DBRS Confirms UPM-Kymmene Oyj at BBB

Dominion Bond Rating Service (DBRS) has today confirmed the Senior Debt of UPM-Kymmene Oyj (UPM or the Company) at BBB. The trend is Stable.

The current rating reflects the Company’s business and financial risk profiles, which are lower than the forest industry average. Product and geographical diversification, electrical power-generation assets and timberland ownership have reduced earnings and cash flow volatility thereby lowering both business and financial risk. Despite weak European paper markets, UPM has maintained a strong financial discipline in the past three years that has resulted in comparatively stable credit metrics, and DBRS expects these financial policies to be maintained in future years. Earnings are expected to gradually improve as industry-wide capacity curtailments and moderately rising demand support product price increases.

In addition, high energy prices are expected to produce further increases in the cost of raw materials and transportation. However, cost-reduction programs, both completed and planned, will moderate the increase in UPM’s operating costs. Capex is expected to remain at high levels, but considerably below depreciation. Projects such as paper-machine and sawmill upgrades and investments in power plants and pulp mills will lower costs, increase capacity and have a positive impact on earnings in 2006–2007. Earnings in 2006 are expected to be moderately higher than in 2005. As a result, DBRS expects UPM’s ability to generate consistent levels of cash flow to remain intact.

However, a significant major debt-financed acquisition or a prolonged strengthening of the euro during weak market conditions would pressure the rating. A rating upgrade would be considered if the Company were to reduce debt and improve credit metrics through a business cycle.

Note: This rating is based on public information.