03 Dec 2007

Advancing the decision to implement permanent capacity reductions and making accounting changes

The group management considers the need for permanently reducing the production capacity in the company's newsprint production in Europe to be in the order of 3-400 000 tonnes. A final decision is advanced to the first quarter of 2008.

Reduced estimated economic life for paper machines inn Norway generates a significant surplus of energy and energy contracts with a net value of NOK 3.7 billion (gross value NOK 5.8 billion) is recognised in the balance sheet.

Fixed assets are written down by NOK 1.8 billion, of which NOK 0.2 billion are due to changed economic life and NOK 1.6 billion are due to the effect of market energy prices.

Goodwill is written down in its entirety by NOK 2.7 billion.

The net equity effect of the accounting changes are minus NOK 800 million which is recorded in accounts in the fourth quarter of 2008.  Equity less goodwill increases by NOK 1.9 billion.
Increasing the pace of the restructuring in Norske Skog

Norske Skog is reviewing all its paper machines to identify which can be closed permanently or rebuilt to produce other paper grades. The objective is increased profitability for Norske Skog through reduced costs and an improved market balance. The original schedule aimed for a final conclusion during the first half of 2008. This plan will be advanced. For the segment newsprint Europe, the group management considers there to be need for a permanent capacity closures of 3-400 000 tonnes. A final decision is scheduled at the corporate assembly in March 2008. The previous decision to reduce newsprint capacity in Europe by 200 000 tonnes in 2008 is maintained.

Changed economic life assessment and specific assessment of Norwegian energy contracts

The politically determined energy contracts in Norway expire in 2010. Norske Skog's Norwegian mills use about 4TWh per year. At present, about 40 per cent of this is delivered on terms determined by politically elected authorities. As of 2011, all electrical energy to the company's Norwegian mills will be delivered on commercial terms. The politically determined terms include an obligation to maintain production at the company's Norwegian mills. The commercial contracts will be handled to generate the maximum return for the company as a whole.

With a basis in the expected newsprint demand development, an assessment has been made of the competitiveness of the company's Norwegian mills after the expiry of the politically determined energy contracts. The result is that the three paper machines at Norske Skog Follum, as well as PM1 and PM2 at Norske Skog Skogn are not considered to be competitive after 2010 with the present economic conditions.

"The accounting assessments are based on the present political and business conditions in Norway. What the actual decision will be depends on the development of these conditions," says CEO Christian Rynning-Tønnesen.

PM3 at Norske Skog Skogn and Norske Skog Saugbrugs in its entirety are considered to be competitive also after 2010.

An assessment has also been made of the demand development in other markets. On the basis of this assessment, the expected economic life of some paper machines in Korea and Australasia has also been reduced. None of these changes entail any need for write-downs.

It is important to emphasise that an accounting assessment of the economic life is not synonymous with a decision to shut down. Any shut down decisions will be made on the basis of a specific assessment of capacity requirements and the competitiveness of each individual machine at the time the decision is made.

The company's energy contracts in Norway have so far been considered to be for own use and therefore not recorded in the accounts at real value. Changed economic life for Norske Skog's Norwegian mills will generate a significant energy surplus in Norske Skog from 2011. We expect that some of this energy will be sold in the market, and will due to this be recorded in the accounts at real value.

Energy contracts with a gross value of NOK 5.8 billion will be entered in the accounts in the fourth quarter. This will generate an income of NOK 3.7 billion in the quarter after provisions for future tax liabilities. The energy contracts will be recognised in the balance sheet from the same date and future changes in value will be recognised in the income statement. This will increase the volatility in the company's accounts under IFRS. In the period 2011-2020, an estimated 50 per cent of the energy volume will be used for own activities, while the rest, based on present assessments, will be considered surplus energy which can be sold in the market.

Due to changed accounting of the energy contracts, the future profitability of Norske Skog's mills will now be calculated from the expected market energy price. This will make the future cash flows at the Norwegian mills lower than previously estimated. This results in a need for a write-down of NOK 1.6 billion at Norske Skog Saugbrugs. PM 7 at Norske Skog Follum is written down by NOK 200 million as a result of shorter remaining economic life, while the two other paper machines at Follum, as well as PM 1 and PM 2 at Norske Skog Skogn retaining their present recorded value, but with depreciation in the period 2008-2010.

The annual deprecation will increase as of 2008 as a result of the changed accounting assumptions. At a later date, Norske Skog will issue more precise information on how this is distributed over the segments.
Changed assumptions for long-term currency exchange rates

On the basis of the weakened USD compared with most other currencies, Norske Skog has concluded that the long-term USD exchange rate used in the impairment model must be adjusted down. This means a need for write-down of goodwill in Australasia of NOK 2.7 billion. After this, there are no goodwill items in Norske Skog's group accounts. There is no need to write down other assets due to the changed USD exchange rate.

Total accounting write-down of about NOK 800 million

Total write-downs and changed accounting of energy contracts causes write-down of NOK 800 million in total. This will be recorded in the accounts in the fourth quarter of 2007.

Norske Skog has bank debts totalling NOK 4 billion and undrawn lines of credit of NOK 6 billion with covenants stating that net tangible worth must be at least NOK 9 billion and that net interest-bearing debt to equity ratio shall not be less than 1.4. The company's equity vis-à-vis the loan term definition will increase by NOK 1.9 billion to pro forma NOK 15.5 billion. The loan-to-asset value ration will increase from 0.98 to pro forma 1.04.
Oxenøen, 3 December 2007

Norske Skog
Corporate communications

For further information:

Vice president, corporate communications
Tom Bratlie
Tel: +47 67 59 93 34
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Jarle Langfjæran
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