«Borregaard provides sustainable solutions based on renewable raw materials and unique competence»

ANNUAL REPORT 2013

«Borregaard provides sustainable solutions based on renewable raw materials and unique competence»

ANNUAL REPORT 2013 The Borregaard Group 4 Message from the CEO 7 The Board of Directors 8 Report of the Board of Directors 10 Sustainability and Corporate responsibility 15 Corporate Governance 27 The Group Executive Management 34 Consolidated Financial Statements 2013 36 Borregaard ASA - Financial Statements 2013 76 Historical Key Figures 86 Group Directory 88

4 The Borregaard Group The Borregaard Group

The Borregaard Group 5 The Borregaard Group Borregaard operates one of the world s most advanced biorefineries. By using natural, sustainable raw materials, the Group produces advanced and environmentally friendly biochemicals and biomaterials that can replace oil-based products. Borregaard also holds strong positions within selected niches of fine chemicals. Borregaard in a nutshell: A biorefinery with high value added Specialisation in global niches Strong innovation ability and continuous improvement Competence is the main competitive advantage A biorefinery with high value added The Group s business model is closely linked to the integrated nature of its biorefinery in Norway, which utilises the three key components of wood (cellulose fibres, lignin and sugar) to produce a diversified portfolio of products. The biorefinery utilises approximately 85% of the feedstock to make Borregaard s products, while the remaining biomass is used to produce thermal energy for its production processes. In addition to its biorefinery in Sarpsborg, Borregaard has six plants outside of Norway dedicated to producing lignin-based products. The company also has sales offices in 16 countries in Europe, Asia, Africa and the Americas serving its global customer base. At the end of 2013, the Group employed 1,049 man-years. Specialisation in global niches Borregaard is a supplier of specialised biochemicals for a global customer base. The Group s main products are ligninbased products and specialty cellulose, but its product portfolio also includes vanillin, bioethanol and fine chemicals. Borregaard s niche products serve applications in a wide range of global end-markets including construction, agriculture, food and beverages, transportation and pharmaceuticals. Borregaard s strong market positions have been developed through thorough understanding of its markets, the production of advanced and specialised products and local presence in the form of a global marketing organisation. Competence is Borregaard s main competitive advantage Borregaard is a competence-driven company with production, research and development (R&D), and sales and marketing as core competencies. To maintain its leading position, Borregaard places a significant emphasis on training programmes and cooperation between the various disciplines. Borregaard has a leading research centre combining wood

6 The Borregaard Group chemistry and fine chemistry and focusing on the development of new or improved products, applications and technologies. The Group has 94 employees in R&D, of which 80 are located at the R&D centre in Norway. Borregaard is organised in three business areas: Performance Chemicals develops, produces and sells ligninbased binding and dispersing agents for use in a wide range of end-market applications, with a particular focus on specialised products within categories such as concrete admixtures, batteries, oilfield chemicals and agro chemicals. In addition, Performance Chemicals includes some trading activity of chemicals that are either linked to lignin-based products or have previously been produced by Borregaard. Other Businesses mainly consists of Ingredients and Fine Chemicals. Borregaard Ingredients supplies wood-based and petrochemical-based vanillin products to flavour and fragrance companies, as well as to the food and beverage industry. Borregaard is the only producer of wood-based vanillin in the world. Borregaard supplies fine chemicals to the pharmaceutical industry and is the world s largest supplier of intermediates for non-ionic X-ray contrast media. Other Businesses also includes sales of surplus basic chemicals from its chlor-alkali production in Sarpsborg. In addition, Borregaard headquarters costs, corporate functions, corporate R&D, utilities and services at the Sarpsborg site are included in this business area. Specialty Cellulose develops, produces and sells specialty cellulose mainly for use in the production of cellulose acetate, cellulose ethers and other specialty segments. The production and sale of 2 nd generation bioethanol is also part of the Specialty Cellulose business area. Performance Chemicals Specialty Cellulose Other Businesses Technology leader and largest supplier of lignin-based products in the world with global market coverage. Leading global specialty cellulose supplier. Significant producer of 2 nd generation bioethanol. Only producer of wood-based vanillin. Largest producer of C 3 -aminodiols for nonionic X-ray contrast media. Key figures Operating revenues EBITA 1 ROCE 2 NOK mill NOK mill % % 5 000 700 15% 25% 13.9% 13.9% 12.5% 600 4 000 3 854 3 941 3 997 537 546 12% 20% 501 3 382 3 461 500 8.4% 3 000 9% 15% 400 7.5% 20.7% 19.7% 17.3% 2 000 1 000 300 200 100 253 289 6% 3% 10% 5% 9.5% 11.3% 0 2009 2010 2011 2012 2013 0 2009 2010 2011 2012 2013 0% 0% 2009 2010 2011 2012 2013 EBITA EBITA margin (%) 1. Operating profit before amortisation and other income and expenses. 2. Return on capital employed

The MESSAGE Borregaard FROM THE Group CEO 7 Message from the CEO Borregaard s operational strategy is two-fold and consistent over time: The Group aims to be a world leader both in innovation and productivity within its selected market segments. This strategy is supported by a strong corporate culture and a unique competence base. Therefore, know-how and competence are amongst our major competitive advantages. Borregaard s business model is based on our biorefinery concept and our unique competence in sales and marketing, research and development and production. The interaction between these disciplines is an important success factor for Borregaard. Our business model is also supported by our corporate culture: We are market-oriented, innovative and have a flexible organisation. Market-oriented Borregaard ensures good business understanding as well as insight into the market s requirements and customer expectations at all levels of the organisation. We place great emphasis on training our managers and employees in all aspects of the organisation s strategy and business understanding. Close to 10% of Borregaard s employees work in sales and marketing and technical customer service. Their most important tasks are knowing the different needs of customers as well as the value of our products and solutions. Innovative Innovation, research and development are essential elements in renewing Borregaard s business as well as strengthening the Group s sustainability both financially and environmentally. Innovation in Borregaard is market-driven and an interdisciplinary collaboration between different parts of the organisation. Borregaard s research and innovation efforts increased in 2013 and amounted to NOK 157 million which is 4% of our revenues. In 2013, 13% of the Group s turnover came from products launched in the last five years. Flexible organisation Borregaard is committed to maintaining international competitiveness through not only innovation, but also technology, productivity and cost reductions. Continuous improvement is an important part of our culture and is achieved by combining the use of technology with skills development and a flexible organisation. At Borregaard we value the commitment and initiative of all employees. Good craftsmanship and thorough, fact-based decisions are implemented through good cooperation and involvement between management, employees and their representatives. We see the organisation as a whole and its diversity as a strength. Our core values Technical experience and expert knowledge is not enough to run a sustainable business. Borregaard s core values are sustainability, long-term thinking and integrity. Our corporate culture and our values are crucial to how we utilise this expertise through interacting with colleagues, business partners and society. In closing, I want to take this opportunity to thank all Borregaard employees for dedicated efforts in the year gone by. I also want to thank all our shareholders, who have placed their trust in us. Kind regards, Per Sørlie President and CEO

8 The THE Borregaard BOARD OF DIRECTORS Group The Board of Directors Jan Anders Oksum Terje Andersen Jan Erik Korssjøen Kristine Ryssdal Ragnhild Wiborg Ragnhild Anker Eide Observer Observer Åsmund Dybedal Bente Seljebakken Klausen Roy Kåre Appelgren

THE The BOARD Borregaard OF DIRECTORS Group 9 Jan Anders Oksum Chair Member of the Board in Borregaard Industries Limited (BIL) 2007-2012. Member of the Board in Borregaard ASA from 2012. Mr. Oksum is an independent consultant within organisational and leadership development, strategy and project execution at JAAG Consult AS. He has worked in various positions at Norske Skogindustrier ASA from 1979 to 2006, including the position of CEO from 2004 to 2006. Mr. Oksum has served as Chair and Director of various national and international companies. He holds a degree in Chemical Engineering from the Norwegian University of Science and Technology in Trondheim. Mr. Oksum has attended 8 out of 8 Board Meetings in 2013. Kristine Ryssdal Member Member of the Board since 2012. Ms. Ryssdal has been with Statoil ASA since 2012 as Vice President Legal. Prior to joining Statoil, she served as the Senior Vice President and Chief Legal Officer of Renewable Energy Corporation ASA. Ms. Ryssdal also has experience from various other positions, including Attorney at the Norwegian Attorney General s Office, Legal Counsel for Norsk Hydro ASA and Senior Advisor for Commercial and Legal Affairs of Norsk Hydro Canada Oil & Gas Inc. She holds a Cand. Jur. degree from the University of Oslo and a Master of Laws from the London School of Economics. Ms. Ryssdal has attended 7 out of 8 Board Meetings in 2013. Åsmund Dybedal Employee representative Member of the Board since April 2013. Mr. Dybedal is Leader of The Norwegian United Federation of Trade Unions at Borregaard (Fellesforbundet Borregaard Fagforening), as well as Chair of the Board of the Norwegian Confederation of Trade Unions (LO) at Borregaard. He has attended 6 out of 6 Board Meetings in 2013. Terje Andersen Member Member of the Board in Borregaard Industries Limited (BIL) 2005-2012. Member of the Board in Borregaard ASA from 2012. Mr. Andersen is CEO of Orkla Investments. He has held various positions within the Orkla group since 1989 including CFO of Orkla ASA. He also has experience from Nevi Finans AS and as Management Consultant in Deloitte Touche. Mr. Andersen holds a number of positions in various boards. He holds a degree in Business Administration (siviløkonom) from the Norwegian School of Economics and Business Administration in Bergen. Mr. Andersen has attended 8 out of 8 Board Meetings in 2013. Ragnhild Wiborg Member Member of the Board since the Annual General Meeting in April 2013. Ms. Wiborg is CEO/CIO of Wiborg kapitalförvaltning. Previously she was CIO & Portfolio Manager at Odin Fund Management. She has held senior positions in a number of financial institutions and companies, such as Pareto and First Chicago. Ms. Wiborg serves as a Board Member at IM Skaugen, EAM Solar and REC Silicon and as a shareholder-elected Nomination Committee member of several listed companies. She holds a Master Degree in Macroeconomics, a Bachelor of Science degree in Economics and Major in International Business. Ms. Wiborg has attended 6 out of 6 Board Meetings in 2013. Bente Seljebakken Klausen Observer Observer at the Board since 2012. Ms. Seljebakken Klausen works as a Laboratory Technician at Borregaard R&D. She is Chair of the Norwegian Engineers and Managers Association (FLT) at Borregaard, and secretary of the Borregaard Workers Shop Stewards Committee (Borregaardarbeidernes tillitsmannsutvalg). Ms. Seljebakken Klausen has attended 6 out of 8 Board Meetings in 2013. Jan Erik Korssjøen Member Member of the Board since 2012. Mr. Korssjøen was CEO of Kongsberg Gruppen from 1999 to 2008 and has previously held a number of management positions in Kongsberg Industry and Kongsberg Gruppen. He has been a member of the Board of Directors in Cermaq ASA since 2009 and currently also holds the position of Industrial Professor at Buskerud University College. Mr. Korssjøen holds a Master Degree in Mechanical Engineering from the Norwegian University of Science and Technology in Trondheim. Mr. Korssjøen has attended 8 out of 8 Board Meetings in 2013. Ragnhild Anker Eide Employee representative Member of the Board since 2012. Ms. Anker Eide works as a Manager in Mechanical Maintenance at Borregaard Sarpsborg. She is Chair of The Norwegian Society of Graduate Technical and Scientific Professionals (Tekna) at Borregaard and chair of the Board of the Joint Union for Officials and Engineers at Borregaard. Ms. Anker Eide has attended 8 out of 8 Board Meetings in 2013. Roy Kåre Appelgren Observer Observer at the Board in Borregaard Industries Limited (BIL) 2010-2012. Observer at the Board in Borregaard ASA from 2012. Mr. Appelgren works as a Senior Engineer in Mechanical Maintenance at Borregaard. He is Chair of The Norwegian Society of Engineers and Technologists (NITO) at Borregaard and a member of the Joint Union for Officials and Engineers at Borregaard. Mr. Appelgren has attended 7 out of 8 Board Meetings in 2013.

10 REPORT OF THE BOARD OF DIRECTORS REPORT OF THE BOARD OF DIRECTORS

REPORT OF THE BOARD OF DIRECTORS 11 Report of the Board of Directors Overview and highlights 2013 Following its listing on the Oslo Stock Exchange on 18 October 2012, 2013 was Borregaard s first full year as an independent company. The year can be viewed as satisfactory both in terms of financial performance, shareholder value creation, operations and business development. Borregaard ASA is located in Sarpsborg, Norway. The Group has global operations as specified in Note 7 in the Financial Statement for 2013 of Borregaard ASA. Borregaard is a leading global player with strong positions within selected niches of bio-based specialty chemicals, specialty cellulose and fine chemicals. The company operates one of the world s most advanced biorefineries with high value added through full utilisation of the common wood raw material base. The Group s strong research and development competence contributes to continuous specialisation of existing operations as well as new products and applications. In 2013, Borregaard received substantial financial grants from both Norwegian authorities and the European Union. Furthermore, the company was named Most innovative newcomer in connection with the European Commission s first European Small and Mid-Cap Awards. Borregaard s strength as the market leader and only global player within lignin-based products made it possible to maintain and reinforce its presence in key markets despite the indefinite close-down of the operations in Spain and the reduced raw material supply in the Czech Republic. The completed capacity expansion for high-value lignin products in Sarpsborg will further support the Group s specialisation strategy. In 2013, several investment projects further enhancing the company s environmental profile were completed. A new biological purification plant for treatment of waste water and production of biogas, together with a new energy plant replacing heavy oil with natural gas, are yielding environmental benefits and an improved energy supply. In the wake of two financially strong years, the Group delivered another satisfactory operating profit and return on capital employed in 2013. Also, the share price development was strong in 2013 with an increase of 44% assuming reinvestment of dividend. Market trends Borregaard has enjoyed generally favourable market conditions also in 2013, in spite of the continued downturn in a number of traditionally important markets within the Euro-zone. The principal elements of the company s specialisation strategy - a diversified product portfolio and global market exposure - provide a natural hedge against the negative impact of regional effects. 1. Figures in parantheses are from the corresponding period previous year. 2. Operating profit before amortisation and other income and expenses. Performance Chemicals saw strong overall demand, especially in Asia. Sales were constrained by reduced raw material supply due to loss of lignin raw material in Spain and the Czech Republic. Double digit volume growth for high-value products and significant improvement both in product mix and prices for low- and medium-value products more than compensated for the reduced raw material supply. The high price level for Specialty Cellulose seen in 2011 and 2012 was somewhat adjusted in 2013, mainly in segments competing with cotton linter pulp. The market balance for specialty cellulose is affected by new capacity gradually entering the market from 2013. In Ingredients, the challenging market situation seen since late 2011, largely due to oversupply and stronger competition from Chinese producers, has persisted. However, sales volumes now show an encouraging trend, but still at relatively lower price level. Fine Chemicals sales of intermediates for non-ionic X-ray contrast media and some pharmaceutical intermediates have been stable since capacity adjustments in mid 2011. Financial performance in 2013 Borregaard s operating revenues in 2013 totalled NOK 3,997 million (NOK 3,941 million 1 ). EBITA 2 amounted to NOK 501 million, compared with NOK 546 million in the preceding year. A strong EBITA improvement in Performance Chemicals was more than offset by weaker results in Specialty Cellulose and Other Businesses. Reduced wood cost, favourable currency impact and all-time high production output at the Sarpsborg site contributed positively. Other income and expenses totalled NOK 14 million (NOK -71 million), representing a gain from property sale partly off-set by write-downs of assets in Borregaard s lignin operations in Spain. The 2012 expense was related to write-downs of assets and restructuring charges in Borregaard s operation in Brazil as well as stay-on bonuses to management in connection with the IPO process. Operating profit ended at NOK 513 million (NOK 472 million). Net financial items amounted to NOK -39 million (NOK -52 million). A reduction in net interest expense of NOK 24 million due to lower net interest-bearing debt was partly off-set by an FX change of NOK -11 million. Group profit before tax in 2013 amounted to NOK 474 million (NOK 420 million). The tax charge was NOK 143 million (NOK 142 million), giving a tax rate of 30%. Earnings per share ended at NOK 3.35 (NOK 2.76). The Board of Directors of Borregaard ASA proposes dividends for 2013 of NOK 1.10 per share, representing a total dividend payment of NOK 109 million. As of 1 January 2013, the Group applied IAS 19 Employee Benefits (IAS 19R) and changed the basis for calculating the pension liability and costs for defined benefit plans. The Group previously used the corridor approach when recognising unamortised

12 REPORT OF THE BOARD OF DIRECTORS Net Net sales sales by Net sales by by geographical geographical area area area 2013 2013 2013 Asia Asia 29% 29% Asia 29% Europe Europe 47% 47% Europe 47% Americas Americas 23% 23% Americas 23% RoW RoW 1% 1% RoW 1% Earnings per Earnings per per share share share NOK NOK NOK 4 4 4 3.35 3.35 3.17 3.17 3.35 3.17 3 2.76 3 2.76 3 2.76 2 2 1.80 1.80 2 1.80 1.39 1.39 1.39 1 1 1 0 0 0 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2009 2010 2011 2012 2013 Cash Cash flow flow from Cash flow from from operations operations 1 1 1 NOK NOK mill mill NOK mill 800 800 800 723 723 700 700 699 699 700 660 723 660 699 660 600 600 547 600 547 547 528 528 500 500 528 536 551 536 551 540 500 540 536 551 540 400 400 504 504 452 452 400 504 452 300 300 300 200 200 200 100 100 100 0 0 0 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2009 2010 2011 2012 2013 Cash Cash flow flow from from Interest Interest & & EBITDA EBITDA Cash operating operating flow activities from activities Interest taxes taxes paid & paid EBITDA operating (IFRS) (IFRS) activities taxes paid (IFRS) 1. Cash 1. Cash flow flow from from operations operations before before 1. Cash financial financial flow items from items and operations and taxes taxes before financial items and taxes changes in accounting estimates. The corridor approach is no longer accepted and all changes in accounting estimates shall be recognised in other comprehensive income Man Man in accordance years years by by geographical with IAS 19R. areas areas See Note 4 and 10 for effects of the restating. Man years by geographical areas Cash flow and financial structure Cash Norway flow Norway 70% from 70% operating activities in 2013 amounted to NOK 540 million (NOK Norway 70% 551 million). The slight decrease in cash flow from operating avtivities is mainly related to higher tax payments in 2013 largely off-set by improved profit before Europe Europe 11% 11% tax adjusted for non-cash elements. Europe Replacement (ex. investments declined in 2013 (ex. Norway) 11% Norway) (ex. Norway) compared with 2012, while expansion investments were at the same level as the previous year. During 2013, the Group Asia Asia 4% 4% has repurchased treasury shares at a cost of Asia 4% NOK 33 million. As of 31 December, the RoW Group 5% had net interest-bearing debt totalling NOK 707 million (NOK 840 million). At the end of 2013, NOK 750 million had been drawn on the long-term Operating revolving revenues credit facilities. In 2014, Borregaard has EBITA issued 1 NOK 400 million NOK in an open bond issue and has entered NOK into mill a EUR 40 million loan % 5 000 agreement Trends with the in Nordic in sickness Investment absence Bank. See Note 700 37. 13.9% 13.9% Trends in sickness absence 12.5% 4 000 As of 6.0% 31 December 2013, the company is well capitalised with an equity ratio 501 of 6.0% 3 382 3 461 6.0% 500 53.9% and 5.3 a 5.3 leverage ratio (NIBD/EBITDA) of 0.97. 3 000 5.3 5.0% 5.0% 5.0% 4.8 4.8 4.8 RoW RoW 5% 5% 4.1 4.8 4.8 4.8 Americas Americas 10% 10% Americas 10% 3 854 3 941 3 997 4.1 Business 4.0% segments 4.0% 4.1 3.8 3.8 300 289 2 000 253 4.0% 3.8 Performance Chemicals had operating revenues in 2013 of NOK 1,756 million 200 3.0% (NOK 1,689 3.0% 3.0% 1 000 million). EBITA amounted to NOK 326 million (NOK 269 million). 100 An improved 2.0% product mix, beneficial currency impact and price increases more 2.0% 2.0% than compensated 0 for an 8% decline in total sales volume 0 caused by reduced 1.0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 raw material 1.0% 1.0% supply. During 2013, the lignin operation in Spain ceased due to the financial 0 restructuring of Sniace, the supplier of raw material. In addition, there 0 0 was less supply 2009 2009 of 2010 2010 lignin 2011 2011 raw 2012 material 2012 2013 2013in the Czech Republic, partly off-set by spot 2009 2010 2011 2012 2013 1. For purchases from 1. For production production plants various 1. For production plantseuropean sources. In spite of the overall decline, sales volume for high-value products grew in both absolute and relative terms (from 15% to 18% of total volume). Medium-value products accounted for 71% in 2013 versus 69% in 2012. Trends in in H1 Trends in H1 H1 value value value 1 1 1 5.0% 5.0% NOK per mtds 5.0% 4.5 4.5 4 500 4.5 4.0% 4.0% 3.8 3.8 3 883 4.0% 4 000 3.8 3.3 3.3 3.3 3 366 3.0% 3 285 3 395 3.0% 3 500 3 222 3.0% 2.2 2.2 3 000 2.0 2.0 2.2 2.0% 2.0% 2.0 2.0% 2 500 1.0% 2009 2010 2011 2012 2013 1.0% 1.0% 0% 0% 0% 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 000 2009 mtds 2010 2011 2012 2013 600 500 400 420 453 Gross average price Sales volume 473 600 400 501 7.5% 8.4% 537 546 EBITA EBITA margin (%) 462 15% 12% 9% 6% 3% 0% NOK per mt 12 000 11 000 10 000 9 000 8 000 7 000 6 000 000 mt 180 150 120 7 409 2009 160 300 200 100 0 2009 2010 2011 2012 2013 200 90 60 30 0

13.9% 12.5% 546 501 12% 20% 20.7% 19.7% 17.3% Asia 29% Norway 70% 9% 15% 6% 10% 9.5% 11.3% Europe REPORT 47% OF THE BOARD OF DIRECTORS 13 2012 2013 EBITA margin (%) 3% 5% Specialty Cellulose posted operating revenues of NOK 1,597 0% 0% million (NOK 1,616 million) 2009 2010with 2011 EBITA 2012at 2013 NOK 224 million (NOK 281 million). The decline was caused by a weaker product mix and lower prices in some segments, partly off-set by reduced raw material prices and strong production output. The share of highly specialised products was 67% of total volume in 2013, compared with 73% in 2012, reflecting the challenging market development. NOK per mt 12 000 11 000 10 000 9 000 8 000 7 000 6 000 000 mt 180 150 120 90 60 30 0 7 409 8 099 Gross average price 10 279 2009 2010 2011 2012 2013 160 146 Sales volume 144 9 949 9 343 150 158 2009 2010 2011 2012 2013 Other Businesses mainly includes Borregaard s Ingredients and Fine Chemicals businesses, but also sales of surplus basic chemicals from its chlor-alkali production in Sarpsborg. In addition, the segment includes Borregaard corporate functions and R&D, utilities and services at the Sarpsborg site. In 2013, operating revenues in Other Businesses were NOK 703 million (NOK 715 million). EBITA was NOK -49 million in 2013 (NOK -4 million). The notable decline is related to weaker profitability in the Ingredients and Fine Chemicals businesses, full year depreciation of the BALI pilot plant and costs associated with being a stand-alone company. Sustainability and Corporate Responsibility Sustainability is an integrated part of Borregaard s business model. This is reflected in the Group s main objective: Providing sustainable solutions based on renewable raw materials and unique competence. Borregaard s 2013 report on sustainability, corporate responsibility and EHS is found from page 15. This report is an integral part of the Report of the Board of Directors. Financial and operational risks Borregaard is financially exposed to currency risk for most of its sales, primarily in USD and EUR. A substantial part of this Americas 23% exposure, defined as estimated net cash flow in USD and EUR, is routinely hedged with RoW a 1% nine-month time horizon. Subject to certain criteria being met, the hedging horizon may be extended up to 36 months. In 2013, a substantial EUR amount was hedged within a 3-year time horizon. See Note 28. Borregaard is also Earnings exposed per to price share risk for wood, energy NOK (thermal energy and electric power) as well as other strategic 4 raw materials. In sales, all Borregaard s business segments are 3.35 exposed to price risk in international 3.17 markets. Furthermore, 3 2.76 there is production risks inherently associated with the operation of processing plants. Borregaard has a strong commitment to continuous 2 improvement 1.80 throughout its worldwide operations, calling on 1.39 a wide range of measures both on the revenue and cost side. Credit risk in Borregaard is perceived to be 1 modest due to the quality of its customer base and its stringent credit management policy. 0 700 2009 2010 2011 2012 2013 Short term liquidity risk associated with cash flow fluctuations is low because Borregaard has ensured, ample short-term and long-term credit facilities from a group of major Nordic banks. The magnitude of such facilities was further increased in 2013 in connection Cash with the flow change from operations of the Group s 1 principal cash management NOK mill bank. As of 31 December 2013, the undrawn portion of available 800 long-term facilities amounted to NOK 1,050 million. 723 660 600 547 The company s business 528 activities and financial position, 500 536 551 540 together with the factors likely to affect its future development 400 504 452 and performance, are set out above. With its considerable financial resources together with contracts with customers and 699 300 2.0% suppliers across 200 different geographic areas and industry sectors, the company 100 is well placed to manage its ongoing business 1.0% risks. The company has adequate resources to continue in 0 operational existence 2009 2010 for the 2011 foreseeable 2012 2013 future. Hence, in 0% accordance with Cash flow the from Accounting Interest Act & 3-3a), EBITDA we confirm that operating activities taxes paid the financial statements (IFRS) have been prepared under the assumption of a going concern. See Note 28. 1. Cash flow from operations before financial items and taxes Corporate governance Borregaard s governance systems are based on principles set out in the Norwegian Code of Conduct for Corporate Governance. An overall report on Corporate Governance at Borregaard may be found from page 27. Remuneration of Group Executive Management The Board of Directors has established a Compensation Committee which deals with all important matters related to pay and other remuneration of senior executives before such matters are decided by the Board of Directors. In accordance with Norwegian company legislation, the Board of Directors has also established guidelines on the pay and other remuneration of senior executives, included in Note 9 to the consolidated financial statements of Borregaard ASA. Shareholder matters All shares in Borregaard ASA have equal rights and are freely traded. The company has established a programme enabling 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0 5.0% 4.0% 3.0% Trends in 5.3 4.8 2009 2010 1. For production Trend 4.5 3.3 2009 2010

14 REPORT OF THE BOARD OF DIRECTORS employees to purchase shares at a discounted price. In connection with the programme and the share option programme for the Group Executive Management and other key employees, Borregaard ASA held 1,270,000 treasury shares as of 31 December 2013. In 2014, 535,500 share options have been exercised. The Group holds 951,534 treasury shares as of 26 March 2014. See Note 37. The company is unaware of any agreements between shareholders aiming at restricting the free trading of the company s shares or limiting the exercise of ownership rights for such shares. The company has not entered into any material agreements which become enforceable, altered or will expire in the case of an offer being made to acquire the company. Allocation of profit In 2013 Borregaard ASA posted a profit of NOK 15 million. The Board of Directors proposes the following allocation (NOK million): Dividend 109 Retained earnings -94 Total 15 The Borregaard Group posted a profit of NOK 331 million in 2013. The Board of Directors proposes the distribution of an ordinary dividend of NOK 1.10 per share for the 2013 financial year, except for treasury shares. Total dividend proposed is thus NOK 109 million. Outlook for 2014 Performance Chemicals continues to enjoy strong demand in major applications. Total sales volume in 2014 is expected to be on or moderately below its 2013 level. Increased raw material supply from existing sources and new contracted suppliers are expected largely to compensate for sales from inventories in 2013 and the reduced supply in Spain. In 2014, cellulose prices in sales currency are expected to be lower than in 2013. In addition, product mix in 2014 is expected to be marginally weaker than in 2013. However, actual product mix will be dependent on termined by demand development, especially within the construction end-market. The challenging market situation for vanillin products is expected to continue. The Fine Chemicals business is likely to remain relatively stable. If maintained, the recent weakening of the NOK will contribute positively in all business areas. The impact will gradually take effect towards mid-year 2014. Sarpsborg, 26 March 2014 The Board of Directors of Borregaard ASA Jan A. Oksum (chair) Terje Andersen Ragnhild Wiborg Kristine Ryssdal Jan Erik Korssjøen Ragnhild Anker Eide Åsmund Dybedahl Per A. Sørlie (President and CEO)

Sustainability and Corporate Responsibility 15 Sustainability and Corporate Responsibility

16 Sustainability and Corporate Responsibility Sustainability and Corporate responsibility in Borregaard Borregaard ASA is subject to the reporting requirements of the Accounting Act 3-3c with regard to Corporate Social Responsibility. This requires Borregaard to account for what the company is doing to integrate consideration of human rights, labor rights and social issues, the environment and anti-corruption in their business strategies, in daily operations and relationships with its stakeholders. This chapter responds to these requirements. Borregaard s main objective is to develop and deliver sustainable solutions using natural raw materials and its unique competence. Hence, both the company s aspirations and challenges are linked to corporate social responsibility and its sustainable development. Borregaard executes its corporate responsibility by developing and running its operations profitably in a manner that conforms with fundamental ethical values and respect for individuals, the environment and society as a whole. This approach also involves maintaining a dialogue with the Group s key stakeholders and taking them into consideration when running the business and making decisions. Main areas Corporate responsibility is a broad concept that covers many areas. With a view to specifying and prioritising the Group s corporate responsibility activities, Borregaard has defined the following main areas: A Sustainable business model D Suppliers and business partners B Environment, health and safety E Involvement in local community C Competence and employee development Stakeholder dialogue Maintaining good contact with the Group s various stakeholders is important in terms of creating trust in Borregaard and an understanding of what the company does within local communities and society at large. Every Borregaard unit has to consider issues relevant to the relationship between the company and the wider community, facilitate good dialogue and ensure that complaints and other enquiries from external stakeholders are handled efficiently. Borregaard must assess the need to implement improvement projects in areas where specific challenges exist. Organisation and responsibilities Corporate responsibility is a line manager s responsibility in Borregaard. This means that corporate responsibility must form an integral part of what the Group s management team, various units and departments do. The management team also has the overall responsibility to monitor the company s aspirations, initiatives and results in this area as well. Borregaard has a number of guideline documents and reporting procedures as part of its corporate responsibility policy. These documents and reporting on corporate responsibility are the responsibility of the HR & Communications department. The documents are also approved by Borregaard s Board of Directors. References Guidelines on corporate responsibility Ethical guidelines Competition law manual Guidelines on responsible procurement Guidelines on human rights Guidelines on whistleblowing Guidelines on Environment, Health and Safety (EHS) Anti-corruption manual

Sustainability and Corporate Responsibility 17 A Sustainable business model Borregaard s fundamental understanding of sustainability and corporate responsibility is that the business model itself and the company s products are sustainable and meet global needs. The world faces numerous different challenges associated with population growth and urbanisation in the years ahead. Borregaard s bio-based products are alternatives to petrochemical-based products, thereby contributing to resolve some of the long-term global challenges associated with access to resources and the impact on the environment and climate. Borregaard has employed an independent third party, Ostfold Research, to conduct a life cycle anaysis (LCA) in accordance with the ISO 14044/48 standard. This involves analysing all the environmental and resource-related impacts that the products have throughout their entire life cycle. This analysis confirms that Borregaard s bio-based products do well from a climate perspective when compared with petrochemical alternatives. Borregaard has also made efforts to reduce greenhouse gas emissions in its own processes, including eliminaton of heavy oil consumption and increasing the amount of energy supplied from more eco-friendly energy sources. Key initiatives and results in 2013 In 2013 Borregaard completed an energy plant where the use of heavy oil has been completely replaced by natural gas at the biorefinery in Sarpsborg. One of the advantages of this is major environmental improvements in terms of fewer air-based and greenhouse gas emissions. The commissioning of a new biological purification plant for treatment of waste water and production of biogas also helped to improve the environmental footprint of the biorefinery concept. In 2013 Borregaard was granted a European patent for its BALI (Borregaard Advanced LIgnin) technology, a proprietary biorefinery process developed for producing green chemicals and sugar based on biomass from wood, agricultural and forestry waste. Patenting is a key element in the Group s efforts to protect its technology. Innovation plays an important role in maintaining sustainability. In 2013, 13% of Borregaard s revenues came from products launched in the previous five years, a slight improvement on the previous year. Key targets in this area for 2014 To continue developing the BALI technology To achieve further cuts in the company s emissions To increase the level of innovation measured in terms of new product sales Borregaard s business model: Renewable raw materials High raw material utilisation Environmentally friendly substitutes for petrochemicals

18 Sustainability and Corporate Responsibility Environment, health and safety are an integral part of Borregaard s business plan. The Group needs B to make active efforts by adopting measures that can contribute to proper environmental and Environment, resource management. Borregaard s aspiration is health and safety to make a positive contribution to its employees health and it has a zero-tolerance policy when it comes to injuries to employees or other people caused by its activities. Borregaard s aspirations and recommendations concerning EHS are set out in a separate guideline document (see list on page 16). Borregaard has established a risk assessment and management system, which is a part of the Group s business management activities. This system is regularly reviewed (at least every year) by management Groups and the Board of Directors. Risk management covers every aspect of Borregaard s activities, but self-assessments are carried out on environment, health and safety matters. EHS factors are a management responsibility. Borregaard also has its own dedicated support functions for environment, health and safety and risk management. Health and the working environment Borregaard strives to ensure that working conditions are conducive to the good health of its employees. This is why both preventive activities and initiatives have been introduced to reduce stressful aspects in the working conditions. The health of its employees is regularly monitored through health and working environment surveys. The working environment is generally considered to be good, and improvement efforts are continually being made. There is an emphasis on closely following up those on sick leave and on adapting tasks for individual employees. A number of preventive initiatives related to exercise, diet and smoking have been continued at the plant in Sarpsborg during 2013. Results in 2013 The sick leave rate in the Borregaard Group was 3.8% in 2013, marking a 20% drop on 2012 when the rate was 4.8%. The sick leave rate at the Borregaard plant in Sarpsborg fell by more than 19% from 2012 to 2013 (from 5.7% to 4.6%). The sick leave rate at Borregaard s plants outside Norway has historically been low, with a further reduction in 2013. A health programme was introduced at the plant in Germany in 2013, which resulted in a reduction in the sick leave rate from 8.1% in 2012 to 5.7% in 2013. The programme mainly involves exercise activities and regular monitoring of health-related issues. Workplace safety Safety is integrated into every part of Borregaard s operations. Borregaard also has a worldwide safety programme called Zero Harm. Important measures aimed at achieving fewer injuries include: basic EHS training, focusing on personal responsibility for own safety, clearly defined safety management, reviewing rules for and the practical use of protective equipment, and rules on order and tidiness in the workplace. All injuries are investigated to identify root causes, implement corrective actions and document lessons that can be learned. Safety is also a permanent agenda item at the shift handover meeting for all workers in Sarpsborg who are starting a new shift period. Results in 2013 In recent years Borregaard has reduced the number of injuries and the gravity of these incidents. In 2013, however, there was a slight increase in the number of injuries at the Sarpsborg plant. On the other hand, there were no lost time injuries at Borregaard s plants outside Norway in 2013. The plants in the UK and Germany are prime examples of this, and 2013 marked ten and six years respectively since the last recorded lost time injury. The Group s lost time injuries rate, measured as H1 value (number of injuries resulting in sick leave per million hours worked), rose from 2.0 in 2012 to 2.2 in 2013. The total number of injuries, measured as H2 value (number of injuries per million hours worked), rose from 11.4 in 2012 to 15.1 in 2013. The Sarpsborg plant accounted for the rise in the number of injuries, although these were mainly of a minor nature. The H1 value was 3.2 compared to 0.8 in 2012 and the H2 value was 21.3 compared to 9.7 in 2012. Work on reporting, analysing root causes and implementing measures in connection with near accidents and hazardous conditions, as well as frequent inspections at the plants, will continue. In 2013 LignoTech in South Africa organised a Safety Day where staff performed role-plays and other exercises to raise their awareness about the different safety risks in the workplace. Initiatives in 2014 In 2014 Borregaard will follow up with a training course for all Performance Chemicals employees to ensure that their safety knowledge is kept up to date. Continuous follow-up is needed to create a good safety culture. EHS training will be a main feature in 2014, both within and outside the operations organisation. A new EHS manual will be issued in the 2 nd quarter, and the EHS department will work more closely with department heads on local EHS targets. Borregaard will also continue its initiative to reduce exposure to gas emissions, launched in 2012. This will involve various technical measures and information campaigns about the damage caused to people s health as a result of chemical exposure. Public safety Safety work does not just include issues and problems relating to personal safety and security during work activities. Borregaard also continuously assesses the safety conditions in relation to the wider community outside the company. This applies in particular to Borregaard s large plant in Sarpsborg,

Sustainability and Corporate Responsibility 19 which is covered by the Norwegian Major Accident Regulations (Storulykkeforskriften). The purpose of these regulations is to prevent major accidents and limit the damage if an accident occurs. They also include measures for preventing and limiting the damage impact of major accidents in companies where hazardous chemicals are present. The regulations require safety analyses and information to be made available to the local community. Borregaard s most recent information report about the Major Accident Regulations was distributed in February 2013. One of the key initiatives in recent years was the conversion of the chlor-alkali plant (completed in 2012), which resulted in chlorine no longer being stored at the plant. In 2013 Borregaard completed a natural gas based energy plant which resulted in a complete replacement of the use of heavy oil. Not only will this reduce emissions to air, but it will also remove the environmental risk of oil being discharged into the water. Consequently, the use of heavy oil at Borregaard is no longer covered by the provisions of the Major Accident Regulations. Environment Borregaard is making efforts to reduce its environmental impact in a number of areas. The most significant environmental challenges are associated with the Sarpsborg plant. Its greenhouse gas emissions are primarily due to thermal energy production, which is also relevant to other emissions to air. There was a particular focus on reducing emissions to water in 2013 through efforts to devise measures aimed at meeting new permit conditions. Steam consumption at Borregaard s plant in Sarpsborg was at the same level as 2012, even though the production of cellulose and lignin increased by around 6.5% from 2012 to 2013. During the last decade, Borregaard has implemented an energy strategy in order to replace the use of heavy oil with more climate- and eco-friendly energy sources. At present, Borregaard meets its constant energy needs (base load) in the form of steam through recovery of thermal energy from production, bioenergy and energy recovery from waste. There are some periods where more energy is required (peak load). During these periods Borregaard has historically produced steam using heavy oil and electrical power. In 2013 Borregaard commissioned a new plant based on liquefied natural gas (LNG) which, together with the occasional use of electrical power, is the energy source for peak Sick leave Borregaard Group loads. This means that Borregaard has phased out the use of heavy oil as an energy 6% source. One of the advantages of this will be major environmental improvements in terms of 5% fewer emissions to air. Using natural gas instead of heavy 4% oil will reduce NOx emissions by 90%, while sulphuric 3% dioxide (SO 2 ) and dust emissions will almost be eliminated, and CO 2 emissions will be 2% reduced by 25%. Borregaard is also working on a new energy efficiency programme at the plant in Sarpsborg, 2010 which 2011 will 2012mainly 2013 help 0% reduce thermal energy consumption and, in turn, emissions to air. The project involves making better use of the surplus thermal energy and waste energy to Sick be able leave to reduce the Sick leave amount of natural gas and electricity Sarpsborg used. The pre-project Borregaard is Group being supported by Enova, which is providing Emissions up to NOK to air NOx A. Energy consumption and production 1 million, and has been completed 6% in February 2014. This 6% 700 The total amount of energy consumed by all Borregaard will then provide the basis 5% for specific projects targeting a 5% 600 units amounted to 1.84 TWh in 2013 (1.25 TWh of thermal reduction in annual energy consumption at Borregaard s 4% 500 power and 0.60 TWh of electricity-specific consumption). 4% Sarpsborg plant by around 60 GWh over four years. 3% 400 The majority of the energy was consumed by 3% Borregaard s Borregaard has earmarked resources to invest in energy 2% 300 plant in Sarpsborg, where total consumption 2% amounted to efficiency initiatives relating to the project over the coming 200 1.64 TWh in 2013, including 1.04 TWh of thermal power. years until 2017. Borregaard 1% will carry out an additional 1% 0% 2010 2011 2012 2013 1% 0% 100 2010 2011 0 2012 2013 2010 2011 2012 Sick leave Borregaard Group Sick leave Sarpsborg Emissions to air NOx Lost time injuries Borregaard Group Emissions to air 6% 5% 4% 3% 2% 1% 0% 6% 5% 2010 2011 2012 2013 Sick leave Sarpsborg 6% 5% 4% 3% 2% 1% 0% 18 16 14 700 18 16 600 14 500 12 400 10 8 300 6 200 4 100 2 0 0 2010 2011 20122010 2013 2011 2012 Lost time injuries Emissions to air Borregaard Group 200000 180000 160000 140000 200000 180000 160000 140000 14 120000 100000 12 80000 10 60000 8 40000 6 20000 4 0 2 2010 2011 20122010 2013 0 2011 2012 H1 value=number of lost time injuries 2010 2011 2012 per million hours worked H2 value=number of recordable injuries per million Tonnes/day hours worked 120 100 80 1 0,9 0,8 0,7 0,6 Copper Emissions to water Sarpsborg AOX kg/da

Copper Fibre (organic suspended materials) 20 12 Sustainability and Corporate Responsibility 10 pre-project in 2014, supported 2 by Enova, to investigate the C. Reduction in emissions 4,7 to air 2011 2012 0 4,6 energy efficiency impact of a new bark boiler. In 2013 SO 2 emissions were discharged from both the 2010 2011 2012 2013 2010 2011 2012 2013 Sick leave cellulose processes and ethanol and biogas production. Borregaard At LignoTech Group South Africa a constant focus on energy Emissions efficiency has resulted in a reduction in energy consumption tonnes of which were produced in Sarpsborg. Borregaard to Total air NOx SO 2 emissions amounted to 419 tonnes in 2013, 286 ions to air accompanied by a rise in production. LignoTech AOX700 USA renovated has invested in a number of initiatives KOF that have Copper reduced its office in 2013 to make 1 it more energy 600 efficient in SO 2 emissions in Sarpsborg 120 from 1,200 tonnes annually 0,9 terms of heating, ventilation, 0,8 cooling and lighting. 500 to less than 300 tonnes 100 annually 14 over the last 16 years. 0,7 400 Introducing natural gas as 80 a replacement 12 0,6 for heavy oil in B. Greenhouse gases 0,5 10 300 thermal energy production 60 has reduced SO 2 emissions further in 2013. Borregaard 40also introduced additional facili- 0,4 8 Borregaard s direct emissions 0,3 of the greenhouse 200 gas CO 2 6 primarily derive from fossil 0,2fuels used in thermal 100 energy ties for monitoring and controlling 20 SO 2 emissions from its 0,1 4 production. The total emissions 0 generated by 0all of the plant units. An ongoing programme 0 2 aimed at replacing the 2010 2011 Group s 2012 plants 2013 2010 2011 2012 amounted to 167,315 tonnes in 2013. 2010 2013 CO 2011 2012 2010 2011 2012 2013 2 pipework system by 2017 is also 0 helping cut SO 2 emissions. 2011 emissions 2012 at Sarpsborg accounted for 137,852 tonnes of this. Borregaard reported a slight rise in CO 2 emissions in The overall result of these measures will be better local air quality in Sarpsborg. Sick 2013 leave due to the company taking over a waste incineration ssions to water Sarpsborg plant from Østfold Energi from 1 January 2013, which Emissions produces kg/day steam at Borregaard s site. The plant is not respon- to The air total amount of NOx emissions from Borregaard AOX was Sarpsborg Fosfor 312 tonnes in 2013, marking a 16% 1 reduction on 2012. 200000 Nitrogen sible for any real increase in CO 2 emissions as they were The reduction in emissions is mainly 0,9 15 180000 attributable to lower 0,8 previously reported by Østfold 80 Energi. The 160000 emissions from 450 12.5 consumption of heavy oil at the 0,7plants in Sarpsborg where 70 140000 400 0,6 this plant account for 27.5% of Borregaard s greenhouse 60 252 tonnes of NOx emissions were 0,5 discharged in 2013 120000 350 10 gas emissions. 300 50 compared to 271 tonnes in 2012. 0,4 7.5 100000 80000 60000 Borregaard s 5 use of natural gas and electricity for steam 20 40000 production 2.5 instead of heavy 10 oil contributed 20000 to a 11% reduction from 2012 to 2013 0 0 in CO 2 emissions at the Sarpsborg 2012 0 2010 2011 2012 2013 plant. 2010 2011 2013 2011 2012 2013 14 8 6 4 40 30 2010 2011 2012 5,3 5,2 5,1 5 4,9 4,8 250 200 150 0,3 0,2 0,1 2010 2011 2012 2013 Biogas from the new purification and biogas plant in 100 0 Sarpsborg will replace fossil 50 fuel in one of the spraydryers for lignin, thereby resulting 0 in lower emissions of CO 2, SO 2010 2011 2012 2013 2 and NOx. 2010 2011 2012 2013 ay organic material) In 2013 Borregaard also commissioned a new biological Emissions to D. water Emissions to water y) purification plant, the Eco-friendly plant, which not only Sarpsborg There was a positive trend in 2013 in terms of the emissions to water from Borregaard. In September Fosfor Lost time injuries Tonnes/day kg/day significantly reduces emissions to water, but also produces O 2008 2 emissions Borregaard Group 120 15 Sarpsborg green energy in the form of biogas replacing SO 2 process fossil fuel for Borregaard s aerobic purification Total plant SO 80 was 2 emission closed due 100 12.5 spraydrying of lignin. This will yield a reduction in CO 2 to the risk of legionella. A new, 70legionella-safe anaerobic emissions of more than 8,000 tonnes in 2014. 80 60 This energy purification plant 10 was completed in autumn 2013, to satisfy the new permit 7.5 conditions 50 switch has received NOK 30 40 million in support from Enova. 90 for emissions to water. 60 70 30 30 40 5 20 50 20 2.5 10 20 30 0 0 0 2010 2011 2012 2013 10 2010 2011 2012 2013 10 40 To 2010 2011 2012 2013 00 H1 value=number 02 04 06 08 of lost 10 time 12 injuries 14 per million hours worked H2 value=number of recordable injuries per million hours Tonnes/year worked y consumption egaard Group 700 600 NOx and SO 2 emissions Borregaard Group 0 COD (tonnes/day organic material) 2010 2011 Copper 2012(kg/day) 2013 Total NOx emissions Tonnes/year SO 2 emissions Sarpsborg 50 1400 500 40 1200 400 30 1000 300 20 800 600 200 10 400 100 0 200 2008 2009 2010 2011 2012 2013 0 0 2010 2011 2012 Tonnes/year 2013 92 94 96 98 00 02 04 06 08 10 12 14 2011 2012 2013 NOx emissions SO 2 emissions 1600 GWh 2000 1800 1600 1400 Energy consumption Borregaard Group -10 Tonnes/year 200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 2008 2009 2010 2011 2012 2013 Tonnes/year 40 30 20 10 0 2010 2011 2010 2012 2011 2013 2012 2013 50 40 30 CO 2 emissions Borregaard SO Group 2 process *The rise in CO 2 emissions in 2013 is due to the company taking over the ownership of a waste incineration plant from 1 January 2013. Tonnes/year Total NOx emissions *