp Mill and amounted to EUR 6 (EUR 6) million. Other environmental provisions include EUR 1 (EUR 1) million related to the site of the former Summa Mill.

• Stora Enso Pulp AB has been removing mercury from the harbour basin at Skutskär for a number of years in co-operation with local authorities. In addition, the Company is obliged to upgrade an old landfill previously used by the mill to comply with revised environmental regulations. At year end Stora Enso Pulp AB had environmental provisions of EUR 6 (EUR 7) million.

• The most significant item of remaining obligation relates to landfills that were not disposed of as a part of the disposal of Baienfurt Mill real estate in Germany during 2010.This environmental provision amounted to EUR 6 (EUR 6) million.

• Hylte Mill and the Commune Hylte have a contract about the restoration and leakage water handling in respective on a landfill in Hyltebruk, based on this a new provision by EUR 5 million has been recognized.

Restructuring provisions

The group has undergone major restructuring in recent years, from divestments to mill closures and administrative cost-saving programmes. New restructuring provisions by Divisions are: Paper EUR 6 million, Packaging Solutions EUR 3 million, Consumer Board EUR 2 million, Wood Products EUR 1 million and Biomaterials and Segment Other EUR 1 million combined.

The liability at the end of 2016 for restructuring provisions amounted to EUR 24 (EUR 55) million and covered the costs of closing down operations, demolition, clearance and redundancy costs for reducing staff numbers.

Restructuring provisions decreased by EUR 31 million compared with 31 December 2015. This net change contains Kabel Mill disposal amounting to EUR 6 million of earlier made provisions.

The total cash payments made during the year in respect of established restructuring provisions amounted to EUR 36 (EUR 53) million.

Stora Enso announced in June 2016 the divestment of the Kabel Coated Mechanical Paper Mill in Germany to a German based investor group. New provision amounted to EUR 2 million.

In September 2016 Packaging Solutions announced plans to consolidate manufacturing of corrugated packaging in Finland to improve profitability and competitiveness and to close Heinola Corrugated Mill permanently. The provision amounted to EUR 3 million.

In 2015, the group announced restructuring provisions in Packaging Solutions EUR 5 million, Wood Products EUR 1 million and Paper EUR 1 million. Stora Enso announced in June 2015 the permanent shutdown of the corrugated packaging converting unit in Chennai, India, due to unprofitability and a major decrease in local market demand. Provision amounted to EUR 4 million.

Details of intangible asset and property, plant and equipment impairments relating to restructurings are in Note 10 Depreciation, amortisation and impairment charges.

Other obligatory provisions

Other obligatory provisions amounted to EUR 10 million at 31 December 2016, a decrease of EUR 4 million compared with 31 December 2015. This net decrease contains the Arapoti Mill disposal by EUR 7 million and reversal of EUR 2 million of earlier made provisions regarding the shutdown of packaging converting unit in Chennai, India.

Notes to the Consolidated financial statements – Note 23 Operative liabilities 118

Note 23 Operative liabilities

Non-current operative liabilities

As at 31 December
EUR million 2016 2015
Post-employment benefit provisions (Note 20 ) 436 378
Other provisions (Note 22 ) 114 112
Share-based payments (Note 21 ) 8 5
Other payables 53 44
Total 611 539

Current operative liabilities

As at 31 December
EUR million 2016 2015
Trade payables 1 239 1 203
Payroll and staff-related accruals 227 217
Accrued liabilities and deferred income 180 182
Current portion of provisions (Note 22 ) 20 48
Advances received 14 14
TRS Hedges - 3
Other payables 114 146
Total 1 794 1 813

Note 24 Financial risk management

Risk management principles and process

Stora Enso is exposed to several financial market risks that the group is responsible for managing under policies approved by the Board of Directors. The objective is to have cost-effective funding in group companies and manage financial risks using financial instruments to decrease earnings volatility. The main exposures for the group are interest rate risk, currency risk, funding risk and commodity price risk, especially for fibre and energy.

The Stora Enso Group Financial Risk Policy governs all financial transactions in Stora Enso. This policy and any future amendments take effect when approved by the Board of Directors and all policies covering the use of financial instruments must comply with it. Stora Enso Treasury Internal Risk Instruction refines the guidance into more detailed instructions. The major financial market risks are detailed below. Group's joint operations companies operate under their own financial risk policies, which may not be fully similar to group's policies.

Interest rate risk

Fluctuations in interest rates affect the interest expense of the group. The group's aim is to keep interest costs stable. The group's aggregate duration should not exceed the average loan maturity, and aiming towards longer duration. Duration above average loan maturity is approved by the Board of Directors.

As of 31 December 2016, one percentage point parallel change up or down in interest rates impacts annual net interest expenses by EUR 5 (EUR 11) million, assuming that the duration and the funding structure of the group stays constant during the year. This simulation calculates the interest effect of a 100 basis point parallel shift in interest rates on all floating rate instruments from their next reset date to the end of the year. In addition, all short-term loans maturing during the year are assumed to be rolled over at maturity to year end using the new higher interest rate.

The total group floating rate net interest-bearing liability position, excluding cash and cash equivalents but including floating legs of interest rate swaps, is some EUR 0.7 (EUR 1.4) billion. The average interest reset period for group net interest-bearing liabilities, including all interest rate derivatives but excluding cash and cash equivalents, is some 3.4 (2.9) years. A one percentage point parallel change up or down in interest rates would also result in gains or losses of EUR 15 (EUR 16) million effect before taxes in Cash flow hedge reserve in OCI regarding interest rate swaps under cash flow hedge accounting. Note 27 Derivatives summarises the nominal and fair values of the outstanding interest rate derivative contracts.

Currency transaction risk

The group is exposed to currency risk arising from exchange rate fluctuations against its reporting currency euro. Currency transaction risk is the impact of exchange rate fluctuations on the group Income Statement, which is the effect of currency rates on expected future cash flows. The group policy to mitigate this is to hedge 50% of the forecast major currency cash flows for 12 months.

The principal foreign exchange transaction exposure comprises both the geographical location of Stora Enso production facilities and the sourcing of raw material and sales outside the euro area, mainly denominated in Swedish crown, US dollars and British pounds.

The table below presents the estimated net operative foreign currency exposure for the main currencies, for the next 12 months and the related hedges in place as at 31 December, retranslated using year end exchange rates. The net operative receivables and payable exposures, representing the balances as at 31 December, include foreign currency exposures generated by external and intercompany transactions, in line with requirements of IFRS 7, although in practice mainly external exposures have been hedged through currency hedges. A positive amount of exposure in the table represents an estimated future receivable of a foreign currency amount.

Notes to the Consolidated financial statements – Note 24 Financial risk management 120

Operative foreign currency exposure

As at 31 December 2016
As at 31 December 2015
EUR million SEK USD GBP BRL CZK SEK USD GBP BRL CZK
Estimated annual net cash flow exposure -870 1 290 320 - -180 -920 1 150 410 - -180
Cash flow hedges next 12 months 450 -660 -170 - 80 440 -550 -220 - 70
Estimated Annual Net Cash Flow Exposure, Net of
Hedges
-420 630 150 - -100 -480 600 190 - -110
Hedging Percentage as at 31 December for Next 12
Months
52% 51% 53% - 44% 48% 48% 54% - 39%
Translation exposure in Income Statement1 -300 90 10 -150 -170 -460 120 - -130 -170
Operative receivables and payables exposure 35 112 19 -8 -26 36 134 29 -91 -23
Currency hedges 64 -146 -24 - - 149 -119 -39 11 -
Statement of Financial Position Exposure, Net of Hedges 99 -34 -5 -8 -26 185 15 -10 -80 -23
Estimated Annual Operative Exposure, Net of Hedges -621 686 155 -158 -296 -755 735 180 -210 -303

1 Includes unhedged sales, costs and depreciation invoiced or expensed in the domestic currency of non-euro based entities, retranslated using year end exchange rates.

The table below includes the estimated effect on annual Operating Profit of a strengthening in EUR versus SEK, USD, GBP and CZK by 5% and versus BRL by 10%, as reasonably possible changes in rates, measured against year end closing rates. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement or Equity and, conversely, a positive amount reflects a potential net gain. In practice, the actual foreign currency results may differ from the sensitivity analysis presented below since the Income Statements of subsidiaries with functional currencies other than the euro are translated into the group reporting currency using the average exchange rates for the year, whereas the Statements of Financial Position of such subsidiaries, including currency hedges, trade receivables and payable, are translated using the exchange rates at the reporting date.

The calculation includes currency hedges and assumes that no changes other than a single currency exchange rate movement have taken place. The currency effects are based on estimated operative foreign currency flows for the next twelve months, hedging levels at the year end and the assumption that the currency cash flow hedging levels, translation exposure in Income Statement and all other variables will remain constant during the next twelve months. Hedging instruments include foreign exchange forward contracts and foreign exchange options. Indirect currency effects with an impact on prices and product flows, such as a product becoming cheaper to produce elsewhere, have not been considered in this calculation.

Estimated currency effects of strengthening of EUR

As at 31 December 2016 As at 31 December 2015
EUR million SEK USD GBP BRL CZK SEK USD GBP BRL CZK
Currency change versus EUR -5% -5% -5% -10% -5% -5% -5% -5% -10% -5%
Effect on estimated annual net cash flow and translation
exposure
59 -69 -17 15 18 69 -64 -21 13 18
Effect on hedging reserve before taxes as at year end1 -23 33 9 - -4 -22 28 11 - -4
EBIT impact as at year end2 -5 2 - 1 1 -9 -1 1 8 1
Estimated Annual EBIT Impact3 31 -34 -8 16 15 38 -37 -9 21 15

1 The effect on hedging reserve (other comprehensive income) before taxes at year end is related to the fair value change in derivatives contracts qualifying as cash flow hedges of highly probable forecast cash flows.

2 The Operating Profit impact as at year end represents the estimated currency effect related to operative payables and receivables, net of hedges.

3 The estimated annual Operating Profit impact includes currency effects in respect of operative exposures in the Statement of Financial Position, forecast cash flows and related hedges and translation exposure in Income Statement.

The table below presents, for the main currencies, the financial foreign currency exposure and the related hedges in place as at 31 December. Net debt includes loan payables and related interest rate derivatives, net of loan receivables and cash and cash equivalents. The currency derivatives hedge mainly financial exposures in the Statement of Financial Position and from time to time also forecast cash flows not qualifying under hedge accounting. These forecast cash flows are not included in the below table. A negative amount of exposure in the table represents a net payable of a foreign currency amount.

Additionally, the table includes the estimated effect on the Income Statement of a strengthening in the EUR versus SEK, USD, CNY and PLN by

Notes to the Consolidated financial statements – Note 24 Financial risk management 121

5% and versus BRL by 10%, as reasonably possible changes in rates, measured against year-end closing rates. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement and, conversely, a positive amount reflects a net potential gain. In practice, the actual foreign currency results may differ from the sensitivity analysis below as the exposure amounts may change during the year.

Financial foreign currency exposure and estimated currency effects in income statement

As at 31 December 2016 As at 31 December 2015
EUR million SEK USD CNY PLN BRL SEK USD CNY PLN BRL
Net debt excluding hedges 655 -470 538 199 61 879 -603 520 218 60
Currency hedges -754 -54 -96 - - -926 29 -55 - -
Net Financial Exposure -99 -524 442 199 61 -47 -574 465 218 60
Currency change versus EUR -5% -5% -5% -5% -10% -5% -5% -5% -5% -10%
Effect in the Income Statement 5 26 -22 -10 -6 2 29 -23 -11 -6

Currency translation risk

Translation risk results from fluctuations in exchange rates affecting the value of Stora Enso's net foreign currency denominated assets and liabilities. Translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset.

The Statements of Financial Position of foreign subsidiaries, equity accounted investments and foreign currency denominated available-for-sale investments are translated into euros using exchange rates prevailing at the reporting date, thus exposing consolidated group equity to fluctuations in currency rates. The resulting translation differences, along with other movements such as the translation rate difference in the Income Statement, are recorded directly in Shareholders' Equity, though these cumulative differences materialise through the Income Statement on the disposal, in whole or in part, of the foreign entity. The next table shows the translation exposure on equity before and after hedges.

Translation risk and hedges: 2016

As at 31 December
EUR million Euro
area
USD area2 Sweden China Poland Brazil Other Total
Translation Exposure on Equity 2 104 1 326 879 480 267 462 288 5 806
EUR/USD hedges1 332 -332 - - - - - -
Translation Exposure after Hedges 2 436 994 879 480 267 462 288 5 806

1 USD denominated bonds classified as hedges of investments in foreign assets.

2 Includes the joint operation Montes del Plata in Uruguay, which has USD as its functional currency.

Translation risk and hedges: 2015

As at 31 December
EUR million Euro
area
USD area2 Sweden China Poland Brazil Other Total
Translation Exposure on Equity 1 699 1 187 854 730 275 406 237 5 388
EUR/USD hedges1 321 -321 - - - - - -
Translation Exposure after Hedges 2 020 866 854 730 275 406 237 5 388

1 USD denominated bonds classified as hedges of investments in foreign assets.

2 Includes the joint operation Montes del Plata in Uruguay, which has USD as its functional currency.

The table below shows the effect on consolidated equity of a strengthening in the euro against the US dollar, Swedish crown, Chinese renminbi, Polish zloty and Brazilian real at 31 December. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. The calculation includes the effects of currency hedges of net investments in foreign entities and assumes that no changes take place other than a single currency exchange rate movement on 31 December each year. The exposures used in the calculations are the foreign currency denominated equity and the hedging levels at 31 December. The hedging instruments used may be foreign currency forward contracts, currency options and foreign currency denominated borrowings. Full details of actual CTA movements and hedging results are given in Note 28 Cumulative translation adjustment and equity hedging.

Consolidated equity: Currency effects of strengthening of EUR before tax

As at 31 December 2016 As at 31 December 2015
EUR million Before Hedges Hedges Net
Impact
Before Hedges Hedges Net
Impact
By 5% versus SEK -44 - -44 -43 - -43
By 5% versus USD -66 17 -49 -59 16 -43
By 5% versus CNY -24 - -24 -37 - -37
By 5% versus PLN -13 - -13 -14 - -14
By 10% versus BRL -46 - -46 -41 - -41
Total Effect from Above -193 17 -176 -194 16 -178

Liquidity and refinancing risk

Funding risk arises from the difficulty of obtaining finance for operations at a given point in time. Stora Enso's funding policy states that the average maturity of outstanding loans and committed credit facilities covering short-term borrowings should be at least four years. The policy further states that the group must have committed credit facilities to cover planned funding needs, the current portion of long-term debt, commercial paper borrowings and other uncommitted short-term loans.

Refinancing risk, or the risk that maturing debt could not be refinanced in the market, is mitigated by Stora Enso's target of maintaining an even maturity profile of outstanding debt.

The table below shows group contractual undiscounted interest-bearing financial liabilities, to be settled on a net cash basis, classified under principal headings based on the remaining period to contractual maturity at the reporting date. Forward rates were used at point of estimation for contractual finance charges.

Contractual maturity repayments of interest-bearing liabilities, settlement net: 2016

EUR million 2017 2018 2019 2020 2021 2022+ Total
Bond loans 265 237 475 - - 728 1 705
Loans from credit institutions 254 227 173 314 143 323 1 434
Financial lease liabilities 28 27 - - - 1 56
Other non-current liabilities 5 7 - - - - 12
Non-current Debt including Current Portion 552 498 648 314 143 1 052 3 207
Less fair value adjustments to carrying amounts - 5 4 4 3 11 27
Estimated contractual finance charges 125 109 93 59 50 352 788
Contractual Repayments on Non-Current Debt 677 612 745 377 196 1 415 4 022
Short-term borrowings, carrying amounts 452 - - - - - 452
Contractual finance charges 12 - - - - - 12
Bank overdrafts 4 - - - - - 4
Total Contractual Repayments at 31 December 2016 1 145 612 745 377 196 1 415 4 490

Contractual maturity repayments of interest-bearing liabilities, settlement net: 2015

EUR million 2016 2017 2018 2019 2020 2021+ Total
Bond loans - 295 573 545 - 421 1 834
Loans from credit institutions 200 359 172 163 302 441 1 637
Financial lease liabilities 7 27 27 - - - 61
Other non-current liabilities 21 10 2 - - 5 38
Non-current Debt including Current Portion 228 691 774 708 302 867 3 570
Less fair value adjustments to carrying amounts - 4 7 5 5 13 34
Estimated contractual finance charges 144 138 119 90 52 375 918
Contractual Repayments on Non-Current Debt 372 833 900 803 359 1 255 4 522
Short-term borrowings, carrying amounts 492 - - - - - 492
Contractual finance charges 11 - - - - - 11
Bank overdrafts 1 - - - - - 1
Total Contractual Repayments at 31 December 2015 876 833 900 803 359 1 255 5 026

Financial transactions counterparty credit risk

Financial counterparty risk is Stora Enso's exposure on financial contracts arising from a deterioration in counterparties' financial health.

This risk is minimised by:

• entering into transactions only with leading financial institutions and with industrial companies that have a good credit rating;

• investing in liquid cash funds only with financial institutions or companies that have a minimum rating of BBB-, with at least 50% of liquidity investments in funds with a minimum rating of A-, using Standard and Poor's credit rating symbols;

• requiring parent company guarantees when dealing with any subsidiary of a rated company.

The Group Financial Risk Policy defines the limits for accepted counterparty risk, based on the tenor of financial contract and counterparty's credit rating.

At year end 2016, the were no significant concentrations of risk with respect to counterparties of derivative contracts, with the highest counterparty exposure being at EUR 5 (EUR 7) million and credit rating of A (BBB+) using Standard and Poor's credit rating symbols.

Raw material and energy price risk

Group earnings are exposed to commodity and energy price volatility. Financial energy hedges are part of the total energy price risk management in the group, whilst commodity risks are measured and hedged if economically possible. A 10% movement in energy and raw material prices would result in a EUR 34 (EUR 24) million change in the fair value of energy and raw material hedging contracts. The majority of these fair value changes, after taxes, are recorded directly in Equity under Hedging Reserves, until the contracts mature and the result is entered in the Income Statement. These estimates represent only the sensitivity of the financial instruments to market risk and not the group exposure to raw material and energy price risks as a whole, since the actual purchases are not financial instruments within the scope of the IFRS 7 disclosure requirements. At end 2016, the maturities of the energy and commodity contracts were between one month and six years. In 2015 the maturities ranged from one month to seven years.

The greater part of group energy price risk has been covered by entering into long-term physical fixed price purchase agreements. The group also has a 15.5% holding, valued at EUR 242 (EUR 123) million, in PVO, a privately owned group of companies in the energy sector. The value of these shares is dependent on energy prices and discussed in more detail in Note 14 Available-for-sale investments.

In addition, in an effort to mitigate the other commodity risk exposures, the group is a significant shareholder in major forest companies in Finland and Sweden thus if prices increase for fibre in these countries, so do the profits from these group interests.

Share price risk

The group has certain investments in publicly traded securities (Note 14 Available-for-sale investments). The market value of these equity investments was EUR 42 (EUR 28) million at the year end. Market value changes in these investments are recorded, after taxes, directly under Shareholders' Equity in the Available-for-Sale Reserve.

Customer credit risk

Customer credit risk is Stora Enso's exposure to contracts arising from deterioration in the financial health of customers. The group uses various different measures to reduce credit risks, including but not limited to letters of credit, prepayments and bank guarantees. The group has also obtained export guarantees, covering both political and commercial risks, which are used in connection with individual customers outside the OECD area. Management considers that no significant concentration of credit risk with any individual customer, counterparty or geographical region exists for Stora Enso. The Age Analysis of Trade Receivables is given in Note 17 Receivables.

Capital risk management

Stora Enso's debt structure is focused on capital markets, whereas banks are primarily used to provide back-up facilities. Group objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, as well as to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may, subject to shareholder approval as appropriate, vary the dividend paid to shareholders, buy its own shares in the market, return capital to shareholders, issue new shares or sell assets to reduce debt.

The group monitors its capital on the basis of a target debt-to-equity ratio of 0.80 or less, indicating a strong financial position, and financial flexibility. Debt-to-equity ratios are shown below:

Capital structure

As at 31 December
EUR million 2016 2015
Interest-bearing liabilities 3 774 4 197
Interest-bearing assets 1 048 957
Interest-bearing Net Debt 2 726 3 240
Equity Attributable to Owners of the Parent 5 806 5 388
Debt / Equity Ratio 0.47 0.60

In joint operation Montes del Plata and in subsidiary Stora Enso (Guangxi) Packaging Company Ltd. there are financial covenants related to the debt-to-assets ratio which have been complied with during the reported years.

Notes to the Consolidated financial statements – Note 25 Fair values 125

Note 25 Fair values

Accounting principles

Investments

The group classifies its investments in marketable debt and equity securities, and investments in unlisted equity securities into three categories being trading, held-to-maturity and available-for-sale. Investments acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and are therefore fair valued through the Consolidated Income Statement and presented as current assets. Investments with fixed maturity, which management has the intent and ability to hold to maturity, are classified as held-to-maturity, to be disclosed in non-current assets. Investments in listed and unlisted shares are classified as available-for-sale. Management determines the classification of its investments at the time of the purchase and reevaluates such designation on a regular basis.

Fair value of financial instruments

The fair values of publicly traded derivatives, along with trading and available-for-sale securities, are based on quoted market prices at the reporting date; the fair values of interest rate swaps are calculated as the present value of the estimated future cash flows and the fair values of foreign exchange forward contracts are determined using forward exchange rates at the reporting date. The valuation principles for derivative financial instruments have been described in more detail in Note 27 Derivatives.

In assessing the fair values of non-traded derivatives and other financial instruments, the group uses a variety of methods and makes assumptions based on market conditions at each reporting date. Quoted market prices or dealer quotes for identical or similar instruments are used for non-current debt. Other techniques, such as option pricing models and estimated discounted value of future cash flows, are used to determine fair values for the remaining financial instruments. The face values, less any estimated credit adjustments, for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair values of financial liabilities for disclosure purposes are estimated by discounting the future contractual cash flows at the current market interest rates available to the group for similar financial instruments.

Purchases and sales of financial instruments are recognised on the trade date, which is the date on which the group commits to purchasing or selling the financial instrument. Financial instruments are derecognised when the rights to receive or the cash flows from the financial instruments have expired or have been transferred and the group has transferred substantially all risks, rewards and obligations of the ownership of the financial instrument asset or liability.

Fair value hierarchy

  • The group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
  • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
  • Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;
  • Level 3: techniques which use inputs which have a significant effect on the recorded fair values that are not based on observable market data.

See Note 14 Available-for-sale investments for more information on Level 3 fair value measurement of available-for-sale investments.

Notes to the Consolidated financial statements – Note 25 Fair values 126

Carrying amounts of financial assets and liabilities by measurement category: 2016

EUR million Loans and
Receivables
Financial Items
at Fair Value
through
Income
Statement
Hedging
Derivatives
Available
for-Sale
Investments
Carrying
Amounts
Fair Value Note
Financial Assets
Available-for-sale - - - 295 295 295 14
Non-current loan receivables 7 - - - 7 7 17
Trade and other operative receivables 870 3 - - 873 873 17
Interest-bearing receivables 5 12 29 - 46 46 17
Cash and cash equivalents 953 - - - 953 953
Total 1 835 15 29 295 2 174 2 174
Financial Items
at Fair Value
through
Income
Hedging Measured at
Amortised
Carrying
Note
- - 2 655 2 655 2 684 26
- - 552 552 552 26
7 50 506 563 563 26
23 - 1 468 1 491 1 491 23
- - 4 4 4
30 50 5 185 5 265 5 294
Statement Derivatives Cost Amounts Fair Value

Carrying amounts of financial assets and liabilities by measurement category: 2015

EUR million Loans and
Receivables
Financial Items
at Fair Value
through
Income
Statement
Hedging
Derivatives
Available
for-Sale
Investments
Carrying
Amounts
Fair Value Note
Financial Assets
Available-for-sale - - - 159 159 159 14
Non-current loan receivables 68 - - - 68 70 17
Trade and other operative receivables 987 - - - 987 987 17
Interest-bearing receivables 12 12 29 - 53 53 17
Cash and cash equivalents 808 - - - 808 808
Total 1875 12 29 159 2 075 2 077
EUR million Financial Items
at Fair Value
through
Income
Statement
Hedging
Derivatives
Measured at
Amortised
Cost
Carrying
Amounts
Fair Value Note
Financial Liabilities
Non-current debt - - 3 342 3 342 3 445 26
Current portion of non-current debt - - 228 228 228 26
Interest-bearing liabilities 22 48 556 626 626 26
Trade and other operative payables 24 - 1 421 1 445 1 445 23
Bank overdrafts - - 1 1 1
Total 46 48 5 548 5 642 5 745

Notes to the Consolidated financial statements – Note 25 Fair values 127

In the previous tables, fair value is estimated to be equal to the carrying amount for short-term financial assets and financial liabilities such as trade receivables and payables due to short time to maturity and limited credit risk. The fair value of non-current debt, considered as a level 2 fair value measurement, is estimated based on discounted cash flow analysis in which yield curves observable at commonly quoted intervals are used as a discount factor in the model. In 2015 the fair value of non-current loan receivables included Papyrus loan note fair valuation and the fair value, categorised on level 3 in the fair value hierarchy, was estimated based on discounted cash flow analysis with the most significant input being the discount rate. Papyrus Holdings AB voluntarily prepaid the full loan note balance and related interests in November 2016.

In 2014, Stora Enso acquired 100% of the shares of the US-based company Virdia Inc. The transaction included potential payouts depending on completion of specific technical and commercial milestones. The present value of the estimated payouts, considered as a level 3 fair value measurement, is estimated based on certain probability criteria and discounted cash flow analysis. At year end, the fair value amounted to EUR 23 (EUR 21) million and is presented in the above table under trade and other operative payables.

Fair value measurements recognised in the statement of financial position: 2016

As at 31 December
EUR million Level 1 Level 2 Level 3 Total
Derivative Financial Assets
Hedging derivatives - 29 - 29
Derivatives at fair value through profit and loss - 12 - 12
Available-for-Sale Investments
Listed securities 42 - - 42
Unlisted shares - - 253 253
Trade and Other Operative Assets
Operative receivables through profit and loss - 3 - 3
Total 42 44 253 339
Derivative Financial Liabilities
Hedging derivatives - 50 - 50
Derivatives at fair value through profit and loss - 7 - 7
Trade and Other Operative Liabilities
Operative payables through profit and loss - - 23 23
Total - 57 23 80

Notes to the Consolidated financial statements – Note 25 Fair values 128

Fair value measurements recognised in the statement of financial position: 2015

As at 31 December
EUR million Level 1 Level 2 Level 3 Total
Derivative Financial Assets
Hedging derivatives - 29 - 29
Derivatives at fair value through profit and loss - 12 - 12
Available-for-Sale Investments
Listed securities 28 - - 28
Unlisted shares - - 131 131
Total 28 41 131 200
Derivative Financial Liabilities
Hedging derivatives - 48 - 48
Derivatives at fair value through profit and loss - 22 - 22
Trade and Other Operative Liabilities
Operative payables through profit and loss - 3 21 24
Total - 73 21 94

Reconciliation of levels 3 fair value measurement of financial assets

EUR million 2016 2015
Opening balance at 1 January 131 444
Gains/Losses recognised through income statement 5 -2
Gains/Losses recognised in Available-for-Sale Investments reserve 125 -325
Additions 2 14
Disposals -10 -
Closing Balance at 31 December 253 131

Notes to the Consolidated financial statements – Note 26 Debt 129

Note 26 Debt

Accounting principles

Debt

Debt is recognised initially at fair value, net of transaction costs incurred. In subsequent periods, it is stated at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and redemption value is recognised in the Consolidated Income Statement over the period of the borrowings. Interest expenses are accrued for and recorded in the Consolidated Income Statement for each period.

Debt with an original maturity greater than 12 months is classified as non-current debt in the Consolidated Statement of Financial Position, though repayments falling due within 12 months are presented in current liabilities under the current portion of non-current debt. Short-term commercial paper, bank and other interest-bearing borrowings for which the original maturity is less than 12 months are presented in current liabilities under interest-bearing liabilities.

Finance leases

Leases of property, plant and equipment under which the group has substantially all the rewards and risks of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property or the estimated present value of the minimum lease payments. Each lease payment is allocated between the capital liability and finance charges so as to achieve a constant interest rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in interest-bearing liabilities with the interest element of the finance charge being taken to the Consolidated Income Statement over the lease period. Property, plant and equipment acquired under finance leasing contracts are depreciated over the lesser of the useful life of the asset or lease period.

The below table includes a breakdown of the group's interest-bearing liabilities and the related changes in the balances.

Interest-bearing liabilities

As at 31 December
EUR million 2016 2015
Bond loans 1 705 1 834
Loans from credit institutions 1 434 1 637
Finance lease liabilities 56 61
Other non-current liabilities 12 38
Non-current Debt including Current Portion 3 207 3 570
Short-term borrowings 452 492
Interest payable 54 64
Derivative financial liabilities (see Note 25 ) 57 70
Bank overdrafts 4 1
Total Interest-bearing Liabilities 3 774 4 197
EUR million 2016 2015
Carrying Value at 1 January 4 197 4 894
Proceeds of new long-term debt 368 435
Repayment of long-term debt -781 -1 181
Change in short-term borrowings and interest payable -50 -15
Change in derivative financial liabilities -13 -110
Translation differences and other 53 174
Total Interest-bearing Liabilities 3 774 4 197

Borrowings have various maturities, details of which are set out in Note 24 Financial risk management, the longest being in 2036, and have either fixed or floating interest rates ranging from 0.6% (0.3%) to 8.6% (8.6%). The majority of group loans are denominated in euros, US dollars and Swedish crown. At 31 December 2016 unused committed credit facilities were unchanged at EUR 700 million. The EUR 700 million committed

Notes to the Consolidated financial statements – Note 26 Debt 130

credit facility agreement with a syndicate of 13 banks matures in January 2019. The facility is used as a backup for general corporate purposes. In addition, Stora Enso has access to various long-term sources of funding up to EUR 1 000 (EUR 850) million mainly from Finnish pension funds.

During 2016, Stora Enso has successfully issued a new bond under its EMTN (Euro Medium Term Note) programme. The EUR 300 million sevenyear bond pays a fixed coupon of 2.125% and matures in June 2023.

In June 2016, Stora Enso repurchased in a public tender part of its outstanding EUR 500 million fixed rate notes with a nominal value of EUR 285 million from the 2018 bond, and of EUR 67 million from the 2019 bond, issued in 2012. Including the previously mentioned repayments, Stora Enso's total repayments of EUR, SEK and USD bond notes amounted to a nominal of EUR 427 (EUR 964) million during 2016.

In 2016, net interest-bearing liabilities decreased by EUR 514 million to EUR 2 726 million. Net interest-bearing liabilities are equal to total interestbearing liabilities less total interest-bearing assets. Cash and cash equivalents net of overdrafts increased by EUR 142 million to EUR 949 million at 31 December 2016.

Bond loans in non-current debt

Issue/
Maturity
Dates
Description of Bond Interest Rate
%
Currency of
Bond
Nominal Value Outstanding As at 31
December
Carrying Value As at 31
December
Issued 2016 2015 2016 2015
All Liabilities are Held by the Parent Company Currency million EUR million
Fixed Rate
1993-2019 Series C Senior Notes 2019 8.600 USD 50 50 50 47 47
2006-2036 Global 7.250% Notes 2036 7.250 USD 300 300 300 281 272
2012-2017 Euro Medium Term Note 5.750 SEK 500 480 500 50 54
2012-2018 Euro Medium Term Note 5.000 EUR 500 212 500 212 498
2012-2019 Euro Medium Term Note 5.500 EUR 500 428 500 427 498
2016-2023 Euro Medium Term Note 2.125 EUR 300 300 - 298 -
Total Fixed Rate Bond Loans 1 315 1 369
Floating Rate
2006-2018 Euro Medium Term Note Euribor+0.96 EUR 25 25 25 25 25
2006-2018 Euro Medium Term Note Euribor+0.72 EUR 50 - 50 - 50
2012-2017 Euro Medium Term Note Stibor+3.90 SEK 2 200 2 060 2 200 215 240
2015-2025 Euro Medium Term Note Euribor+2.25 EUR 125 125 125 125 125
2015-2027 Euro Medium Term Note Euribor+2.35 EUR 25 25 25 25 25
Total Floating Rate Bond Loans 390 465
Total Bond Loans 1 705 1 834

Notes to the Consolidated financial statements – Note 26 Debt 131

Finance lease liabilities

At 31 December 2016 Stora Enso had a small number of finance leasing agreements for machinery and equipment for which capital costs of EUR 21 (EUR 27) million were included in property, plant and equipment; the depreciation and impairment thereon was EUR 8 (EUR 9) million. The aggregate leasing payments for the year amounted to EUR 8 (EUR 10) million, the interest element being EUR 1 (EUR 2) million. There was one new finance lease transaction during 2016 amounting EUR 2 million.

Finance lease liabilities

As at 31 December
EUR million 2016 2015
Minimum Lease Payments
Less than 1 year 29 9
1-2 years 28 28
2-3 years - 27
3-4 years - -
4-5 years - -
Over 5 years 1 -
58 64
Future finance charges -2 -3
Present Value of Finance Lease Liabilities 56 61
Present Value of Finance Lease Liabilities
Less than 1 year 28 7
1-2 years 27 27
2-3 years - 27
3-4 years - -
4-5 years - -
Over 5 years 1 -
56 61

Notes to the Consolidated financial statements – Note 27 Derivatives 132

Note 27 Derivatives

Accounting principles

Derivative financial instruments and hedging

Financial derivatives are initially recognised in the Consolidated Statement of Financial Position at fair value and subsequently measured at their fair value at each reporting date, though the method of recognising the resulting gains or losses is dependent on the nature of the item being hedged. When derivative contracts are entered into, the group designates them as either hedges of the exposure to changes in the fair value of recognised assets or liabilities (fair value hedges), hedges of forecast transactions or firm commitments (cash flow hedges), hedges of net investments in foreign entities or derivative financial instruments not meeting the hedge accounting criteria in accordance with IAS 39.

At the inception of a transaction, the group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all financial instruments designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The group also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.

Fair value hedges

In case of fair value hedges, the group uses either derivatives or borrowings for this purpose. The gains and losses on hedging instruments designated and qualifying as fair value hedges, and which are highly effective, are recorded in the Consolidated Income Statement, along with any changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.

Cash flow hedges

Changes in the fair value of derivatives designated and qualifying as cash flow hedges, and which are effective, are recognised in cash flow hedges reserve within OCI, the movements of which are disclosed in the Consolidated Statement of Comprehensive Income. The cumulative gain or loss of a derivative deferred in equity is transferred to the Consolidated Income Statement and classified as income or expense in the same period in which the hedged item affects the Consolidated Income Statement. In respect of hedges of exposures to foreign currency risk of future transactions resulting in the recognition of non-financial assets, the gains and losses deferred to cash flow hedges reserve within OCI are transferred from equity to be included in the initial acquisition cost of the nonfinancial assets at the time of recognition. The deferred amounts are ultimately recognised in the Income Statement through depreciation over the lifetime of those non-financial assets. The changes in the time value component of the currency options are classified as financial income and expense and not included in the hedge designation.

When a hedging instrument expires, or is sold, terminated or exercised, or has its designation revoked or no longer meets the criteria for hedge accounting under IAS 39, any cumulative gain or loss deferred in equity at that time remains in equity and is accounted for as an adjustment to income or expense when the committed or forecast transaction is ultimately recognised in the Consolidated Income Statement. However, if the forecast transaction is no longer expected to occur, the cumulative gain or loss reported in equity from the period when the hedge was effective is recognised in the Consolidated Income Statement immediately.

Net investment hedges

Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges, the group using either derivatives or borrowings for this purpose. If the hedging instrument is a derivative, any gain or loss thereon relating to the effective portion of the hedge is recognised in equity in CTA, as disclosed in the Consolidated Statement of Comprehensive Income; the gain or loss relating to the ineffective portion is immediately recognised in the Consolidated Income Statement. In addition, exchange gains and losses arising on the translation of a borrowing that hedges such an investment are also recognised in CTA, any ineffective portion being immediately recognised in the Consolidated Income Statement.

Fair value through profit and loss derivatives

Certain derivative transactions, while providing effective economic hedges under group risk management policies, do not qualify for hedge accounting under the specific rules in IAS 39 and therefore changes in the fair value of such non-qualifying hedge instruments together with any ineffectiveness of hedge-accounted instruments are accounted for at fair value through the Consolidated Income Statement. Fair value changes of derivative instruments relating to sales, purchases and staff benefits are presented under operating profit and specified in Note 27 Derivatives and in Note 6 Personnel expenses. Fair value changes from all other derivatives are recognised in the Consolidated Income Statement under financial items.

Valuation of derivatives

Derivative financial instruments are recorded in the Statement of Financial Position at their fair values defined as the amount at which the instrument could be exchanged in an orderly transaction between market participants at the measurement date. The fair values of such financial items have been estimated on the following basis:

  • Currency and equity option contract values are calculated using year-end market rates together with common option pricing models.
  • The carrying amounts of foreign exchange forward contracts are calculated using forward exchange rates at the reporting date.
  • The fair values of interest rate swaps are calculated using a discounted cash flow analysis.
  • Interest rate option fair values are calculated using year-end interest rates together with common option pricing models.
  • Commodity contract fair values are computed with reference to quoted market prices on futures exchanges.
  • The fair values of commodity options are calculated using year-end market rates together with common option pricing models.
  • The fair values of Total Return (Equity) Swaps are calculated using year-end equity prices as well as year-end interest rates.

Notes to the Consolidated financial statements – Note 27 Derivatives 133

Shareholders' equity – other comprehensive income

Certain derivatives are designated as cash flow hedges and measured at fair value with the fair value movements being recorded in the separate equity category of OCI: Cash Flow Hedges Reserve. The other component of OCI is the Available-for-Sale Investments Reserve representing the difference between the reporting date fair value of investments and their initial fair value at acquisition (see Note 14 Available-for-sale investments).

Cash flow hedges

In the group the estimated net amount of unrealised cash flow hedge loss net of taxes amounted to EUR 11 (EUR loss 24) million of which a loss of EUR 23 (EUR loss 9) million related to currencies and a gain of EUR 12 (EUR loss 15) million to commodities. The minority's share of unrealised cash flow hedge result net of taxes amounted to nil (EUR gain 1 million). The unrealised gains and losses are expected to be recycled through the Income Statement within one to three years with the longest hedging contract maturing in 2027 (2027), however the majority are expected to mature in 2017. Any hedge ineffectiveness is presented as an adjustment to sales or to materials and services, depending on the underlying exposure, totalling EUR loss 2 (EUR nil) million for commodity contract hedges and nil for currency hedges in both 2016 and 2015. Derivatives used in currency cash flow hedges are mainly forward contracts and options, with swaps mainly used in commodity hedges and interest rate cash flow hedges.

In the Beihai Mill project in Guangxi, China, the group has hedged its exposures to the foreign currency risk of future transactions resulting in the recognition of non-financial assets. The gains and losses deferred to OCI cash flow hedges reserve are transferred from equity to be included in the initial acquisition cost of the non-financial assets at the time of recognition. During the year, the total amount removed from equity and included in the initial cost of non-financial assets amounted to loss of EUR 4 (EUR loss 9) million.

In 2015, the group entered into new interest rate swap derivatives with a total nominal value of EUR 150 million. The swaps have been designated as cash flow hedges of newly issued EUR bond notes maturing in 2025 and 2027 with hedge result being booked to Cash Flow Hedges Reserve within OCI. During 2015 the group closed majority of its non-hedge accounted interest rate swaps and all of its outstanding non-hedge accounted interest rate options and interest rate collars.

Equity accounted investments

Associate companies record hedges and pensions-related amounts directly in equity, and the group records its share of these amounts also in equity in the "OCI of Equity Accounted Investments" classification.

OCI equity accounted investments

Year Ended 31 December
EUR million 2016 2015
Bergvik Skog AB -19 -17
Tornator Oyj - -2
Total -19 -19

Fair values of derivatives

Hedge gains and losses in financial items

Year Ended 31 December
EUR million 2016 2015
Net losses on fair value hedges - -2
Fair value changes in hedged items - 1
Net Losses on Fair Value Hedges in Financial Items - -1
Non-qualifying Hedges
Net losses/gains on interest rate derivatives -4 1
Net gains on currency derivatives 30 1
Net Gains in Financial Items 26 2

Derivatives used in fair value hedges are mainly interest rate swaps.

Notes to the Consolidated financial statements – Note 27 Derivatives 134

Hedge gains and losses in operating profit

Year Ended 31 December
EUR million 2016 2015
Fair Value Hedge Accounted
Net losses on fair value hedges - -16
Fair value changes in hedged items - 16
Net Gains on Fair Value Hedges - -
Cash Flow Hedge Accounted
Currency hedges 8 -120
Commodity contract hedges 3 -39
Total 11 -159
As adjustments to Sales 16 -128
As adjustments to Materials and services -5 -31
Realised from OCI through Income Statement 11 -159
Commodity contract hedge ineffectiveness -2 -
Net Gains/Losses from Cash Flow Hedges 9 -159
Non-qualifying Hedges
Currency hedges -9 -14
Commodity contract hedges - -5
Net Losses on Non-Qualifying Hedges -9 -19
Net Hedge Losses in Operating Profit - -178

In 2016 the group ceased hedge accounting for one of its subsidiaries due to the fact that the forecasted future transactions were no longer expected to occur. This resulted to a loss of EUR 2 million being booked to operating profit and the loss being presented in the above table as ineffectiveness from cash flow hedges.

Fair values of derivative instruments

As at 31 December
EUR million Positive
Fair Values
Negative
Fair Values
Net Fair Values Net Fair Values
2016 2015
Cash flow hedge accounted
Currency forward contracts 8 -17 -9 -2
Currency options 4 -23 -19 3
Commodity contracts 16 -1 15 -17
Interest rate swaps 1 -8 -7 -2
Non-qualifying hedges
Interest rate swaps - - - 7
Currency forward contracts 12 -7 5 -16
Commodity contracts - - - -1
Equity swaps (TRS) 3 - 3 -3
Total 44 -56 -12 -31

Positive and negative fair values of financial instruments are shown under Interest-bearing Receivables and Liabilities and Non-current Debt with the exception of TRS, which is shown under Operative Receivables and Liabilities.

Notes to the Consolidated financial statements – Note 27 Derivatives 135

The presented fair values in the previous table include accrued interest and option premiums.

Nominal values of derivative financial instruments

As at 31 December
EUR million 2016 2015
Interest Rate Derivatives
Interest rate swaps
Maturity under 1 year - 301
Maturity 2–5 years - -
Maturity 6–10 years 181 187
Maturity over 10 years 25
Total 206 488
Foreign Exchange Derivatives
Forward contracts 1 783 1 706
Currency options 1 525 2 044
Total 3 308 3 750
Commodity Derivatives
Commodity contracts 319 250
Total 319 250
Total Return Swaps
Equity swaps (TRS) 25 27
Total 25 27

The following table analyses the group's derivative financial instruments to be settled on a gross basis into relevant maturity groupings based on the remaining contract period at the reporting date. For Stora Enso maturities are for one year only.

Contractual derivatives maturity repayments gross settlement

As at 31 December 2016 As at 31 December 2015
EUR million 2017 2018+ 2016 2017+
Currency Forwards and Options: Cash Flow Hedges
Outflow 1 214 - 1 087 -
Inflow 1 190 - 1 080 -
Currency Forwards and Options: Fair Value in Income
Statement
Outflow 1 053 92 1 365 -
Inflow 1 054 81 1 350 -

Contractual payments for net-settled derivative financial liabilities were in the following maturity groupings: within one year EUR 23 (EUR 37) million and within two to five years EUR 10 (EUR 22) million.

The group enters into derivative transactions under master netting agreements agreed with each counterparty. In case of an unlikely credit event, such as default, all outstanding transactions under the agreements are terminated and only a single net amount per counterparty is payable in settlement of all transactions. The agreements do not meet the criteria for offsetting in the Statement of Financial Position due to the reason that offsetting is enforceable only on the occurrence of certain future events.

Notes to the Consolidated financial statements – Note 27 Derivatives 136

Financial impact of netting for instruments subject to an enforceable master netting agreement 2016

Not offset in the Statement of Financial Position
EUR million Gross amount of
recognised
financial
instruments
Related liabilities (-) or
assets (+) subject to
Master Netting
Agreements
Collateral
received (-) or
given (+)
Net Exposure
Derivative assets 40 -40 - -
Derivative liabilities -56 40 - -16

Financial impact of netting for instruments subject to an enforceable master netting agreement 2015

Not offset in the Statement of Financial Position
EUR million Gross amount of
recognised
financial
instruments
Related liabilities (-) or
assets (+) subject to
Master Netting
Agreements
Collateral
received (-) or
given (+)
Net Exposure
Derivative assets 33 -33 - -
Derivative liabilities -71 33 - -38

Note 28 Cumulative translation adjustment and equity hedging

Cumulative translation adjustment

Year Ended 31 December
EUR million 2016 2015
At 1 January
CTA on net investment in non-euro foreign entities -155 -183
Hedging thereof 12 45
Net currency losses/gains in equity -143 -138
Tax on hedging -4 -11
-147 -149
CTA Movement for the Year Reported in OCI
Restatement of opening non-euro denominated equity 95 10
Difference in Income Statement translation 1 13
Internal equity injections and dividends 5 9
Other - -8
CTA release through the Income Statement 23 4
124 28
Hedging of Net Investment for the Year Reported in OCI
Hedging result -11 -33
Taxes 2 7
-9 -26
At 31 December
CTA on net investment in non-euro foreign entities -31 -155
Hedging thereof (see below) 1 12
Cumulative net currency losses in equity -30 -143
Tax on hedging -2 -4
Net CTA in Equity -32 -147
Hedging of Net Investment in Foreign Entities
Hedging 1 12
Tax on hedging -2 -4
Net Hedging Result in Equity -1 8
Realised gains 45 45
Unrealised gains/losses -46 -37
Total Gains -1 8

The group is currently hedging only its equity exposure to the US dollar. The main movements in CTA in 2016 were a gain of EUR 125 (loss of EUR 145) million related to the Brazilian real, a gain of EUR 45 (EUR 107) million related to the US dollar, a loss of EUR 33 (gain of EUR 16) million related to the Swedish crown, a loss of EUR 27 (gain of EUR 45) million related to the Chinese renminbi and a gain of EUR 24 (loss of EUR 10)

Notes to the Consolidated financial statements – Note 28 Cumulative translation adjustment and equity hedging 138
-- --------------------------------------------------------------------------------------------------------------- -----

million related to Russian rouble. The most significant accumulated CTA balances are in the US dollar area, amounting to a gain of EUR 241 (EUR 196) million, in Sweden, amounting to a loss of EUR 196 (EUR 163) million, in Brazil, amounting to a loss of EUR 128 (EUR 253) million and in China, amounting to a gain of EUR 97 (EUR 124) million.

The release of cumulative translation adjustments to the Income Statement amounted to a loss of EUR 23 (loss of EUR 4) million in 2016 and was mainly related to the disposal of Arapoti mill in Brazil.

Amounts recognised in the statement of financial position - CTA and equity hedging

As at 31 December
Cumulative Translation Adjustments
(CTA)
Equity Hedges Net CTA in the Statement of Financial
Position
EUR million 2016 2015 2016 2015 2016 2015
Brazil -128 -253 - - -128 -253
China 97 124 - - 97 124
Czech Republic 26 26 -9 -9 17 17
Poland -34 -24 17 17 -17 -7
Russia -45 -69 - - -45 -69
Sweden -196 -163 50 50 -146 -113
Uruguay 227 188 -57 -46 170 142
USA 14 8 - - 14 8
Others 9 8 - - 9 8
CTA before Tax -31 -155 1 12 -30 -143
Taxes - - -2 -4 -2 -4
Net CTA in Equity -31 -155 -1 8 -32 -147

Amounts recognised in the statement of other comprehensive income - CTA and equity hedging

As at 31 December
Cumulative Translation Adjustments
(CTA)
Equity Hedges Net CTA in the Statement of Financial
Position
EUR million 2016 2015 2016 2015 2016 2015
Brazil 125 -145 - - 125 -145
China -27 45 - - -27 45
Czech Republic - 3 - - - 3
Poland -10 4 - - -10 4
Russia 24 -10 - - 24 -10
Sweden -33 16 - - -33 16
Uruguay 39 103 -11 -33 28 70
USA 6 4 - - 6 4
Others 1 8 - - 1 8
CTA before Tax 124 28 -11 -33 113 -5
Taxes - - 2 7 2 7
Amounts recognised in OCI 124 28 -9 -26 115 2

Notes to the Consolidated financial statements – Note 28 Cumulative translation adjustment and equity hedging 139

Hedging of net investment in foreign entities

Group policy for translation risk exposure is to minimise this by funding assets whenever possible and economically viable in the same currency, but if matching of the assets and liabilities in the same currency is not possible hedging of the remaining translation risk may take place. The gains and losses net of tax on all financial liabilities and instruments used for hedging purposes are offset in CTA against the respective currency movements arising from the restatement of the net investments at current exchange rates on the reporting date; the net amount of losses included in CTA during the period as shown in the previous table came to EUR 9 (losses of EUR 26) million.

Hedging instruments and unrealised hedge losses

As at 31 December
Nominal amount (Currency) Nominal amount (EUR) Unrealised Losses (EUR)
EUR million 2016 2015 2016 2015 2016 2015
Borrowings
USD area 350 350 332 321 -46 -37
Total Hedging 332 321 -46 -37

Notes to the Consolidated financial statements – Note 29 Commitments and contingencies 140

Note 29 Commitments and contingencies

Guarantees

The guarantees entered into with financial institutions and other credit guarantors generally oblige the group to make payment in the event of default by the borrower. The guarantees have off-Balance-Sheet credit risk representing the accounting loss that would be recognised at the reporting date if the counterparties failed to perform completely as contracted. The credit risk amounts are equal to the contract sums assuming the amounts are not paid in full and are irrecoverable from other parties.

Operating Leases

Payments made under operating leases are expensed on a straight-line basis over the lease periods. When an operating lease is terminated before the expiry of the lease period, any obligatory payment to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. Lease termination benefits are recognised on a discounted basis.

Commitments

As at 31 December
EUR million 2016 2015
On Own Behalf
Mortgages 9 4
On Behalf of Equity Accounted Investments
Guarantees 4 17
On Behalf of Others
Guarantees 34 30
Other Commitments Own
Operating leases in next 12 months 86 83
Operating leases after next 12 months 747 804
Pension liabilities 1 0
Other commitments 9 11
Total 890 949
Mortgages 9 4
Guarantees 38 47
Operating leases 833 887
Pension liabilities 1 0
Other commitments 9 11
Total 890 949

In 2016, the group's commitments amounted to EUR 890 (EUR 949) million. In addition, parent company Stora Enso Oyj has guaranteed the liabilities of many of its subsidiaries and joint operations up to EUR 2 123 (EUR 2 352) million as of 31 December 2016.

In 2015, Stora Enso Logistic AB's time charter arrangements relating to vessels MV Schieborg and MV Slingeborg were reorganised and Stora Enso Logistics AB entered into time charter parties with subsidiaries of Koninklijke Wagenborg B.V., the new owners of the vessels. In connection therewith, Stora Enso Oyj issued a guarantee to a third-party creditor securing certain obligations of the owners under the term facilities agreement entered into by and between the owners, Koninklijke Wagenborg B.V. and the creditor. The group's maximum exposure under the guarantee amounted to EUR 21 (EUR 25) million plus interests and costs at year end.

The group leases office and warehouse space, cars, machinery and equipment under various non-cancellable operating leases, some of which

Notes to the Consolidated financial statements – Note 29 Commitments and contingencies 141

contain renewal options. There were no leases deemed onerous at the end of 2016 and 2015. The future cost for contracts exceeding one year and for non-cancellable operating leasing contracts are:

Repayment schedule of operating lease commitments

As at 31 December
EUR million 2016 2015
Less than 1 year 86 83
1–2 years 73 73
2–3 years 66 64
3–4 years 59 59
4–5 years 53 55
Over 5 years 496 553
Total 833 887

The group has rental commitments for up to 50 years, with the option to terminate after 20 years, on approximately 84 000 (86 000) hectares of land contracted to date in China, as well as being obliged to pay for the standing trees on land it has contracted to rent. Future land rental payments reported under operating leases are estimated at EUR 562 (EUR 599) million for the plantations.

Stora Enso Oyj has also signed a 15-year take-or-pay contract with Rederi AB Trans-Atlantic for the operation of ships between Finland and Sweden. The group's commitment amounted to EUR 68 (EUR 81) million for the remaining five years at the end of 2016.

Capital expenditure commitments at the balance sheet date but not recognised in the financial statements amounted to EUR 171 (EUR 196) million. These include the group's share of direct capital expenditure contracts in joint operations. Commitments in relation to capital expenditure mainly relate to ongoing projects at Guangxi in China and at Imatra Mills in Finland.

Contingent liabilities

Stora Enso has undertaken significant restructuring actions in recent years which have included the divestment of companies, sale of assets and mill closures. These transactions include a risk of possible environmental or other obligations the existence of which would be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the group.

Stora Enso is party to legal proceedings that arise in the ordinary course of business and which primarily involve claims arising out of commercial law. The management does not consider that liabilities related to such proceedings before insurance recoveries, if any, are likely to be material to the group's financial condition or results of operations.

Latin American cases

Veracel

Fibria and Stora Enso each own 50% of Veracel, and the joint ownership is governed by a shareholder agreement. In May 2014, Fibria initiated arbitration proceedings against Stora Enso claiming that Stora Enso was in breach of certain provisions of the shareholder agreement. Fibria has estimated that the interest to be paid regarding the dispute should be approximately USD 54 (EUR 51) million. Stora Enso denies any breach of contract and disputes the method for calculating the interest to be paid. No provisions have been made in Stora Enso's accounts for this case.

On 11 July 2008, Stora Enso announced that a federal judge in Brazil had issued a decision claiming that the permits issued by the State of Bahia for the operations of Stora Enso's joint operations company Veracel were not valid. The judge also ordered Veracel to take certain actions, including reforestation with native trees on part of Veracel's plantations and a possible fine of BRL 20 (EUR 6) million. Veracel disputes the decision and has filed an appeal against it. Veracel operates in full compliance with all Brazilian laws and has obtained all the necessary environmental and operating licences for its industrial and forestry activities from the relevant authorities. In November 2008, a Federal Court suspended the effects of the decision. No provisions have been recorded in Veracel's or Stora Enso's accounts for the reforestation or the possible fine.

Legal proceedings in Finland

In December 2009, the Finnish Market Court fined Stora Enso for competition law infringements in the market for roundwood in Finland from 1997 to 2004. Stora Enso did not appeal against the ruling. In March 2011 Metsähallitus of Finland initiated legal proceedings against Stora Enso, UPM and Metsäliitto claiming compensation for damages allegedly suffered due to competition law infringements. The total claim against the defendants amounted to approximately EUR 160 million and the secondary claim against Stora Enso to approximately EUR 87 million. In its ruling

Notes to the Consolidated financial statements – Note 29 Commitments and contingencies 142
---------------------------------------------------------------------------------------- -- -----

issued in June 2016, the Helsinki District Court dismissed Metsähallitus' claim for damages against Stora Enso, Metsäliitto and UPM. Metsähallitus has appealed this ruling. In addition, certain Finnish municipalities and private forest owners initiated similar legal proceedings. The total amount claimed from the defendants amounts to approximately EUR 25 million, the secondary claims solely against Stora Enso amount to approximately EUR 6 million. Stora Enso denies that the plaintiffs suffered any damages whatsoever and will forcefully defend itself. No provisions have been made in Stora Enso's accounts for these lawsuits.

Legal proceedings in Sweden

Insurance claim

Stora Enso was informed in July that six Swedish Insurance companies are filing lawsuits against Stora Enso. The claimed amount is approximately SEK 300 (EUR 31) million attributable to insurance compensation paid to injured parties in connection with the forest fire in Västmanland, Sweden in 2014. Stora Enso denies liability and will respond within the frame of the legal proceedings.

Norrsundet Pulp Mill environmental case

The production of pulp at Norrsundet Mill in Sweden was permanently closed in December 2008. Provisions for refuse handling contamination on site and sea sediment have been recognized. In 2011 some chemical substances were found in the sea sediment outside the mill area. Discussions with the country administrative board about responsibility and possible actions are ongoing and no decisions had been taken by the balance sheet date. Stora Enso has, however, initiated mapping of the extent of possible sediments.

Veracel's potential tax exposure arising from PIS/COFINS tax credits

In December 2011 Veracel Celulose SA (Veracel) received a tax audit report, in which the tax authority claimed that part of the PIS (social intergration programme) and COFINS (contribution for the financing of social security) paid by Veracel on the purchase of raw material and services, was not eligible for tax credit. Stora Enso and Veracel consider the claim unjustified and no provisions have been made in Stora Enso's or Veracel´s accounts for this matter. The dispute is still pending.

Notes to the Consolidated financial statements – Note 30 Principal subsidiaries and joint operations 143

Note 30 Principal subsidiaries and joint operations

The following is a list of the Company's fifty principal operating subsidiary undertakings ranked by external sales. These companies along with the parent account for 98% (98%) of group external sales. The principal country in which each subsidiary operates is the country of incorporation. The group's effective interest in the undertakings is 100% except where indicated, and is held in each case by a subsidiary undertaking except for those companies marked with "+" which are held directly by the Parent Company. Subsidiaries operating outside the euro area are indicated by "◊".

Subsidiary companies (Ranked by external sales)

Country Sales
%
Consumer
Board
Packaging
Solutions
Biomaterials Wood
Products
Paper Other
Stora Enso Oyj Finland 31.08
Stora Enso Paper AB Sweden 8.45
Stora Enso Skoghall AB Sweden 6.46
Stora Enso Fors AB Sweden 3.64
Stora Enso Amsterdam B.V. Netherlands 3.28
Stora Enso Skog AB Sweden 3.25
Stora Enso Wood Products GmbH Austria 2.78
Stora Enso Poland S.A. +/◊ Poland 2.58
Stora Enso Publication Papers Oy Ltd + Finland 2.48
Stora Enso Maxau GmbH Germany 2.39
Stora Enso Langerbrugge NV + Belgium 2.30
Stora Enso Ingerois Oy + Finland 2.13
Stora Enso Pulp AB Sweden 2.08
Stora Enso Kabel GmbH & Co. KG1 Germany 1.95
Sydved AB (66.7%) Sweden 1.69
Stora Enso Wood Products Oy Ltd + Finland 1.49
Puumerkki Oy Finland 1.46
Stora Enso Sachsen GmbH Germany 1.40
Stora Enso Timber AB Sweden 1.30
Stora Enso Eesti AS + Estonia 1.24
OOO Stora Enso Packaging BB Russia 1.06
Stora Enso Wood Products Zdirec s.r.o. Czech Republic 1.00
Stora Enso Narew Sp.z.o.o. +/◊ Poland 0.97
Stora Enso Australia Pty Ltd Australia 0.93
Stora Enso Packaging AB Sweden 0.93
Stora Enso WP Bad St. Leonhard GmbH Austria 0.86
Stora Enso Packaging Oy + Finland 0.83
Stora Enso Timber Deutschland GmbH Germany 0.71
Stora Enso Bioenergi AB Sweden 0.66
Stora Enso Huatai (Shandong) Paper Co Ltd (60%) China 0.59
Stora Enso Wood Products d.o.o. Koper Slovenia 0.53
Stora Enso Inpac Packaging Co. Ltd (90%) China 0.51
Stora Enso Suzhou Paper Co Ltd (97.9%)1 China 0.51

Notes to the Consolidated financial statements – Note 30 Principal subsidiaries and joint operations 144

Stora Enso (Guangxi) Packaging Company Ltd (80.1%) China 0.50
Stora Enso Wood Products Planá s.r.o. Czech Republic 0.46
Stora Enso (Guangxi) Forestry Company Ltd. (80.1%) China 0.43
AS Stora Enso Latvija Latvia 0.37
Dongguan Stora Enso Inpac Packaging Co. Ltd (90%) China 0.35
Stora Enso Bois SAS France 0.34
Stora Enso Paper GmbH + Germany 0.32
UAB Stora Enso Lietuva Lithuania 0.29
Stora Enso Timber UK Ltd UK 0.25
Guangxi Stora Enso Forestry Co Ltd (89.5%) China 0.22
Stora Enso Timber DIY Products B.V. Netherlands 0.22
Stora Enso Wood Products Sp.z.o.o. Poland 0.21
Stora Enso Packaging SIA Latvia 0.17
VLAR Papier NV (65%) Belgium 0.17
Stora Enso Packaging UAB Lithuania 0.16
Stora Enso North American Sales, Inc. +/◊ USA 0.16
DanFiber A/S (51%) Denmark 0.15
Puumerkki AS Estonia 0.15

1 Business operations of Stora Enso Kabel GmbH & Co. KG in Germany and Stora Enso Suzhou Paper Co Ltd in China were divested during 2016.

The following is a list of the Company's joint operations. The Company holds a 50% interest in joint operations and they are consolidated into the group's financial statements. The countries operating outside the euro area are indicated by "◊". Sales of the joint operations occur via subsidiaries.

Joint operations

Country Consumer
Board
Packaging
Solutions
Biomaterials Wood
Products
Paper Other
Montes del Plata (50%) Uruguay
Veracel Celulose SA (50%) Brazil

Notes to the Consolidated financial statements – Note 31 Related party transactions 145

Note 31 Related party transactions

Balances and transactions between the group and its subsidiaries and joint operations, which are classified as related parties, have been eliminated on consolidation and are not disclosed in this note.

The key management personnel of the group are the members of the Group Leadership Team and the Board of Directors. The compensation of key management personnel is presented in Note 7 Board and executive remuneration.

In the ordinary course of business, the group engages in transactions on commercial terms with equity accounted investments and other related parties that are not more favourable than would be available to other third parties – with the exception of Veracel and Pohjolan Voima Oy (PVO). Stora Enso intends to continue with transactions on a similar basis with its equity accounted investments further details of which are shown in Note 13 Equity accounted investments.

The group's principal subsidiary companies and joint operations are listed in Note 30 Principal subsidiaries and joint operations.

Energy

The group holds a 15.5% interest in Pohjolan Voima Oy (PVO), a privately owned group of companies in the energy sector that produces electricity and heat for its shareholders in Finland. Each subsidiary of the PVO group has its own class of shares that entitle the shareholder to the energy produced in proportion to its ownership of that class of share. Stora Enso is the second-largest shareholder in PVO, being entitled to a capacity share of 468 MW and Seppo Parvi, as group representative, has been the Deputy Chairman of PVO's Board of Directors since 2015. Prices paid to PVO for electricity are based on production costs, which are generally lower than market prices and in 2016, amounted to EUR 37 (EUR 38) million. For information about the amount of electricity generated, purchased and sold, please see Stora Enso Sustainability Report 2016, section Materials, water & energy (Energy). Sustainability Report 2016 is part of Stora Enso's Annual Report 2016 and available online in PDF format at storaenso.com/ annualreport.

Financial arrangements

The group borrows from or has financial arrangements with several financial institutions where certain members of the Stora Enso Board of Directors or Group Leadership Team also act as members of the Board of Directors, Supervisory Board or Executive Management Group of one or more of those bodies. All group borrowings and financial arrangements have been negotiated on arms-length terms and several have existed for a number of years and prior to the current Board membership.

In 2014, International Finance Corporation (IFC) agreed to invest in an equity stake of CNY 356 million (EUR 49 million) in Stora Enso's Guangxi project, representing a 5% shareholding in the project. By the end of 2016, IFC has already invested CNY 245 million (EUR 33 million). Stora Enso's outstanding loan balances from IFC amounted to EUR 436 (EUR 423) million at year end. The funding is based at USD 6-month LIBOR plus margins ranging from +2.30% to +2.80%.

Research and development

Stora Enso conducts research and development in its own research centres and together with an external network. In addition, interests are held in the following research partners: Swetree Technologies AB, Cellutech AB and Clic Innovation Ltd.

Paper for recycling

The group owns non-controlling interests in several paper recyclers from which paper for recycling is purchased at market prices.

Forest assets and wood procurement

The group has a 41% interest in Tornator with the remaining 59% being held mainly by Finnish institutional investors. Stora Enso has long-term purchase contracts with the Tornator Group for approximately 2 million cubic metres of wood annually at market prices, and in 2016 purchases of 2 (2) million cubic metres came to EUR 65 (EUR 60) million.

In 2016, the group has a 49% interest in Bergvik Skog with the remaining 51% held mainly by institutional investors. The group has long-term supply contracts with Bergvik Skog under which Bergvik Skog sells some 5 million cubic metres of wood annually to Stora Enso at market prices. In 2016, these purchases of 5 (5) million cubic metres amounted to EUR 103 (EUR 95) million and group sales, mainly forest management services, to Bergvik Skog amounted to EUR 41 (EUR 35) million.

Stora Enso has a significant land leasing contract with its noncontrolling interest partner Guangxi Forestry Group Co. Ltd. in China. The leases paid during 2016 amounted to EUR 16 (EUR 16) million.

Stevedoring

The group owns 34.4% of the shares of Steveco Oy, a Finnish company engaged in loading and unloading vessels. The other shareholders in Steveco are UPM-Kymmene, Finnlines, Ahlström Capital and Myllykoski. Stevedoring services are provided by Steveco at market prices and in 2016 amounted to EUR 25 (EUR 26) million.

Notes to the Consolidated financial statements – Note 32 Earnings per share and equity per share 146

Note 32 Earnings per share and aquity per share

Accounting principles

Basic earnings per share, applicable to owners of the parent, is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the group and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares plus the diluted effect of all potential ordinary shares dilutive such as shares from the share-based payments.

Earnings per share

Year Ended 31 December
2016 2015
Net profit for the period attributable to the owners of the parent, EUR million 463 807
Total comprehensive income attributable to the owners of the parent, EUR million 679 573
Weighted average number of A and R shares 788 619 987 788 619 987
Weighted average number of share awards 1 268 485 1 189 457
Weighted diluted number of shares 789 888 472 789 809 444
Basic Earnings per Share, EUR 0.59 1.02
Diluted Earnings per Share, EUR 0.59 1.02
Total Recognised Income and Expense per Share, EUR 0.86 0.73

Equity per share

As at 31 December
2016 2015
Shareholders' equity, EUR million 5 806 5 388
Market value, EUR million 8 085 6 618
Number of A and R shares 788 619 987 788 619 987
Share awards 1 338 213 1 198 756
Diluted number of shares 789 958 200 789 818 743
Basic Shareholders' Equity per Share, EUR 7.36 6.83
Diluted Shareholders' Equity per Share, EUR 7.35 6.82
Dividend per Share Paid/Declared, EUR 0.37 0.33
Market Value per Share, EUR
A shares 10.40 8.40
R shares 10.21 8.39

Extract from the parent company Stora Enso Oyj financial statements 147

Extract from the Parent Company Stora Enso Oyj Financial Statements

Accounting principles

The Parent Company Financial Statements are prepared according to Generally Accepted Accounting Principles in Finland (Finnish GAAP); see Group Consolidated Financial Statements Note 1, Accounting Principles. The main differences between the accounting policies of the Group and the Parent Company relate to:

Accounting of amortisation of capitalised goodwill

The valuation of certain financial assets, financial liabilities, financial instruments and securities

Accounting of post-employment Defined Benefit Plans

The presentation and accounting of deferred tax

Accounting of equity incentive schemes

Accounting of financial leases.

Change in the presentation method

The amended Accounting Act came into effect on 1 January 2016. With the amendment, the group containing extraordinary income and expenses was removed from the income statement. The merger loss of EUR 18.1 million that was recognised in extraordinary expenses in 2015 was transferred to other operating expenses. Consequently, operating profit for 2015 were decreased by the same amount. The Group contribution of EUR 0.2 million that was recognised in extraordinary income in 2015 was transferred to appropriations. The corresponding changes were also made to the cash flow statement.

The company has changed its presentation of derivatives in accordance with Finnish Accounting Board's opinion 13.12.2016 1963/2016. Hedge accounted derivatives that are hedging parent company's own highly probable cash flows are now measured at fair value in the balance sheet according to IFRS standards with effective hedge result being recognised in the fair value reserve in equity. The fair values of such derivatives were previously presented as off-balance sheet items. At the end of the period, the fair value reserve was EUR 16.6 million negative (EUR 10.6 million negative in 2015). The company has also changed presentation of certain non-hedge accounted derivatives with unrealised losses being immediately recognised in the Income Statement while any unrealised gains only being recognized at maturity or when derivative result otherwise realises. In 2016 the change had a negative impact of EUR 35.5 million on the Income Statement (EUR 13.9 million negative in 2015). As a consequence the negative impact on parent company's equity totaled EUR 52.1 million (EUR 22.8 million negative in 2015). Comparative periods have not been restated due to the change.

Parent Company income statement Year Ended 31 December
EUR million 2016 2015
Sales 3 453 3 440
Changes in inventories of finished goods and work in progress -9 -
Production for own use 1 -
Other operating income 174 199
Materials and services -2 167 -2 187
Personnel expenses -318 -313
Depreciation and value adjustments -145 -126
Other operating expenses -741 -744
Operating Profit 248 269
Net financial items -73 1
Profit before Appropriations and Taxes 175 270
Appropriations -43 -76
Income tax expense - -1
Net Profit for the Period 132 193
Extract from the parent company Stora Enso Oyj financial statements 148

Parent Company statement of financial position

Assets

As at 31 December
EUR million 2016 2015
Fixed Assets and Non-current Investments
Intangible assets 85 63
Tangible assets 926 940
Shares in Group companies 6 179 6 192
Other investments 782 1 292
7 972 8 487
Current Assets
Inventories 442 445
Long-term receivables 1 -
Short-term receivables 947 1 388
Cash and cash equivalents 2 259 1 123
3 649 2 956
Total Assets 11 621 11 443

Equity and Liabilities

As at 31 December
EUR million 2016 2015
Share capital 1 342 1 342
Share premium 3 639 3 639
Fair value reserve -17 -
Invested non-restricted equity fund 633 633
Retained earnings 722 789
Net profit for the period 132 193
6 451 6 596
Appropriations 180 136
Provisions 17 21
Non-current Liabilities 1 752 2 347
Current Liabilities 3 221 2 343
Total Equity and Liabilities 11 621 11 443

The presentation of Intangible assets and Tangible assets has been further specified with regard to the comparison period.

Extract from the parent company Stora Enso Oyj financial statements 149

Parent Company cash flow statement

Year Ended 31 December
EUR million 2016 2015
Cash Provided by Operating Activities
Net profit for the period 132 193
Taxes - 1
Appropriations 43 76
Depreciation and value adjustments 145 126
Unrealised foreign exchange wins and losses -29 70
Other non-cash items -6 -2
Financial income and expenses 73 -1
Interest received 61 71
Interest paid net of amounts capitalised -122 -130
Dividends received 133 246
Other financial items paid net -116 -106
Income taxes paid -1 -1
Change in net working capital 110 63
Net Cash Provided by Operating Activities 423 606
Net Cash from Investing Activities
Capital expenditure -154 -237
Proceeds from sale of fixed assets 3 5
Purchases of other investments -5 -9
Investment in subsidiary shares -91 -12
Proceeds from disposal of subsidiary shares - 326
Proceeds from disposal of shares in other companies 11 -
Proceeds from long-term receivables net 964 51
Net Cash Provided in Investing Activities 728 124
Cash Flow from Financing Activities
Proceeds from (payment of) long-term liabilities net -587 -461
Proceeds from (payment of) short-term borrowings net 827 -433
Capital repayment / dividend per share paid/declared -260 -237
Group contributions paid and received - 40
Net Cash Used in Financing Activities -20 -1 091
Net Increase (Decrease) in Cash and Cash Equivalents 1 131 -361
Translation adjustment 5 -10
Cash and cash equivalents at start of year 1 123 1 494
Cash and Cash Equivalents at Year End 2 259 1 123

The Board of Directors' Proposal for the distribution of dividend 150

The Board of Director's Proposal for the distribution of dividend

The Parent Company distributable shareholders' equity on 31 December 2016 amounted to EUR 1 470 552 196.69, including the profit for the period of EUR 132 174 538.59. The Board of Directors proposes to the Annual General Meeting of the Company that the distributable funds be used as follows:

Dividend of EUR 0.37 per share from the
distributable shareholders' equity to be distributed
on 788 619 987 shares, not to exceed EUR 291 789 395.19
Remaining in distributable
shareholders' equity EUR 1 178 762 801.50
Distributable shareholders' equity
on 31 December 2016, total EUR 1 470 552 196.69

There have been no material changes in the Parent Company's financial position since 31 December 2016. The liquidity of the Parent Company remains good and the proposed dividend does not risk the solvency of the Company.

Helsinki, 3 February 2017

Karl-Henrik Sundström

CEO

Gunnar Brock Jorma Eloranta
Chairman Vice Chairman
Anne Brunila Elisabeth Fleuriot
Hock Goh Mikael Mäkinen
Richard Nilsson Hans Stråberg

Auditor's report

(Unofficial translation from the Finnish original)

To the Annual General Meeting of Stora Enso Oyj

Report on the Audit of Financial Statements Opinion

We have audited the financial statements of Stora Enso Oyj (business identity code 1039050-8) for the year ended 31 December, 2016. The financial statements comprise the consolidated statement of financial position, income statement, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies, as well as the parent company's balance sheet, income statement, cash flow statement and notes to the financial statements.

In our opinion

• the consolidated financial statements give a true and fair view of the group's financial performance and financial position in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and

• the financial statements give a true and fair view of the parent company's financial performance and financial position in accordance with the laws and regulations gov-erning the preparation of financial statements in Finland and comply with statutory requirements.

Basis for opinion

We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor's Responsibilities for the Audit of Financial Statements section of our report.

We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter How our audit addressed the key audit matter
Valuation of Biological Assets As part of our audit procedures, we have gained understanding over the management
Refer to Note 1, Note 2 and Note 12 review and monitoring controls for interpretation of group policy and IAS 41 standard.
The fair value of Group's Biological assets through subsidiaries, joint
operations and associates amounts to EUR 3 386 million as of
December 31, 2016.
We have tested management's controls and effectiveness of systems in place for the
existence and valuation of Biological assets directly owned by the subsidiary
companies.
The value of Biological assets is measured at fair value less costs to
sell. The fair value is determined using discounted cash flows based on
sustainable forest management plans taking into account the growth
We have assessed the key assumptions contained within the fair value calculations
including sales price assumptions, growth assumptions and discount rates. We have
used Deloitte specialists where applicable.
potential of one cycle. The one cycle varies depending on the
geographic location and species. These discounted cash flows requires
We have performed analytic review of the results of the IAS 41 valuations to highlight
outliers which warrant further procedures.
estimates of growth, harvest, sales price and costs.
Due to the level of judgment involved in the valuation of Biological
We have assessed and tested the controls and procedures around management's
recording of Joint Operations results, including impact of Biological assets valuation.
Assets, complexity of the governance structure as well as the
significance of biological assets to the Group's financial position, this is
considered to be a key audit matter.
As part of our audit procedures, we have assessed and tested the controls and
procedures around management's recording of Forest associate results including
impact of Biological assets valuation, as this has direct impact to Group's Equity
accounted investments Balance Sheet line item.
As part of our audit procedures, we have communicated with the auditors of the four
largest associates and Joint Operations. As part of the communication, among other
things we have gone through the key audit procedures performed.
We have assessed the appropriateness of presentation in the consolidated financial
statements.

Key audit matter How our audit addressed the key audit matter

Valuation of property, plant and equipment, goodwill and other intangible assets

Refer to Note 2, Note 10 and Note 11

As at 31 December 2016, the Group has Goodwill of EUR 238 million, which is assessed at least annually for impairment, and EUR 5 791 million property, plant and equipment and other intangible assets, which are assessed for impairment where possible impairment indicators are identified.

In 2016 the Group recorded an impairment of EUR 92 million for property, plant and equipment and other intangible assets. Impairment related mainly to Newsprint Europe Cash generating unit in Paper Division, for which an impairment of EUR 78 million was recorded due to further weakened long-term earnings expectations resulting from decline in the European Paper markets. In addition, the Group recorded EUR 11 million impairment of Goodwill, which was fully relating to Corrugated China operations in Packaging Solutions Division.

As at 31 December 2016, the value of Stora Enso Oyj's subsidiary shares amounted to EUR 6 179 million in the parent company's financial statements prepared in accordance with the Finnish Gaap. Under Finnish Gaap, an impairment is recorded when it is considered to be substantial and permanent. In 2016 impairment of subsidiary shares amounted to EUR 58 million.

The assessment of the recoverable amount requires significant judgment, in particular relating to estimated cash flow projections and discount rates.

Due to the level of judgment, market environment and significance to the Group's financial position, this is considered to be a key audit matter.

The Group has significant investment projects with Property, plant and equipment, and other intangible assets additions of EUR 638 million during the year ended 31 December 2016.

The significant level of additions requires consid-eration of the nature of costs incurred to ensure that capitalization of property, plant and equipment, and intangible assets meets the recogni-tion criteria of IAS 16 and IAS 38, and the appli-cation of the judgment assigning appropriate useful economic lives. Thus, this is considered to be a key audit matter.

As part of our audit procedures we have evaluated the robustness of budgeting process, which is basis for the valuations.

We have tested the controls and review procedures around identification of impairment indicators.

We have critically evaluated management's methodologies in preparing impairment models and documented basis for key assumptions.

We performed procedures on those Cash Generating Units where management has identified impairment indicators; or where the recoverable amount is close to carrying value.

As part of our audit procedures we assessed the assumptions contained within the calculations including growth assumptions, discount rates and implications of industry changes. In addition, we have analysed earlier estimates against actual business development. We have used Deloitte specialists where applicable.

We have reviewed the appropriateness of the controls relating to the significant investment projects, such as the controls over accounting being in line with IFRS and group policy.

As part of our audit procedures we assessed the validity of amounts capitalised and assumptions relating to depreciations.

Provisions and contingent liabilities

Refer to Note 2, Note 22 and Note 29

As of 31 December 2016 the Group had environmental, restructuring and other provisions totalling EUR 134 million.

In addition the Group has disclosed significant open legal cases and other contingent liabilities in Note 29.

The assessment of the existence of the present legal or constructive obligation, analysis of the probability of the related payment and analysis of a reliable estimate, requires management's judgement to ensure appropriate accounting or disclosures.

Due to the level of judgement relating to recog-nition, valuation and presentation of provisions and contingent liabilities, this is considered to be a key audit matter.

Key audit matter How our audit addressed the key audit matter

As part of our audit procedures we have assessed man-agement's processes to identify new possible obligations and changes in existing obligations for compliance with group policy and IAS 37 requirements.

We have analysed significant changes from prior periods and obtain a detailed understanding of these items and assumptions applied.

We have obtained legal representation letters on the main outstanding legal cases.

As part of our audit procedures we have reviewed minutes of board meetings (including the sub-committees).

We have held regular meetings with management and legal counsels.

We have assessed the appropriateness of presentation in the consolidated financial statements.

Responsibilities of the Board of Directors and the Chief Executive Officer for the financial statements

The Board of Directors and the Chief Executive Officer are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Chief Executive Officer are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors and the Chief Executive Officer are responsible for assessing the parent company's and the group's ability to continue as going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or cease operations, or there is no realistic alternative but to do so.

Auditor's responsibilities in the audit of financial statements

Our objectives are to obtain reasonable assurance on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the parent company's or the group's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of the Board of Directors' and the Chief Executive Officer's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company's or the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other Reporting Requirements

Other information

The Board of Directors and the Chief Executive Officer are responsible for the other information. The other information comprises information included in the report of the Board of Directors and in the Annual Report, but does not include the financial statements and our report thereon. We obtained the report of the Board of Directors prior to the date of the auditor's report, and the Annual Report is expected to be made available to us after the date of the auditor's report.

Our opinion on the financial statements does not cover the other information.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

In our opinion, the information in the report of the Board of Directors is consistent with the information in the financial statements and the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

If, based on the work we have performed, we conclude that there is a material misstatement in the information included in the report of the Board of Directors, we are required to report this fact. We have nothing to report in this regard.

Other opinions

We support that the financial statements should be adopted. The proposal by the Board of Directors regarding the treatment of

distributable funds is in compliance with the Limited Liability Companies Act. We support that the Board of Directors of the parent company and the Chief Executive Officer should be discharged from liability for the financial period audited by us.

Helsinki, 3 February 2017

Deloitte & Touche Oy

Audit Firm

Jukka Vattulainen Authorised Public Accountant (KHT) Capacities by mill in 2017 155

Capacities by mill in 2017

Consumer Board

Consumer board Location Grade Capacity
1 000 t
Beihai1 CHN LPB, CKB, FSB, FBB 390
Fors SWE FBB 455
Imatra FIN SBS, FBB, LPB 1 155
Ingerois FIN FBB 280
Skoghall SWE LPB, CUK 855
Total 3 135
1 Ramping-up
Plastic coating
Skoghall (Forshaga) SWE Plastic coating 120
Imatra FIN Plastic coating 285
Total 405

Packaging Solutions

Containerboards Location Grade Capacity
1 000 t
Heinola FIN SC fluting 300
Ostrołeka POL Testliner, PfR fluting, sack paper,
wrapping paper
723
Varkaus FIN Kraftliner, white-top kraftliner 390
Total 1 413
Capacity
million
Corrugated packaging Grade m2
Baltic states Corrugated
packaging
135
Kaunas
Riga
Tallinn
Corrugated
Finland packaging 160
Heinola
Lahti
Kristiinankaupunki
Poland Corrugated
packaging
395
Łódz
Mosina
Ostrołęka
Tychy
Corrugated
Russia packaging 345
Arzamas
Balabanovo
Balabanovo offset
Lukhovitsy
Corrugated
Sweden packaging 275
Jönköping
Skene
Vikingstad
Corrugated
Total packaging 1 310
Inpac Location Grade Capacity
million pcs
Capacity
million
m2
Gaobu, Dongguan CHI Corrugated and
consumer packaging
285 50
Jiashan, Zhejiang CHI Corrugated and
consumer packaging
50 10
Qian'an, Hebei CHI Corrugated and
consumer packaging
495 55
Total 830 115

Biomaterials

Mill Location Grade Division Capacity
1 000 t
Enocell FIN Short and long-fibre Biomaterials 475
Skutskär SWE Short, long-fibre and fluff pulp Biomaterials 540
Sunila FIN Long-fibre pulp Biomaterials 375
Montes del Plata (50% share) URU Short-fibre pulp Biomaterials 675
Veracel (50% share) BRA Short-fibre pulp Biomaterials 575
Total 2 640
Chemical Pulp
Mill Location Grade Division Capacity
1 000 t
Heinola FIN Neutral Sulphite
Semi-Chemical Pulp
Packaging
Solutions
265
Kaukopää, Imatra FIN Short and long-fibre Consumer
Board
825
Nymölla SWE Short and long-fibre Paper 340
Ostrołęka POL Long-fibre Packaging
Solutions
110
Oulu FIN Long-fibre Paper 360
Skoghall SWE Long-fibre Consumer
Board
375
Tainionkoski, Imatra FIN Short and long-fibre Consumer
Board
195
Varkaus FIN Short and long-fibre Packaging
Solutions
310
Veitsiluoto FIN Short and long-fibre Paper 380
Chemical Pulp Total (incl.
Biomaterials)
5 800
of which market pulp 1 2 150
1 market pulp defined as dried pulp shipped out from the mill to external customers.

Deinked Pulp (DIP)

Mill Location Grade Division Capacity
1 000 t
Hylte SWE DIP Paper 290
Langerbrugge BEL DIP Paper 680
Maxau GER DIP Paper 295
Ostrołęka POL Recycled fibre
based pulp
Packaging
Solutions
615
Sachsen GER DIP Paper 430
Total 2 310

Capacities by mill in 2017 156

CTMP Mill Location Grade Division Capacity 1 000 t Beihai1 CHN BCTMP Consumer Board 150 Fors SWE CTMP Consumer Board 185 Kaukopää FIN CTMP Consumer Board 220 Skoghall SWE CTMP Consumer Board 270 Total 825 1 Ramping-up Lignin Mill Capacity 1 000 t Sunila 50

Wood Products

Mill Location Sawing
Capacity
1 000 m3
Further
Processing
Capacity
1 000 m3
Pellet capacity
1 000 t
CLT
capacity
1 000 m3
LVL
capacity
1 000 m3
Ala SWE 370 45 75 - -
Alytus LIT 200 90 - - -
Amsterdam NLD - 50 - - -
Bad St.
Leonhard
AUT 350 105 - 72 -
Brand AUT 440 255 - - -
Gruvön SWE 370 150 100 - -
Honkalahti FIN 310 70 - - -
Imavere EST 335 155 100 - -
Impilahti RUS 120 10 15 - -
Kitee FIN 260 110 25 - -
Launkalne LAT 190 20 - - -
Murow POL 250 210 - - -
Nebolchi RUS 180 30 35 - -
Näpi EST 40 120 15 - -
Pfarrkirchen GER - 130 - - -
Planá CZE 360 220 - - -
Uimaharju FIN 240 20 - - -
Varkaus1 FIN 125 - - - 65
Veitsiluoto2 FIN 200 - - - -
Ybbs AUT 550 430 - 78 -
Zdírec CZE 550 220 65 - -
Total 5 440 2 440 430 150 65

1 Varkaus LVL ramping-up

2 Veitsiluoto Sawmill belongs to division Paper.

Paper

Mill Location Grade Capacity
1 000 t
Impr. news,
Anjala FIN book 435
Dawang CHN SC 140
Hylte SWE News 480
Kvarnsveden SWE SC, news,
impr. news
665
SC, news,
impr. news,
Langerbrugge BEL dir. 555
Maxau GER SC 530
Nymölla SWE WFU 485
Oulu FIN WFC 1 080
Sachsen GER News,
directory
310
Veitsiluoto FIN LWC, MWC,
WFU
790
Total 5 470
Abbreviations used in the tables:
CLT cross-laminated timber
CTMP chemi-thermo-mechanical pulp
CUK coated unbleached kraftboard
DIP deinked pulp
FBB folding boxboard
HWC heavy-weight coated paper
LPB liquid packaging board
LVL laminated veneer lumber
LWC light-weight coated paper
MWC medium-weight coated paper
PfR paper for recycling
SBS solid bleached sulphate board
SC super-calendered paper
WFC wood free coated paper
WFU wood free uncoated paper
WLC white lined chipboard
WTL white top liner

The formula: (Sum of net saleable production of two best consecutive months / Available time of these two consecutive months) x Available time of the year

Information for shareholders 157

Information for Shareholders

Annual General Meeting (AGM)

Stora Enso Oyj's AGM will be held at 16.00 (Finnish time) on Thursday 27 April 2017 at the Marina Congress Center, Katajanokanlaituri 6, Helsinki, Finland.

Nominee-registered shareholders wishing to attend and vote at the AGM must be temporarily registered in the Company's register of shareholders on the record date, 13 April 2017. Instructions for submitting notice of attendance will be given in the invitation to the AGM, which can be consulted on the Company's website at storaenso.com/agm.

AGM and dividend in 2017

13 April Record date for AGM
27 April Annual General Meeting (AGM)
28 April Ex-dividend date
2 May Record date for dividend
9 May Dividend payment

Dividend

The Board of Directors proposes to the AGM that a dividend of EUR 0.37 per share be paid to the shareholders for the fiscal year ending 31 December 2016. The dividend payable on shares registered with Euroclear Sweden will be forwarded by Euroclear Sweden AB and paid in Swedish crown. The dividend payable to ADR holders will be forwarded by Citibank, N.A. (Citi) and paid in US dollars.

Publication dates for 2017

4 February Financial results for 2016
Week 8 Annual Report 2016
27 April Interim Report for January–March
26 July Interim Report for January–June
24 October Interim Report for January–September

Distribution of financial information

Stora Enso's Annual Report 2016 consists of four reports: Progress Book, Sustainability Report, Financial Report, and Corporate Governance Report. You can find the highlights of the year and the online Financial Report at storaenso.com/annualreport.

Progress Book is published in English, Finnish, and Swedish. Progress Book 2016 is downloadable as a PDF file from the Company's website. Sustainability report is published in English and is downloadable as a PDF file from the Company's website.

Financial Report is published in English and is downloadable as a PDF file from the Company's website. The Official Financial Statements (in Finnish), an English translation of the Parent Company Financial Statements, and the list of principal subsidiaries can be found on the Company's website.

Corporate Governance Report is published in English and is downloadable as a PDF file from the Company's website. A Finnish translation of the report can be found on the Company's website.

Interim Reports are published in English, Finnish and Swedish at storaenso.com/press.

Information for holders of American Depositary Receipts (ADRs)

The Stora Enso dividend reinvestment and direct purchase plan is administered by Citibank, N.A. The plan makes it easier for existing ADR holders and first-time purchasers of Stora Enso ADRs to increase their investment by reinvesting cash distributions or by making additional cash investments. The plan is intended for US residents only. Further information on the Stora Enso ADR programme is available at citi.com/DR.

Contact information for Stora Enso ADR holders

Citibank Shareholder Services Computershare P.O. Box 43077 Providence, Rhode Island 02940-3077 Email: [email protected]

Toll-free number: (877)-CITI-ADR Direct dial: (781) 575-4555

Contacts

Ulla Paajanen-Sainio SVP, Investor Relations Stora Enso Oyj, P.O. Box 309, FI-00101 Helsinki, Finland Tel. +358 2046 21242, [email protected]

storaenso.com [email protected]

Stora Enso Oyj

P.O. Box 309 FI-00101 Helsinki, Finland Visiting address: Kanavaranta 1 Tel. +358 2046 131

Stora Enso AB

P.O. Box 70395 SE-107 24 Stockholm, Sweden Visiting address: World Trade Center Klarabergsviadukten 70 Tel. +46 1046 46 000

storaenso.com [email protected]

Concept, design, and illustrations: Miltton Oy

It should be noted that Stora Enso and its business are exposed to various risks and uncertainties and certain statements herein which are not historical facts, including, without limitation those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties, which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the group's products and the pricing pressures thereto, price fluctuations in raw materials, financial condition of the customers and the competitors of the group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the group's principal geographic markets or fluctuations in exchange and interest rates. All statements are based on management's best assumptions and beliefs in light of the information currently available to it and Stora Enso assumes no obligation to publicly update or revise any forwardlooking statement except to the extent legally required.

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