| ITEM 1. | BUSINESS |
In this document, please note the following:
references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries, unless the context clearly suggests otherwise, and references to “Mercer Inc.” mean Mercer International Inc. excluding its subsidiaries;
references to “ADMTs” mean air-dried metric tonnes;
references to “MW” mean megawatts and “MWh” mean megawatt hours; and
“€” refers to Euros, which is our reporting currency; “$” refers to U.S. dollars; and “C$” refers to Canadian dollars.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures.
General We operate in the pulp business and are among the largest publicly traded producers of market northern bleached softwood kraft, or “NBSK”, pulp in the world. Mercer Inc. We are the sole isreorganized as a company under the laws of the State of Washington in 2006 from a Washington corporation and our shares ofbusiness trust. Its common stock areis quoted and listed for trading on the NASDAQ Global Market (MERC) and the Toronto Stock Exchange (MRI.U).We operate in the pulp business and are the second largest producer of market northern bleached softwood kraft, or “NBSK”, pulp in the world. kraft pulpNBSK producer, and the only significant producer of pulp for resale, known as “market pulp”, in Germany, which is the largest pulp import market in Europe. We also generate and sell a significant amount of surplus “green” energy to regional utilities. Our operations are located in Eastern Germany and Western Canada. We currently employ approximately 1,056 people at our German operations, 381 people at our Celgar mill in Western Canada and 18 people at our office in Vancouver, British Columbia, Canada.1,500 people. We operate three NBSK pulp mills with a consolidated annual production capacity of approximately 1.5 million ADMTs:
| • | Rosenthal | ||
| • | Celgar |
| • | Stendal mill. Our 74.9% owned subsidiary, Stendal, owns and operates the Stendal mill, a state-of-the-art, single-line, ISO 9001 and 14001 certified NBSK pulp mill that has an annual production capacity of approximately 650,000 ADMTs and 102 MW of electrical generation. The Stendal mill generated and exported 368,634 MWh of electricity in 2012, resulting in approximately €32.2 million in annual revenues. The Stendal mill is located near the town of Stendal, Germany, approximately 130 kilometers west of Berlin. |
Organizational Chart
The following chart sets out our directly and indirectly owned principal operating subsidiaries, their jurisdictions of organization, their principal activities and their annual pulp production and electrical generation capacity:
History and Development of Business
We acquired our initialcommenced pulp and paper operations in 1993. Subsequently, we disposedwith the acquisition of our paper operations to focus our business on our core pulp operations.
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We initially hadcurrently have a 63.6%74.9% ownership interest in StendalStendal. We, and over time, increased our interest to 74.9%.
In 2012, our Stendal mill commenced an approximate €40.0 million project, referred to as “Project Blue Mill”, which is designed to increase production and efficiency through debottlenecking initiatives including the installation of an additional 40 MW steam turbine at our Stendal mill. The debottlenecking which, among other things, requires the new turbine in order to enhance and efficiently utilize steam production, is designed to increase the mill’s annual pulp production capacity by 30,000 ADMTs. The new turbine is also expected to
initially produce an additional 109,000 MWh of surplus renewable energy for sale at premium pricing. Project Blue Mill is currently expected to be completed and start to generate power resources in or about September 2013.
A significant portion of the capital investments at our German mills, including the construction of the Stendal mill, were financed through government grants. Since 1999, our German mills have benefited from an aggregate €383.7€386.3 million in government grants. These grants reduce the cost basis of the assets purchased when the grants are received and are not reported in our income. See “- Capital Expenditures”.
In February 2005, we acquired the Celgar mill for $210.0 million of which $170.0 million was paid in cash and $40.0 million was paid in our shares, plus $16.0 million for the defined working capital of the mill. The Celgar mill was completely rebuilt in the early 1990s through a C$850.0 million modernization and expansion project, which transformed it into a modern and competitive producer.
Since its acquisition, we completed a C$28.0 millionhave effected several capital project which improved efficienciesprojects and reliability and, with other measures, increasedinitiatives at the Celgar mill’smill to increase its annual pulp production capacity to 500,000 ADMTs. In 2008, we commenced520,000 ADMTs and its production of “green” energy. This includes a new “green” energycapital project, at our Celgar mill, referred to as the “Celgar Energy Project”, to increasewhich was completed in September 2010 and increased the Celgar mill’s production of “green” energy and optimizeoptimized its power generation capacity. We are completing the project withcapacity, at an aggregate cost of approximately C$4064.9 million, inof which approximately C$48.0 million was financed by grants from the Canadian federal government and expect to complete the same in or about September 2010. See “- Capital Expenditures”.
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Our competitive strengths include the following:
| • | Modern and Competitive Mills.We operate three large, modern, competitive NBSK pulp mills that produce high quality NBSK pulp, which is a premium grade of kraft pulp. | ||
| • | Stable Income Source from the Sale of Surplus Renewable | ||
| • | Leading Market Position.We are among the largest publicly traded NBSK market pulp producers in the world, which provides us increased presence and better industry information in the markets in which we operate and provides for close customer relationships with many large pulp consumers. |
| • | Strategic Locations and Customer | ||
| • | Advantageous Capital Investments and Financing.Our German mills are eligible to receive government grants in respect of qualifying capital investments. Over the last | ||
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| • | Experienced Management Team.Our directors and senior managers have extensive experience in the pulp and forestry industries. We also have experienced managers at all of our mills. Our management has a proven track record of implementing new initiatives and capital projects in order to reduce costs throughout our operations as well as identifying and harnessing new revenue opportunities. |
Our corporate strategy is to create shareholder value by focusing on the expansion of our asset and earnings base.base through organic growth and acquisitions, primarily in Europe and North America. We pursue organic growth through active management and targeted capital expenditures to generate a high return by increasing pulp and energy production, reducing costs and improving efficiency. We seek to acquire interests in companies and assets in the pulp industry and related businesses where we can leverage our experience and expertise in adding value through a focused management approach. Key features of our strategy include:
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| • | Reducing Volatility and Increasing the Stability of our Revenues by Maximizing Renewable Energy Realizations.We focus on the generation and sales of surplus renewable energy because there are minimal associated incremental costs and such sales are highly profitable and provide us with a stable income source unrelated to cyclical changes in pulp prices. In 2012, our mills sold a record 710,241 MWh of surplus electricity resulting in revenues of approximately €60.6 million, compared to 652,113 MWh and approximately €58.0 million in revenues in 2011. In 2012, we commenced Project Blue Mill to increase production and efficiency through debottlenecking initiatives and the installation of a 40 MW steam turbine at our Stendal mill. The new turbine is expected to initially produce an additional 109,000 MWh of surplus electricity. Based upon the current production levels of our mills, we expect to sell in excess of 740,000 MWh of surplus renewable energy in 2013. We continually explore and pursue initiatives to enhance our energy generation and sales in order to reduce volatility and increase our revenues from a stable source. |
| • | NBSK Market Pulp.We |
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General Pulp is used in the production of paper, tissues and There are two We produce and paper relatedpaper-related products. Pulp is generally classified according to fiber type, the process used in its production and the degree to which it is bleached. Kraft pulp, a type of chemical pulp, is produced through a sulphate chemical process in which lignin, the component of wood which binds individual fibers, is dissolved in a chemical reaction. Chemically prepared pulp allows the wood’s fiber to retain its length and flexibility, resulting in stronger paper products. Kraft pulp can be bleached to increase its brightness. Kraft pulp is noted for its strength, brightness and absorption properties and is used to produce a variety of products, including lightweight publication grades of paper, tissues and paper relatedpaper-related products.The selling price of kraft pulp depends in part on the fiber used in the production process. primary speciesmain types of wood used as fiber:bleached kraft pulp, being softwood kraft made from coniferous trees and hardwood.hardwood kraft made from deciduous trees. Softwood species generally have long, flexible fibers which add strength to paper while fibers from species of hardwood contain shorter fibers which lend bulk and opacity. Generally, prices for softwood pulp are higher than for hardwood pulp. Most uses of market kraft pulp, including fine printing papers, coateduncoated magazine papers and various tissue products, utilize a mix of softwood and hardwood grades to optimize production and product qualities. In recent years, production of hardwood pulp, based on fast growing plantation fiber primarily from Asia and South America, has increased much more rapidly than that of softwood grades that have longer growth cycles. As a result of the growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp. Counteracting customers’ increased proportionate usage of hardwood pulp has been the requirement for strength characteristics in finished goods. Paper and tissue makers focus on higher machine speeds and lower basis weights for publishing papers which also require the strength characteristics of softwood pulp. We believe that the ability of kraft pulp users to continue to further substitute hardwood for softwood pulp is limited by such requirements.8
Most paper users of market kraft pulp use a mix of softwood and hardwood grades to optimize production and product qualities. In 2012, market kraft pulp consumption was approximately 53% hardwood kraft, 45% softwood kraft and the remainder comprised of sulphite and unbleached pulp. Over the last several years, production of hardwood pulp, based on fast growing plantation fiber primarily from Asia and South America, has increased much more rapidly than that of softwood grades that have longer growth cycles. Hardwood kraft generally has a cost advantage over softwood kraft as a result of lower fiber costs, higher wood yields and, for newer hardwood mills, economies of scale. As a result of this growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp. Counteracting customers’ increased usage of hardwood pulp has been the requirement for strength characteristics in finished goods. Paper and tissue makers focus on larger paper machines with higher speeds and lower basis weights for certain papers which require the strength characteristics of softwood pulp. Additionally, where paper products are lightweight or specialized, like direct mail, magazine paper or premium tissue, or where strength or absorbency are important, softwood kraft forms a significant proportion of the fiber used. As a result, we believe that the ability of kraft pulp users to continue to further substitute hardwood for softwood pulp is limited by such requirements.
Markets
We believe that over 125130 million ADMTs of kraftchemical pulp are converted annually into printing and writing papers, tissues, cartonboardscarton boards and other white grades of paper and paperboard around the world. We also believe that approximatelyover one third of this pulp is sold on the open market as market pulp, while the remainder is produced for internal purposes by integrated paper and paperboard manufacturers.
Demand for kraft pulp is cyclical in nature and is generally related to global and regional levels of economic activity. In 2008, overall global demand for all kraft pulp types, including softwood, was negatively impacted by the weak global economic conditions and global financial and credit turmoil the world began to experience in the second half of that year and which continued into the first half of 2009. Significant producer shutdowns and curtailments, along with strong demand from China, resulted in an improved supply-demand balance and increasedimproved prices in the second half of 2009.
Between 19982003 and 20082012, worldwide demand for softwoodchemical market pulp grew at an average rate of approximately 2.3%2.0% annually. The following chart illustrates the global demand for chemical market pulp for the periods indicated:
Estimated Global Chemical Market Pulp Demand
Source: PPPC 2012
Since 2007, demand for softwood market pulp has grown in the emerging markets of Asia, Eastern Europe and Latin America. China in particular has experienced substantial growth and its demand forimports of softwood market pulp grew by approximately 12.2%14% per annum between 2003 and 2008.2012. China now accounts for approximately 23%26% of global bleached softwood kraft market pulp demand, compared to only 10.2%10% in 2003. Western Europe currently accounts for approximately 28%27% of global bleached softwood kraft market pulp demand. Within Europe, Eastern Europedemand, compared to approximately 38% in 2003.
The following chart sets forth industry-wide bleached softwood kraft delivery levels to China between 2003 to the present:
Source: PPPC 2012
Growth in NBSK pulp demand in China and other emerging markets has, experienced significantto a large extent, been driven by increased demand from tissue producers, as a result of economic growth with the region’sand rising income levels and living standards in such markets. These factors generally contribute to a greater demand for softwood market pulp increasingpersonal hygiene products in such regions. In China alone, two large tissue producers have publicly announced plans to add a total of 50 tissue paper machines at various sites by the end of 2015 to increase their annual tissue capacity by approximately 6% between 20072.3 million ADMTs. At this time there can be no assurance as to when and 2009.
This has also led to an overall shift in demand for NBSK pulp, as demand from tissue producers has increased, while demand from printing and writing end uses has decreased. Between 2003 and 2012, NBSK pulp demand for tissue production increased by approximately 106% which has more than offset the secular decline in demand in printing and writing papers resulting from the rapid growth of digital media.
The following chart compares NBSK pulp demand by end use in each of 2003 and 2012:
Source: Brian McClay 2012 (end use) / Hawkins Wright 2012 (total demand)
A measure of demand for kraft pulp is the ratio obtained by dividing the worldwide demand of kraft pulp by the worldwide capacity for the production of kraft pulp, or the “demand/capacity ratio”. An increase in this ratio generally occurs when there is an increase in global and regional levels of economic activity. An increase in this ratio also generally indicates greater demand as consumption increases, which often results in rising kraft pulp prices and a reduction of inventories by producers and buyers. As prices continue to rise, producers continue to run at higher operating rates. However, an adverse change in global and regional levels of economic activity generally negatively affects demand for kraft pulp, often leading buyers to reduce their purchases and relyingrely on existing pulp inventories. As a result, producers run at lower operating rates by taking downtime to limit thebuild-up of their own inventories. The demand/capacity ratio for softwood kraft pulp was approximately 93%, 92% and 93% in 2012, 2011 and 2010, respectively.
A significant factor affecting our market is the amount of closures of old, high-cost capacity. Over the last seven years, several mills in North America, Finland, Sweden and Africa were indefinitely closed. Although some capacity was restarted in late 2009 approximately 89%and 2010 in 2008response to very high NBSK pulp prices, we believe the net effect of these closures and approximately 94%restarts is an estimated 3.4 million tonnes of capacity removed from the market since 2006. Further, in 2007.
We estimate that there were approximately 2.2 million ADMTsare aware of NBSK capacity of indefinite and permanent closures during 2009. Some of such capacity closures may potentially be restarted during periods of strong pulp markets and prices.
CompetitionNBSK Pulp Pricing
Pulp prices are highly cyclical. In general, kraft pulp is a globally traded commodity. Pricing and demand are influenced by the balance between supply and demand, as affected by global macroeconomic conditions, changes in consumption and capacity, the level of customer and producer inventories and fluctuations in exchange rates. As Northern Europe has historically been the world’s largest market and NBSK is the premium grade, the European NBSK market pricing is generally used as a benchmark price by the industry.
The average annual European list prices for NBSK pulp since 2000 have ranged from a low of approximately $447 per ADMT to a high of $1,030 per ADMT.
The following chart sets out the changes in list prices for NBSK pulp in Europe, as stated in U.S. dollars, Canadian dollars and Euros for the periods indicated:
Source: RISI pricing report.
In 2006, pulp prices increased steadily from approximately $600 per ADMT in Europe to $870 per ADMT at the end of 2007. These price increases resulted from increased demand and the closure of several pulp mills, particularly in North America, which reduced NBSK capacity. In the second half of 2008, list prices for NBSK pulp decreased markedly due to weak global economic conditions. As a result, list prices for NBSK pulp in Europe decreased from $900 per ADMT in mid-2008 to $635 per ADMT at the end of the year. Such pulp price weakness continued into early 2009, though commencing in mid-2009, pulp markets began to strengthen which led to improved prices. Strong demand from China, capacity closures and historically low global inventories for bleached softwood kraft pulp helped support upward price momentum. During the second half of 2009, several price increases raised European list prices by a total of $170 per ADMT to $800 per ADMT by year end. Such price increases were partially offset by the continued weakening of the U.S. dollar versus the Euro and Canadian dollar during the period.
In 2010, several increases lifted prices to record levels in the middle of the year and at the end of 2010 list prices were near historic highs of $950, $960 and $840 per ADMT in Europe, North America and China, respectively. Pulp prices remained strong in 2011, reaching record levels of $1,030 per ADMT in Europe and $1,035 and $920 per ADMT in North America and China, respectively. However, uncertainty concerning the economic situation in Europe, along with credit tightening in China in the last part of the year, caused pulp prices to drop to $825 per ADMT in Europe and $890 and $670 per ADMT in North America and China, respectively, by the end of the year. Economic uncertainty in Europe and China continued to dampen demand and NBSK pulp prices, which remained generally weak in 2012. Year-end list prices were approximately $810, $870 and $655 per ADMT in Europe, North America and China, respectively.
A producer’s net sales realizations are list prices, net of customer discounts, commissions and other selling concessions. While there are differences between NBSK list prices in Europe, North America and Asia, European prices are generally regarded as the global benchmark and pricing in other regions tends to follow European trends. The nature of the pricing structure in Asia is different in that, while quoted list prices tend to be lower than Europe, customer discounts and commissions tend to be lower resulting in net sales realizations that are generally similar to other markets.
The majority of market NBSK pulp is produced and sold by Canadian and Northern European producers, while the price of NBSK pulp is generally quoted in U.S. dollars. As a result, NBSK pricing is affected by fluctuations in the currency exchange rates for the U.S. dollar versus the Canadian dollar, the Euro and local currencies. NBSK pulp price increases during 2006, 2007 and the first half of 2008 were in large part offset by the weakening of the U.S. dollar. Similarly, the strengthening of the U.S. dollar against the Canadian dollar and the Euro towards the end of 2008 helped partially offset pulp price decreases caused by the deterioration in global economic conditions. The overall strengthening of the U.S. dollar against the Euro in 2010, and in particular in the first half of 2010, improved the operating margins of our German mills. Although the U.S. dollar weakened against the Euro for most of 2011, it strengthened at the end of 2011. Overall, the U.S. dollar was 8% stronger against the Euro in 2012 compared to 2011, partially offsetting pulp price decreases in 2012.
The global supply and demand balance for NBSK pulp is a key determinant in pulp pricing. The following chart sets forth changes in FOEX PIX index prices for NBSK pulp and global bleached softwood kraft inventory levels between 2003 to 2012:
Source: Factset FOEX PIX Pulp NBSK (prices) PPPC (inventories).
Competition
Pulp markets are large and highly competitive. Producers ranging from small independent manufacturers to large integrated companies produce pulp worldwide. Our pulp and customer services compete with similar products manufactured and distributed by others. While many factors influence our competitive position, particularly in weak economic times, a key factor is price. Other factors include service, quality and convenience of location. Some of our competitors are larger than we are in certain markets and have substantially greater financial resources. These resources may afford those competitors more purchasing power, increased financial flexibility, more capital resources for expansion and improvement and enable them to compete more effectively. Our key NBSK pulp competitors are principally located in Northern Europe and Canada.
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The following diagram provides a simplified description of the kraft pulp manufacturing process at our pulp mills:
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In the initial processing stage, wood chips are screened to remove oversized chips and sawdust and are conveyed to a pressurized digester where they are heated and cooked with chemicals. This occurs in a continuous process at the Celgar and Rosenthal mills and in a batch process at the Stendal mill. This process softens and eventually dissolves the phenolic material called lignin that binds the fibers to each other in the wood.
Cooked pulp flows out of the digester and is washed and screened to remove most of the residual spent chemicals called black liquor, and partially cooked wood chips. The pulp then undergoes a series of bleaching stages where the brightness of the pulp is gradually increased. Finally, the bleached pulp is sent to the pulp machine where it is dried to achieve a dryness level of more than 90%. The pulp is then ready to be baled for shipment to customers.
A significant feature of kraft pulping technology is the recovery system, whereby chemicals used in the cooking process are captured and extracted for re-use, which reduces chemical costs and improves environmental performance. During the cooking stage, dissolved organic wood materials and used chemicals, collectively known as black liquor, are extracted from the digester. After undergoing an evaporation process, black liquor is burned in a recovery boiler. The chemical compounds of the black liquor are collected from the recovery boiler and are reconstituted into cooking chemicals used in the digesting stage through additional processing in the recausticizing plant.
The heat produced by the recovery boiler is used to generate high-pressure steam. Additional steam is generated by a power boiler through the combustion of biomass consisting of bark and other wood residuesresiduals from sawmills and our woodrooms and residue generated by the effluent treatment system. Additionally, during times of upset, we may use natural gas to generate steam. The steam produced by the recovery and power boilers is used to power a turbine generator to generate electricity, as well as to provide heat for the digesting and pulp drying processes.
We manufacture and sell NBSK pulp produced from The following table sets out our pulp production capacity and actual production by mill for the periods indicated: Rosenthal Celgar Stendal Total pulp production Rosenthal Mill.The Rosenthal mill is situated on a 220 acre site in the town of Blankenstein in the state of Thüringia, approximately 300 kilometers south of Berlin. The Saale river flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with a current annual production capacity of approximately 355,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the mill include: an approximately 315,000 square feet fiber storage area; debarking and chipping facilities for pulp logs; an approximately 300,000 square feet roundwood yard; a fiber line, which includes a Kamyr continuous digester and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a baling line; an approximately 63,000 square feet finished goods storage area; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a fresh water plant; a wastewater treatment plant; and a power station with a turbine capable of producing 57 MW of electric power from steam produced by the recovery boiler and a power boiler. The kraft pulp produced at the Rosenthal mill is a long-fibered softwood pulp produced by a sulphate cooking process and manufactured primarily from wood chips and pulp logs. A number of factors beyond economic supply and demand have an impact on the market for chemical pulp, including requirements for pulp bleached without any chlorine compounds or without the use of chlorine gas. The Rosenthal mill has the capability of producing both “totally chlorine free” and “elemental chlorine free” pulp. Totally chlorine free pulp is bleached to a high brightness using oxygen, ozone and hydrogen peroxide as bleaching agents, whereas elemental chlorine free pulp is produced by substituting chlorine dioxide for chlorine gas in the bleaching process. This substitution virtually eliminates complex chloro-organic compounds from mill effluent. Kraft pulp is valued for its reinforcing role in mechanical printing papers and is sought after by producers of paper for the publishing industry, primarily for magazines and advertising materials. Kraft pulp is also an important ingredient for tissue manufacturing, and tissue demand tends to increase with living standards in developing countries. Kraft pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price. The Rosenthal mill produces pulp for reinforcement fibers to the specifications of certain of our customers. We believe that a number of our customers consider us their supplier of choice. Stendal Mill.The Stendal mill is situated on a 200 acre site owned by Stendal that is part of a larger 1,250 acre industrial park near the town of Stendal in the state of Saxony-Anhalt, approximately 300 kilometers north of the Rosenthal mill and 130 kilometers west of Berlin. The mill is adjacent to the Elbe river and has access to harbor facilities for water transportation. The mill is a single line mill with a current annual design production capacity of approximately 650,000 ADMTs of kraft pulp. The Stendal mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly being generated is sold to the regional power grid. The facilities at the an approximately 920,000 square feet fiber storage area; debarking and chipping facilities for pulp logs; a fiber line, which includes ten SuperBatch™ digesters and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a baling line; an approximately 108,000 square feet finished goods storage area; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a fresh water plant; a wastewater treatment plant; and a power station with a turbine capable of producing approximately 102 MW of electric power from steam produced by the recovery boiler and a power boiler. Upon completion of Project Blue Mill, the mill will have two turbines and is expected to be able to produce 142 MW of electrical power. The kraft pulp produced at the Stendal mill is of a slightly different grade than the pulp produced at the Rosenthal mill as the mix of softwood fiber used is slightly different. This results in a complementary product more suitable for different end uses. The Stendal mill is capable of producing both totally chlorine free and elemental chlorine free pulp. Celgar Mill.The Celgar mill is situated on a 400 acre site near the city of Castlegar, British Columbia. The mill is located on the south bank of the Columbia River, approximately 600 kilometers east of the port city of Vancouver, British Columbia, and approximately 32 kilometers north of the Canada-U.S. border. The city of Seattle, Washington is approximately 650 kilometers southwest of Castlegar. It is a single line mill with a current annual production capacity of approximately 520,000 ADMTs of kraft pulp. Internal power generating capacity resulting from the completion of the Celgar Energy Project in 2010 enables the Celgar mill to be self-sufficient in electrical power and to sell surplus electricity. The facilities at the chip storage facilities with a capacity of 200,000 cubic meters of chips; a woodroom containing debarking and chipping equipment for pulp logs; a fiber line, which includes a dual vessel hydraulic digester, two stage oxygen delignification and a four stage bleach plant; two pulp machines, which each include a dryer, a cutter and a baling line; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing area and wastewater treatment system; and two turbines and generators capable of producing approximately 48 MW and 52 MW, respectively, of electric power from steam produced by the recovery boiler and a power boiler. The Celgar mill produces high-quality kraft pulp that is made from a unique blend of slow growing/long-fiber Western Canadian tree species. It is used in the manufacture of high-quality paper and tissue products. We believe the Celgar mill’s pulp is known for its excellent product characteristics, including tensile strength, wet strength and brightness. The Celgar mill is a long-established supplier to paper and tissue producers in Asia.wood chipswoodchips and pulp logs.logs at our three mills. Annual
Production
Capacity(1) Year Ended December 31, 2012 2011 2010 Pulp Production by Mill: (ADMTs) 355,000 337,959 344,389 324,194 520,000 490,018 488,007 502,107 650,000 640,298 621,281 599,985 1,525,000 1,468,275 1,453,677 1,426,286 (1) Capacity is the rated capacity of the plants for the year ended December 31, 2012. For more information aboutRosenthal mill see “Item 2 — Properties”.include: For more information aboutStendalCelgar mill see “Item 2 — Properties”.include: For more information about the facilities at the Celgar mill, see “Item 2 — Properties”.12
Our pulp mills are large scale bio-refineries that, produce bothin addition to pulp, andalso produce surplus “carbon neutral” or “green” energy. As part of the pulp production process our mills generate “green” energy using carbon-neutral biofuels such as black liquor and wood waste. Through the incineration of black liquorbiofuels in the recovery and power boilers, our mills produce sufficient steam to cover all of our steam requirements and generallyallow us to produce surplus energyelectricity which we sell to third party utilities.
Our surplus energy sales provide our mills with a new stable revenue source unrelated to pulp prices. Since our energy production is a by-product of our pulp production process, there are minimal incremental costs and our surplus energy sales are highly profitable. We believe that this revenue source from power sales gives our mills a competitive advantage over other older mills which do not have the equipment or capacity to produce and/or sell surplus power in a meaningful amount.
In 2012 and 2011, we sold 478,674710,241 MWh and 456,059652,113 MWh of surplus energy, respectively, and recorded revenues of €42.5€60.6 million and €31.0€58.0 million, respectively, from such energy sales.
The following table sets out our electricity generation and surplus energyelectricity sales for the last threefive years:
The following chart sets forth our consolidated revenues from electricity and Exports
Energy Project is completed, and based upon the current production levels of our mills, we currently expect to generate and sell between approximately 700,000 MWh and 750,000 MWh of surplus renewable energy per annum.
German Mills
Our Rosenthal and Stendal mills have participatedparticipate in a program established pursuant to Germany’sthe Renewable Energy Resources Act, or “Renewable Energy Act”. The Renewable Energy in Germany. Such Act, in existence since 2000, requires that public electric utilities give priority to electricity produced from renewable energy resourcessources by independent power producers and pay a fixed tariff for a period of 20 years. Previously, this legislation was only applicable to installments with a capacity of 20MW or less, effectively excluding our Rosenthal and Stendal mills. Subsequent amendments to the Renewable Energy Act have removed this restriction. Under the program, our German mills now sell their surplus energy to the local electricity grid at the rates stipulated by the Renewable Energy Act for biomass energy.
Since 2005, our German mills have also benefited from the sale of emission allowances under the European Union carbon emissions trading scheme,Carbon Emissions Trading Scheme, referred to as “EU ETS”. However, our participationeligibility for special tariffs under the Renewable Energy Act may in the future reducehas reduced the amount of emissions allowances granted to our German mills under the EU ETS.
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In 2012, we commenced Project Blue Mill which is designed to increase the Stendal mill’s annual pulp production by 30,000 ADMTs and initially produce an additional 109,000 MWh of surplus renewable electricity. Project Blue Mill is eligible for €12.0 million of non-refundable government grants and the Stendal mill arranged a €17.0 million secured term debt facility, amortized over five-years, of which 80% will be government guaranteed. The balance of Project Blue Mill will be funded through operating cash flow of the Stendal mill and up to an aggregate of €6.5 million in pro rata shareholder loans from Mercer Inc. and its noncontrolling shareholder.
In 2012, we generated €11.6 million from the sale of tall oil, a by-product of our production process.
Celgar Mill
In mid-2008September 2010, we commencedcompleted the Celgar Energy Project at the Celgar mill to increase and optimize the mill’s production of “green” energy and optimize its power generation capacity.energy. The project includesincluded the installation of a 48 MW condensing turbine, which is expected to bringbrought the mill’s installed generating capacity up to 100 MW, and upgrades to the mill’s bark boiler and steam consuming facilities. In January 2009 theThe Celgar mill finalizedhas an electricity purchase agreement,Electricity Purchase Agreement with British Columbia Hydro and
Power Authority, referred to as the “EPA”“B.C. Hydro”, with B.C. Hydro, British Columbia’s primary public utility provider, for the sale of power generated from the Celgar Energy Project.such project. Under the EPA,Electricity Purchase Agreement, the Celgar mill is setagreed to supply a minimum of approximately 238,000 MWh of surplus electrical energy annually to the utility over a ten-year term.
In 2012, we entered into a non-repayable contribution agreement with NRCan whereby NRCan agreed to provide approximately C$40 million (€26.7 million) in grants towards certain costs associated with the Celgar Energy Project. In December 2009, we received an initial grantsold roughly 171,994 MWh of C$12.9 million from NRCan which was used to pay outstanding Celgar Energy Project costs.
and/or sell surplus power in a meaningful amount.
Our major costs of production are fiber, labor, fiber, energy and chemicals. Fiber, comprised of wood chips and pulp logs, is our most significant operating expense. Given the significance of fiber to our total operating expenses and our limited ability to control its costs, compared with our other operating costs, volatility in fiber costs can materially affect our margins and results of operations.
LaborFiber
Our mills are situated in regions which generally provide a relatively stable supply of fiber. The fiber consumed by our mills consists of wood chips produced by sawmills as a by-product of the sawmillingsawmill process and pulp logs. Wood chips are small pieces of wood used to make pulp and are either wood residuals from the sawmillingsawmill process or logs or pulp logs chipped especially for this purpose. Pulp logs consist of lower quality logs not used in the production of lumber. Wood chips and pulp logs are cyclical in both price and supply.
Generally, the cost of wood chips and pulp logs areis primarily affected by the supply and demand for lumber. Additionally, regional factors such as harvesting levels and weather conditions can also have a material effect on the supply, demand and price for fiber.
In Germany, since 2006, the price and supply of wood chips has been affected by increasing demand from alternative or renewable energy producers and government initiatives for carbon neutral energy. Declining energy
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In April 2008, the Russian government raised tariffs on the export of sawmill and pulp wood to 25% from the 20% effective since July 2007.. A further increase to 80%, was initially scheduled for January 1, 2009 has beenbut was officially deferred twice now until late 2010. If and when implemented,Russia’s export tariff remained unchanged at 25% in 2011. In August 2012, Russia entered the additional tariff increase is expectedWorld Trade Organization, or “WTO”, and, due to reduceinclusion in the WTO, Russia has lowered its export of Russian woodtariffs to Europe, in particular to Scandinavian producers who importbetween 13% and 15%, which we believe has had a significant amount of their wood from Russia. This may put upward pressurepositive impact on pricing as such producers try to replace these volumes from other regions.
Offsetting some of the increases in demand for wood fiber have been initiatives in which we and other producers are participating to increase harvest levels in Germany, particularly from small private forest owners. We believe that Germany has the highest availability of softwood forests in Europe suitable for harvesting and manufacturing. PrivateWe believe private ownership of such forests is approximately 50%. Many of these forest ownership stakes are very small and have been harvested at rates much lower than their rate of growth. In early 2009, forest owners began to reduce their harvesting rates in response to slowing economies in Germany and elsewhere and the related weaker demand for pulp logs, forest owners reduced their harvesting rates slightly. While prices for pulp logs in Germany remained relatively low in the first half of 2009, further reductions in harvesting rates ledleading to an undersupply which resulted in increased fiber prices later in theduring that year. These same supply issues are expectedFiber prices continued to continue to cause pulp log prices to ease upwards in the early partincrease through most of 2010 and we expect this trend2011, driven by a weak lumber market, lower harvesting in central Germany and increased demand for wood from the energy sector for heating and other bio-energy purposes.
In 2012, fiber prices in Germany decreased by approximately 10%, mainly due to continue throughreduced demand for fiber from the first halfEuropean particle board industry and other regional residual fiber users and the start of 2010.
We believe we are the largest consumer of wood chips and pulp logs in Germany and often provide the best long-term economic outlet for the sale of wood chips in Eastern Germany. We coordinate the wood procurement activities for our German mills to reduce overall personnel and administrative costs, provide greater purchasing power and coordinate buying and trading activities. This coordination and integration of fiber flows also allows us to optimize transportation costs, and the species and fiber mix for both mills.
In 2009,2012, the Rosenthal mill consumed approximately 1.61.7 million cubic meters of fiber. Approximately 63% of such consumption was in the form of sawmill wood chips and approximately 37% was in the form of pulp logs. The wood chips for the Rosenthal mill are sourced from approximately 3227 sawmills located primarily in the states of Bavaria, Baden-Württemberg and Thüringia and are within a 300 kilometer radius of the Rosenthal mill. Within this radius, the Rosenthal mill is the largest consumer of wood chips. Given its location and size, the Rosenthal mill is often the best economic outlet for the sale of wood chips in the area. Approximately 81%75% of the fiber consumed by the Rosenthal mill is spruce and the remainder is pine. While fiber costs and supply are subject to cyclical changes largely in the sawmill industry, we expect that we will be able to continue to obtain an adequate supply of fiber on reasonably satisfactory terms for the Rosenthal mill due to its location and our long-term relationships with suppliers. We have not historically experienced any significant fiber supply interruptions at the Rosenthal mill.
Wood chips for the Rosenthal mill are normally sourced from sawmills under one year or quarterly supply contracts with fixed volumes, which providequarterly adjustments for price adjustments.market pricing. Substantially all of our chip supply is sourced from suppliers with which we have a long-standing relationship. We generally enter into annual contracts with such suppliers. Pulp logs are sourced from the state forest agencies in Thüringia, Saxony and Bavaria on a contract basis and partly from private holders on the same basis as wood chips. Like the wood chip supply arrangements, these contracts tend to be of less thanfor one-year terms with quarterly adjustments for market pricing. We organize the harvestingtransportation of pulp logs sourced from the state agencies in Thüringia, Saxony and Bavaria after discussions with the agencies regarding the quantities of pulp logs that we require.
In 2009,2012, the Stendal mill consumed approximately 3.13.3 million cubic meters of fiber. Approximately 20%24% of such fiber was in the form of sawmill wood chips and approximately 80%76% in the form of pulp logs. The core wood supply region for the Stendal mill includes most of the Northern part of Germany within an approximate 300 kilometer radius of the mill. We also purchase wood chips from Southwestern and Southern Germany. The fiber base in the wood supply area for the Stendal mill consisted of approximately 53%66% pine and 47%34% spruce
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In 2009,2012, the Celgar mill consumed approximately 2.6 million cubic meters of fiber. Approximately 39%69% of such fiber was in the form of sawmill wood chips and the remaining 61%31% came from pulp logs processed through its woodroom or chipped by a third party. The source of fiber at the mill is characterized by a mixture of species (whitewoods and cedar) and the mill sources fiber from a number of Canadian and U.S. suppliers.
As a result of the cyclical decline in sawmill chip supply resulting from lower lumber production in British Columbia commencing in 2008, the Celgar mill increased its U.S. purchases of fiber, diversified its suppliers and, where possible, increased chip production through third party field chipping contracts and existing sawmill suppliers. In 2009, the Celgar mill upgraded its woodroom which, along with subsequent improvements during the year, increased its capacity to be able to process up to 50% of the mill’s fiber needs. The woodroom upgrades also increased the mill’s ability to process small diameter logs and facilitate an efficient flow of fiber. This has increased the overall volume of fiber being processed and helped mitigate increases in the price of fiber.
The Celgar mill has access to over 30approximately 25 different suppliers from Canada and the U.S., representing approximately 74%75% of its total annual fiber requirements. The Celgar mill’s woodroom suppliessupplied the remaining chips to meet25% of the Celgar mill’s fiber requirements.requirements in 2012. Chips are purchased in Canada and the U.S. in accordance with chip purchase agreements. Generally, pricing is reviewed and adjusted periodically to reflect market prices. Several One
of the longer-term contracts areis a so-called “evergreen” agreements,agreement, where the contract remains in effect until one of the parties elects to terminate. Termination requires a minimum of two and, in some cases, five years’ written notice. Certain non-evergreen long-term agreements provideAll other contracts are generally for renewal negotiations prior to expiry.
To secure the volume of pulp logs required by theits woodroom, the Celgar mill has entered into annual pulp log supply agreements, which can range from three-month to one-year terms, with a number of different suppliers, many of whom are also contract chip suppliers to the mill. All of the pulp log agreements can be terminated by either party for any reason, upon seven days’ written notice.
In 2012, our fiber costs at the Celgar mill were approximately 6% higher than in 2011, as a result of the impact of foreign exchange changes more than offsetting improved availability of wood chips.
EnergyLabor
Our labor costs are generally steady, with small overall increases due to inflation in wages and health care costs. Over the last three years, we have been able to largely offset such increases by increasing our efficiencies and production and streamlining operations.
Energy
Our energy is primarily generated from renewable carbon neutral sources, such as black liquor and wood waste. Our mills produce all of our steam requirements and generally generate excess energy which we sell to third party utilities. In 2009,2012, we generated 1,445,3321,704,058 MWh and we sold 478,674710,241 MWh of surplus energy. Once completed, the Celgar Energy Project is expected to generate a minimum of approximately 238,000 MWh of electricity. See also “- “—Generation and Sales of ‘Green’ Energy and Chemicals at our Mills”. We utilize fossil fuels, such as natural gas, in limited circumstances includingprimarily in our lime kilns and we use a limited amount forstart-up and shutdown operations. Additionally, from time to time, mill process disruptions occur and we consume small quantities of purchased electricity and fossil fuels to maintain operations. As a result, all of our mills are subject to fluctuations in the prices for fossil fuels.
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Chemicals
Consolidated cash production costs per CashtonneADMT for our pulp mills are set out in the following table for the periods indicated: Years Ended December 31, 2009 2008 2007 (per ADMT) Fiber € 207 € 247 € 247 Labor 37 36 43 Chemicals 43 44 39 Energy 13 21 18 Other 42 43 46 Total cash production costs(1) € 342 € 391 € 393
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Cash Production Costs | (per ADMT) | |||||||||||
Fiber | € | 257 | € | 275 | € | 256 | ||||||
Labor | 47 | 43 | 42 | |||||||||
Chemicals | 49 | 46 | 41 | |||||||||
Energy | 19 | 20 | 20 | |||||||||
Other | 46 | 56 | 54 | |||||||||
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Total cash production costs(1) | € | 418 | € | 440 | € | 413 | ||||||
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| (1) | Cost of production per ADMT produced excluding depreciation. |
Our pulpThe distribution of our sales revenues by geographic area are set out in the following table for the periods indicated: Years Ended December 31, 2009 2008 2007 (in thousands) Germany € 154,323 € 198,340 € 198,575 China 146,613 131,412 159,553 Italy 44,616 56,487 50,177 Other European Union countries(1) 107,276 133,621 136,434 Other Asia 38,946 65,192 58,242 North America 68,213 78,718 66,229 Other countries 8,312 17,146 26,639 Total(2) € 568,299 € 680,916 € 695,849
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Revenues by Geographic Area | (in thousands) | |||||||||||
China | € | 230,007 | € | 234,654 | € | 196,022 | ||||||
Germany | 228,402 | 256,563 | 278,348 | |||||||||
Other European Union countries(1) | 168,616 | 175,937 | 182,246 | |||||||||
North America | 47,513 | 69,345 | 92,628 | |||||||||
Italy | 43,112 | 51,509 | 56,301 | |||||||||
Other Asia | 33,197 | 30,872 | 37,561 | |||||||||
Other countries | 1,632 | 823 | 1,503 | |||||||||
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Total(2) | € | 752,479 | € | 819,703 | € | 844,609 | ||||||
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| (1) | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. |
| (2) | Excluding intercompany |
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Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | ||
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| * | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. |
The distribution of our pulp sales by end customer are set out in the following table for the periods indicated:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands of ADMTs) | ||||||||||||
Tissue | 576 | 602 | 610 | |||||||||
Specialty | 214 | 222 | 180 | |||||||||
Printing & Writing | 639 | 563 | 597 | |||||||||
Other | 44 | 41 | 42 | |||||||||
Our global sales and marketing group is responsible for conducting all sales and marketing of the pulp produced at our mills and currently has approximately 19 employees engaged full time in such activities. This group largely handles all European and North American sales directly. Sales to Asia are made directly or through commission agents overseen by our sales group. The global sales and marketing group handles sales to overapproximately 200 customers. We coordinate and integrate the sales and marketing activities of our German mills to realize on a number of synergies between them. These include reduced overall administrative and personnel costs and coordinated selling, marketing and transportation activities. We also coordinate sales from the Celgar mill with our German mills on a global basis, thereby providing our larger customers with seamless service across all major geographies. In marketing our pulp, we
seek to establish long-term relationships by providing a competitively priced, high-quality, consistent product and excellent service. In accordance with customary practice, we maintain long-standing relationships with our customers pursuant to which we periodically reach agreements on specific volumes and prices.
Our pulp sales are on customary industry terms. At December 31, 2009,2012, we had no material payment delinquencies. In 2009, 2008 and 2007,2012, one customer accounted for 11% of our pulp sales. In 2011, no single customer accounted for more than 10% of our pulp sales. OurIn 2010, one customer which purchased for several of its mills accounted for 11% of pulp sales. We do not believe our pulp sales are not dependent upon the activities of any single customer.
Approximately 54%, 58% and 55% of our sales were to tissue and specialty paper product manufacturers for the years ended December 31, 2012, 2011 and 2010, respectively. The balance of our sales for such periods was to other paper product manufacturers. Over the last five years, our sales to tissue and specialty paper product manufacturers have increased by over 15%. Generally such customers are not as sensitive to cyclical declines in demand caused by downturns in economic activity.
We transport our NBSK pulp generally by truck, rail and ocean carriers through third-party carriers. Our carrier contracts are generally from one to two years.
Our German mills are currently the only market kraft pulp producers in Germany, which is the largest import market for kraft pulp in Europe. We therefore have a competitive transportation cost advantage compared to NorscanCanadian and Northern European pulp producers when shipping to customers in Europe. Due to the location of our German mills, we are able to deliver pulp to many of our customers primarily by truck. Most trucks that deliver goods into Eastern Germany generally do not also haul goods out ofhave significant backhaul opportunities as the region as Eastern Germany is primarily an importer of goods. We are therefore frequently able to obtain relatively low back haulbackhaul freight rates for the delivery of our products to many of our customers. Since many of our customers are located within a 500 kilometer radius of our German mills, we can generally supply pulp to customers of these mills faster than our competitors because of the short distances between the mills and our customers.
The Celgar mill’s pulp is transported to customers by rail, truck and ocean carrier using strategically located third party warehouses to ensure timely delivery. The majority of Celgar’s pulp for overseas markets is initially delivered primarily by rail to the Port of Vancouver for shipment overseas by ocean carrier. Based in Western Canada, the Celgar mill is well positioned to service Asian customers. The majority of the Celgar mill’s pulp for domestic markets is shipped by rail to third party warehouses in the U.S. or directly to the customer.
In each of the three years ended December 31, 2009,2012, 2011 and 2010, outbound transportation costs comprised approximately 51%, 47% and 44%9% of our total consolidated cost of sales. Generally, in recent years, our transportation costs have increased due to increases in fuel costs and lower shipping capacity. As a result, we have taken initiatives to target sales were to tissue and specialty paper product manufacturers. The balance of our salesthe most “freight logical” customers for such periods was to other paper product manufacturers. Sales to tissue and specialty paper product manufacturers are a key focus for us, as they generally are not as sensitive to cyclical declines in demand caused by downturns in economic activity.
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In 2009,2012, we continued with our capital investment programs designed to increase pulp and green energy production capacity, reduce costs and improve efficiency and environmental performance at our mills. The improvements made at our mills over the past six years have reduced operating costs and increased the competitive position of our facilities.
Total capital expenditures at our mills are set out in the Rosenthal mill in 2009, 2008 and 2007 were €9.1 million, €8.7 million and €5.2 million, respectively. following table for the periods indicated:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
Rosenthal | € | 15,436 | € | 13,718 | € | 4,033 | ||||||
Stendal | € | 14,767 | € | 8,296 | € | 3,625 | ||||||
Celgar | € | 6,461 | € | 15,718 | € | 30,642 | ||||||
Capital investments at the Rosenthal mill in 20092012 related primarily to the mill’s recovery boiler upgrade, which we believe will reduce our wastewater fees, while, in 2011, they related primarily to the installation of a new chipper and 2008upgrades to the recovery process. In 2010, capital expenditures related mainly to the upgrade of a bleaching line. In addition, we initiatedline and a washer project at a total cost of approximately €2.5 million which will helphelped offset three years of wastewater fees that would otherwise be payable.
Capital investments at the Stendal mill in 20092012 related primarily to the commencement of Project Blue Mill. In 2011 and 2010, capital investments related mainly to relatively small projects designed to improve safety and environmental performance as well as improve the overall efficiency of the mill.
In 2012, the Stendal mill commenced Project Blue Mill to increase production and efficiency at the mill through debottlenecking initiatives, including the installation of an additional 40 MW steam turbine. Project Blue Mill is estimated to require approximately €40.0 million in capital expenditures over about 21 months, which will be primarily funded through €12.0 million of non-refundable German government grants and a new €17.0 million five-year amortizing secured term debt facility, of which 80% will be government guaranteed. The balance of Project Blue Mill will be funded through operating cash flow of the Stendal mill and up to an aggregate of €6.5 million in pro rata shareholder loans from Mercer Inc. and Stendal’s noncontrolling shareholder. Project Blue Mill is currently expected to be completed and start to generate electricity sales in or about September 2013. As of December 31, 2012, we had expended an aggregate €13.3 million on Project Blue Mill.
Certain of our capital investment programs in Germany were partially financed through government grants made available by German federal and state governments. Under legislation adopted by the federal and certain state governments of Germany, government grants are provided to qualifying businesses operating in Eastern Germany to finance capital investments. The grants are made to encourage investment and job creation. For example, the government grants received in connection with Project Blue Mill require us to maintain the employment of core employees for five years after completion of the project. Currently, grants are available for up to 15%30% of the cost of qualified investments. Previously, government grants were available for up to 35% of the cost of qualified investments, such as for the construction of our Stendal mill. These grants at the 35% of cost level required that at least one permanent job be created for each €500,000€0.5 million of capital investment eligible for such grants and that such jobs be maintained for a period of five years from the completion of the capital investment project. Generally, government grants are not repayable by a recipient unless it fails to complete the proposed capital investment or, if applicable, fails to create or maintain the requisite amount of jobs. In the case of such failure, the government is entitled to revoke the grants and seek repayment unless such failure resulted from material unforeseen market developments beyond the control of the recipient, wherein the government may refrain from reclaiming previous grants. Pursuant to such legislation in effect at the time, the Stendal mill received approximately €278.0 million of government grants. We believe that we are in compliance in all material respects with all of the terms and conditions governing the government grants we have received in Germany.
The following table sets out for the periods indicated the effect of these government grants on the recorded value of such assets in our consolidatedConsolidated Balance Sheets:
| As at December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
Property, plant and equipment, gross amount less amortization | € | 1,085,593 | € | 1,112,639 | € | 1,144,759 | ||||||
Less: government grants less amortization | 276,715 | 291,665 | 297,992 | |||||||||
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Property, plant and equipment, net (as shown on the Consolidated Balance Sheet) | € | 808,878 | € | 820,974 | € | 846,767 | ||||||
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The following table sets forth the gross amount of all government grants we have received and capitalized in our balance sheets:
| As at December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Properties, gross amount including government grants less amortization | € | 1,152,288 | € | 1,171,891 | € | 1,237,624 | ||||||
| Less: government grants less amortization | 283,730 | 290,187 | 304,366 | |||||||||
| Properties, net (as shown on consolidated balance sheets) | € | 868,558 | € | 881,704 | € | 933,258 | ||||||
| As at December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
Government grants—gross | € | 431,580 | € | 429,946 | € | 419,891 | ||||||
Less: accumulated amortization | 154,865 | 138,281 | 121,889 | |||||||||
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Government grants less accumulated amortization | € | 276,715 | € | 291,665 | € | 297,992 | ||||||
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Qualifying capital investments at industrial facilities in Germany that reduce effluent discharges offset wastewater fees that would otherwise be required to be paid. For more information about our environmental capital expenditures, see “—Environmental”.
In 2012, capital expenditures at the Celgar mill includes a project to recover/recycle chemicals from the mill’s effluent, referred to as the “GAP Project”, while in 2009, 2008 and 2007 were €17.8 million, €12.1 million and €7.9 million, respectively. In 2009, capital2011 such expenditures related primarily to a project to improve the Celgar mill’s fiber line and oxygen delignification process, referred to as the “Oxygen Delignification Project” and the GAP Project. We completed the Celgar Energy Project and upgrades to the mill’s woodroom. We commenced the Celgar Energy Project as part of our continued focus on energy production and sales andin 2010 to increase the mill’s production of “green” energy and optimize its power generation capacity. The project is designed to be a high return capital project with an estimated cost of approximately €35.0 million. It includesC$64.7 million (€49.0 million) and included the installation of a second turbine generator with a design capacity of 48 MW.
In October 2009, as part of the GTP, the Canadian government, through NRCanNatural Resources Canada, referred to as “NRCan”, agreed to provide approximately C$57.7 million (€38.5 million) in credits towards the capital costs associated withto improve energy efficiency or effect environmental improvements at the Celgar mill, includingmill. Of the same, we used approximately C$46.8 million in connection with the Celgar Energy Project. Such credits when received, will reducereduced the cost basis of the assets purchased and arewere not
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Excluding costs for the Celgar Energy Project to beprojects financed through government grants, under the GTP, our capital expenditures for all of our mills in 20102013 are expected to be approximately €6.3 million.
Our operations are subject to a wide range of environmental laws and regulations, dealing primarily with water, air and land pollution control. We devote significant management and financial resources to comply with all applicable environmental laws and regulations. Our total capital expenditures on environmental projects at our mills were approximately We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in substantial compliance with the requirements of all applicable environmental laws and regulations and our respective operating permits. Under German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures against the wastewater fees that they would otherwise be required to pay. We estimate that the aggregate wastewater fees we saved in Environmental compliance is a priority for our operations. To ensure compliance with environmental laws and regulations, we regularly monitor emissions at our mills and periodically perform environmental audits of operational sites and procedures both with our internal personnel and outside consultants. These audits identify opportunities for improvement and allow us to take proactive measures at the mills as considered appropriate. The Rosenthal mill has a relatively modern biological wastewater treatment and oxygen bleaching facility. We have significantly reduced our levels of The Stendal mill The Celgar mill has been in substantial compliance with applicable environmental laws, regulations and permits.€9.5€9.3 million in 2009 (2008 — €4.9 million). In 2010, we expect environmental project related capital expenditures to be approximately €1.82012 (approximately €7.1 million primarily relating to a washer project at the Rosenthal mill.20092012 as a result of environmental capital expenditures and initiatives to reduce allowable emissions and discharges at our Stendal andmill was approximately €4.2 million. The estimated amount of accrued wastewater fees we expect to recover at our Rosenthal mills weremill is approximately €6.4€6.6 million. We expect that capitalCapital investment programs and other environmental initiatives at our German mills will mostly offset the wastewater fees that may bewere payable for 20102012 and 2011 andwe believe they will ensure that our operations continue in substantial compliance with prescribed standards.adsorbableabsorbable organic halogen discharge at the Rosenthal mill and we believe the Rosenthal mill’s adsorbableabsorbable organic halogen and chemical oxygen demand discharges are in compliance with the standards currently mandated by the German government.which commenced operations in September 2004, has beenis in substantial compliance with applicable environmental laws, regulations and permits. Management believes that, as the Stendal mill is astate-of-the-art facility, it will be able to continue to operate in compliance with the applicable environmental requirements.November 2008,2012, after a hearing, the Celgar mill sufferedwas required to pay C$30,000 as a fine and C$120,000 as a contribution to a conservation trust fund for environmental projects in respect of a minor 2008 spill of diluted weak black liquor intoin the nearby Columbia River. The spill was promptly reported by the mill to authorities at the time of occurrence and remediated. An environmental impact report prepared by independent consultants engaged by the mill concluded that the environmental impact of the spill was minimal. The spill was also investigated by federal and provincial environmental authorities and, in January 2009, the Celgar mill received a government directive requiring it to take a number of measures relating to the retention capacity of spill ponds. These measures have now been completedremediated to the satisfaction of the overseeing20
The Celgar mill operates two landfills, a newly commissioned site andone of which is an older site.site that the mill is in the process of decommissioning. The Celgar mill intends to decommission the old landfill and is developingcontinuing work on finalizing a closure plan for such site and then reviewing such plan with the CanadianBritish Columbia Ministry of Environment, or “MOE”. However, the MOE, in conjunction with the provincial pulp and paper industry, is in the process of developing a standard for landfill closures. In addition, theA portion of thethis older landfill owned by an adjacent sawmill continues to be active. Accordingly, the mill has not been able to move forward with the closure.is still being utilized. We currently believe we may receive regulatory approval for suchexpect to finalize our closure plan in 20102013 and commencereceive MOE approval for it in 2014. The actual closure activities thereafter. We currently estimateshall be effected pursuant to a timetable agreed to by the mill and the MOE. The cost of closing the landfill atis expected to be approximately €1.8 million but since the closure program for the old landfill has not been finalized or approved, there can be no assurance that the decommissioning of the old landfill will not exceed such cost estimate.
Future regulations or permits may place lower limits on allowable types of emissions, including air, water, waste and hazardous materials, and may increase the financial consequences of maintaining compliance with environmental laws and regulations or conducting remediation. Our ongoing monitoring and policies have enabled us to develop and implement effective measures to maintain emissions in substantial compliance with environmental laws and regulations to date in a cost-effective manner. However, there can be no assurances that this will be the case in the future.
There are So far, the potentialand/or perceived effects of climate change and social and governmental responses to it have created both business opportunities and the potential for negative consequences for our business. The focus on climate change has generated a substantial increase in demand and in legislative requirements for “carbon neutral” or “green” energy in both Europe and, increasingly, in North America. Pulp mills consume wood As part of their production process, our mills take wood These factors, along with governmental initiatives in respect of renewable or green energy legislation, have provided business opportunities for us to enhance our generation and sales of green energy We are constantly exploring other initiatives to enhance our generation and sales of surplus green Currently, there numerous differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be occurring around the world.occurring. As a result, we are currently unable tocannot identify and predict all of the specific consequences of climate change on our business and operations.To date,residue,residuals, being wood chips and pulp logs, as the base raw material for itstheir production process. Wood chips are residueresiduals left over from lumber production and pulp logs are generally lower quality logs left over from logging that are unsuitable for the production of lumber.residueresiduals and process itthem through a digester where cellulose is separated from the wood to be used in pulp production and the remaining residue,residuals, called “black liquor”, is used for green energy production. As a result of their use of wood residueresiduals and because our mills generate combined heat and power, they are efficient producers of energy. This energy is carbon neutral and produced from a renewable source. Our relatively modern mills generate a substantial amount of energy that is surplus to their requirements.and to participate in the sale of emission allowances under the EU ETS. See “Generation and Sales of ‘Green’ Energyregional utilities. In early 2012 we commenced Project Blue Mill, a project at our Mills”.Currently,Stendal mill to install a new 40 MW steam turbine which we expect will initially produce an additional 109,000 MWh of surplus renewable electricity.energy.energy and chemical by-products. Other potential opportunities that may result from climate change include:
21the expansion of softwood forests and increased growth rates for such forests;
more intensive forestry practices and timber salvaging versus harvesting standing timber;
greater demand for sustainable energy and cellulosic biomass fuels; and
additional governmental incentives and/or legislative requirements to enhance biomass energy production.
At this time, we cannot predict which, if any, of these potential opportunities will be available to, or realized by, us or their economic effect on our business.
While all of the specific consequences to our business from climate controlchange are not yet predictable, the most visible potential negative consequence is that the focus on renewable energy will continue to create greater demand for the wood residuals or fiber that is consumed by our mills as part of their production process.
In Germany, since 2006, the price and supply of wood residuals have been affected by an increasing demand from alternative or renewable energy producers and governmental initiatives for carbon neutral energy. Over the long term, this non-traditional demand for fiber is expected to increase in Europe. Additionally, the growing interest and focus in British Columbia for renewable green energy is also expected to create additional competition for such fiber in that region over time. Such additional demand for wood residuals may increase the competition and prices for wood residuals over time. See “Operating Costs — “—Production Costs—Fiber”.
Governmental action or legislation may also have an important effect on the demand and prices for wood residuals. As governments pursue green energy initiatives, they risk creating incentives and demand for wood residuals from renewable energy producers that “cannibalizes” or adversely affects existing traditional users, such as lumber and pulp and paper producers. We are activelycontinually engaged in continuing dialogue with government to educate and try to ensure potential initiatives recognize the traditional and continuing role of our mills in the overall usage of forestry resources and the economies of local communities.
Other potential negative consequences from climate change over time that may affect our business include:
a greater susceptibility of northern softwood forest to disease, fire and insect infestation;
the disruption of transportation systems and power supply lines due to more severe storms;
the loss of fresh water transportation for logs and our finished goods inventories due to lower water levels;
decreases in quantity and quality of processed water for our mill operations;
the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and
lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals.
We currently employ approximately Rosenthal, which employs approximately Stendal and its subsidiaries employ approximately We negotiated a five-year collective agreement in November 2012, effective May 1, 2012, with our hourly workers at the 1,4551,500 people. We have approximately 1,0561,044 employees working in our German operations, including our wood procurement, transportation and sales subsidiaries. In addition, there are approximately 1816 people workingemployed at the office we maintain in Vancouver, British Columbia, Canada. Celgar currently employs approximately 381443 people in its operations, the vast majority of which are unionized.444441 people, is bound by collective agreements negotiated with Industriegewerkschaft Bergbau, Chemie, Energie, or “IGBCE”, a national union that represents pulp and paper workers. In January 2009,December 2011, we successfully negotiated a new agreement with IGBCE substantially upon the same terms as the previous labor contract which expired at the end of 2008. Thiscontract. The new collective agreement provided for a one-time payment of €200 per employee, an approximately 2.3%3.0% wage increase in 2009.606597 people. Pursuant to the government grants and financing arranged in connection with theIn 2011, Stendal mill, we have agreed with German state authorities to maintain at least 580 jobs until September 2010. Stendal has not yet entered into anya seven-year collective agreementsagreement with IGBCE although it may do soeffective July 2011. Since, prior to entering into this collective agreement, Stendal’s employees had relatively lower wages compared to their peers at other German pulp mills, this agreement provided for an approximately 5.5% wage increase in 2012. The collective agreement provides for a further 2.5% minimum annual wage increase from 2013 to 2015. The collective agreement is scheduled to expire in 2018.future.22
The following summaries of certain material provisions of: (i) our Senior Notes In In order to take into account the nature of the non-recourse “project financing” of the loan facility for our Stendal mill and to enhance our financing flexibility, the indenture governing our We have purchased and cancelled an aggregate of approximately senior notes;Senior Notes; (ii) our convertible notes; (iii) the Stendal Loan Facility; (iii) a €17.0 million amortizing term facility at our Stendal mill in respect of Project Blue Mill, referred to as the “Blue Mill Facility”; (iv) the working capital facilities and investment loan associated with our Rosenthal Loan Facility;mill; and (v) the Celgar Working Capital Facility, as such terms are referred to below, are not complete and these provisions, including definitions of certain terms, are qualified by reference to the applicable documents and the applicable amendments to such documents on file with the U.S. Securities and Exchange Commission, orreferred to as the “SEC”.February 2005,November 2010, we issued $310.0$300.0 million in aggregate principal amount of senior notes,9.5% Senior Notes due 2017, referred to as the “Senior Notes” to principally refinance our 9.25% Senior Notes due 2013, referred to as the “2013 Senior Notes”. The Senior Notes bear interest at thea rate of 9.25%9.5% per annum, payable semi-annually in arrears on February 15December 1 and August 15 of each year the notes are outstanding.June 1, commencing June 1, 2011. The Senior Notes mature on February 15, 2013.December 1, 2017. The Senior Notes are our senior unsecured obligations and, accordingly, will rank junior in right of payment to all existing and future secured indebtedness and all indebtedness and liabilities of our subsidiaries, equal in right of payment with all of our existing and future unsecured senior indebtedness and senior in right of payment to the 8.5% convertible senior subordinated notes due 2010 and the 8.5% convertible senior subordinated notes due 2012 as well as any current or future subordinated indebtedness. Since February 15, 2009, we have been able to redeem theThe Senior Notes in whole or in part, at the applicable redemption prices plus accrued and unpaid interest, if any, to the redemption date. The notes were issued under an indenture which, among other things, restricts our ability and the ability of our restricted subsidiaries under the indenture to: (i) incur additional indebtedness or issue preferred stock; (ii) pay dividends or make other distributions to our stockholders; (iii) purchase or redeem capital stock or subordinated indebtedness (unless there is no default and such purchase or redemption involves our 8.5% convertible senior subordinated notes due 2010 and the daily closing sale price per share of our common stock on the NASDAQ Global Market for a period of at least ten consecutive trading days exceeds 120% of the then applicable conversion price of such convertible notes);indebtedness; (iv) make investments; (v) create liens and enter into sale and lease back transactions; (vi) incur restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (vii) sell assets; (viii) consolidate or merge with or into other companies or transfer all or substantially all of our assets; and (ix) engage in transactions with affiliates. These limitations are subject to other important qualifications and exceptions.senior notesSenior Notes provides for a “restricted group”“Restricted Group” and an “unrestricted group”. The terms of the indenture are applicable to the restricted groupRestricted Group and are generally not applicable to the unrestricted group. Currently, the restricted groupRestricted Group is comprised of Mercer Inc., the Rosenthal and Celgar mills and certain holding subsidiaries. The restricted groupRestricted Group excludes our Stendal mill. The working capital facilities and Rosenthal Investment Loan at our Rosenthal and Celgar mills and our convertible notes and Senior Notes are obligations of the restricted group.Restricted Group. The Stendal Loan Facility is an obligationand Blue Mill Facility are obligations of our unrestricted group.Convertible NotesIn October 2003, we issued $82.5 million in aggregate principal amount of 8.5% convertible senior subordinated notes due 2010, referred to as the “2010 Convertible Notes”. In December 2006, we$15.2 million principal amount of such notes in exchange for approximately 2.2 million shares of our common stock. In November 2009, we entered into private exchange agreements with holders of $43.3$15.6 million in aggregate principal amount of the 2010 Convertibleour Senior Notes pursuant to which such23
Stendal Loan Facility
In August 2002, Stendal entered into a senior €828.0 million project finance facility, referred to as the “Stendal Loan Facility”. The Stendal Loan Facility was comprised of several tranches which covered, among other things, project construction and development costs, financing andstart-up costs and working capital, as well as the financing of athe debt service reserve account, or “DSRA”, approved cost overruns and a revolving loan facility that covered time lags for receipt of grant funding and value-added tax refunds, which has been repaid. The DSRA is an account maintained to hold and, if needed, pay up to one year’s principal and interest due under the facility as partial security for the lenders. Other than the revolving working capital tranche, no further advances are currently available under the Stendal Loan Facility.
Pursuant to the Stendal Loan Facility, interest accrues at variable rates between Euribor plus 0.90% and Euribor plus 1.85%1.80% per year. The facility provides for Stendal to manage its risk exposure to interest rate risk, currency risk and pulp price risk by way of interest rate swaps, Euro and U.S. dollar swaps and pulp hedging transactions, subject to certain controls, including certain maximum notional and at-risk amounts. Pursuant to the terms of the facility, in 2002 Stendal entered into interest rate swap agreements in respect of borrowings to fix most of the interest costs under the Stendal Loan Facility at a rate of 5.28% plus an applicable margin, until final payment
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The tranches are generally repayable in installments and mature between the fifth and 15th anniversary of the first advance under the Stendal Loan Facility.
In February 2009, we completed an agreement with Stendal’s lending syndicate to amend the Stendal Loan Facility, referred to as the “Amendment”. Pursuant to the Amendment, Stendal’s obligation to repay €164.0 million of scheduled principal payments, referred to as the “Deferred Amount”, is deferred until maturity of the facility in September 2017. Until the Deferred Amount is repaid in full, Stendal may not make distributions, in the form of interest and capital payments on shareholder debt or dividends on equity invested, to its shareholders, including us. The Amendment also provides for a 100% cash sweep, referred to as the “Cash Sweep”, of any excess cash of Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Stendal Loan Facility during the then following 12 months, or “Fully Funded”, and second to prepay the Deferred Amount. Not included in the Cash Sweep is an amount of €15.0 million which Stendal is permitted to retain for working capital purposes.
The Amendment implemented a permitted leverage ratio of total debt under the Stendal Loan Facility to EBITDA, or “Senior Debt/EBITDA Cover Ratio”, to be effective from December 31, 2009 and to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. Subsequently, Stendal’s lending syndicate waived compliance with the permitted leverage ratio for the year ended December 31, 2009. The Amendment also revisesrevised the Stendal Loan Facility’s annual debt service cover ratio, or “Annual Debt Ratio”, requirement to be at least 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x from January 1, 2014 until Maturity.
The Amendment includes the following as events of default:
| • | if scheduled debt service for two consecutive half-year periods is partially or wholly financed by drawings from the DSRA and as a result the DSRA is less than 331/3% Fully Funded; | ||
if the DSRA is fully drawn and Stendal exercises its current six-month principal payment deferral right in respect of the next repayment date;
failure to meet the Senior Debt/EBITDA Cover Ratio or Annual Debt Ratio as set out above; or
if, from December 31, 2011 until the date the Stendal Loan Facility is fully repaid, Mercer Inc. raises proceeds from an equity financing (subject to certain exceptions) and the DSRA is not Fully Funded and if we fail to contribute the lesser of 50% of the net proceeds raised or €10.0 million to the capital of Stendal.
The Amendment provides that Stendal and its shareholders may, once per fiscal year, cure a deficiency in eithereach of the Annual Debt Ratio or the Senior Debt/EBITDA Cover Ratio by way of a capital contribution or fully subordinated shareholder loan to Stendal in the amount necessary to cure such deficiency and thereby prevent the occurrence of an event of default.
The tranches under the Stendal Loan Facility are severally guaranteed by German federal and state governments in respect of an aggregate of 80% of the principal amount of these tranches. Under the guarantees, the German federal and state governments that provide the guarantees are responsible for the performance of our payment obligations for the guaranteed amounts. Such governmental guarantees permit the Stendal Loan Facility to benefit from lower interest costs and other credit terms than would otherwise be available.
In order to permit Stendal to enter into the principal amount outstandingBlue Mill Facility (as described below), the Stendal Loan Facility was amended. In particular, the funds in the DSRA may now be used to bridge any deficiency in funding for Project Blue Mill, payments to Stendal’s capital reserves are no longer an equity cure measure under the Stendal Loan Facility was €514.5 million.
In connection with the Stendal Loan Facility, we entered into a shareholders’ undertaking agreement, referred to as the “Undertaking”, dated August 26, 2002, as amended, with Stendal’s then minority shareholders
and the
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Since completion of the Stendal mill in September 2004, Stendal has repaid €215.0 million of the Stendal Loan Facility. As at December 31, 2012, the principal amount outstanding under the Stendal Loan Facility was €452.9 million.
Blue Mill Facility
In January 2012, our Stendal mill entered into the Blue Mill Facility, being a €17.0 million amortizing term facility, to finance Project Blue Mill. The Blue Mill Facility, 80% of which is guaranteed by the State of Saxony-Anhalt, bears interest at a rate of Euribor plus 3.5% per annum and is scheduled to mature in September 2017. The Blue Mill Facility’s annual debt service cover ratio and permitted ratio of total debt to EBITDA are identical to the Annual Debt Ratio and the Senior Debt/EBITDA Cover Ratio in the Stendal Loan Facility (including cure provisions). There is also a cross default for the Stendal Loan Facility. The Blue Mill Facility will be repaid in nine half-yearly installments, together with accrued interest commencing September 30, 2013 and will be non-recourse to Mercer Inc. This facility was undrawn as at December 31, 2012.
Rosenthal Loan Facilities
Our Rosenthal refinanced itsmill has the following credit facilities:
a €25.0 million revolving working capital facility that matures October 2016, referred to as the “Rosenthal Loan Facility”, with a new revolving working capital facility, in a maximum amount of €25.0 million.. The €25.0 million revolving working capital facility for the Rosenthal millLoan Facility consists of a revolving credit facility which may be utilized by way of cash advances or advances by way of letter of credit or bank guarantees. The facility matures in December 2012. The interest payable on cash advances is Euribor plus 3.5%, plus certain other costs incurred by the lenders in connection with the facility. Each cash advance is to be repaid on the last day of the respective interest period and in full on the termination date and each advance by way of a letter of credit or bank guarantee shall be repaid on the applicable expiry date of such letter of credit or bank guarantee. An interest period for cash advances shall be one, three or six months or any other period as Rosenthal and the lenders may determine. There is also a 1.1% per annum commitment fee on the unused and uncancelled amount of the revolving facility which is payable quarterlysemi-annually in arrears. This facility is secured by a first fixed chargeranking security interest on the inventories, receivables and accounts of Rosenthal. It also provides Rosenthal with a hedging facility relating to the hedging of the interest, currency and pulp prices as they affect Rosenthal pursuant to a strategy agreed to by Rosenthal and the lender from time to time. As at December 31, 2012, €23.7 million was available under this facility;
a €4.4 million investment loan, agreementreferred to as the “Rosenthal Investment Loan”, with a lender, relating to the purchase of a new wash press in 2009 at our Rosenthal mill. The four-year amortizing investment loan bears interest at the rate of Euribor plus 2.75%. Borrowings under this agreement are secured by the new wash press equipment.
a €3.5��million revolving credit facility for our Rosenthal mill which bears interest at the rate of Euribor plus 3.5%. The facility matures in December 2015. As at December 31, 2012, €2.5 million was available under this facility.
As of December 31, 2012, the total amount of funds available under the investment loan agreement.
Celgar Working Capital Facility
Our Celgar amended itsmill has a C$40.0 million revolving working capital credit facility that matures May 2013, referred to as the “Celgar Working Capital Facility”. The Celgar Working Capital Facility now matures in May 2013 andIt is available by way of: (i) Canadian and U.S. denominated advances which bear interest at a designated prime rate plus 2.0% for Canadian advances and at a
designated base rate plus 2.0% per annum for U.S. advances; (ii) banker’s acceptance equivalent loans which bear interest at the applicable Canadian dollar bankers’ acceptance rate plus 3.75% per annum;and/or (iii) LIBOR advances which bear interest at the applicable LIBOR plus 3.75% per annum. The Celgar Working Capital Facility also incorporates a C$3.0 million letter of credit sub line. Celgar is also required to pay a 0.5% per annum standby fee monthly in arrears on any unutilized portion of the revolving facility. Availability of drawdowns under the facility is subject to a borrowing base limit that is based upon the Celgar mill’s eligible accounts receivable and inventory levels from time to time. The Celgar Working Capital Facility is secured by, among other things, a first fixed charge on the current assets of Celgar.
As at December 31, 2012, C$24.0 million of funds were available under the Celgar Working Capital Facility.
We make available free of charge on or through our website atwww.mercerint.com annual reports onForm 10-K, quarterly reports onForm 10-Q and current reports onForm 8-K, and all amendments to these reports, as soon as reasonably practicable after we file these materials with the SEC. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an internet site atwww.sec.gov that also contains our current and periodic reports, including our proxy and information statements.26
All websites referred to herein are inactive textual references only, meaning that the information contained on such websites is not incorporated by reference herein and you should not consider information contained on such websites as part of this document unless expressly specified.
| ITEM 1A. RISK |
The statements in this “Risk Factors” section describe material risks to our business and should be considered carefully. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. In addition, these statements constitute our cautionary statements under thePrivate Securities Litigation Reform Act of 1995. Our disclosure and analysis in this annual report onForm 10-K and in our annual report to shareholders contain some forward-looking statements that set forth anticipated results based on management’s current plans and assumptions.
There are a number of important factors, many of which are beyond our control that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, statements regarding:but are not limited to, the following:
the highly cyclical nature of our business;
our level of indebtedness could negatively impact our financial condition and results of operations;
a weakening of the global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;
cyclical fluctuations in the price and supply of our raw materials could adversely affect our business;
we operate in highly competitive markets;
we are exposed to currency exchange rate and interest rate fluctuations;
we use derivatives to manage certain risks which has caused significant fluctuations in our operating results;
we are subject to extensive environmental regulation and we could have environmental liabilities at our facilities;
our business is subject to risks associated with climate change and social government responses thereto;
our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such requirements;
future acquisitions may result in additional risks and uncertainties in our business;
changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;
Project Blue Mill might not generate the results we expect;
we are subject to risks related to our employees;
we rely on German federal and state government grants and guarantees and participate in European statutory programs;
we are dependent on key personnel;
we may experience material disruptions to our production;
if our long-lived assets become impaired, we may be required to record non-cash impairment that could have a material impact on our results of operations;
we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters;
our insurance coverage may not be adequate;
we rely on third parties for transportation services; and
the price of our common stock may be volatile.
From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts.
Statements in the future tense, and all statements accompanied by terms such as “may”, “will”, “believe”, “project”, “expect”, “estimate”, “assume”, “intend”, “design”, “anticipate”, “plan”, and variations thereof and similar terms are intended to be forward-looking statements as defined by federal securities law. You can find examples of these statements throughout this annual report onForm 10-K, including in the description of business in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. While these forward-looking statements reflect our best estimates when made, the following risk factors could cause actual results to differ materially from estimates or projections.
We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).
You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. As noted above, these forward-looking statements speak only as of the date when they are made. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements. Moreover, in the future, we may make forward-looking statements that involve the risk factors and other matters described in this document as well as other risk factors subsequently identified.
Our business is highly cyclical in nature.
The pulp business is highly cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. Pulp markets are highly competitive and are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of
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Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends.
Demand for pulp has historically been determined primarily by the level of economic growthgeneral global macroeconomic conditions and has been closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved. However, athe global economic crisis in the latter half of 2008 resulted in a sharp decline of pulp prices from a high of €900 per ADMT to €635 per ADMT at the end of 2008. Although pulpPulp prices began to increase in the second half of 2009 there may be renewed pulp price deteriorationand continued to increase to record levels through June of 2010, before declining slightly in the future. We cannot predictfourth quarter of 2010. Pulp prices again rebounded to record levels in the impactfirst half of sustained2011 but declined sharply in the latter part of the year, primarily due to economic weakness on theuncertainty in Europe and credit tightening in China. Economic uncertainty in Europe and China, respectively, impacted both demand and prices. In 2012, list prices were on average approximately 15% lower than 2011. At the end of 2012, list prices for our products.
Accordingly, prices for pulp are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the price for pulp, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.
Our level of indebtedness could negatively impact our financial condition and results of operations.
As of December 31, 2009,2012, we had approximately €829.2€711.4 million of indebtedness outstanding, of which €514.6€452.9 million relates to the Stendal Loan Facility. We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following:
our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all;
a significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes;
increasing our vulnerability to current and future adverse economic and industry conditions;
a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations;
our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general;
causing us to offer debt or equity securities on terms that may not be favorable to us or our shareholders;
limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and
our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness.
The indenture relating togoverning our Senior Notes and our bank credit facilities contain restrictive covenants which impose operating and other restrictions on us and our subsidiaries. These restrictions will affect, and in many respects will limit or prohibit, our ability to, among other things, incur or guarantee additional indebtedness or enter into sale/leaseback transactions, pay dividends or make distributions on capital stock or redeem or repurchase capital stock, make investments or acquisitions, create liens and enter into mergers, consolidations or transactions
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Certain of the agreements governing our indebtedness, including the Stendal Loan Facility, have covenants that require us to maintain prescribed financial ratios and tests. Failure to comply with thesuch covenants in the indenture relating to our Senior Notes or in our bank credit facilities could result in events of default and could have a material adverse effect on our liquidity, results of operations and financial condition.
Our ability to repay or refinance our indebtedness will depend on our future financial and operating performance. Our performance, in turn, will be subject to prevailing economic and competitive conditions, as well as financial, business, legislative, regulatory, industry and other factors, many of which are beyond our control. Our ability to meet our future debt service and other obligations, in particular the Stendal Loan Facility, may depend in significant part on the extent to which we can implement successfully our business strategy. We cannot assure you that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized.
The weakA weakening of the global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources.
Principally, as pulp demand has historically been determined by the level of economic growth and business activity,general global macroeconomic activities, demand and prices for our product have historically decreased substantially during economic slowdowns. Additionally, restricted credit availability restrains our customers’ ability or willingness to purchase our products resulting in lower revenues. Restricted credit availability also can restrict us in the way we operate our business, our level of inventories and the amount of capital expenditures we may undertake. Depending on their severity and duration, the effects and consequences of a global economic downturn could have a material adverse effect on our liquidity and capital resources, including our ability to raise capital, if needed, and otherwise negatively impact our business and financial results.
In a weak pulp price and demand environment, there can be no assurance that we will be able to generate sufficient cash flows to service, repay or refinance debt.
Our main raw material is fiber in the form of wood chips and pulp logs. Such fiber is cyclical in terms of both price and supply. The cost of wood chips and pulp logs is primarily affected by the supply and demand for lumber. Demand for these raw materials is generally determined by the volume of pulp and paper products produced globally and regionally. Since 2006, generally higher energy prices and a focus on, and governmental initiatives related to, “green” or renewable energy have led to an increase in renewable energy projects in Europe, including Germany. Demand for wood residuals from such energy producers, combined with lower harvesting rates, has generally put upward pressure on prices for wood residuals such as wood chips in Germany and its neighboring countries. This has resulted in higher fiber costs for our German mills and such trend could continue to put further upward pressure on wood chip prices.
Similarly, North American sawmill activity declined significantly during the recession, reducing the supply of chips and availability of pulp logs to our Celgar mill. Additionally, North American energy producers are exploring the viability of renewable energy initiatives and governmental initiatives in this field are increasing, all of which could lead to higher demand for sawmill residual fiber, including
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We do not own any timberlands or have any long-term governmental timber concessions nor doand we currently have anyfew long-term fiber contracts at our German operations. Raw materials are available from a number of suppliers and we have not historically experienced material supply interruptions or substantial sustained price increases, howeverincreases. However, our requirements have increased and may continue to increasedo so as we increaseexpand capacity through capital projects or other efficiency measures at our mills. As a result, we may not be able to purchase sufficient quantities of these raw materials to meet our production requirements at prices acceptable to us during times of tight supply. In addition, the quantity, quality and qualityprice of fiber we receive could be reducedaffected as a result of industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation (including new taxes or tariffs), weather conditions, acts of godGod and other events beyond our control. An insufficient supply of fiber or reduction in the quality of fiber we receive would materially adversely affect our business, financial condition, results of operations and cash flow. In addition to the supply of wood fiber, we are dependent on the supply of certain chemicals and other inputs used in our production facilities. Any disruption in the supply of these chemicals or other inputs could affect our ability to meet customer demand in a timely manner and could harm our reputation. Any material increase in the cost of these chemicals or other inputs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We operate in highly competitive markets.
We sell our pulp globally, with a large percentage sold in Europe, North America and Asia. The markets for pulp are highly competitive. A number of other global companies compete in each of these markets and no company holds a dominant position. Our pulp is considered a commodity because many companies produce similar and largely standardized products. As a result, the primary basis for competition in our markets has been price. Many of our competitors have greater resources and lower leverage than we do and may be able to adapt more quickly to industry or market changes or devote greater resources to the sale of products than we can. There can be no assurance that we will continue to be competitive in the future. Prices for our products are affected by many factors outside of our control and we have no influence over the timing and extent of price changes, which are often volatile. Our profitability with respect to these products depends, in part, on managing our costs, particularly raw material and energy costs which represent significant components of our operating costs and can fluctuate based upon factors beyond our control.
The global pulp market has historically been characterized by considerable swings in prices which have and will result in variability in our earnings. Prices are typically denominated in U.S. dollars.
We are exposed to currency exchange rate and interest rate fluctuations.
The majority of our sales wereare in products quoted in U.S. dollars while most of our operating costs and expenses, other than those of the Celgar mill, wereare incurred in Euros. In addition, all of the products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily incurred in Canadian dollars. Our results of operations and financial condition are reported in Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S. dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies relative to the Euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In 2002, Stendal entered intovariable-to-fixed interest rate swaps to fix interest payments under the Stendal mill financing facility,Loan Facility, which has kept Stendal from benefiting from the general decline in interest rates that ensued. These derivatives are marked to market at the end of each reporting period and all unrealized gains and losses are recognized inas earnings or losses for the relevant reporting periods.
Increases in our capital expenditures or maintenance costs could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations.
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We use derivative instruments to limit our exposure to interest rate and pulp price fluctuations. Concurrently with entering into the Stendal financing, Stendal entered intovariable-to-fixed rate interest swaps for the full term of theour Stendal Loan Facility to manage its interest rate risk exposure with respect to the full principal amount of this facility.
We record unrealized gains or losses on our derivative instruments when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. These unrealized and realized gains and losses can materially impact our operating results for any reporting period. For example, our operating results for 2009 included unrealized net losses of €5.7 million on our interest rate derivatives. For 2008, our operating results included unrealized net losses of €25.2 million on our interest rate derivatives. Our operating results for 2007 included realized and unrealized net gains of €20.4 million on currency and interest rate derivatives.
If any of the variety of instruments and strategies we utilize are not effective, we may incur losses which may have a materially adverse effect on our business, financial condition, results of operations and cash flow. Further, we may in the future use derivative instruments to manage pulp price risks. The purpose of our derivative activity may also be considered speculative in nature; we do not use these instruments with respect to any pre-set percentage of revenues or other formula, but either to augment our potential gains or reduce our potential losses depending on our perception of future economic events and developments.
We are subject to extensive environmental regulation and we could have environmental liabilities at our facilities.
Our operations are subject to numerous environmental laws as well as permits, guidelines and policies. These laws, permits, guidelines and policies govern, among other things:
unlawful discharges to land, air, water and sewers;
waste collection, storage, transportation and disposal;
hazardous waste;
dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances;
the clean-up of unlawful discharges;
land use planning;
municipal zoning; and
employee health and safety.
In addition, as a result of our operations, we may be subject to remediation, clean upclean-up or other administrative orders or amendments to our operating permits, and we may be involved from time to time in administrative and judicial proceedings or inquiries. Future orders, proceedings or inquiries could have a material adverse effect on our business, financial condition and results of operations. Environmental laws and land use laws and regulations are constantly changing. New regulations or the increased enforcement of existing laws could have a material adverse effect on our business and financial condition. In addition, compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be
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We are subject to liability for environmental damage at the facilities that we own or operate, including damage to neighboring landowners, residents or employees, particularly as a result of the contamination of soil, groundwater or surface water and especially drinking water. The costs of such liabilities can be substantial. Our potential liability may include damages resulting from conditions existing before we purchased or operated these facilities. We may also be subject to liability for any offsite environmental contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. In addition, we may be held legally responsible for liabilities as a successor owner of businesses that we acquire or have acquired. Except for Stendal, our facilities have been operating for decades and we have not done invasive testing to determine whether or to what extent environmental contamination exists. As a result, these businesses may have liabilities for conditions that we discover or that become apparent, including liabilities arising from non-compliance with environmental laws by prior owners. Because of the limited availability of insurance coverage for environmental liability, any substantial liability for environmental damage could materially adversely affect our results of operations and financial condition.
Enactment of new environmental laws or regulations or changes in existing laws or regulations might require significant capital expenditures. We may be unable to generate sufficient funds or access other sources of capital to fund unforeseen environmental liabilities or expenditures.
The Celgar Energy Project may not generate the results or benefits we expect.
Currently, there are differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be occurring around the world. As a result, we are currently unable to identify and predict all of the specific consequences of climate change on our business and operations.
To date, the potentialand/or perceived effects of climate change and social and government responses to it have created both opportunities, such as enhanced sales of surplus “green” energy, and risks for our business.
While all of the specific consequences from climate change are not yet predictable, we are subject to risks that government and social focus on and demand for “carbon neutral” or “green” energy will create greater demand for the wood residuals or fiber that is consumed by our pulp mills as part of their production process. In addition, governmental initiatives or legislation may also increase both the demand and prices for wood residuals. As governments pursue green energy initiatives, they may implement financial, tax, pricing or other legislated incentives for renewable energy producers that “cannibalize” or materially adversely affect fiber supplies for existing traditional users, such as lumber and pulp and paper producers.
Such additional demand for wood residualsand/or governmental initiatives may materially increase the competition and prices for wood residuals over time. This could increase our fiber costsand/or restrict our ability to acquire fiber at competitive prices or at all during times of shortages. If our fiber costs increase and we cannot pass on these costs to our customers or offset them through higher prices for our sales of surplus energy, it will negatively affect our operating margins, results of operations and financial position. If we cannot obtain the fiber required to
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Other potential risks to our business from climate change include:
a greater susceptibility of northern softwood forest to disease, fire and insect infestation, which could diminish fiber availability;
the disruption of transportation systems and power supply lines due to more severe storms;
the loss of water transportation for logs and our finished goods inventories due to lower water levels;
decreases in quantity and quality of processed water for our mill operations;
the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and
lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals.
The occurrence of some or all of these events could have a material adverse effect on our operationsand/or financial results.
Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for all of our capital requirements.
Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and, as a result of changes to environmental regulations that require capital expenditures, bring our operations into compliance with such regulations. In addition, our senior management and board of directors may approve projects in the future that will require significant capital expenditures. Increased capital expenditures could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. Recent global credit conditions and the downturn in the global economy have resulted in a significant decline in the credit markets and the overall availability of credit. Our indebtedness could adversely affect our financial health, limit our operations and impair our ability to raise additional capital. If this occurs, we may not be able to obtain additional funds on favorable terms or at all. If we cannot maintain or upgrade our equipment as may be required from time to time, we may become unable to manufacture products that compete effectively. An inability to make required capital expenditures in a timely fashion could have a material adverse effect on our growth, business, financial condition or results of operations.
Future acquisitions may result in additional risks and uncertainties in our business.
In order to grow our business, we may seek to acquire additional assets or companies. Our ability to pursue selective and accretive acquisitions will be dependent on management’s ability to identify, acquire, and develop suitable acquisition targets in both new and existing markets, but, in certain circumstances, acceptable acquisition targets might not be available. In pursuing acquisition and investment opportunities, we face competition from other companies having similar growth strategies, many of which may have substantially greater resources than us. Competition for these acquisitions or investment targets could result in increased acquisition or investment prices, higher risks and a diminished pool of businesses or assets available for acquisition.
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could have a material adverse effect on our operating results. Furthermore, the costs of integrating acquired businesses (including restructuring charges associated with the acquisitions, as well as other acquisition costs, such as accounting fees, legal fees and investment banking fees) could significantly impact our operating results.
Although we perform diligence on the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. We may not be able to ascertain the value or understand the potential liabilities of the acquired businesses and their operations until we assume operating control of the assets and operations of these businesses.
Furthermore, any future acquisitions of businesses or facilities could entail a number of risks, including:
problems with the effective integration of operations;
inability to maintain key pre-acquisition business relationships;
increased operating costs;
exposure to substantial unanticipated liabilities; and
difficulties in realizing projected efficiencies, synergies and cost savings.
In addition, geographic and other expansions, acquisitions or joint ventures may require significant managerial attention, which may be diverted from our other operations. If we are unsuccessful in overcoming these risks, our business, financial condition or results of operations could be materially and adversely affected.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing the company on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to the credit markets, increase our cost of financing and have an adverse effect on the market price of our securities.
Project Blue Mill may not generate the results or benefits we expect.
Project Blue Mill is subject to customary risks and uncertainties inherent for large capital projects which could result in the project not completing on schedule or as budgeted. The Stendal mill could experience operating difficulties or delays during the start-up period when the new 40 MW turbine is being ramped up. Project Blue Mill may not increase the Stendal mill’s pulp production and energy generating capacity to the levels we had planned. Cost overruns, equipment breakdowns or failures to perform to design specifications could have a material adverse effect on our Stendal mill’s results of operations and financial performance.
We are subject to risks related to our employees.
The majority of our employees are unionized. In the futureunionized and we may enter into ahave collective agreementagreements in place with our pulp workersemployees at the Stendal mill. The collective agreements relating to hourly workers at bothall of our Rosenthal and Celgar mills expired in 2008. In September 2008, we negotiated a new four-year collective agreement, effective May 1, 2008, with the hourly workers at our Celgar mill and, in January 2009, we entered into a new collective agreement with our Rosenthal employees.mills. Although we have not experienced any work stoppages in the past, there can be no assurance that we will be able to negotiate acceptable collective agreements or other satisfactory arrangements with our employees upon the expiration of our collective agreements or in conjunction with the establishment of a new agreement or arrangement with our pulp workers at the Stendal mill.agreements. This could result in a strike or work stoppage by the affected workers. The registration or renewal of the collective agreements or the outcome of our wage negotiations could result in higher wages or benefits paid to union members. Accordingly, we could experience a significant disruption of our operations or higher on-going labor costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flow.
We rely on German federal and state government grants and guarantees.guarantees and participate in European statutory programs.
We currently benefit from a subsidized capital expenditure program and lower cost of financing as a result of German federal and state government grants and guarantees at our Stendal mill. Should either the German federal or state governments be prohibited from honoring legislative grants and guarantees at Stendal, or should we be required to repay any such legislative grants, this may have a material adverse effect on our business, financial condition, results of operations and cash flow.
Since 2005, our German mills have benefitted from sales of emission allowances under the EU ETS. As a result of our Rosenthal and Stendal mills’ recently commenced participation ineligibility for special tariffs under the Renewable Energy Act, the amount of emissions allowances granted to our German mills under the EU ETS may behas been reduced.
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Our future success depends, to a large extent, on the efforts and abilities of our executive and senior mill operating officers. Such officers are industry professionals many of whom have operated through multiple business cycles. Our officers play an integral role in, among other things:
sales and marketing;
reducing operating costs;
identifying capital projects which provide a high rate of return; and
prioritizing expenditures and maintaining employee relations.
The loss of one or more of our officers could make us less competitive in these areas which could materially adversely affect our business, financial condition, results of operations and cash flows. We do not maintain any key person life insurance for any of our executive or senior mill operating officers.
We may experience material disruptions to our production.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our pulp and energy salesand/or negatively impact our results of operations. Any of our mills could cease operations unexpectedly due to a number of events, including:
unscheduled maintenance outages;
prolonged power failures;
equipment failure;
employee errors or failures;
design error or employee or contractor error;
chemical spill or release;
explosion of a boiler;
disruptions in the transportation infrastructure, including roads, bridges, railway tracks, tunnels, canals and ports;
fires, floods, earthquakes or other natural catastrophes;
prolonged supply disruption of major inputs;
labor difficulties; and
other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our productsand/or require us to make unplanned capital expenditures. If any of our facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations.
We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Should the markets for our products deteriorate or should we decide to invest capital differently or should other cash flow assumptions change, it is possible that we will be required to record non-cash impairment charges in the future that could have a material adverse effect on our results of operations.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks or natural
disasters, could create economic and financial disruptions, could lead to operational difficulties (including travel limitations) that could impair our ability to manage or operate our business and adversely affect our results of operations.
Our insurance coverage may not be adequate.
We have obtained insurance coverage that we believe would ordinarily be maintained by an operator of facilities similar to our mills. Our insurance is subject to various limits and exclusions. Damage or destruction to our facilities
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We rely on third parties for transportation services.
Our business primarily relies upon third parties for the transportation of pulp to our customers, as well as for the delivery of our raw materials to our mills. Our pulp and raw materials are principally transported by truck, barge, rail and sea-going vessels, all of which are highly regulated. Increases in transportation rates can also materially adversely affect our results of operations.
Further, if our transportation providers fail to deliver our pulp in a timely manner, it could negatively impact our customer relationships and we may be unable to sell it at full value. If our transportation providers fail to deliver our raw materials in a timely fashion, we may be unable to manufacture pulp in response to customer orders. Also, if any of our transportation providers were to cease operations, we may be unable to replace them at a reasonable cost. The occurrence of any of the foregoing events could materially adversely affect our results of operations.
Washington State lawThe price of our common stock may be volatile.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described above and the following:
actual or anticipated fluctuations in our operating results or our competitors’ operating results;
announcements by us or our competitors of new products, capacity changes, significant contracts, acquisitions or strategic investments;
our growth rate and our Articlescompetitors’ growth rates;
the financial market and general economic conditions;
changes in stock market analyst recommendations regarding us, our competitors or the forest products industry generally or lack of Incorporation may have anti-takeover effects which will make an acquisitionanalyst coverage of our Companycommon stock;
sales of common stock by another company more difficult.our executive officers, directors and significant stockholders; and
changes in accounting principles.
In addition, there has been significant volatility in the market price and trading volume of securities of companies operating in the forest products industry that often has been unrelated to the provisionsoperating performance of Chapter 23B.19particular companies. Some companies that have had volatile market prices for their securities have had securities litigation brought against them. If litigation of theWashington Business Corporation Act, contained within Title 23B of theRevised Code of Washington, which prohibits a Washington corporation, including our Company, from engagingthis type is brought against us, it could result in any significant business transaction with an “acquiring person” for a period of five years after the date of the transaction in which the person became an acquiring person, unless the significant business transaction is approved by a majority of our board of directors prior to the time the person became an acquiring person. A significant business transaction includes mergers, asset salessubstantial costs and other transactions resulting in a disproportionate financial benefit to the acquiring person. Subject to certain exceptions, an “acquiring person” is a person who, together with affiliateswould divert management’s attention and associates, owns or acquires 10% or more of a corporation’s voting stock. We may in the future adopt certain measures that may have the effect of delaying, deferring or preventing a change in control of our Company. Under Washington State law, we have the ability to adopt certain of these measures, including, without limitation, a shareholder rights plan, without any further vote or action by the holders of our shares. These measures may have anti-takeover effects, which may delay, defer or prevent a takeover attempt that a holder of our shares might consider in its best interest.
| ITEM 1B. UNRESOLVED |
None.
| ITEM 2. | PROPERTIES |
We own the Rosenthal and Celgar mills and the underlying property. The Stendal mill is situated on property owned by Stendal, our 74.9% owned subsidiary.
We lease offices in the state of Thüringia, approximately 250 kilometers south of Berlin. The Saale river flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with a current annual production capacity of approximately 330,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the mill include:
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| Annual | ||||||||||||||||
| Production | Years Ended December 31, | |||||||||||||||
| Capacity(1) | 2009 | 2008 | 2007 | |||||||||||||
| (ADMTs) | ||||||||||||||||
Pulp Production by Mill: | ||||||||||||||||
| Rosenthal | 330,000 | 310,244 | 328,693 | 326,838 | ||||||||||||
| Celgar | 500,000 | 466,855 | 485,893 | 476,243 | ||||||||||||
| Stendal | 645,000 | 620,342 | 610,401 | 601,592 | ||||||||||||
| Total pulp production | 1,475,000 | 1,397,441 | 1,424,987 | 1,404,673 | ||||||||||||
| ITEM 3. | LEGAL PROCEEDINGS |
In October 2005, our wholly-owned subsidiary, Zellstoff Celgar Limited, received a re-assessment for real property transfer tax payable in British Columbia, Canada, in the amount of approximately €3.0 million (C$4.5 million) in connection with the acquisition of the Celgar mill. We are currently contesting the re-assessment and as part of this process, a statutory lien was registered against the assets of the Celgar mill by British Columbia’s revenue authority in 2008. Wewe currently expect the Supreme Court of British Columbia to hold a hearing inon this matter sometime in 2010.2013. The reassessment has been fully paid and the amount, if any, that may be payablereimbursed to us in connection with this matter remains uncertain.
In September 2009,of 2010, the Celgar mill received a summons for chargesletter from the Upper Columbia River Natural Resources Trustee Council, an organization consisting of aboriginal groups and US government representatives, referred to as the “Council”, alleging that, based on their preliminary assessment (the “Preliminary Assessment”), between 1961 to 1993, the Celgar mill had discharged chlorinated organic compounds into the Columbia River. The Preliminary Assessment was conducted to evaluate the need to conduct a formal natural resource damage assessment under the CanadianU.S.FisheriesComprehensive Environmental Response, Compensation and Liability Act, referred to as “CERCLA”. Although we did not acquire the Celgar mill until 2005, and the Celgar mill’s alleged discharges occurred prior to our acquisition of the mill, the Council determined to proceed with a formal natural resource damage assessment under the CERCLA. Although at this time it is unclear as to whether any harm was caused by these alleged discharges and, in any event, we do not believe we are liable, due to the preliminary nature of the assessment, we cannot at this time quantify the costs, if any, associated with this matter.
In January 2012, we served a Notice of Intent to Submit a Claim to Arbitration on the Government of Canada, referred to as the “NAFTA Notice”, for breaches by it of its obligations under the North American Free Trade Agreement, referred to as “NAFTA”. The Company’s NAFTA claim, referred to as the “NAFTA Claim”, relates to its investments in the Celgar mill and arises from the treatment of the Celgar mill’s energy generation assets and operations by the Province of British Columbia, primarily through the actions of B.C. Hydro, a provincially owned and controlled enterprise, and the British ColumbiaEnvironmental Management Actin connection Utilities Commission, a provincial government regulatory agency. Our NAFTA Claim is against the Government of Canada, rather than the Province of British Columbia as, under NAFTA, the Canadian federal government is responsible for the actions of its provinces. Our NAFTA Claim alleges that our Celgar mill has received unfair and discriminatory treatment regarding the mill’s ability to purchase and sell energy compared to other pulp mills and entities that generate and sell electricity within the Province of British Columbia. Subsequent to the filing of the NAFTA Notice, our representatives met with a November 2008 spillrepresentatives of diluted weak black liquorthe Government of Canada and diluted weak black liquor foam into the nearby Columbia River. The charges relate primarily to exceedances of allowable limits under the Celgar mill’s effluent discharge permit and spill pond maintenance requirements. We expect the Provincial CourtProvince of British Columbia to holdattempt to settle our NAFTA Claim through consultation and negotiation, as required under NAFTA Article 1118. However, no resolution was achieved. As a hearingresult, we served a Request for Arbitration on this matter sometimethe Government of Canada under NAFTA in 2010. Althoughorder to meet the applicable filing deadline and to preserve and progress our NAFTA Claim. Under our NAFTA Claim, we cannot assess with any certaintyare seeking approximately C$250 million in damages consisting of past losses of approximately C$19.0 million per year accruing since 2008 and the potential liability for damages, if any,net present value of projected losses that maywould result from these charges, we do not currently expect them to havethe ongoing application of discriminatory Provincial policies should the status quo remain
unchanged. Our NAFTA Claim is being instituted under Chapter 11 of NAFTA and will be heard by a material adverse effect on our business or operations. Nevertheless,tribunal appointed in accordance with Article 1123 of NAFTA. At this time, there can be no assurance thatwhether we will not be requiredsuccessful in such claim and we cannot quantify the amount we may recover, if any, under such proceedings if we were successful.
In 2012, as a result of a regular tax field audit for the Stendal mill, German public authorities commenced a preliminary investigation into a past and the current managers of the mill relating to paywhether certain settlement amounts received by the maximum amountStendal mill in 2007, 2010 and 2011 from the main contractor under the Engineering, Procurement and Construction Contract for the construction of fines that may be levied pursuantthe Stendal mill should have reduced the assessment base for the original investment subsidies granted to the applicationmill by German authorities. The payments were made by the contractor to the Stendal mill to settle certain warranty, performance and remediation claims that the Stendal mill made against the contractor after completion of statutory provisions.
We are also subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
| ITEM 4. |
Not applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
(a)Market Information.Our shares are quoted for trading on the NASDAQ Global Market under the symbol “MERC” and listed in U.S. dollars on the Toronto Stock Exchange under the symbol “MRI.U”. The following table sets forth the high and low sale prices of our shares on the NASDAQ Global Market for each quarter in the two yeartwo-year period ended December 31, 2009:
Fiscal Quarter Ended | High | Low | ||||||
2008 | ||||||||
| March 31 | $ | 9.02 | $ | 6.70 | ||||
| June 30 | 8.48 | 6.31 | ||||||
| September 30 | 7.72 | 3.17 | ||||||
| December 31 | 3.66 | 0.95 | ||||||
2009 | ||||||||
| March 31 | $ | 2.24 | $ | 0.25 | ||||
| June 30 | 1.24 | 0.51 | ||||||
| September 30 | 4.37 | 0.50 | ||||||
| December 31 | 3.68 | 1.73 | ||||||
Fiscal Quarter Ended | High | Low | ||||||
2012 | ||||||||
March 31 | $ | 8.80 | $ | 6.15 | ||||
June 30 | 8.10 | 5.55 | ||||||
September 30 | 7.51 | 5.05 | ||||||
December 31 | 7.80 | 6.18 | ||||||
2011 | ||||||||
March 31 | $ | 14.71 | $ | 7.45 | ||||
June 30 | 15.27 | 9.62 | ||||||
September 30 | 11.34 | 6.79 | ||||||
December 31 | 7.59 | 5.30 | ||||||
(b)Shareholder Information.As at February 24, 2010,13, 2013, there were approximately 382308 holders of record of our shares and a total of 36,451,16155,815,704 shares were outstanding.
(c)Dividend Information.The declaration and payment of dividends is at the discretion of our board of directors. Our board of directors has not declared or paid any dividends on our shares in the past two years and does not anticipate declaring or paying dividends in the foreseeable future.
(d)Equity Compensation Plans.The following table sets forth information as at December 31, 20092012 regarding our equity compensation plans approved by our shareholders. 1,000,000As at December 31, 2012, 1,124,957 of our shares may be issuedwere available for future issuance pursuant to grants of options, stock appreciation rights, restricted stock, restricted stock rights, performance shares and restricted sharesperformance units under our 2010 Stock Incentive Plan, referred to as the “2010 Plan”, which was adopted in June 2010 and which replaced our 2004 Stock Incentive Plan.Plan, referred to as the “2004 Plan”. Our Amended and Restated 1992 Non-Qualified Stock Option Plan expired in 2008.
| Number of Shares to be | Weighted-average | Number of Shares | ||||||||||
| Issued Upon Exercise | Exercise Price of | Available for Future | ||||||||||
| of Outstanding Options | Outstanding Options | Issuance Under Plan | ||||||||||
| 2004 Stock Incentive Plan | 30,000 | $ | 7.30 | 151,149 | (1) | |||||||
| Amended and Restated 1992 Non-Qualified Stock Option Plan | 890,000 | $ | 6.40 | — | (2) | |||||||
| Number of Shares to be Issued Upon Exercise of Outstanding Options | Weighted-average Exercise Price of Outstanding Options | Number of Shares Available for Future Issuance Under Plan | ||||||||||
2010 Stock Incentive Plan | — | $ | — | 1,124,957 | (1)(2) | |||||||
2004 Stock Incentive Plan | 30,000 | (3) | $ | 7.30 | — | |||||||
Amended and Restated 1992 Non-Qualified Stock Option Plan | 145,000 | (4) | $ | 6.35 | — | (5) | ||||||
| (1) | As at December 31, 2012, we had 786,129 performance share units outstanding under the 2010 Plan. In February 2011, we awarded 783,395 performance share units under the 2010 Plan which may vest and become issuable into a maximum of 783,395 shares of our common stock only upon the attainment of designated performance objectives over a three year performance period that commenced on January 1, 2011 and will end on December 31, 2013. In February 2011, we awarded 29,180 performance share units under the 2010 Plan. These were subsequently forfeited in 2012, and a cash payment was made as compensation. During 2012, we awarded 55,478 performance share units under the 2010 Plan which may vest and become issuable into a maximum of 55,478 shares of our common stock only upon the attainment of designated performance |
| (2) | As at December 31, 2012, we had 196,500 restricted stock outstanding under the 2010 Plan. In 2011, we issued 238,000 shares of restricted stock under the 2010 Plan, of which 78,000 vested in 2012 and the remaining 160,000 vest in equal amounts over a four-year period between 2013 and 2016. During 2012, we issued 36,500 shares of restricted stock under the 2010 Plan, which vest in June 2013. |
| (3) | The terms of the 2004 Plan will govern all prior awards granted under such plan until such awards have been cancelled or forfeited or exercised in accordance with the terms thereof. |
| (4) | Our 1992 Amended and Restated Stock Option Plan expired in 2008 but an aggregate of |
| (5) | The plan has expired. |
Our 2010 Plan provides for options, restricted stock rights, restricted stock, performance shares, performance share units and stock appreciation rights to be awarded to employees, consultants and non-employee directors. The 2010 Plan replaced the Company’s 2004 Plan. However, the terms of ourthe 2004 Stock Incentive Plan referred to as the “2004 Plan”, permit us to grantgovern prior awards under other plans, programs or agreements which may be settled in sharesuntil all awards granted under the 2004 Plan. Pursuant to such terms we initiated a long-term performance incentive supplement,Plan have been exercised, forfeited, cancelled, expired, or “Performance Supplement”, in February 2008. The function of the Performance Supplement,otherwise terminated in accordance with the purposesterms of the 2004 Plan, issuch plan. The Company may grant up to promote the long-term successa maximum of the Company and the creation of shareholder value by aligning the interests of our employees, including senior management, with those of our shareholders. Any grants made2,000,000 common shares under the Performance Supplement are settled in2010 Plan, plus the formnumber of common shares issued under the 2004 Plan and any shares issuedremaining available for grant pursuant to the Performance Supplement reduce the number of shares available under the 2004 Plan.
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39
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
| Mercer International Inc. | 100.00 | 73.80 | 111.46 | 73.52 | 18.03 | 29.11 | ||||||||||||||||||
| SIC Code Index | 100.00 | 102.94 | 159.91 | 196.01 | 32.40 | 31.43 | ||||||||||||||||||
| NASDAQ Stock Market Index | 100.00 | 102.20 | 112.68 | 124.57 | 74.71 | 108.56 | ||||||||||||||||||
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| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||||||||
Mercer International Inc. | 100.00 | 24.52 | 39.59 | 98.98 | 77.91 | 91.44 | ||||||||||||||||||
SIC Code Index | 100.00 | 29.09 | 78.01 | 168.84 | 270.89 | 252.09 | ||||||||||||||||||
NASDAQ Stock Market Index | 100.00 | 60.02 | 87.24 | 103.08 | 102.26 | 120.41 | ||||||||||||||||||
| ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected historical financial and operating data as at and for the periods indicated. The following selected financial data is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements and related notes contained in this annual report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The following selected financial data:
| Year Ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (Euro in thousands, other than per share and per ADMT amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Pulp | € | 761,854 | € | 831,396 | € | 856,311 | € | 577,298 | € | 689,320 | ||||||||||
Energy and chemicals | € | 72,289 | € | 68,079 | € | 49,288 | € | 45,540 | € | 34,358 | ||||||||||
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| € | 834,143 | € | 899,475 | € | 905,599 | € | 622,838 | € | 723,678 | |||||||||||
Costs and expenses | € | 785,138 | € | 788,356 | € | 737,856 | € | 635,637 | € | 710,349 | ||||||||||
Operating income (loss) | € | 49,005 | € | 111,119 | € | 167,743 | € | (12,799 | ) | € | 13,329 | |||||||||
Interest expense | € | 55,805 | € | 58,995 | € | 67,621 | € | 64,770 | € | 65,756 | ||||||||||
Gain (loss) on derivative instruments | € | 3,741 | € | (1,418 | ) | € | 1,899 | € | (5,760 | ) | € | (25,228 | ) | |||||||
Other income (expense) | € | (58 | ) | € | 1,501 | € | 468 | € | (1,804 | ) | € | (1,174 | ) | |||||||
Income (loss) after income taxes(1) | € | (10,491 | ) | € | 54,006 | € | 94,748 | € | (72,125 | ) | € | (85,540 | ) | |||||||
Net income (loss) per share(2) | ||||||||||||||||||||
Basic | € | (0.22 | ) | € | 1.00 | € | 2.24 | € | (1.71 | ) | € | (2.00 | ) | |||||||
Diluted | € | (0.22 | ) | € | 0.89 | € | 1.56 | € | (1.71 | ) | € | (2.00 | ) | |||||||
Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
Basic | 55,597 | 50,117 | 38,591 | 36,297 | 36,285 | |||||||||||||||
Diluted | 55,597 | 56,986 | 56,963 | 36,297 | 36,285 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Current assets | € | 344,998 | € | 373,226 | € | 356,880 | € | 200,934 | € | 258,901 | ||||||||||
Current liabilities | € | 136,425 | € | 126,067 | € | 125,197 | € | 101,784 | € | 104,527 | ||||||||||
Working capital | € | 208,573 | € | 247,159 | € | 231,683 | € | 99,150 | € | 154,374 | ||||||||||
Total assets | € | 1,183,603 | € | 1,217,250 | € | 1,216,075 | € | 1,083,831 | € | 1,151,600 | ||||||||||
Long-term liabilities | € | 768,253 | € | 807,641 | € | 877,315 | € | 896,074 | € | 914,970 | ||||||||||
Total equity | € | 278,925 | € | 283,542 | € | 213,563 | € | 85,973 | € | 132,103 | ||||||||||
Other Data | ||||||||||||||||||||
Pulp sales volume (ADMTs) | 1,473,519 | 1,427,924 | 1,428,638 | 1,445,461 | 1,423,300 | |||||||||||||||
Pulp production (ADMTs) | 1,468,275 | 1,453,677 | 1,426,286 | 1,397,441 | 1,424,987 | |||||||||||||||
Average pulp price realized (per ADMT)(3) | € | 511 | € | 574 | € | 591 | € | 393 | € | 478 | ||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Euro in thousands, other than per share and per ADMT amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
| Revenues | € | 619,799 | € | 720,291 | € | 727,295 | € | 644,899 | € | 469,178 | ||||||||||
| Costs and expenses | € | 632,598 | € | 706,962 | € | 657,709 | € | 552,395 | € | 450,528 | ||||||||||
| Operating income (loss) from continuing operations | € | (12,799 | ) | € | 13,329 | € | 69,586 | € | 92,504 | € | 18,650 | |||||||||
| Gains (losses) on derivative instruments | € | (5,760 | ) | € | (25,228 | ) | € | 20,357 | € | 105,848 | € | (71,763 | ) | |||||||
| Interest expense | € | 64,770 | € | 65,756 | € | 71,400 | € | 91,931 | € | 86,326 | ||||||||||
| Investment income (loss) | € | (1,804 | ) | € | (1,174 | ) | € | 4,453 | € | 6,090 | € | 2,422 | ||||||||
| Income (loss) from continuing operations after income taxes(2) | € | (72,125 | ) | € | (85,540 | ) | € | 23,640 | € | 70,313 | € | (129,732 | ) | |||||||
| Net income (loss) attributable to common shareholders (including discontinued operations) | € | (62,189 | ) | € | (72,465 | ) | € | 22,179 | € | 63,210 | € | (117,146 | ) | |||||||
| Net income (loss) per share attributable to common shareholders from continuing operations, | ||||||||||||||||||||
| Basic | € | (1.71 | ) | € | (2.00 | ) | € | 0.62 | € | 2.08 | € | (3.59 | ) | |||||||
| Diluted | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | € | 1.72 | € | (3.59 | ) | |||||||
| Net income (loss) per share attributable to common shareholders (including discontinued operations) | € | (1.71 | ) | € | (2.00 | ) | € | 0.61 | € | 1.90 | € | (3.75 | ) | |||||||
| Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
| Basic | 36,297 | 36,285 | 36,081 | 33,336 | 31,218 | |||||||||||||||
| Diluted | 36,297 | 36,287 | 45,303 | 43,084 | 31,218 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
| Current assets | € | 201,805 | € | 258,901 | € | 290,259 | € | 221,800 | € | 251,522 | ||||||||||
| Current liabilities | € | 101,784 | € | 104,527 | € | 121,516 | € | 120,002 | € | 140,327 | ||||||||||
| Working capital | € | 100,021 | € | 154,374 | € | 168,743 | € | 101,798 | € | 111,195 | ||||||||||
| Total assets(1) | € | 1,083,831 | € | 1,151,600 | € | 1,272,393 | € | 1,284,089 | € | 1,379,372 | ||||||||||
| Long-term liabilities | € | 896,074 | € | 914,970 | € | 895,262 | € | 967,583 | € | 1,120,784 | ||||||||||
| Total equity | € | 85,973 | € | 132,103 | € | 255,615 | € | 196,504 | € | 118,261 | ||||||||||
Other Pulp Data | ||||||||||||||||||||
| Sales volume (ADMTs) | 1,445,461 | 1,423,300 | 1,352,590 | 1,326,355 | 1,101,304 | |||||||||||||||
| Production (ADMTs) | 1,397,441 | 1,424,987 | 1,404,673 | 1,302,260 | 1,184,619 | |||||||||||||||
| Average price realized (per ADMT) | € | 393 | € | 478 | € | 516 | € | 465 | € | 407 | ||||||||||
| (1) | We do not report the effect of government grants relating to our assets in our income. These grants reduce the cost basis of the assets |
| (2) |
41
| (3) | Average realized pulp price for the periods indicated reflects customer discounts and pulp price movements between the order and shipment date. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of our continuing operations as at and for the three years ended December 31, 20092012, 2011 and 2010 is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report.
General We operate in the pulp business and our operations are located in Germany and Western Canada. Our mills have a current combined annual production capacity of approximately Markets for NBSK pulp are global, cyclical and commodity based. Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results for kraft pulp are influenced largely by the market price for In 2010, the supply/demand balance for softwood market pulp improved due to strong demand in China and supply reductions resulting from the closure of several older mills and the residual effect of earthquakes in Chile. During the year, several increases lifted prices to record levels in the middle of the year. Although pulp list prices continued to increase through the first half of 2011, economic uncertainty in Europe and credit tightening in China resulted in a decline in pulp prices commencing in the fourth quarter of 2011. In 2012, there was continuing economic uncertainty in Europe and credit tightening in China in the first half of the year. Further, in the latter part of Our sales realizations are Surplus energy and chemicals are by-products of our pulp production and the volumes generated and sold are primarily related to the rate of pulp production. Prices for our energy and chemical sales are generally stable and unrelated to cyclical changes in Production and sales of surplus energy Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips and pulp logs. Wood chip and pulp log costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp customers or purchasers of surplus energy. Overall weak lumber markets in 2010, 2011 and most of 2012 resulted in reduced sawmill activity and log harvesting in the regional fiber baskets for our mills. This has reduced the supply of both wood residuals such as chips and pulp logs. This cyclical supply reduction put upward pressure on fiber prices. Additionally, higher energy prices and a focus on “green” or renewable energy, while benefiting our surplus power sales, has also led to an overall increase in demand for wood residuals from other renewable energy producers such as pellet producers. 1,475,000 ADMTs.We operate in markets that1.5 million ADMTs of NBSK pulp and 259 MW of electrical generation.our products, raw materialsNBSK pulp, fiber costs and foreign currency exchange rates. Kraft pulp markets are highly cyclical, with prices determined by supply and demand. Demand forIn general, kraft pulp is a globally traded commodity. Pricing and demand are influenced to a significant degreeby the balance between supply and demand, as affected by global levels of economic activity and supply is driven by industry capacity and utilization rates. Our product mix is important because premium grades of NBSK pulp generally achieve higher prices and profit margins.Global economicmacroeconomic conditions, changes in productionconsumption and industry capacity, the level of customer and inventory levels are the primary factors affecting kraft pulp prices. Historically, kraft pulp prices have been cyclicalproducer inventories and fluctuations in nature.exchange rates. The average European list prices for NBSK pulp between 2000 and 20082012 ranged from a low of $447 per ADMT in 2002 to a high of $900$1,030 per ADMT in mid-2008. 2011.2008, we experienced extremely difficult2012, weak demand for paper in Europe resulted in some integrated producers curtailing their paper production and selling their pulp on the market, conditions characterized by poorprimarily in China. These factors negatively impacted demand and rapidly decliningsupply and list prices all of which impacted our results for 2008. In slowing economic times, a key factor influencing our competitive position is the price of our product. At the end of 2008,NBSK pulp. On average, NBSK list prices in Europe had declinedwere down approximately 15% in 2012 compared to $635 per ADMT. As world economies began to stabilize, NBSK2011. At the end of 2012, list prices rebounded in the latter part of 2009 to finish at $800 per ADMTwere approximately $810 in Europe and $870 and $655 in North America and China, respectively, at year end.affected bylist prices, net of customer discounts, commissions and other items, as well as fluctuationsselling concessions. Our reported average sale price realizations are affected by NBSK price movements between the order and shipment dates.NBSK pulp prices.During the last three years, energy productionhave become aand chemicals are key source of revenuesrevenue sources for us. In 20092012, 2011 and 2008,2010, our mills generated 478,674710,241 MWh, 652,113 MWh and 456,059520,005 MWh, respectively, of surplus energy, primarily from a renewable carbon-neutral source. Revenues from the sale of surplus energy in our German mills also increased by 39.7%Initiatives to €41.9 million in 2009 from €30.0 million in 2008, mainly due to changes to the Renewable Energy Act. Additionally, upon the projected completion of the Celgar Energy Project in September 2010, we currently estimate that surplus power sales from the mill will generate approximately C$20.0 million (€13.3 million) to C$25.0 million (€16.7 million) in annual revenues. We anticipate that with the increased focus on renewable energy, including through legislation, incentives and commercialization in Europe and increasingly in North America, revenues from the sale of our surplus energy are likely to increase. Increasingincrease our generation and sales of surplus renewable energy and chemicals will continue to be a key focus for us in the near term. We are currently exploring variousus. Project Blue Mill at our Stendal mill is expected to both increase pulp production and efficiencies through debottlenecking and increase surplus electricity production by approximately 109,000 MWh. Further initiatives to enhance suchincrease energy generation and chemical sales revenues. Such initiatives, if implemented, will likelymay require additional capital spending.Declining energy pricesA recovery in U.S. housing starts which commenced in the latter part of 2012 has resulted in increased sawmill activity and weakening economies through muchis expected to increase the supply of 2009 tempered this increase during 2009. However, overwoodchips for the longer term, we expect demand from renewable energy producers may increase and put upward pressure on prices for wood residuals such as wood chips in Germany and its neighboring countries. Similarly, renewable energy initiatives in British Columbia are increasing and could also lead to higher demand for wood residuals there over time. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp customers or purchasers of surplus energy.42
Our financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro and Canadian dollar exchange raterates and in interest rates. Changes in currency rates affect our operating results because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is quoted in U.S. dollars, even though a significant portion of the sales from our German mills is invoiced in Euros and we report our results in Euros. Therefore, a weakening of the U.S. dollar against the Euro and the Canadian dollar will generally reduce the amount of our pulp operations’ revenues. Most of our operating costs at our German mills, including our debt obligations under the Stendal Loan Facility, and Rosenthal Loan Facility, are incurred in Euros. Most of our operating costs at the Celgar mill, including the Celgar Working Capital Facility,mill’s working capital facility, are in Canadian dollars. These costs do not fluctuate with the U.S. dollar to Euro or Canadian dollar exchange rates. Thus, a weakening of the U.S. dollar against the Euro and the Canadian dollar tends to reduce our sales revenue, gross profit and income from operations. Conversely, an increase in the U.S. dollar versus the Euro and the Canadian dollar positively impacts our revenues by increasingand increases our operating margins and cash flow.
We also periodically enter into interest rate, and foreign currency, pulp price and energy price derivative contracts to partially protect against the effect of such changes. Gains or losses on such derivatives are included in our earnings, either as they are settled or as they are marked to market for each reporting period. See “Item 7A — Quantitative and Qualitative Disclosures about Market Risk”.
2009 Significant Actions
In 20092012, we took the following significant actions:
43
Completed an upgrade to the start of 2010. However, the economicRosenthal mill’s recovery isboiler in the early stagessecond quarter of 2012 to reduce the mill’s emissions, increase production capacity and there is uncertainty aslower operating costs; and
Continued to the strength and timing of such recovery. These conditions are beyond our ability to control and may have a significant impact on our business, results ofimprove mill operations and financial position.efficiencies, which allowed us to achieve record annual pulp production and energy generation.
Three-Year SnapshotCurrent Market Environment
Economic uncertainty in Europe and China negatively impacted demand and list prices for NBSK pulp through 2012. In the fourth quarter of 2012, although supply and demand were balanced, prices were generally stagnant with only modest price increases.
We believe that the market is currently balanced and we currently expect that a modest price recovery will continue in 2013. As pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.
Summary Financial Highlights
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands of Euros, other than per share amounts) | ||||||||||||
Pulp revenues | € | 761,854 | € | 831,396 | € | 856,311 | ||||||
Energy and chemical revenues | 72,289 | 68,079 | 49,288 | |||||||||
Operating income | 49,005 | 111,119 | 167,743 | |||||||||
Gain (loss) on derivative instruments | 3,741 | (1,418 | ) | 1,899 | ||||||||
Foreign exchange gain (loss) on debt | — | 1,175 | (6,126 | ) | ||||||||
Income tax benefit (provision) | (7,293 | ) | 695 | 5,879 | ||||||||
Net income (loss)(1) | (12,185 | ) | 50,075 | 86,279 | ||||||||
Net income (loss) per share(1) | ||||||||||||
Basic | € | (0.22 | ) | € | 1.00 | € | 2.24 | |||||
Diluted | € | (0.22 | ) | € | 0.89 | € | 1.56 | |||||
| (1) | Attributable to common shareholders. |
Selected Production, Sales and Other Data
Selected production, sales and exchange rate data for each of our last three years is as follows:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Pulp Production (’000 ADMTs) | 1,397.4 | 1,425.0 | 1,404.7 | |||||||||
| Scheduled Production Downtime (’000 ADMTs) | 52.1 | 47.0 | 46.0 | |||||||||
| Pulp Sales (’000 ADMTs) | 1,445.5 | 1,423.3 | 1,352.6 | |||||||||
| Pulp Revenues (in millions) | € | 577.3 | € | 689.3 | € | 704.4 | ||||||
| NBSK pulp list prices in Europe ($/ADMT) | $ | 667 | $ | 839 | $ | 800 | ||||||
| NBSK pulp list prices (€/ADMT) | € | 478 | € | 571 | € | 584 | ||||||
| Average pulp sales realizations (€/ADMT)(1) | € | 393 | € | 478 | € | 516 | ||||||
| Energy Production (’000 MWh) | 1,445.3 | 1,456.6 | 1,401.9 | |||||||||
| Energy Sales (’000 MWh) | 478.7 | 456.1 | 430.4 | |||||||||
| Energy Revenue (in millions) | € | 42.5 | € | 31.0 | € | 22.9 | ||||||
| Average energy sales realizations (€/MWh) | € | 89 | € | 68 | € | 53 | ||||||
| Average Spot Currency Exchange Rates | ||||||||||||
| € / $(2) | 0.7176 | 0.6800 | 0.7294 | |||||||||
| C$ / $(2) | 1.1412 | 1.0669 | 1.0740 | |||||||||
| C$ / €(3) | 1.5851 | 1.5603 | 1.4690 | |||||||||
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Consolidated | ||||||||||||
Pulp Production (‘000 ADMTs) | 1,468.3 | 1,453.7 | 1,426.3 | |||||||||
Scheduled Production Downtime (‘000 ADMTs) | 50.9 | 52.4 | 43.5 | |||||||||
Scheduled Production Downtime (days) | 40 | 35 | 31 | |||||||||
Pulp Sales (‘000 ADMTs) | 1,473.5 | 1,427.9 | 1,428.6 | |||||||||
Average NBSK pulp list prices in Europe ($/ADMT)(1) | $ | 813 | $ | 956 | $ | 938 | ||||||
Average NBSK pulp list prices in Europe (€/ADMT) | € | 632 | € | 687 | € | 707 | ||||||
Average pulp sales realizations (€/ADMT)(2) | € | 511 | € | 574 | € | 591 | ||||||
Energy Production (‘000 MWh) | 1,704.1 | 1,640.4 | 1,444.1 | |||||||||
Energy Sales (‘000 MWh) | 710.2 | 652.1 | 520.0 | |||||||||
Average energy sales realizations (€/MWh) | € | 85 | € | 89 | € | 85 | ||||||
Average Spot Currency Exchange Rates | ||||||||||||
€ / $(3) | 0.7782 | 0.7186 | 0.7541 | |||||||||
C$ / $(3) | 0.9995 | 0.9887 | 1.0298 | |||||||||
C$ / €(4) | 1.2850 | 1.3761 | 1.3671 | |||||||||
| (1) |
| (2) | Average realized pulp price for the periods indicated reflect customer discounts and pulp price movements between the order and shipment date. |
| (3) | Average Federal Reserve Bank of New York noon spot rate over the reporting period. |
| (4) | Average Bank of Canada noon spot rate over the reporting period. |
In the year ended December 31, In 2012, surplus energy and chemicals sales increased by approximately 6% to List prices for NBSK pulp in Europe averaged approximately Pulp Pulp production increased to a 20092012 Compared to Year Ended December 31, 200820112009,2012, pulp revenues decreased by approximately 16.2%8% to €577.3€761.9 million from €689.3€831.4 million in 2008,2011, primarily due to lower average pulp sales prices.realizations, partially offset by higher pulp sales volumes and a stronger U.S. dollar relative to the Euro. In 2009, revenues from2012, there was continuing economic uncertainty in Europe and credit tightening in China in the salefirst half of excessthe year. Further, in the latter part of 2012, weak demand for paper in Europe resulted in some integrated producers curtailing their paper production and selling their pulp on the market, primarily in China. These factors negatively impacted demand and supply and list prices for NBSK pulp. NBSK pulp prices remained relatively stable during the first quarter of 2012 before decreasing in the middle part of the year and were generally stagnant in the latter part of 2012.€42.5an annual record of €72.3 million from €31.0€68.1 million in 2008.Pulp prices decreased in 2009,2011, primarily as a result of significantly weaker demand. record pulp production. In 2012, tall oil, which had previously been classified as an offset to operating costs, has been included with revenues as we currently expect proceeds from the sale of tall oil to remain stable in future periods.$667$813 (€478)632) per ADMT in 2009,2012, compared to approximately $839$956 (€571)687) per ADMT in 2008.2011. At the end of 2009,2012, list prices increased to approximately $800were $810 (€558)614) per ADMT in Europe and $700$870 (€488)660) and $655 (€497) per ADMT in Asia, depending upon the country of delivery. At December 31, 2009, Norscan producers’ inventories for softwood kraft decreased to approximately 19 days’ supply, compared to 40 days at the end of 2008.Pulp sales volume increased to 1,445,461 ADMTs in 2009 from 1,423,300 ADMTs in 2008.North America and China, respectively. Average pulp sales realizations decreased by approximately 17.8%11% to $393€511 per ADMT in 20092012 from €478€574 per ADMT in 2008 because of2011, primarily due to lower pulp prices. The weakened market conditions, however, wereprices, only partially offset by an overall slightly highera stronger U.S. dollar duringrelative to the year.production decreasedsales volume increased by approximately 3% to 1,397,441a record 1,473,519 ADMTs in 20092012 from 1,424,9871,427,924 ADMTs in 2008,2011, primarily as a result of increased sales to China in 2012.heavier scheduled maintenance program.record level of 1,468,275 ADMTs in 2012 from 1,453,677 ADMTs in 2011, primarily due to increased pulp production at our Stendal and Celgar mills. In 20092012 and 2008,2011, we took a total of 4340 and 3335 days scheduled maintenance downtime, respectively, at our mills and expect to take approximately 35 days in 2010.44
On average, in 2009,2012, our per unit fiber costs decreased by approximately 16.2%7% compared to 2008. In Germany,2011, primarily due to lower fiber costs were significantly lower asin Germany caused by decreased demand from the European particle board industry decreased.and other regional residual fiber users. Fiber costs at our Celgar mill decreased fromwere higher, primarily due to the prior year primarily as a resultimpact of foreign exchange changes more than offsetting improved woodroom performance and decreased reliance on fiber sourced from third party field chippers. Inwood chip availability for the near term, weregion. We currently expect fiber costs at our German mills to increase moderately. Seasonal weather factors and low harvesting rates are expected slightly in the short—to limit roundwood availability. Also, continuing weakness in European lumber markets is expected to limit any material increase in woodchip availability. Fiber costs at our Celgar mill are expected to remain flat or decline slightly as we move further into 2010mid-term, primarily due to increased efficiencieshigher demand from pellet and board producers which has been compounded by winter weather conditions limiting wood supply, though we expect these costs to be partially offset by price decreases in wood chip production that resulted from upgrades to the Celgar mill’s woodroom.
Operating depreciation and amortization decreased marginallyincreased to €53.9€57.8 million in 20092012 from €55.5€55.8 million in 2008.
For the year ended December 31, 2009,2012, operating income (loss) decreased to €(12.8)€49.0 million from €13.3€111.1 million in 2008,2011, primarily due to lower price realizations.
Interest expense in 20092012 decreased to €64.8€55.8 million from €65.8€59.0 million in 20082011, primarily due to lowerreduced debt levels associated with our Stendal mill and the conversion of borrowing.
Transportation costs increased to €71.8 million in 2012 from €67.8 million in 2011, primarily as a result of higher sales volumes and the impact of foreign exchange on our shipments from Celgar.
In 2009,2012, we recorded an unrealized lossgain of €5.8€1.7 million on the Stendal Interest Rate Swap Contracts,Contract, compared to an unrealized loss of €25.2€1.4 million in 2008,2011, which was primarily the result of lower long-terman increase in short-term European interest ratesrates. We entered into various fixed pulp swap contracts with a bank in 2009.
A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2009,2012, we recorded neither a foreign exchange loss or gain on our debt, of €2.7 million as a result of the weakening of the U.S. dollar in the latter part of the year, compared to a lossgain of €4.2€1.2 million in 2008.
We recorded a gain of approximately €4.4 millionlosses on the extinguishment of debt of €0.1 million in each of 2012 and 2011, primarily in connection with the 2010 Convertiblepurchase and extinguishment of some of our outstanding Senior Notes.
In 2009,2012, the noncontrolling shareholder’s proportionate interest in the Stendal mill’s lossincome was €9.9€1.7 million, compared to a€3.9 million in 2011.
In 2012, deferred tax recoveries were €0.1 million, compared to deferred tax recoveries of €2.4 million in 2011, primarily due to the timing of recognizing deferred tax assets based on forecasted income.
In 2012, we reported net loss of €13.1 million in 2008.
In 2008, we reported net loss attributable to common shareholders of €72.5 million, or €2.00 per basic and diluted share, which included an unrealized loss of €29.5 million on our Stendal Interest Rate Swap Contracts and a foreign exchange loss on our long-term debt and non-cash inventory provisions totaling €11.3 million.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United
45
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) noncontrolling interestsinterest on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) Operating EBITDA does not reflect the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the periods indicated:
| Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| Net income (loss) attributable to common shareholders | € | (62,189 | ) | € | (72,465 | ) | ||
| Net income (loss) attributable to noncontrolling interest | (9,936 | ) | (13,075 | ) | ||||
| Income taxes (benefits) | (5,869 | ) | 2,477 | |||||
| Interest expense | 64,770 | 65,756 | ||||||
| Investment (income) loss | 1,804 | 1,174 | ||||||
| Foreign exchange (gain) loss on debt | (2,692 | ) | 4,234 | |||||
| Gain on extinguishment of convertible notes | (4,447 | ) | — | |||||
| Loss (gain) on derivative instruments | 5,760 | 25,228 | ||||||
| Operating income (loss) | (12,799 | ) | 13,329 | |||||
| Add: Depreciation and amortization | 54,170 | 55,762 | ||||||
| Operating EBITDA | € | 41,371 | € | 69,091 | ||||
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands) | ||||||||
Net income (loss) attributable to common shareholders | € | (12,185 | ) | € | 50,075 | |||
Net income attributable to noncontrolling interest | 1,694 | 3,931 | ||||||
Income tax provision (benefit) | 7,293 | (695 | ) | |||||
Interest expense | 55,805 | 58,995 | ||||||
Loss (gain) on derivative financial instruments | (3,741 | ) | 1,418 | |||||
Loss on extinguishment of debt | 81 | 71 | ||||||
Foreign exchange gain on debt | — | (1,175 | ) | |||||
Other expense (income) | 58 | (1,501 | ) | |||||
|
|
|
| |||||
Operating income | 49,005 | 111,119 | ||||||
Add: Depreciation and amortization | 58,052 | 56,005 | ||||||
|
|
|
| |||||
Operating EBITDA | € | 107,057 | € | 167,124 | ||||
|
|
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In the year ended December 31, List prices for NBSK pulp in Europe and 20082011 Compared to Year Ended December 31, 200720102008,2011, pulp revenues decreased by approximately 2.1%3% to €689.3€831.4 million from €704.4a record €856.3 million in 2007,2010, primarily due to a weaker U.S. dollar relative to the challenging market conditionsEuro. Pulp prices were higher in the first half of 2011 before declining in the second half because of 2008economic uncertainty in Europe and the weakness of the U.S. dollarcredit tightening in much of the first three quarters of 2008.China. In 2008,2011, revenues from the sale of excess energy and chemicals increased by approximately 38% to €31.0€68.1 million from €22.9€49.3 million in 2007. The increase in energy revenues in 2008 includes the settlement of certain energy forward contracts totaling approximately €4.5 million.Pulp prices increased in the first half of 2008, primarily as a result of stronger demand and the weakening of the U.S. dollar but decreased in the second half2010 due to deteriorating global economic conditions. record energy sales at all of our mills.wereaveraged approximately $839$956 (€571)687) per ADMT in 2008,2011, compared to approximately $800$938 (€584)707) per ADMT in 2007.2010. At the end of 2008,2011, list prices decreased to approximately $635$825 (€456)636) per ADMT in Europe$530$890 (€381)686) and $670 (€516) per ADMT in Asia, depending upon the country of delivery. At December 31, 2008, Norscan producers’ inventories for softwood kraft rose to 40 days’ supply, compared to 27 days at the end of 2007 as a result of weak demandNorth America and consumer de-stocking.Pulp sales volume increased to 1,423,300 ADMTs in 2008 from 1,352,590 ADMTs in 2007.China, respectively. Average pulp sales realizations decreased by approximately 7.4%3% to €478€574 per ADMT in 20082011 from €516€591 per ADMT in 200746
Pulp sales volume marginally decreased to 1,427,924 ADMTs in the year.
Pulp production increased to 1,424,987a record level of 1,453,677 ADMTs in 20082011 from 1,404,6731,426,286 ADMTs in 2007,2010, primarily as alla result of record annual pulp production at our mills generally performed wellGerman mills. In 2011 and our Stendal and Rosenthal mills marked a record production year. In each of 2008 and 2007,2010, we took a total of 3335 and 31 days scheduled maintenance downtime, respectively, at our mills.
Costs and expenses increased to €707.0€788.4 million in the year ended December 31, 20082011 from €657.7€737.9 million in 2007.
On average, and excluding the effect of the non-cash inventory provisions onin 2011, our fiber inventories in the fourth quarter of 2008, ourper unit fiber costs in 2008 were generally flat from 2007. In Germany,increased by approximately 7% compared to 2010, primarily as a result of higher fiber costs decreased slightly as sustained production curtailments by large parts of the European board industry lowered demand for fiber throughout 2008 and decreased prices for roundwood which offset price increases in wood chips caused by decreased sawmilling activity. Fiber costs at our Celgar mill caused by increased competition for fiber in 2008 from the prior year,second half of 2011. Fiber prices at our German mills also increased slightly, primarily as a result of increased whole log chippinglow harvesting activity in Germany and higher freight costs incurredcompetition from board producers in the deliveryfirst half of wood chips2011.
Selling, general and administrative expenses increased to the mill.
Operating depreciation and amortization decreased marginally to €55.5€55.8 million in 20082011 from €56.4€55.9 million in 2007.
For the year ended December 31, 2008,2011, operating income decreased to €13.3€111.1 million from €69.6€167.7 million in 2007,2010, primarily due to lower sales realizations resulting from deteriorating market conditionshigher fiber costs and non-cash inventory provisions totaling €11.3 million.
Interest expense in 20082011 decreased to €65.8€59.0 million from €71.4€67.6 million in 2007 primarily due to lower levels of borrowing.
Transportation costs marginally increased to €67.8 million in 2011 from €66.4 million in 2010.
In 2011, we recorded an unrealized loss of €25.2€1.4 million on the Stendal Interest Rate Swap Contracts,Contract, compared to a netan unrealized gain of €20.4€1.9 million in 20072010, which was primarily the result of highera small decrease in long-term European interest rates.
A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2008,2011, we recorded an unrealizeda foreign exchange lossgain on our debt of €4.2€1.2 million as a result of the strengthening of the U.S. dollar in the latter part of the year,2011, compared to a gainloss of €11.0€6.1 million in 2007.
During 2011, we recorded losses on the extinguishment of debt of €0.1 million, primarily in connection with the purchase and extinguishment of some of our outstanding Senior Notes. In 2008,2010, we recorded losses of €7.5 million, primarily in connection with the purchase of our 2013 Senior Notes.
In 2011, the noncontrolling shareholder’s proportionate interest in the Stendal mill’s lossincome was €13.1€3.9 million, compared to €1.3€8.5 million in 2010.
In 2011, deferred tax recoveries were €2.4 million, compared to €9.8 million in 2010, primarily due to the timing of income in 2007.
In 2008, we reported a net loss attributable to common shareholders of €72.5 million, or €2.00 per basic and diluted share which included an unrealized loss of €29.5 million on our Stendal Interest Rate Swap Contracts and a foreign exchange loss on our long-term debt and non-cash inventory provisions totaling €11.3 million. In 2007,2011, we reported net income attributable to common shareholders of €22.2€50.1 million, or €0.61€1.00 per basic and €0.58€0.89 per diluted share, whichshare. This included an aggregate net gaina non-cash loss of €31.3€1.4 million on our outstanding derivativesStendal Interest Rate Swap Contract. In 2010, we reported net income attributable to common shareholders of €86.3 million, or €2.24 per basic and €1.56 per diluted share. This included aggregate non-cash unrealized losses of €0.5 million, comprised of a non-cash gain of €1.9 million on our Stendal Interest Rate Swap Contract, a non-cash foreign exchange gainloss of €6.1 million on our long-term debt, compared to a non-cash loss of €29.5€2.6 million on the extinguishment of our 2013 Senior Notes and a net non-cash income tax benefit of €6.3 million.
In 2011, “Operating EBITDA” decreased to €167.1 million from €224.0 million in 2008.
47
| Years Ended December 31, | ||||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
| Net income (loss) attributable to common shareholders | € | (72,465 | ) | € | 22,179 | |||
| Net income (loss) attributable to noncontrolling interest | (13,075 | ) | 1,251 | |||||
| Discontinued operations after income taxes | — | 210 | ||||||
| Income taxes (benefits) | 2,477 | 10,314 | ||||||
| Interest expense | 65,756 | 71,400 | ||||||
| Investment (income) loss | 1,174 | (4,453 | ) | |||||
| Foreign exchange (gain) loss on debt | 4,234 | (10,958 | ) | |||||
| Loss (gain) on derivative instruments | 25,228 | (20,357 | ) | |||||
| Operating income (loss) | 13,329 | 69,586 | ||||||
| Add: Depreciation and amortization | 55,762 | 56,658 | ||||||
| Operating EBITDA | € | 69,091 | € | 126,244 | ||||
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
Net income attributable to common shareholders | € | 50,075 | € | 86,279 | ||||
Net income attributable to noncontrolling interest | 3,931 | 8,469 | ||||||
Income tax benefits | (695 | ) | (5,879 | ) | ||||
Interest expense | 58,995 | 67,621 | ||||||
Loss (gain) on derivative financial instruments | 1,418 | (1,899 | ) | |||||
Foreign exchange (gain) loss on debt | (1,175 | ) | 6,126 | |||||
Loss on extinguishment of debt | 71 | 7,494 | ||||||
Other income | (1,501 | ) | (468 | ) | ||||
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Operating income | 111,119 | 167,743 | ||||||
Add: Depreciation and amortization | 56,005 | 56,231 | ||||||
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Operating EBITDA | € | 167,124 | € | 223,974 | ||||
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Our earnings are sensitive to, among other things, fluctuations in: NBSK Pulp Price. NBSK pulp is a global commodity that is priced in U.S. dollars, whose markets are highly competitive and cyclical in nature. As a result, our earnings are sensitive to NBSK pulp price changes. Based upon our Foreign Exchange.As NBSK pulp is principally quoted in U.S. dollars, the amount of revenues we generate fluctuates with changes in the value of the U.S. dollar to the Euro. Based upon our 20092012 sales volume (and assuming all other factors remained constant), each $10.00 per tonne change in NBSK pulp prices yields a change in Operating EBITDA of approximately €10.4€11.5 million.20092012 revenues, each €0.01 change in the value of the U.S. dollar yields a change in annual gross sales revenue of approximately €8.0€9.8 million.
Seasonal Influences.We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These factors are common in the NBSK pulp industry. We generally have weaker pulp demand in Europe during the summer holiday months and in China in the period relating to its lunar new year. We typically have a seasonal build-up in raw material inventories in the early winter months as the mills build up their fiber supply for the winter when there is reduced availability.
Summary of The following table is a summaryselected financial information for the periods indicated: Years Ended December 31, 2009 2008 (in thousands) Cash and cash equivalents € 51,291 € 42,452 Cash, restricted — 13,000 Working capital 100,021 154,374 Property, plant and equipment 868,558 881,704 Total assets 1,083,831 1,151,600 Long-term liabilities 896,074 914,970 Total equity 85,973 132,103 Sources and Uses of FundsCash FlowsOur principal sources of funds are cash flows from operations, cash on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds consist of operating expenditures, payments of principal and interest on the Stendal Loan Facility, capital expenditures and interest payments on our outstanding Senior Notes and convertible notes.As at December 31, 2009, our cash and cash equivalents were €51.3 million, compared to €42.5 million at the end of 2008.48
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
Net cash provided by (used in) operating activities | € | 45,973 | € | 111,055 | € | 91,279 | ||||||
Net cash provided by (used in) investing activities | (23,838 | ) | (46,318 | ) | (36,049 | ) | ||||||
Net cash provided by (used in) financing activities | (22,865 | ) | (60,064 | ) | (6,128 | ) | ||||||
Effect of exchange rate on changes in cash and cash equivalents | (103 | ) | 1,377 | (1,371 | ) | |||||||
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Net increase (decrease) in cash and cash equivalents | € | (833 | ) | € | 6,050 | € | 47,731 | |||||
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49
Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses. Generally, finished goods inventories are increased prior to scheduled maintenance downtime to maintain sales volume while production is stopped. Our fiber inventories exhibit seasonal swings as we increase pulp log and wood chip inventories to ensure adequate supply of fiber to our mills during the winter months. Changes in sales volume can affect the level of receivables and influence overall working capital levels. We believe our management practices with respect to working capital conform to common business practices.
Cash provided by operating activities in 2009 provided cash of €37.32012 declined to €46.0 million compared to using cash of €11.9from €111.1 million in 20082011 and €91.3 million in 2010 due to decreased operating income as we focused upon reducing working capital usage in lighta result of weak global demand and pricing.lower average pulp sales realizations. A decrease in receivables, excluding non-cash items, provided cash of €32.1€8.4 million in 2009,2012, compared to an increaseincreases in receivables using cash of €14.8€1.6 million in 2008.2011 and €40.0 million in 2010. A decrease in inventories provided cash of €32.2€1.3 million in 2009,2012, compared to an increaseincreases in inventories using cash of €13.3€17.7 million in 2008.2011 and €24.5 million in 2010. A decrease in accounts payable and accrued expenses used cash of €3.0€14.0 million in 20092012, compared to an increase in accounts payable and usedaccrued expenses providing cash of €1.1€14.3 million in 2008.
Cash Flows from Investing Activities.Investing activities in 20092012 used cash of €15.2€23.8 million, primarily related to capital expenditures of €36.7 million. The maturity of government bonds in 2012 provided cash of €12.2 million. Investing activities in 2011 used cash of €46.3 million, primarily due to €20.8 million of capital spending being only partially offset by a drawdown of €13.0€37.8 million fromand the Stendal Loan Facility’s DSRA.purchase of marketable securities of €12.2 million. Investing activities in 2008 provided2010 used cash of €2.0€36.0 million, primarily due to a drawdowncapital spending of €20.0 million from€38.3 million.
In 2012, capital expenditures, primarily related to Project Blue Mill and the DSRA under the Stendal Loan Facility to repay principal. The repayment of notes receivable providedrecovery boiler upgrade at our Rosenthal mill, used cash of €0.2 million in 2009, compared€36.7 million. In 2011, capital expenditures, primarily related to €5.7 million in 2008.
Cash Flows from Financing Activities.In 2009,2012, financing activities used net cash of €13.3€22.9 million, primarily due to €24.6 million used to repay principal repayments under the Stendal Loan Facility and €1.6 million to purchase and extinguish some of €16.5our Senior Notes. In 2012, we received €3.9 million in government grants. In 2011, financing activities used net cash of which €13.0€60.1 million, was funded from the DSRAprimarily due to using cash of €15.2 million to redeem all of our remaining 2013 Senior Notes, €23.2 million to repay principal under the facility,Stendal Loan Facility, €14.7 million to repay the balance of our Celgar Working Capital Facility, €7.5 million to purchase shares of our common stock and €9.7 million to purchase and extinguish some of our Senior Notes. In 2011, we received
€14.2 million in government grants. In 2010, financing activities used net cash of €6.1 million, primarily due to cash used to repurchase our 2013 Senior Notes and €13.9 million in cash used to pay down the repayment of capital lease obligations of €3.2 million which wereStendal Loan Facility, partially offset by the receipt of €16.7 million in government investment grants of €9.1 million primarily for the Celgar Energy Project. Financing activities usedProject and the proceeds received from the sale of the Senior Notes.
The following table is a summary of selected financial information for the dates indicated:
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands) | ||||||||
Financial Position | ||||||||
Cash and cash equivalents | € | 104,239 | € | 105,072 | ||||
Marketable securities | 184 | 12,372 | (1) | |||||
Working capital | 208,573 | 247,159 | ||||||
Total assets | 1,183,603 | 1,217,250 | ||||||
Long-term liabilities | 768,253 | 807,641 | ||||||
Total equity | 278,925 | 283,542 | ||||||
| (1) | Principally comprised of German federal government bonds with a maturity of less than one year. |
Our principal sources of funds are cash flows from operations, cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of €31.2 million in 2008 primarily due to thefunds consist of operating expenditures, payments of principal repayments ofand interest on the Stendal Loan Facility, capital expenditures and interest payments on our outstanding Senior Notes.
As at December 31, 2012, our cash and cash equivalents were €104.2 million, compared to cash and cash equivalents and short-term German federal government bonds aggregating €117.3 million at the end of €34.02011.
As at December 31, 2012, we had approximately €26.2 million of which €20.0and C$24.0 million was funded from the DSRA,available under our Rosenthal and the repayment of capital lease obligations of €3.3 million.
In 2013, excluding amounts being financed through government grants, underwe currently expect capital expenditures to be approximately €29.0 million, primarily related to Project Blue Mill and various smaller projects at all of our mills. In 2012, we committed to implementing Project Blue Mill at a cost of €40.0 million, which will primarily be funded through €12.0 million of non-refundable German government grants and the GTP totaling approximately €19.2€17.0 million Blue Mill Facility. The balance of Project Blue Mill will be funded through operating cash flow of the Stendal mill and up to an aggregate €6.5 million in pro rata shareholder loans from us and Stendal’s noncontrolling shareholder.
As at December 31, 2012, other then planned capital expenditures, we havehad no material commitments to acquire assets or operating businesses.
50
In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
We had the following amounts outstanding under our debt facilities as at the dates indicated: Rosenthal Loan Facility Rosenthal Investment Loan Rosenthal revolving €3.5 million facility Celgar Working Capital Facility Senior Notes Stendal Loan Facility Blue Mill Facility For a description of such indebtedness, see “Item 1—Business—Description of Certain Indebtedness”. Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. The Stendal Loan Facility contains an annual debt service cover ratio which, pursuant to the terms of the Amendment, must not fall below 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x for the period after January 1, 2014 until maturity on September 30, 2017. The Amendment also implements a permitted leverage ratio of total debt to EBITDA which is effective from December 31, 2009. This ratio is set to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. Failure to comply with either ratio constitutes an event of default, but may be cured by the shareholders of Stendal with a once-per-fiscal-year ratio deficiency cure through a capital contribution or subordinated loan in the amount necessary to cure such deficiency. The Stendal Blue Mill Facility requires the Stendal mill to maintain similar debt service and leverage ratios as the Stendal Loan Facility and contains similar cure provisions. Under the Rosenthal Loan Facility, our Rosenthal mill must not exceed a ratio of net debt to EBITDA of 3:1 in any 12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.2:1.0 for each 12 month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1.0. The Celgar Working Capital Facility includes a covenant that, for so long as the excess amount under the facility is less than C$2.0 million, then until it becomes equal to or greater than such amount, the Celgar mill must maintain a fixed charge coverage ratio of not less than 1.1:1.0 for each 12-month period. The Stendal Loan Facility is provided by a syndicate of eleven financial institutions, the Stendal Blue Mill Facility by two financial institutions and each of our Celgar Working Capital Facility and our Rosenthal Loan Facility are provided by one financial institution. To date we have not experienced any reductions in credit availability with respect to these credit facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected. The indenture governing the Senior Notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity. We pay interest on our Senior Notes at the rate of 9.5% on June 1 and December 1 of each year and they mature in December 2017. As at December 31, 2012, we were in full compliance with all of the covenants of our indebtedness. At December 31, December 31, 2012 2011 (in thousands) € — € — 1,632 2,719 — — 4,574 — 215,670 220,753 452,907 477,490 — n/a 20092012 and 2008,2011, we had no off-balance-sheet arrangements.
The following table sets out our contractual obligations and commitments as at December 31, 2009 in connection with our long-term liabilities. Payments Due By Period 2010 2011-2012 2013-2014 Beyond 2014 Total (in thousands) Long-term debt(1) € 2,115 € 43,434 € 233,170 € 35,881 € 314,600 Debt, Stendal(2) 13,917 47,750 80,000 372,907 514,574 Interest on debt(3) 58,693 108,080 68,615 87,185 322,573 Capital lease obligations(4) 2,839 4,774 445 1,529 9,587 Operating lease obligations(5) 3,034 4,296 1,740 4,987 14,057 Purchase obligations(6) 1,093 189 — — 1,282 Contractual commitments for capital expenditures(7) 20,071 — — — 20,071 Other long-term liabilities(8) 720 1,028 1,218 3,843 6,809 Total(9) € 102,482 € 209,551 € 385,188 € 506,332 € 1,203,553
| Payments Due By Period | ||||||||||||||||||||
Contractual Obligations(8) | 2013 | 2014-2015 | 2016-2017 | Beyond 2017 | Total | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
Long-term debt(1) | € | 5,662 | € | 544 | € | 252,290 | € | — | € | 258,496 | ||||||||||
Debt, Stendal(2) | 40,000 | 84,000 | 328,907 | — | 452,907 | |||||||||||||||
Interest on debt(3) | 41,854 | 65,078 | 73,507 | — | 180,439 | |||||||||||||||
Capital lease obligations(4) | 1,998 | 2,807 | 2,048 | 2,900 | 9,753 | |||||||||||||||
Operating lease obligations(5) | 2,973 | 3,080 | 1,803 | 1,553 | 9,409 | |||||||||||||||
Purchase obligations(6) | 14,911 | 1,484 | 852 | 331 | 17,578 | |||||||||||||||
Other long-term liabilities(7) | 2,194 | 1,557 | 1,812 | 5,615 | 11,178 | |||||||||||||||
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Total | € | 109,592 | € | 158,550 | € | 661,219 | € | 10,399 | € | 939,760 | ||||||||||
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| (1) | This reflects the future principal payments due under our long-term debt obligations, but excludes the Stendal Loan Facility. See “Item |
| (2) | This reflects principal only in connection with the Stendal Loan Facility. See “Item |
| (3) | Amounts presented for interest payments include guarantee fees, and assume that all debt outstanding as of December 31, |
| (4) | Capital lease obligations relate to transportation vehicles and production equipment. These amounts reflect principal and interest. |
| (5) | Operating lease obligations relate to transportation vehicles and other production and office equipment. |
| (6) | Purchase obligations relate primarily totake-or-pay contracts, including for purchases of raw materials, made in the ordinary course of business. | |
| (7) | Other long-term liabilities relate primarily to future payments that will be made for post-employment benefits other than pensions. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations. Additionally, the balance also includes pension funding which is calculated on an annual basis. Consequently, the |
| (8) | We have identified approximately |
51
Our reporting currency is the Euro as the majority of our business transactions are denominated in Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.
We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our consolidated statementConsolidated Statement of comprehensive incomeComprehensive Income (Loss) and impact on shareholders’ equity on the balance sheet but do not affect our net earnings.
In the year ended December 31, 2009,2012, we reported a net €28.3€4.5 million foreign currency translation gain and, as a result, the cumulative foreign exchange translation gain reported within accumulated other comprehensive income (loss) increased to €27.5€41.0 million at December 31, 2009.2012. In the year ended December 31, 2008,2011, we reported a cumulativenet €2.3 million foreign currency translation loss of €41.9 million.
Based upon the exchange rate at December 31, 2009,2012, the U.S. dollar has decreased by approximately 2.9%2% in value against the Euro since December 31, 2008.2011. See“Item 7A- “Item 7A—Quantitative and Qualitative Disclosures about Market Risk”.
General The indenture governing our Senior Notes requires that we also provide a discussion in annual and quarterly reports we file with the SEC under Management’s Discussion and Analysis of Financial Condition and Results of Operations of the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, referred to as the “Restricted Group”. The Restricted Group is comprised of Mercer Inc., our Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill. Summary Financial Highlights for the Restricted Group Pulp revenues Energy and chemical revenues Operating income Gain (loss) on derivative instruments Foreign exchange gain (loss) on debt Income tax benefit (provision) Net income (loss) Selected Production, Sales and Other Data for the Restricted Group Selected production, sales and exchange rate data for the Restricted Group for the periods indicated: Restricted Group Pulp Production (‘000 ADMTs) Scheduled Production Downtime (‘000 ADMTs) Scheduled Production Downtime (days) Pulp Sales (‘000 ADMTs) Average NBSK pulp list prices in Europe ($/ADMT)(1) Average NBSK pulp list prices in Europe (€/ADMT) Average pulp sales realizations (€/ADMT)(2) Energy Production (‘000 MWh) Energy Sales (‘000 MWh) Average energy sales realizations (€/MWh) Average Spot Currency Exchange Rates € / $(3) C$ / $(3) C$ / €(4) The following is a discussion of the results of operations and financial condition of the Restricted Group. For further information regarding the Restricted Group including, without limitation, a reconciliation to our consolidated results of operations, see Note Pulp revenues for the Restricted Group In 2012, revenues from the sale of excess energy Pulp prices Pulp sales volume of the Restricted Group marginally increased to 826,921 ADMTs in 2012 from Pulp production for the Restricted Group decreased to Costs and expenses for the Restricted Group in Underunder Our Senior Note Indenture Year Ended December 31, 2012 2011 2010 (in thousands of Euros, other than per share amounts) € 423,943 € 473,992 € 490,020 28,489 25,473 15,145 7,631 62,943 93,691 2,028 — — — 1,175 (6,126 ) (5,482 ) (4,614 ) 8,651 (14,221 ) 39,809 62,327 Year Ended December 31, 2012 2011 2010 828.0 832.4 826.3 32.8 24.5 25.3 30 20 21 826.9 823.2 826.3 $ 813 $ 956 $ 938 € 632 € 687 € 707 € 512 € 575 € 592 930.1 893.7 718.6 341.6 301.4 194.2 € 83 € 85 € 78 0.7782 0.7186 0.7541 0.9995 0.9887 1.0298 1.2850 1.3761 1.3671 (1) Source: RISI pricing report. (2) Average realized pulp price for the periods indicated reflect customer discounts and pulp price movements between the order and shipment date. (3) Average Federal Reserve Bank of New York noon spot rate over the reporting period. (4) Average Bank of Canada noon spot rate over the reporting period. 1920 of the consolidated financial statements included in this annual report onForm 10-K.Restricted Group Results — Year Ended December 31, 20092012 Compared to Year Ended December 31, 20082011in 2009for the year ended December 31, 2012 decreased by approximately 11% to €318.4€423.9 million from €401.0€474.0 million in 2008,the comparative period of 2011, primarily due to lower average pulp sales realizations. Revenuesrealizations, partially offset by higher sales volumes and a stronger U.S. dollar relative to the Euro. The U.S. dollar was approximately 8% stronger versus the Euro in 2012 compared to 2011.were €15.2increased by approximately 12% to a record €28.5 million from €25.5 million in 2009 compared2011, primarily due to €12.1 million in 2008.decreasedwere lower in the first half of 2009 due to deteriorating global economic conditions but increased2012 than in the second half of 2009, primarily as a result of stronger demand and the weakening of the U.S. dollar. List2011. Average list prices for NBSK pulp in Europe were approximately $667$813 (€478)632) per ADMT in 2009,2012, compared to approximately $839$956 (€571)687) per ADMT in 2008.Pulp sales volume of the Restricted Group decreased to 795,092 ADMTs2011. In China, average list prices were $655 (€497) per ADMT in 2009 from 833,177 ADMTs2012 and $834 (€599) per ADMT in 2008. Average2011. In 2012, average pulp sales realizations for the Restricted Group decreased by approximately 16.7%11% to €400€512 per ADMT from €575 per ADMT in the year ended December 31, 2009previous year.€480 per ADMT823,183 ADMTs in 2008.777,099827,977 ADMTs in 20092012 from 814,586832,396 ADMTs in 2008, primarily due to a heavier maintenance program. We took2011. In 2012 and 2011, our Celgar and Rosenthal mills had an aggregate of 3430 days (approximately 32,800 ADMTs) and 20 days (approximately 24,500 ADMTs) of scheduled annual maintenance downtime, at our Rosenthalrespectively, and Celgar mills in 2009 and 22 days of scheduled annual maintenance downtime in 2008. We expect to take approximately 2523 days in 2010.By the end of 2009, pulp inventories for the Restricted Group decreased to €52.9 million from €59.8 million, the same time last year.Cost2013.2009 decreased2012 increased to €354.5€444.8 million from €415.5€436.5 million in the comparative period of 2008,2011, primarily due to foreign exchange and higher sales volumes, partially offset by lower fiber costs.52
Overall, per unit fiber costs of the Restricted Group decreased by approximately 20.5%3% in 2009 versus2012 compared to 2011, primarily due to decreased fiber costs in Germany, partially offset by increased fiber costs in Canada.
In 2012, operating depreciation and amortization for the Restricted Group increased to €31.2 million from €29.8 million in the same period of 2008.
In 2009, operating income (loss) of2012, the Restricted Group decreasedreported operating income of €7.6 million, compared to €(20.9)operating income of €62.9 million in 2011, primarily due to lower average pulp sales realizations, partially offset by a stronger U.S. dollar relative to the Euro and lower fiber costs in 2012.
Transportation costs for the Restricted Group marginally increased to €51.4 million in 2012 from €(2.4)€50.8 million last year.
Interest expense for the Restricted Group decreased to €23.4 million in 2009 was virtually unchanged at €27.42012 from €24.9 million in 2011, primarily due to the conversion of our convertible notes in 2011.
Most of the long-term debt of the Restricted Group is denominated and repayable in foreign currencies, principally in U.S. dollars. In 2012, the Restricted Group recorded neither a loss nor gain on foreign currency denominated debt, compared to a gain of €1.2 million in 2011.
The Restricted Group recorded a loss of approximately €0.1 million on the purchase and subsequent extinguishment of some of our Senior Notes in each of 2012 and 2011.
During 2012, the Restricted Group recorded €5.5 million of net income tax expense, compared to €4.6 million in 2011.
For the reasons discussed above, the Restricted Group reported net loss for 2012 of €14.2 million, compared to €27.0net income of €39.8 million in 2011 and Operating EBITDA of €39.1 million, compared to Operating EBITDA of €93.0 million in the comparative period of 2011. See the discussion of our results for the year ended December 31, 2012 compared to the year ended December 31, 2011 for the definition of Operating EBITDA, significant limitations in Operating EBITDA as an analytical tool and additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) to operating income and Operating EBITDA for the Restricted Group for the periods indicated:
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | € | (14,221 | ) | € | 39,809 | |||
Income tax provision | 5,482 | 4,614 | ||||||
Interest expense | 23,425 | 24,886 | ||||||
Gain on derivative instruments | (2,028 | ) | — | |||||
Foreign exchange (gain) loss on debt | — | (1,175 | ) | |||||
Loss on extinguishment of debt | 81 | 71 | ||||||
Other income | (5,108 | ) | (5,262 | ) | ||||
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Operating income | 7,631 | 62,943 | ||||||
Add: Depreciation and amortization | 31,471 | 30,086 | ||||||
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Operating EBITDA | € | 39,102 | € | 93,029 | ||||
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| (1) | See Note 20 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. |
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Pulp revenues for the Restricted Group for the year ago.
Pulp prices were higher in 2011 than in 2010. Average list prices for NBSK pulp in Europe were $956 (€687) per ADMT in 2011, compared to $938 (€707) per ADMT in 2010. In China, average list prices were $834 (€599) per ADMT in 2011 and $821 (€618) per ADMT in 2010. In 2011, average pulp sales realizations for the Restricted Group decreased by approximately 3% to €575 per ADMT from €592 per ADMT in the previous year.
Pulp sales volume of the Restricted Group marginally decreased to 823,183 ADMTs in 2011 from 826,340 ADMTs in 2010.
Pulp production for the Restricted Group increased to 832,396 ADMTs in 2011 from 826,301 ADMTs in 2010, primarily as a result of record annual production at our Rosenthal mill. In 2011, our Celgar and Rosenthal mills had an aggregate of 20 days (approximately 24,500 ADMTs) of scheduled maintenance downtime, compared to 21 days (approximately 25,300 ADMTs) of scheduled maintenance downtime in 2010.
Costs and expenses for the Restricted Group in 2011 increased to €436.5 million from €411.5 million in 2010, primarily due to higher fiber costs.
Overall, per unit fiber costs of the Restricted Group increased by approximately 9% in 2011 compared to 2010, primarily due to higher fiber costs at our Celgar mill caused by increased competition for fiber.
In 2011, operating depreciation and amortization for the Restricted Group decreased marginally to €29.8 million from €30.0 million in the same period last year.
Selling, general and administrative expenses increased to €24.1 million from €20.2 million in 2010, primarily as a result of a higher non-cash stock compensation expense resulting from a higher share price and increased foreign exchange losses.
In 2011, the Restricted Group reported operating income of €62.9 million, compared to operating income of €93.7 million in 2010, primarily due to higher fiber costs in 2011 and a weaker U.S. dollar.
Transportation costs for the Restricted Group marginally increased to €50.8 million in 2011 from €50.5 million in 2010.
Interest expense for the Restricted Group decreased to €24.9 million in 2011 from €31.5 million in 2010, primarily due to the conversion of our convertible notes in 2011.
Most of the long-term debt of the Restricted Group is denominated and repayable in foreign currencies, principally in U.S. dollars. In 2011, the Restricted Group recorded a gain on foreign currency denominated debt of €2.7€1.2 million, compared to an unrealizeda loss of €4.1€6.1 million in 2008.
During 2011, the Restricted Group recorded a gainloss of approximately €4.4€0.1 million on the purchase and subsequent extinguishment of some of our Senior Notes. In 2010, the Restricted Group recorded a loss of approximately €7.5 million on the extinguishment of approximately €30.2 million ($43.3 million) in aggregate principal amount of our 2010 Convertiblethe 2013 Senior Notes.
During 2011, the Restricted Group recorded a€4.6 million of net loss of €35.9 million for the year ended December 31, 2009,income tax expense, compared to a net lossincome tax recoveries of €30.4€8.7 million forin 2010, primarily due to the year ended December 31, 2008.
For the reasons discussed above, the Restricted Group generated “Operating EBITDA”reported net income for 2011 of €6.8€39.8 million, compared to net income of €62.3 million in 2010 and €26.5Operating EBITDA of €93.0 million, compared to Operating EBITDA of €124.0 million in the years ended December 31, 2009 and 2008, respectively. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysiscomparative period of our results as reported under GAAP.2010. See the discussion of our consolidated results for the year ended December 31, 20092012 compared to the year ended December 31, 2011 for the definition of Operating EBITDA, significant limitations in Operating EBITDA as an analytical tool and additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the Restricted Group for the periods indicated:
| Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Restricted Group(1) | ||||||||
| Net income (loss) attributable to common shareholders | € | (35,927 | ) | € | (30,432 | ) | ||
| Income taxes (benefits) | (183 | ) | 3,728 | |||||
| Interest expense | 27,351 | 27,027 | ||||||
| Investment (income) loss | (5,002 | ) | (6,834 | ) | ||||
| Foreign exchange (gain) loss on debt | (2,692 | ) | 4,114 | |||||
| Gain on extinguishment of convertible notes | (4,447 | ) | — | |||||
| Operating income (loss) | (20,900 | ) | (2,397 | ) | ||||
| Add: Depreciation and amortization | 27,704 | 28,867 | ||||||
| Operating EBITDA | € | 6,804 | € | 26,470 | ||||
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income | € | 39,809 | € | 62,327 | ||||
Income tax (benefits) | 4,614 | (8,651 | ) | |||||
Interest expense | 24,886 | 31,498 | ||||||
Foreign exchange (gain) loss on debt | (1,175 | ) | 6,126 | |||||
Loss on extinguishment of debt | 71 | 7,494 | ||||||
Other income | (5,262 | ) | (5,103 | ) | ||||
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Operating income | 62,943 | 93,691 | ||||||
Add: Depreciation and amortization | 30,086 | 30,270 | ||||||
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Operating EBITDA | € | 93,029 | € | 123,961 | ||||
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| (1) | ||
See Note |
Summary of Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Effect of exchange rate on changes in cash and cash equivalents Net increase (decrease) in cash and cash equivalents Year Ended December 31, 2012 2011 2010 (in thousands) € (2,590 ) € 66,679 € 54,581 (9,359 ) (38,508 ) (33,311 ) 3,937 (35,373 ) 10,120 (103 ) 1,377 (1,371 ) (8,115 ) (5,825 ) 30,019 Restricted Group Results — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007Cash Flows from Operating ActivitiesPulp revenues. Operating activities for the Restricted Group in 2008 decreased to €401.0 million from €401.3used cash of €2.6 million in 2007, primarily due2012 compared to lower sales realizations. Revenues from the saleproviding cash of excess energy were €12.1€66.7 million in 20082011 and €54.6 million in 2010. An increase in receivables used cash of €0.6 million in 2012, compared to €9.1a decrease in receivables providing cash of €3.3 million in 2007. The2011 and an increase in energy revenuesreceivables using cash of €25.9 million in 2008 includes the settlement2010. An increase in inventories used cash of certain energy forward contracts totaling approximately €1.5 million.Pulp prices increased€4.0 million in the first half of 2008, primarily as a result of stronger demand and the weakening of the U.S. dollar but decreased in the second half due to deteriorating global economic conditions. List prices for NBSK53
Cash Flows from 764,531 ADMTsInvesting Activities.Investing activities used cash of €9.4 million, €38.5 million and €33.3 million in 2007. Average pulp sales realizations for the Restricted Group decreased by approximately 8.4%2012, 2011 and 2010, respectively. In 2012, capital expenditures used cash of €21.9 million primarily related to €480 per ADMT in the year ended December 31, 2008 from €524 per ADMT in 2007 because of weakening conditions in the second half of 2008 which was partially offset by the strengthening of the U.S. dollar late in the fourth quarter.
Cash Flows from Financing Activities.Financing activities provided net cash of €3.9 million in 2012, primarily due to cash of €4.6 million provided from proceeds from our credit facilities and €3.1 million provided from government grants, primarily offset by the use of €2.7 million to purchase and extinguish some of our Senior Notes and make scheduled annual maintenance downtime in 2007.
Balance Sheet Data of the Restricted Group increased by approximately 2.9% in 2008 versus the same period of 2007. Fiber costs for our Rosenthal mill decreased slightly as sustained production curtailments by large parts of the European board industry lowered demand for fiber throughout 2008 and decreased prices for roundwood offset price increases in wood chips caused by decreased sawmilling activity. At our Celgar mill, fiber costs increased in 2008 from the prior year, primarily as a result of increased whole log chipping and higher freight costs incurred in the delivery of wood chips to the mill.
54
| Years Ended December 31, | ||||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
Restricted Group(1) | ||||||||
| Net income (loss) attributable to common shareholders | € | (30,432 | ) | € | 17,492 | |||
| Discontinued operations after income taxes | — | 210 | ||||||
| Income taxes (benefits) | 3,728 | 6,428 | ||||||
| Interest expense | 27,027 | 28,472 | ||||||
| Investment (income) loss | (6,834 | ) | (5,303 | ) | ||||
| Foreign exchange (gain) loss on debt | 4,114 | (10,629 | ) | |||||
| Operating income (loss) | (2,397 | ) | 36,670 | |||||
| Add: Depreciation and amortization | 28,867 | 28,919 | ||||||
| Operating EBITDA | € | 26,470 | € | 65,589 | ||||
| Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Restricted Group Financial Position(1) | ||||||||
| Cash and cash equivalents | € | 20,635 | € | 26,176 | ||||
| Working capital | 57,886 | 101,490 | ||||||
| Property, plant and equipment | 362,311 | 351,009 | ||||||
| Total assets | 555,977 | 564,374 | ||||||
| Long-term liabilities | 301,173 | 309,235 | ||||||
| Total equity | 200,247 | 210,179 | ||||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands) | ||||||||
Restricted Group Financial Position(1) | ||||||||
Cash and cash equivalents | € | 36,714 | € | 44,829 | ||||
Marketable securities | 184 | 12,372 | (2) | |||||
Working capital | 132,130 | 149,973 | ||||||
Total assets | 644,119 | 658,844 | ||||||
Long-term liabilities | 260,185 | 262,770 | ||||||
Total equity | 335,353 | 344,415 | ||||||
| (1) | See Note |
| (2) | Principally comprised of German federal government bonds with a maturity of less than one year. |
Sources and Uses of Funds of the Restricted Group had
The Restricted Group’s principal sources of funds are cash flows from operations, cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. The Restricted Group’s principal uses of €20.6funds consist of operating expenditures, capital expenditures and interest payments on our outstanding Senior Notes.
As at December 31, 2012, the Restricted Group’s cash and cash equivalents were €36.7 million, compared to €26.2cash and cash equivalents and short-term German federal government bonds aggregating €57.0 million at the end of 2008. At December 31, 2009, the Restricted Group had working capital of €57.9 million.
As at December 31, 2009,2012, we had not drawn any amount€26.2 million available under the credit facilities related to the Rosenthal mill and C$24.0 million under the Celgar Working Capital Facility.
In 2013, excluding amounts being financed by governmental grants, we currently expect capital expenditures to be approximately €11.5 million, primarily for various small projects at the Rosenthal and Celgar mills.
We expect the Restricted Group to meet its interest and debt service obligations and meet the working and maintenance capital requirements for its current operations from cash flow from operations, cash and cash equivalents on hand, the Rosenthal Loan Facility and C$24.0 million under the C$40.0 million Celgar Working Capital Facility.
In the future we may make acquisitions of businesses or assets or commitments to additional projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
Credit Ratings of Senior Notes
Standard & Poor’s RatingsRating Services, bases itsreferred to as “S&P”, and Moody’s Investors Service, Inc., referred to as “Moody’s”, base their assessment of ourthe credit risk on our Senior Notes on the business and financial profile of the Restricted Group only. In December 2009, immediately following the completion of the exchange of the 2010 Convertible Notes for the 2012 Convertible Notes, Standard and Poor’s initially lowered the Restricted Group’s credit rating to SD. Subsequently, on December 15, 2009, Standard and Poor’s raised the Restricted Group’s credit rating to CCC+ with a negative outlook, citing the reduction in debt maturing in 2010. In January 2010, Standard and Poor’s confirmed the CCC+ rating but changed their outlook to positive, citing improved liquidity but maintaining concern for pulp market volatility. Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets.
55
During the second quarter of 2011, we were subject to improved rating actions by S&P. In July 2011, S&P raised its ratings on the Senior Notes to B+ from B and improved its recovery rating from “4” to “3”. The improved ratings reflect our balance sheet deleveraging in the first half of 2011 and S&P’s belief that demand for NBSK pulp should remain robust and that our liquidity position should continue to improve.
In November 2011, Moody’s upgraded its outlook from “stable” to “positive” while keeping the rating for our Senior Notes at B3. In December 2012, Moody’s maintained its B3 rating for our Senior Notes, while changing its outlook to “stable”.
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of recording of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex.
Our significant accounting policies are disclosed in Note 1 to our audited annual consolidated financial statements included in Part IV of this annual report. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, pensions and post-retirement benefits, provisions for bad debt andamong other things, doubtful accounts derivative instruments,and reserves, depreciation and amortization, future cash flows associated with impairment oftesting for long-lived assets, deferred taxes, inventory provisions andderivative financial instruments, environmental conservation and legal liabilities.liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual estimatesresults could differ materially from these estimates.
The following accounting policies require management’s most difficult, subjective and complex judgments, and are subject to a fair degree of measurement uncertainty.
Derivative Instruments.We adopted guidanceoccasionally enter into derivative financial instruments, including foreign currency forward contracts, electricity forward contracts, interest rate swaps and pulp price swaps to limit exposures to changes in foreign currency exchange rates, energy prices, interest rates, and pulp prices. These derivative instruments are not designated as outlined in theDerivatives and HedgingTopic ASC 815, originally released as Financial Accounting Standards Board Statement 133,Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001.hedging instruments. Derivative instruments are measured at fair value and reported in theour balance sheet as assets or liabilities. Accounting for gains or losses depends onThe change in fair value of electricity derivative contracts is included in operating costs in our Consolidated Statement of Operations and any changes in the intended usefair value of theforeign currency, interest rate and pulp price derivative instruments. Gains or lossescontracts are recognized in gain (loss) on derivative instruments in our Consolidated Statement of Operations. Periodically, we enter into derivative contracts to supply materials for our own use, which are not designated hedges for accounting purposes are recognized in earnings in the period of the change in fair value. Gains or losses on derivative instruments formally designated as hedges are recognized in either earnings or other comprehensive income.
In 2009,2012, we reported a netan unrealized non-cash holding lossgain of €5.8€2.5 million before noncontrolling interestsinterest in respect of the Stendal Interest Rate Swap Contracts.
Impairment of Long-Lived Assets.We state property, plant and equipment at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production equipment and other primarily over 25 years.
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amountvalue of an asset may not be recoverable. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective
judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, actual impairment losses could vary materially, either positively or negatively, from estimated impairment losses.
The costs of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized, as well as interest costs associated with major capital projects until ready for their intended use. The cost of repairs and maintenance as well as planned shutdown maintenance performed on manufacturing facilities, composed of labor, materials and other incremental costs, is charged to operations as incurred.
Leases which transfer to us substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term. Operating lease payments are recognized as an expense in our Consolidated Statement of Operations on a straight-line basis over the lease term.
We provide for asset retirement obligations when there is a legislated or contractual basis for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increase to property, plant, and equipment, and are amortized over the remaining useful life of the related assets. The liability is accreted using a risk-free interest rate.
As a result of improvingcurrent market conditions, we concluded that there were no impairment indicators. Accordingly, we did not undertake a long-lived asset impairment review in 2009.
Deferred Taxes.We currently have deferred tax assets which are comprised primarily of tax loss carryforwards and deductible temporary differences, both of which will reduce taxable income in the future. The amounts recorded for deferred tax are based upon various judgments, assumptions and estimates. We assess the realization of these deferred tax assets on a periodic basis to determine whether a valuation allowance is required. We determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized, based on currently available information, including, but not limited to, the following:
the history of the tax loss carryforwards and their expiry dates; | ||
56
future reversals of temporary differences;
our historical and projected earnings; and
tax planning opportunities.
If we believe that it is more likely than not that some of these deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against these deferred tax assets. Additionally, based on guidance noted in FASB Accounting Standards Codification Topic 740,Income Taxes, tax assets are not permitted to be recognized where the entity does not have a strong history of profitability. As at December 31, 2009,2012, we had €3.4€22.0 million in deferred tax assets and €nil€5.8 million in deferred tax liabilities, resulting in a net deferred tax asset of €3.4€16.3 million. Our tax assets are net of a €99.5€93.8 million valuation allowance. For the year ended December 31, 2009,2012, our review concluded that it was appropriate to increase the valuation allowance against loss carryforwards by approximately €20.8€12.0 million, after considering expected future earnings and reversals of temporary differences.
If market conditions improve or tax planning opportunities arise in the future, we will reduce our valuation allowances, resulting in future tax benefits. If market conditions deteriorate in the future, we will increase our valuation allowances, resulting in future tax expenses. Any change in tax laws particularly in Germany, will change the valuation allowances in future periods.
Government Grants.We record investment grants from federal and state governments when the conditions of their receipt are complied with and there is reasonable assurance that the grants will be received. Grants related to assets are government grants whose primary condition is that the company qualifying for them should purchase, construct or otherwise acquire long-term assets. Secondary conditions may also be attached, including restricting the type or location of the assets and/or other conditions that must be met. Grants related to assets are deducted from the asset costs in our balance sheet.
Grants related to income are government grants which are either unconditional, related to reduced environmental emissions or related to our normal business operations, and are reported as a reduction of related expenses in our Consolidated Statement of Operations when received.
We are required to pay certain fees based on water consumption levels at our German mills. Unpaid fees can be reduced by wastewater grants upon the mills’ demonstration of reduced environmental emissions. The fees are expensed as incurred and the grants are recognized once the German regulators have evaluated and accepted the measurement of the wastewater emission reduction. There may be a significant period of time between recognition of the wastewater expense and recognition of the wastewater grant.
To the extent that government grants have been received and not applied, these grants are recorded in cash with a corresponding adjustment to accounts payable and other in our Consolidated Balance Sheet due to the short-term nature of the related payments.
Foreign Operations and Currency Translation.We translate foreign assets and liabilities of our subsidiaries, other than those denominated in Euros, at the rate of exchange at our balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Transaction gains and losses related to net assets primarily located in Canada are recognized as unrealized foreign currency translation adjustments within accumulated other comprehensive income in shareholders’ equity, until all of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax when we expect earnings of the foreign subsidiary to be indefinitely reinvested. The income tax effect on currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes in our Consolidated Balance Sheet with an offset to other comprehensive income. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in costs and expenses in our Consolidated Statement of Operations. Where inter-company loans are of a long-term investment nature, the after-tax effect of exchange rate changes are included as an unrealized foreign currency translation adjustment within accumulated other comprehensive income in shareholders’ equity.
Inventory Provisions.Inventories of NBSK pulp and logs and wood chips are valued at the lower of cost, using the weighted-average cost method, or net realizable value. We estimate the net realizable value based on future cash flows expected to result from the sale of our product (NBSK pulp). The cash flows are estimated based on the expected time it will take to exhaust the respective inventory, including estimates of additional costs that will need to be incurred to bring that inventory to a salable state. The future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective judgments. Depending on the assumptions and estimates used, the estimated future cash flows can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows, actual inventory provisions could vary materially, either positively or negatively, from estimated inventory provisions.
As at December 31, 2009,2012, we did not record an inventory provision against any of our finished goods and raw materials inventories.
Environmental Conservation.Liabilities for environmental conservation are recorded when it is probable that obligations have been incurred and their fair value can be reasonably estimated. Any potential recoveries of such liabilities are recorded when there is an agreement with the reimbursing entity and recovery is assessed as likely to occur.
The statements in this annual report onForm 10-K that are not reported financial results or other historical information are “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of different places in this report and can be identified by words such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks and assumptions include those set forth in reports and other documents we have filed with or furnished to the SEC, including in our annual report onForm 10-K for the fiscal year ended December 31, New Accounting StandardsSee Note 1 to our consolidated financial statements included in Item 15 of this annual report onForm 10-K.2009.2012. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC. Factors that could cause actual results to differ materially include, but are not limited to those set forth under “Item 1A — 1A—Risk Factors” in this annual report onForm 10-K.
We do not believe that inflation has had a material impact on revenues or income during 2009.572012.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the Euro and the U.S. dollar and the Canadian dollar versus the U.S. dollar and the Euro. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the futurealso use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We also use derivatives to reduce our potential losses or to augment our potential gains, depending on our management’s perception of future economic events and developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in proportion to notional amounts.
Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize is not effective, we may incur significant losses.
Derivatives are contracts between two parties where payments between the parties are dependent upon movements in the price of an underlying asset, index or financial rate. Examples of derivatives include swaps, options and forward rate agreements. The notional amount of the derivatives is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties and the notional amount itself is not generally exchanged by the parties. The principal derivatives we use are foreign exchange derivatives, Foreign exchange derivatives include currency swaps which involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Such cross currency swaps involve the exchange of both interest and principal amounts in two different currencies. They also include foreign exchange forwards which are contractual obligations in which two counterparties agree to exchange one currency for another at a specified price for settlement at a pre-determined future date. Forward contracts are effectively tailor-made agreements that are transacted between counterparties in theover-the-counter market. Interest rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive financial instrument on a future date at a specified price. They also include interest rate swaps which areover-the-counter contracts in which two counterparties exchange interest payments based upon rates applied to a notional amount. Pulp price derivatives include fixed price pulp swaps which are contracts in which two counterparties exchange payments based upon the difference between the market price of pulp and the notional amount in the contract. Energy derivatives include fixed electricity forward sales and purchase contracts which are contractual obligations to buy or sell electricity at a future specified date. Our mills produce surplus electricity that we sell to third parties. As a result, we monitor the electricity market closely. Where possible and to the extent we think it is advantageous, we may sell into the forward market through forward contracts. We occasionally use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euros to U.S. dollars as our principal product is priced in U.S. dollars. We have also converted some of our costs to U.S. dollars by issuing long-term U.S. dollar denominated debt in the form of our The interest rate derivatives we entered into were pursuant to the Stendal Loan Facility which provides facilities for foreign exchange derivatives, interest rate derivatives and commodities derivatives, subject to prescribed controls, including maximum notional and at-risk amounts. The Stendal Loan Facility is secured byand interest rate derivatives, pulp price derivatives and energy derivatives.8.5% convertible subordinated notes and $310.0 million 9.25% Senior Notes. We use interest rate derivatives to fix the rate of interest on indebtedness, including under the Stendal Loan Facility. In 2008, we also used energy derivatives in connection with the sale of surplus electricity generated at our Stendal and Rosenthal mills, all of which had matured by the end of 2009.58
The Rosenthal Loan Facility also allows us to enter into derivative instruments to manage risks relating to its operations but, as at December 31, 2009,2012, we had not entered into any such derivative instruments.
We record unrealized gains and losses on our outstanding derivatives when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. We determine market valuations based primarily upon valuations provided by our counterparties.
In August 2002, Stendal entered into the Stendal Interest Rate Swap ContractsContract in connection with its long-term indebtedness relating to the Stendal mill to fix the interest rate under the Stendal Loan Facility at the then low level, relative to its historical trend and projected variable interest rate. These contracts were entered into under a specific credit line under the Stendal Loan Facility and are subject to prescribed controls, including certain maximum amounts for notional and at-risk amounts. Under the Stendal Interest Rate Swap Contracts,Contract, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rates payable under the Stendal Loan Facility were swapped into fixed rates based on the Eur-Euribor rate for the repayment periods of the tranches under the Stendal Loan Facility. Stendal effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty.
In May 2012, we entered into a fixed price pulp swap contract with a bank. Under the contract, 5,000 MTs of pulp per month is fixed at a price of $915 per MT for each month between May and December of 2012. The contract expired in December 2012. In November 2012, we entered into two additional contracts. Under the terms of these contracts, 3,000 MTs of pulp per month is fixed at prices which range from $880 to $890 per MT. These contracts expire in December 2013.
We are exposed to very modest credit related risks in the event of non-performance by counterparties to derivative contracts. However, we do not expect that the counterparties, which are major financial institutions and large utilities, will fail to meet their obligations.
The following table and the notes thereto sets forth the maturity date, the notional amount, the recognized gain or loss and the strike and swap rates for derivatives that were in effect during 20082012 and 2009:
| Recognized | Recognized | |||||||||||||||||||
| Gain (Loss) | Gain (Loss) | |||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||
| Notional | December 31, | Notional | December 31, | |||||||||||||||||
Derivative Instrument | Maturity Date | Amount | 2009 | Amount | 2008 | |||||||||||||||
| (in millions of | (in thousands) | (in millions of | (in thousands) | |||||||||||||||||
| Euros or MWh) | Euros or MWh) | |||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||
| Stendal interest rate swaps(1) | October 2017 | € | 487.0 | € | (5,760 | ) | € | 523.1 | € | (25,228 | ) | |||||||||
Energy Derivatives(2) | ||||||||||||||||||||
| Energy forward sales | 2009 | — | € | — | 104,000 MWh | € | 9,172 | |||||||||||||
| Electricity forward purchases | 2009 | — | € | — | 104,000 MWh | € | (5,901 | ) | ||||||||||||
| € | — | € | 3,271 | |||||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||||||
Derivative Instrument | Maturity Date | Notional Amount | Recognized Gain (Loss) | Notional Amount | Recognized Gain (Loss) | |||||||||||||||
| (in millions) | (in thousands) | (in millions) | (in thousands) | |||||||||||||||||
Stendal interest rate swap(1) | October 2017 | € | 357.6 | € | 1,713 | € | 404.4 | € | (1,418 | ) | ||||||||||
Fixed price pulp swap(2) | December 2012 | € | 27.6 | € | 2,028 | € | — | € | — | |||||||||||
| (1) | In connection with the Stendal Loan Facility, in the third quarter of 2002 Stendal entered into the Stendal Interest Rate Swap |
| principal amount of the long-term indebtedness under the Stendal Loan Facility. The |
| (2) | In |
Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate59
The following tables provide information about our exposure to interest rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20092012 and expected cash flows from these instruments:
| As at December 31, 2009 | ||||||||||||||||||||||||||||||||
| Carrying | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
| Value | Value | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
| Long-term debt: | ||||||||||||||||||||||||||||||||
| Fixed rate($)(1) | € | 216,299 | € | 182,773 | € | — | € | — | € | — | € | 216,299 | € | — | € | — | ||||||||||||||||
| Average interest rate | 9.25 | % | 9.25 | % | 9.25 | % | ||||||||||||||||||||||||||
| Fixed rate($)(2) | € | 16,749 | € | 15,912 | € | 1,587 | € | — | € | 15,162 | € | — | € | — | € | — | ||||||||||||||||
| Average interest rate | 8.5 | % | 8.5 | % | 8.5 | % | 8.5 | % | ||||||||||||||||||||||||
| Fixed rate (€)(3) | € | 26,160 | € | 27,468 | € | — | € | — | € | 26,160 | € | — | € | — | € | — | ||||||||||||||||
| Average interest rate | 8.5 | % | 8.5 | % | 8.5 | % | ||||||||||||||||||||||||||
| Variable rate (€)(4) | € | 514,574 | € | 514,574 | € | 13,917 | € | 23,167 | € | 24,583 | € | 40,000 | € | 40,000 | € | 372,907 | ||||||||||||||||
| Average interest rate | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | ||||||||||||||||
| Variable rate (€)(5) | € | 3,511 | € | 3,511 | € | 528 | € | 1,056 | € | 1,056 | € | 871 | € | — | € | — | ||||||||||||||||
| Average interest rate | 3.71 | % | 3.71 | % | 3.71 | % | 3.71 | % | 3.71 | % | 3.71 | % | ||||||||||||||||||||
| Variable rate (C$)(6) | € | 16,000 | € | 16,000 | € | — | € | — | € | — | € | 16,000 | € | — | € | — | ||||||||||||||||
| Average interest rate | 4.16 | % | 4.16 | % | 4.16 | % | ||||||||||||||||||||||||||
| Nominal | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
| Amount | Value | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||||||||
| Variable to fixed (€)(7) | € | 487,043 | € | (52,873 | ) | € | 39,280 | € | 43,315 | € | 46,873 | € | 50,794 | € | 54,959 | € | 251,822 | |||||||||||||||
| Average pay rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | ||||||||||||||||
| Average receive rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | ||||||||||||||||
| As at December 31, 2012 | ||||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||
Fixed rate ($)(1) | € | 215,670 | € | 228,071 | € | — | € | — | € | — | € | — | € | 215,670 | € | — | ||||||||||||||||
Average interest rate | 9.5 | % | 9.5 | % | 9.5 | % | ||||||||||||||||||||||||||
Variable rate (€)(2) | € | 452,907 | € | 452,907 | € | 40,000 | € | 40,000 | € | 44,000 | € | 44,000 | € | 284,907 | € | — | ||||||||||||||||
Average interest rate | 1.78 | % | 1.78 | % | 1.78 | % | 1.78 | % | 1.78 | % | 1.78 | % | 1.78 | % | ||||||||||||||||||
Variable rate (€)(3) | € | 1,632 | € | 1,632 | € | 1,088 | € | 544 | € | — | € | — | € | — | € | — | ||||||||||||||||
Average interest rate | 3.4 | % | 3.4 | % | 3.4 | % | 3.4 | % | ||||||||||||||||||||||||
| Nominal Amount | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Interest Rate Derivatives | ||||||||||||||||||||||||||||||||
Interest rate swap: | ||||||||||||||||||||||||||||||||
Variable to fixed (€)(4) | € | 357,576 | € | (50,678 | ) | € | 50,794 | € | 54,959 | € | 59,388 | € | 64,100 | € | 128,335 | € | — | |||||||||||||||
Average pay rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | ||||||||||||||||||
Average receive rate | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | ||||||||||||||||||
| (1) | Senior Notes |
| (2) | ||
| Stendal Loan Facility bears interest at varying rates of between Euribor plus 0.90% to Euribor plus |
| (3) | Rosenthal investment loan bears interest at Euribor plus 2.75%. |
| (4) | Interest rate |
Foreign Currency Exchange Rate Risk
Our reporting currency is the Euro. However, we hold financial instruments denominated in U.S. dollars and Canadian dollars which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the Euro will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the Euro will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the Euro will increase the fair value of such financial instrument assets and a depreciation of these currencies against the Euro will decrease the fair value of financial instrument liabilities, thereby increasing our fair value. We seek to manage our foreign currency risks by utilizing foreign exchange rate derivatives. For a discussion of such derivatives including maturities, notional amounts, gains or losses and strike rates, see “Derivatives” in this Item 7A.
The following table provides
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| As at December 31, 2009 | ||||||||||||||||||||||||||||||||
| Carrying | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
| Value | Value | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
On-Balance Sheet Financial Instruments | ||||||||||||||||||||||||||||||||
| Euro functional currency | ||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Fixed rate($)(1) | € | 216,299 | € | 182,773 | € | — | € | — | € | — | € | 216,299 | € | — | € | — | ||||||||||||||||
| Average interest rate | 9.25 | % | 9.25 | % | 9.25 | % | ||||||||||||||||||||||||||
| Fixed rate($)(2) | € | 16,749 | € | 15,912 | € | 1,587 | € | — | € | 15,162 | € | — | € | — | € | — | ||||||||||||||||
| Average interest rate | 8.5 | % | 8.5 | % | 8.5 | % | 8.5 | % | ||||||||||||||||||||||||
| Fixed rate($)(3) | € | 26,160 | € | 27,468 | € | — | € | — | € | 26,160 | € | — | € | — | € | — | ||||||||||||||||
| Average interest rate | 8.5 | % | 8.5 | % | 8.5 | % | ||||||||||||||||||||||||||
| Variable rate (C$)(4) | € | 16,000 | € | 16,000 | € | — | € | — | € | — | € | 16,000 | € | — | € | — | ||||||||||||||||
| Average interest rate | 4.16 | % | 4.16 | % | 4.16 | % | ||||||||||||||||||||||||||
| As at December 31, 2012 | ||||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
On-Balance Sheet Financial Instruments | ||||||||||||||||||||||||||||||||
Euro functional currency Liabilities: | ||||||||||||||||||||||||||||||||
Fixed rate ($) (1) | € | 215,670 | € | 228,071 | € | — | € | — | € | — | € | — | € | 215,670 | € | — | ||||||||||||||||
Average interest rate | 9.5 | % | 9.5 | % | ||||||||||||||||||||||||||||
| (1) | Senior Notes, | |
Fluctuations in the price of pulp will affect the fair value of our pulp price swaps. A decrease in pulp prices will increase the fair value of the pulp price swaps and an increase in pulp prices will decrease the fair value of the pulp price swaps. We are subject to some electricityenergy price risk, primarily for natural gas purchases. Our electricity price risks are mitigated by the electricity thatability of all of our operations purchase.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements and supplementary data required with respect to this Item 8, and as listed in Item 15 of this annual report onForm 10-K, are included in this annual report onForm 10-K commencing on page 70.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report onForm 10-K. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.61
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Mercer Inc.’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Mercer Inc.’s internal control over financial reporting as of December 31, The effectiveness of Mercer’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears There have been no changes in our internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the year ended December 31, Not applicable.• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer;• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.2009.2012. In making this assessment, management used the criteria set forth inInternal Control-Integrated Framework, as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management believes that Mercer Inc. maintained effective internal control over financial reporting as of December 31, 2009.Mercer Inc.’s independent registered chartered accountants have issued an audit report on Mercer Inc.’s2012.below.20092012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATION 62
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
We are governed by a board of directors, referred to as the “Board”, each member of which is elected annually, beginning with our annual meeting held in 2007. Prior to the conversion, as a business trust, we were managed by trustees, who have comparable duties and responsibilities as directors of corporations. Each of our issued and outstanding shares of common stock is entitled to one vote at such meetings.annually. The following sets forth information relating to our directors and executive officers.
Jimmy S.H. Lee, age 52,55, has been a director since May 1985 and President and Chief Executive Officer since 1992. Previously, during the period that MFC Bancorp Ltd. was our affiliate, he served as a director from 1986 and President from 1988 to December 1996 when it was spun out. During Mr. Lee’s tenure with Mercer, we acquired the Rosenthal mill and converted it to the production of kraft pulp, constructed and commenced operations at the Stendal mill and acquired the Celgar mill.
Eric Lauritzen, age 71,74, has been a director since June 2004. Mr. Lauritzen was President and Chief Executive Officer of Harmac Pacific, Inc., a North American producer of softwood kraft pulp previously listed on the Toronto Stock Exchange and acquired by Pope & Talbot Inc. in 1998, from May 1994 to July 1998, when he retired. Mr. Lauritzen was Vice President, Pulp and Paper Marketing of MacMillan Bloedel Limited, a North American pulp and paper company previously listed on the Toronto Stock Exchange and acquired by Weyerhaeuser Company Limited in 1999, from July 1981 to April 1994.
William D. McCartney, age 57, has been a director since January 2003. Mr. McCartney has been President and Chief Executive Officer of Pemcorp Management Inc., a management services company, since 1990. Mr. McCartney is also a member of the Institute of Chartered Accountants in Canada.
Graeme A. Witts, age 71,74, has been a director since January 2003. Mr. Witts organized Sanne Trust Company Limited, a trust company located in the Channel Islands, in 1988 and was managing director from 1988 to 2000, when he retired. He is now managing director of Azure Property Group, SA, a European hotel group. Mr. Witts is also a fellow of the Institute of Chartered Accountants of England and Wales and has previous executive experience with the Procter & Gamble Company and Clarks Shoes, as well as government auditing.
George MalpassGuy W. Adams, age 70,61, has been a director since November 2006.August 2003. Mr. MalpassAdams is the managing member of GWA Advisors, LLC, GWA Investments, LLC and GWA Capital Partners, LLC, where he has served since 2002. GWA Investments is an investment fund investing in publicly traded securities managed by GWA Capital Partners, LLC, a registered investment advisor. Prior to 2002, Mr. Adams was formerly the President of GWA Capital, which he founded in 1996 to invest his own capital in public and private equity transactions, and a business consultant to entities seeking refinancing or recapitalization.
Bernard Picchi, age 63, has been a director since June 2011. Mr. Picchi has been the Managing Director of Private Wealth Management for Palisade Capital Management, LLC since July 2009. Prior to 2009, Mr. Picchi has been an analyst and consultant for several mid-sized broker/dealers and investment advisory firms. In particular, from 1980 to 1999, Mr. Picchi was an All Star rated energy analyst at Solomon Brothers, Kidder Peabody and Lehman Brothers, where he also served as Director of U.S. Stock Research. Mr. Picchi has also been the sole manager of the 5-Star rated $1.5 billion Capital Appreciation Fund of Federated Investors, where he served as U.S. Director of Research from January 2000 to June 2002. Mr. Picchi is also a Chartered Financial Analyst.
James Shepherd, age 60, has been a director since June 2011. Mr. Shepherd was President and Chief Executive Officer of Canfor Corporation from 2004 to 2007 and Slocan Forest Products Ltd. from 1999 to 2004. Mr. Shepherd is also the former President of Crestbrook Forest Industries Ltd. and Finlay Forest Industries Limited and is the former Chairman of the Forest Products Association of Canada. Mr. Shepherd has been a director with Canfor Corporation, which is listed on the Toronto Stock Exchange, from 2004 to 2007 and has been a director of Primex Forest Products Ltd. andCanfor Pulp Income Fund from 2006 to 2007. Mr. Shepherd is also currently a former director of bothConifex Timber Inc., which is listed on the TSX Venture Exchange, and Buckman Laboratories International Inc.
Keith Purchase, age 68, has been a director since April 2012. Mr. Purchase was Executive Vice-President and Chief Operating Officer of MacMillan Bloedel Ltd. from 1998 to 1999, President and Chief Executive Officer of TimberWest Forest Products Ltd. from 1994 to 1998 and Riverside Forest Products Ltd.
David M. Gandossi, age 52,55, has been Secretary, Executive Vice-President and Chief Financial Officer since August 15, 2003. Mr. Gandossi was formerly the Chief Financial Officer and Executive Vice-President of Formation Forest Products (a closely held corporation) from June 2002 to August 2003. Mr. Gandossi previously served as Chief Financial Officer, Vice-President, Finance and Secretary of Pacifica Papers Inc., a North American specialty pulp and paper manufacturing company previously listed on the Toronto Stock Exchange, from December
63
Claes-Inge Isacson, age 64,67, has been our Chief Operating Officer since November 2006 and is based in our Berlin office. Mr. Isacson brings over 24 years of senior level pulp and paper management to our senior management team, with a focus on kraft pulp. Mr. Isacson held the positions of President Norske Skog Europe, and then Senior Vice President Production for Norske Skogindustrier ASA between 1989 and 2004. His most recent position was President, AF Process, a consulting and engineering company working worldwide. He holds a Masters of Science, Mechanical Engineering.
Leonhard Nossol, age 52,55, has been our Group Controller for Europe since August 2005. He has also been a managing director of Rosenthal since 1997 and the sole managing director of Rosenthal since September 2005. Mr. Nossol had a significant involvement in the conversion of the Rosenthal mill to the production of kraft pulp in 1999 and increases in the mill’s annual production capacity to 330,000355,000 ADMTs, as well as the reduction in production costs at the mill.
Richard Short, age 45, has been our Controller since December 2010, prior to which he was our Director, Corporate Finance, since joining Mercer in 2007. Prior to joining Mercer, Mr. Short was Controller, Financial Reporting from 2006 to 2007 and Director, Corporate Finance from 2004 to 2006 with Catalyst Paper Corp. Mr. Short is a member of the Institute of Chartered Accountants in Canada.
David M. Cooper, age 56,59, has been Vice President of Sales and Marketing for Europe since June 2005. Mr. Cooper previously held a variety of senior positions around the world in Sappi Ltd., a large global forest products group, from 1982 to 2005, including the sales and marketing of various pulp and paper grades and the management of a manufacturing facility. He has more than 2530 years of diversified experience in the international pulp and paper industry.
Eric X. Heine, age 46,49, has been Vice President of Sales and Marketing for North America and Asia since June 2005. Mr. Heine was previously Vice President Pulp and International Paper Sales and Marketing for
Domtar Inc., a global pulp and paper corporation, from 1999 to 2005. He has over 18 years of experience in the pulp and paper industry, including developing strategic sales channels and market partners to build corporate brands.
Wolfram Ridder, age 48,51, was appointed Vice President of Business Development in August 2005, prior to which he was a managing director of Stendal. Mr. Ridder was the principal assistant to our Chief Executive Officer from November 1995 until September 2002.
Genevieve Stannus, age 39,42, has been our Treasurer since July 2005, prior to which she was a Senior Financial Analyst with Mercer from August 2003. Prior to joining Mercer, Ms. Stannus held Senior Treasury Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. She has over ten yearsyears’ experience in the forest products industry. Ms. Stannus is a member of the Certified General Accountants’ Association of Canada.
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We also have experienced mill managers at all of our mills who have operated through multiple business cycles in the pulp industry.
The Board met 14ten times during 20092012 and each current member of the Board attended 75% or more100% of the total number of such meetings and meetings of the committees of the Board on which they serve during their term. In addition, our independent directors regularly meet in separate executive sessions without any member of our management present. The Lead Director presides over these meetings. Although we do not have a formal policy with respect to attendance of directors at our annual meetings, all directors are encouraged and expected to attend such meetings if possible. All of our directors attended our 20092012 annual meeting.
The Board has developed corporate governance guidelines in respect of: (i) the duties and responsibilities of the Board, its committees and officers; and (ii) practices with respect to the holding of regular quarterly and strategic meetings of the Board including separate meetings of non-management directors. The Board has established four standing committees, the Audit Committee, the Compensation and Human Resource Committee, the Governance and Nominating Committee and the Environmental, Health and Safety Committee.
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act and functions pursuant to a charter adopted by the directors. A copy of the current charter is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com under the “Governance” link. The function of the Audit Committee generally is to meet with and review the results of the audit of our financial statements performed by the independent public accountants and to recommend the selection of independent public accountants. The members of the Audit Committee are Mr. McCartney, Mr. The Audit Committee has established procedures for: (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; and (ii) the confidential and anonymous submission by our employees and others of concerns regarding questionable accounting or auditing matters. A person wishing to notify us of such a complaint or concern should send a written notice thereof, marked “Private & Confidential”, to the Chairman of the Audit Committee, Mercer International Inc.,c/o Suite WittsAdams and Mr. Lauritzen,Shepherd, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. Both Mr. McCartney and Mr. Witts are Chartered Accountants and Mr. McCartney is a Chartered Accountant and a “financial expert” within the meaning of such term under theSarbanes-Oxley Act of 2002. The Audit Committee met fivefour times during 2009.2840, P.O. Box 11576, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada V6B 4N8.
The Board has established a Compensation and Human Resource Committee. The Compensation and Human Resource Committee is responsible for reviewing and approving the strategy and design of our compensation, equity-based and benefits programs. The Compensation and Human Resource Committee functions pursuant to a charter adopted by the directors, a copy of which is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. The Compensation and Human Resource Committee is also responsible for approving all compensation actions relating to executive officers. The members of the Compensation and Human Resource Committee are Mr. Malpass,Picchi, Mr. LauritzenWitts and Mr. Adams,Purchase, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Compensation and Human Resource Committee met four times during 2009.65
The Board has established a Governance and Nominating Committee comprised of Mr. Shields,Lauritzen, Mr. McCartney and Mr. Witts, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Governance and Nominating Committee functions pursuant to a charter adopted by the directors, a copy of which is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. The purpose of the committee is to: (i) manage the corporate governance system of the Board; (ii) assist the Board in fulfilling its duties to meet applicable legal and regulatory and self-regulatory business principles and codes of best practice; (iii) assist in the creation of a corporate culture and environment of integrity and accountability; (iv) in conjunction with the Lead Director, monitor the quality of the relationship between the Board and management; (v) review management succession plans; (vi) recommend to the Board nominees for appointment to the Board; (vii) lead the Board’s annual review of the Chief Executive Officer’s performance; and (viii) set the Board’s forward meeting agenda. The Governance and Nominating Committee met four times in 2009.
The Board established an Environmental, Health and Safety Committee in 2006, currently comprised of Mr. Lauritzen,Shepherd, Mr. MalpassPurchase and Mr. Lee, to review on behalf of the Board the policies and processes implemented by management, and the resulting impact and assessments of all our environmental, health and safety related activities. The Environmental, Health and Safety Committee functions pursuant to a charter adopted by the directors, a copy of which is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. More specifically, the Environmental, Health and Safety Committee is to: (i) review and approve, and if necessary revise, our environmental, health and safety policies and environmental compliance programs; (ii) monitor our environmental, health and safety management systems including internal and external audit results and reporting; and (iii) provide direction to management on the frequency and focus of external independent environmental, health and safety audits. The Environmental, Health and Safety Committee met four times in 2009.
The Board appointed Mr. process and ensuring that the Board is appropriately approving strategy and supervising management’s progress against that strategy; (ii) ensuring that the independent directors have adequate opportunity to meet to discuss issues without management being present; (iii) chairing meetings of directors in the absence of the Chairman and Chief Executive Officer; (iv) ensuring that delegated committee functions are carried out and reported to the Board; and (v) communicating to management, as appropriate, the results of private discussions among outside directors and acting as a liaison between the Board and the Chief Executive Officer.ShieldsLauritzen as its Lead Director in September 2003 and in 2006 as Deputy Chairman of the Board.2012. The role of the Lead Director is to provide leadership to the non-management directors on the Board and to ensure that the Board can operate independently of management and that directors have an independent leadership contact. The duties of the Lead Director include, among other things: (i) ensuring that the Board has adequate resources to support its decision-making
The Board has adopted a Code of Business Conduct and Ethics that applies to our directors, employees and executive officers. The code is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com under the “Governance” link. A copy of the code may also be obtained without charge upon request to Investor Relations, Mercer International Inc., Suite 2840, P.O. Box 11576, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada V6B 4N8V6C 1G8 (Telephone:(604) 684-1099) or Investor Relations, Mercer International Inc., 14900 Interurban Avenue South, Suite 282, Seattle WA, U.S.A. 98168 (Telephone:(206) 674-4639).66
The information required under “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2010,2013, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2010,2013, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2010,2013, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Pursuant to the terms of the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving the terms and conditions of all proposed transactions between us, any of our officers, directors or shareholders who beneficially own more than 5% of our outstanding shares of common stock, or relatives or affiliates of any such officers, directors or shareholders, to ensure that such related party transactions are fair and are in our overall best interest and that of our shareholders. In the case of transactions with employees, a portion of the review authority is delegated to supervising employees pursuant to the terms of our written Code of Business Conduct and Ethics. The Audit Committee has not adopted any specific procedures for conduct of reviews and considers each transaction in light of the facts and circumstances. In the course of its review and approval of a transaction, the Audit Committee considers, among other factors it deems appropriate: Whether the transaction is fair and reasonable to us; The business reasons for the transaction; Whether the transaction would impair the independence of one of our non-employee directors; and Whether the transaction is material, taking into account the significance of the transaction. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction. The information called for by Items 404(a) and 407(a) ofRegulation S-K required to be included under this Item 13 is incorporated by reference from the proxy statement relating to our annual meeting to be held in • Whether the transaction is fair and reasonable to us;• The business reasons for the transaction;• Whether the transaction would impair the independence of one of our non-employee directors; and• Whether the transaction is material, taking into account the significance of the transaction.2010,2013, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2010,2013, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
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| ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| Page | ||||
| (b) | |
| List of Exhibits |
| 2 | .1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | ||
| 3 | .1 | Articles of Incorporation of the Company, as amended. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
| 3 | .2 | Bylaws of the Company. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
| 4 | .1* | First Supplemental Indenture dated March 1, 2006 to Indenture dated as of October 10, 2003 between Mercer International Inc. and Wells Fargo Bank, N.A. | ||
| 4 | .2 | Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference fromForm S-3 filed December 10, 2004. | ||
| 4 | .3 | First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference fromForm 8-K dated February 17, 2005. | ||
| 4 | .4 | Indenture dated as of December 10, 2009 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated December 11, 2009. | ||
| 10 | .1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009. | ||
| 10 | .2 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated September 10, 2002. | ||
| 10 | .3* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. | ||
| 10 | .4* | Contract for the Engineering, Design, Procurement, Construction, Erection andStart-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | ||
| 10 | .5* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | ||
| 10 | .6 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference fromForm 8-K dated August 11, 2003. | ||
| 10 | .7 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference fromForm 8-K dated April 28, 2004. | ||
| 10 | .8 | 2004 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 15, 2004. | ||
| 10 | .9 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference fromForm 8-K dated October 2, 2006. |
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| 10 | .10 | Employment Agreement effective October 16, 2006 between Mercer International Inc. and David Ure dated September 22, 2006. Incorporated by reference fromForm 8-K dated October 13, 2006. | ||
| 10 | .11* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | ||
| 10 | .12 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference fromForm 10-Q dated May 6, 2008. | ||
| 10 | .13* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | ||
| 10 | .14* | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
| 10 | .15 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
| 10 | .16 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference fromForm 8-K dated November 30, 2009. | ||
| 14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |||
| 99 | .1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | ||
| 99 | .2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | ||
| 99 | .3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 99 | .4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 99 | .5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 21 | List of Subsidiaries of Registrant. | |||
| 23 | .1 | Consent of Independent Registered Chartered Accountants — PricewaterhouseCoopers LLP. | ||
| 31 | .1 | Section 302 Certificate of Chief Executive Officer. | ||
| 31 | .2 | Section 302 Certificate of Chief Financial Officer. | ||
| 32 | .1** | Section 906 Certificate of Chief Executive Officer. | ||
| 32 | .2** | Section 906 Certificate of Chief Financial Officer. |
| Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | ||
| 3.1 | Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006. | |
| 3.2 | Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006. | |
| 4.1 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference from Form 8-K dated November 19, 2010. | |
| 10.1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2012. | |
| 10.2* | Project Blue Mill Financing Facility Agreement dated January 20, 2012 between Zellstoff Stendal GmbH and Unicredit Bank AG and IKB Deutsche Industriebank AG. | |
| 10.3* | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG as amended by the Amendment Restatement and Undertaking Agreement dated January 20, 2012. | |
| 10.4* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG as amended by the Amendment Agreement dated January 20, 2012. | |
| 10.5* | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | |
| 10.6* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | |
| 10.7 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003. | |
| 10.8 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004. | |
| 10.9 | 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004. | |
| 10.10 | 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010. | |
| 10.11 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006. | |
| 10.12* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | |
| 10.13 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008. | |
| 10.14* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | |
| 10.15 | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated August 24, 2009. | |
| 10.16 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference from Form 8-K dated August 24, 2009. | |
| 10.17 | Extension, Amendment and Confirmation Letter dated October 4, 2012 among Zellstoff—und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, D&Z Beteiligungs GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-Q dated November 2, 2012. | |
| 10.18 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated November 30, 2009. | |
| 14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |
| 99.1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | |
| 99.2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | |
| 99.3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 99.4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 99.5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 21 | List of Subsidiaries of Registrant. | |
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | Section 302 Certificate of Chief Executive Officer. | |
| 31.2 | Section 302 Certificate of Chief Financial Officer. | |
| 32.1** | Section 906 Certificate of Chief Executive Officer. | |
| 32.2** | Section 906 Certificate of Chief Financial Officer. | |
| * | Filed inForm 10-K for prior years. |
| ** | In accordance with Release33-8212 of the Commission, these Certifications: (i) are “furnished” to the Commission and are not “filed” for the purposes of liability under the Exchange Act; and (ii) are not to be subject to automatic incorporation by reference into any of our Company’s registration statements filed under the Securities Act for the purposes of liability thereunder or any offering memorandum, unless our Company specifically incorporates them by reference therein. |
69
Mercer International Inc. We have audited the accompanying consolidated balance sheets of Mercer International Inc. and its subsidiaries as We conducted our A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures INDEPENDENT AUDITORS’ REPORTand Shareholders ofWe have completed integrated audits of Mercer International Inc.’s 2009, 2008 and 2007 consolidated financial statements and of its internal control over financial reporting as at December 31, 2009. Our opinions, based on our audits, are presented below.Consolidated financial statementsatof December 31, 20092012 and December 31, 2008,2011 and the related consolidated statementstatements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three yearthree-year period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.conducted our audits of the Company’s financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009 in accordance with accounting principles generally accepted in the United States.Internal control over financial reportingWe have also audited Mercer International Inc.’s and its subsidiaries’ internal control over financial reporting as atof December 31, 2009,2012, based on criteria established inInternal Control —- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s managementManagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting.Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and on the Company’scompany’s internal control over financial reporting based on our audit.audit of internal control over financial reportingaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. AnOur audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting includesincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audits also included performing such other procedures as we considerconsidered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.thatthat: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable70
In our opinion, the Companyconsolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercer International Inc. and its subsidiaries as of December 31, 2012 and December 31, 2011 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Mercer International Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as atof December 31, 20092012, based on criteria established in Internal Control — Control—Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
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| December 31, | ||||||||
| 2009 | 2008 | |||||||
ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents (Note 2) | € | 51,291 | € | 42,452 | ||||
| Cash, restricted (Note 2) | — | 13,000 | ||||||
| Receivables (Note 3) | 71,523 | 100,158 | ||||||
| Inventories (Note 4) | 72,629 | 98,457 | ||||||
| Prepaid expenses and other | 6,362 | 4,834 | ||||||
| Total current assets | 201,805 | 258,901 | ||||||
| Long-term assets | ||||||||
| Property, plant and equipment (Note 5) | 868,558 | 881,704 | ||||||
| Deferred note issuance and other | 7,315 | 4,430 | ||||||
| Deferred income tax (Note 9) | 3,426 | 3,036 | ||||||
| Note receivable | 2,727 | 3,529 | ||||||
| 882,026 | 892,699 | |||||||
| Total assets | € | 1,083,831 | € | 1,151,600 | ||||
LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses (Note 6) | € | 85,185 | € | 87,517 | ||||
| Pension and other post-retirement benefit obligations (Note 8) | 567 | 510 | ||||||
| Debt (Note 7) | 16,032 | 16,500 | ||||||
| Total current liabilities | 101,784 | 104,527 | ||||||
| Long-term liabilities | ||||||||
| Debt (Note 7) | 813,142 | 837,918 | ||||||
| Unrealized interest rate derivative losses (Note 14) | 52,873 | 47,112 | ||||||
| Pension and other post-retirement benefit obligations (Note 8) | 17,902 | 12,846 | ||||||
| Capital leases and other (Note 15) | 12,157 | 11,267 | ||||||
| Deferred income tax (Note 9) | — | 5,827 | ||||||
| 896,074 | 914,970 | |||||||
| Total liabilities | 997,858 | 1,019,497 | ||||||
EQUITY | ||||||||
| Shareholders’ equity | ||||||||
| Share capital (Note 10) | 202,844 | 202,844 | ||||||
| Paid-in capital | (6,082 | ) | 299 | |||||
| Retained earnings (deficit) | (97,235 | ) | (35,046 | ) | ||||
| Accumulated other comprehensive income (loss) | 23,695 | (1,872 | ) | |||||
| Total shareholders’ equity | 123,222 | 166,225 | ||||||
| Noncontrolling interest (deficit) (Note 17) | € | (37,249 | ) | € | (34,122 | ) | ||
| Total equity | 85,973 | 132,103 | ||||||
| Total liabilities and equity | € | 1,083,831 | € | 1,151,600 | ||||
| Commitments and contingencies (Note 16) | ||||||||
| Subsequent events (Note 18) | ||||||||
72
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Revenues | ||||||||||||
| Pulp | € | 577,298 | € | 689,320 | € | 704,391 | ||||||
| Energy | 42,501 | 30,971 | 22,904 | |||||||||
| 619,799 | 720,291 | 727,295 | ||||||||||
| Costs and expenses | ||||||||||||
| Operating costs | 551,781 | 626,933 | 575,238 | |||||||||
| Operating depreciation and amortization | 53,919 | 55,484 | 56,400 | |||||||||
| 14,099 | 37,874 | 95,657 | ||||||||||
| Selling, general and administrative expenses | 27,414 | 30,158 | 30,714 | |||||||||
| Purchase (sale) of emission allowances | (516 | ) | (5,613 | ) | (4,643 | ) | ||||||
| Operating income (loss) | (12,799 | ) | 13,329 | 69,586 | ||||||||
| Other income (expense) | ||||||||||||
| Interest expense | (64,770 | ) | (65,756 | ) | (71,400 | ) | ||||||
| Investment income (loss) | (1,804 | ) | (1,174 | ) | 4,453 | |||||||
| Foreign exchange gain (loss) on debt | 2,692 | (4,234 | ) | 10,958 | ||||||||
| Gain on extinguishment of convertible notes | 4,447 | — | — | |||||||||
| Gain (loss) on derivative instruments (Note 14) | (5,760 | ) | (25,228 | ) | 20,357 | |||||||
| Total other income (expense) | (65,195 | ) | (96,392 | ) | (35,632 | ) | ||||||
| Income (loss) from continuing operations before income taxes | (77,994 | ) | (83,063 | ) | 33,954 | |||||||
| Income tax benefit (provision) | ||||||||||||
| — current | (134 | ) | (501 | ) | (2,170 | ) | ||||||
| — deferred (Note 9) | 6,003 | (1,976 | ) | (8,144 | ) | |||||||
| Income (loss) from continuing operations after income taxes | (72,125 | ) | (85,540 | ) | 23,640 | |||||||
| Discontinued operations after income taxes | — | — | (210 | ) | ||||||||
| Net income (loss) | (72,125 | ) | (85,540 | ) | 23,430 | |||||||
| Less: net loss (income) attributable to noncontrolling interest | 9,936 | 13,075 | (1,251 | ) | ||||||||
| Net income (loss) attributable to common shareholders | € | (62,189 | ) | € | (72,465 | ) | € | 22,179 | ||||
| Retained earnings (deficit), beginning of period | (35,046 | ) | 37,419 | 15,240 | ||||||||
| Retained earnings (deficit), end of period | € | (97,235 | ) | € | (35,046 | ) | € | 37,419 | ||||
| Net income (loss) per share attributable to common shareholders from continuing operations (Note 12) | ||||||||||||
| Basic | € | (1.71 | ) | € | (2.00 | ) | € | 0.62 | ||||
| Diluted | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | ||||
| Net income (loss) per share attributable to common shareholders (Note 12) | ||||||||||||
| Basic | € | (1.71 | ) | € | (2.00 | ) | € | 0.61 | ||||
| Diluted | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | ||||
73
(In thousands of Euros)
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net income (loss) | € | (72,125 | ) | € | (85,540 | ) | € | 23,430 | ||||
| Other comprehensive income (loss) | ||||||||||||
| Foreign currency translation adjustment | 28,316 | (41,876 | ) | 29,214 | ||||||||
| Pension income (expense) (Note 8) | (3,128 | ) | 4,079 | (809 | ) | |||||||
| Unrealized gains (losses) on securities arising during the year | 379 | (340 | ) | 95 | ||||||||
| Other comprehensive income (loss) | 25,567 | (38,137 | ) | 28,500 | ||||||||
| Total comprehensive income (loss) | (46,558 | ) | (123,677 | ) | 51,930 | |||||||
| Comprehensive (income) loss attributable to noncontrolling interest | 9,936 | 13,075 | (1,251 | ) | ||||||||
| Comprehensive income (loss) attributable to common shareholders | € | (36,622 | ) | € | (110,602 | ) | € | 50,679 | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 2) | € | 104,239 | € | 105,072 | ||||
Marketable securities (Note 3) | — | 12,216 | ||||||
Receivables (Note 4) | 110,087 | 120,487 | ||||||
Inventories (Note 5) | 118,300 | 120,539 | ||||||
Prepaid expenses and other | 7,907 | 8,162 | ||||||
Deferred income tax (Note 10) | 4,465 | 6,750 | ||||||
|
|
|
| |||||
Total current assets | 344,998 | 373,226 | ||||||
|
|
|
| |||||
Long-term assets | ||||||||
Property, plant and equipment (Note 6) | 808,878 | 820,974 | ||||||
Deferred note issuance and other | 12,162 | 10,763 | ||||||
Deferred income tax (Note 10) | 17,565 | 12,287 | ||||||
|
|
|
| |||||
| 838,605 | 844,024 | |||||||
|
|
|
| |||||
Total assets | € | 1,183,603 | € | 1,217,250 | ||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable and other (Note 7) | € | 89,950 | € | 99,640 | ||||
Pension and other post-retirement benefit obligations (Note 9) | 813 | 756 | ||||||
Debt (Note 8) | 45,662 | 25,671 | ||||||
|
|
|
| |||||
Total current liabilities | 136,425 | 126,067 | ||||||
|
|
|
| |||||
Long-term liabilities | ||||||||
Debt (Note 8) | 665,741 | 708,415 | ||||||
Unrealized interest rate derivative losses (Note 16) | 50,678 | 52,391 | ||||||
Pension and other post-retirement benefit obligations (Note 9) | 32,141 | 31,197 | ||||||
Capital leases and other (Note 18) | 13,936 | 13,053 | ||||||
Deferred income tax (Note 10) | 5,757 | 2,585 | ||||||
|
|
|
| |||||
| 768,253 | 807,641 | |||||||
|
|
|
| |||||
Total liabilities | 904,678 | 933,708 | ||||||
|
|
|
| |||||
EQUITY | ||||||||
Shareholders’ equity | ||||||||
Share capital (Note 11) | 248,371 | 247,642 | ||||||
Paid-in capital | (3,547 | ) | (4,857 | ) | ||||
Retained earnings | 25,800 | 37,985 | ||||||
Accumulated other comprehensive income (Note 13) | 25,181 | 21,346 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 295,805 | 302,116 | ||||||
|
|
|
| |||||
Noncontrolling deficit | (16,880 | ) | (18,574 | ) | ||||
|
|
|
| |||||
Total equity | 278,925 | 283,542 | ||||||
|
|
|
| |||||
Total liabilities and equity | € | 1,183,603 | € | 1,217,250 | ||||
|
|
|
| |||||
Commitments and contingencies (Note 19) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
74
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
OPERATIONS
(In thousands of Euros)Euros, except per share data)
| Accumulated Other | ||||||||||||||||||||||||||||||||||||||||
| Common Shares | Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
| Amount | Foreign | Defined | Unrealized | |||||||||||||||||||||||||||||||||||||
| Paid in | Retained | Currency | Benefit | Gains | ||||||||||||||||||||||||||||||||||||
| Number | Excess of | Paid-in | Earnings | Translation | Pension | (Losses) on | Shareholders’ | |||||||||||||||||||||||||||||||||
| of Shares | Par Value | Par Value | Capital | (Deficit) | Adjustments | Plans | Securities | Total | Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2006 | 35,465,176 | € | 26,961 | € | 168,681 | € | 154 | € | 15,240 | € | 11,885 | € | (4,120 | ) | € | - | € | 7,765 | € | 218,801 | ||||||||||||||||||||
| Shares issued on exercise of stock options | 56,666 | 43 | 261 | — | — | — | — | — | — | 304 | ||||||||||||||||||||||||||||||
| Shares issued on grants of restricted stock | 21,000 | 15 | 145 | — | — | — | — | — | — | 160 | ||||||||||||||||||||||||||||||
| Shares issued on repurchase of notes | 742,185 | 557 | 6,181 | — | — | — | — | — | — | 6,738 | ||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | (20 | ) | — | — | — | — | — | (20 | ) | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | 22,179 | — | — | — | — | 22,179 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | 29,214 | (809 | ) | 95 | 28,500 | 28,500 | |||||||||||||||||||||||||||||
| Balance at December 31, 2007 | 36,285,027 | € | 27,576 | € | 175,268 | € | 134 | € | 37,419 | € | 41,099 | € | (4,929 | ) | € | 95 | € | 36,265 | € | 276,662 | ||||||||||||||||||||
| Shares issued on grants of restricted stock | 21,000 | — | — | 61 | — | — | — | — | — | 61 | ||||||||||||||||||||||||||||||
| Shares issued on grants of performance stock | 116,460 | — | — | 29 | — | — | — | — | — | 29 | ||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | 75 | — | — | — | — | — | 75 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (72,465 | ) | — | — | — | — | (72,465 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | (41,876 | ) | 4,079 | (340 | ) | (38,137 | ) | (38,137 | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2008 | 36,422,487 | € | 27,576 | € | 175,268 | € | 299 | € | (35,046 | ) | € | (777 | ) | € | (850 | ) | € | (245 | ) | € | (1,872 | ) | € | 166,225 | ||||||||||||||||
| Capital contribution to acquire additional 4.32% of Stendal Mill | — | — | — | (6,809 | ) | — | — | — | — | — | (6,809 | ) | ||||||||||||||||||||||||||||
| Shares issued on grants of restricted stock | 21,000 | — | — | 52 | — | — | — | — | 52 | |||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | 376 | — | — | — | — | — | 376 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (62,189 | ) | — | — | — | — | (62,189 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | 28,316 | (3,128 | ) | 379 | 25,567 | 25,567 | |||||||||||||||||||||||||||||
| Balance at December 31, 2009 | 36,443,487 | € | 27,576 | € | 175,268 | € | (6,082 | ) | € | (97,235 | ) | € | 27,539 | € | (3,978 | ) | € | 134 | € | 23,695 | € | 123,222 | ||||||||||||||||||
| For the Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Revenues | ||||||||||||
Pulp | € | 761,854 | € | 831,396 | € | 856,311 | ||||||
Energy and chemicals | 72,289 | 68,079 | 49,288 | |||||||||
|
|
|
|
|
| |||||||
| 834,143 | 899,475 | 905,599 | ||||||||||
Costs and expenses | ||||||||||||
Operating costs | 689,052 | 693,825 | 648,592 | |||||||||
Operating depreciation and amortization | 57,776 | 55,760 | 55,932 | |||||||||
|
|
|
|
|
| |||||||
| 87,315 | 149,890 | 201,075 | ||||||||||
Selling, general and administrative expenses | 38,310 | 38,771 | 33,332 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 49,005 | 111,119 | 167,743 | |||||||||
|
|
|
|
|
| |||||||
Other income (expense) | ||||||||||||
Interest expense | (55,805 | ) | (58,995 | ) | (67,621 | ) | ||||||
Gain (loss) on derivative instruments (Note 16) | 3,741 | (1,418 | ) | 1,899 | ||||||||
Foreign exchange gain (loss) on debt | — | 1,175 | (6,126 | ) | ||||||||
Loss on extinguishment of debt (Note 8(b)) | (81 | ) | (71 | ) | (7,494 | ) | ||||||
Other income (expense) | (58 | ) | 1,501 | 468 | ||||||||
|
|
|
|
|
| |||||||
Total other income (expense) | (52,203 | ) | (57,808 | ) | (78,874 | ) | ||||||
|
|
|
|
|
| |||||||
Income (loss) before income taxes | (3,198 | ) | 53,311 | 88,869 | ||||||||
Income tax benefit (provision) (Note 10) | ||||||||||||
Current | (7,411 | ) | (1,682 | ) | (3,881 | ) | ||||||
Deferred | 118 | 2,377 | 9,760 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) | (10,491 | ) | 54,006 | 94,748 | ||||||||
Less: net income attributable to noncontrolling interest | (1,694 | ) | (3,931 | ) | (8,469 | ) | ||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common shareholders | € | (12,185 | ) | € | 50,075 | € | 86,279 | |||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to common shareholders (Note 14) | ||||||||||||
Basic | € | (0.22 | ) | € | 1.00 | € | 2.24 | |||||
Diluted | € | (0.22 | ) | € | 0.89 | € | 1.56 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
75
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPREHENSIVE INCOME (LOSS)
(In thousands of Euros)
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Cash flows from (used in) operating activities | ||||||||||||
| Net income (loss) attributable to common shareholders | € | (62,189 | ) | € | (72,465 | ) | € | 22,179 | ||||
| Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
| Loss (gain) on derivative instruments | 5,760 | 25,228 | (13,537 | ) | ||||||||
| Foreign exchange (gain) loss on debt | (2,692 | ) | 4,234 | (10,958 | ) | |||||||
| Gain on extinguishment of convertible notes | (4,447 | ) | — | — | ||||||||
| Depreciation and amortization | 54,170 | 55,762 | 56,658 | |||||||||
| Accretion (income) expense | 181 | — | — | |||||||||
| Noncontrolling interest | (9,936 | ) | (13,075 | ) | 1,251 | |||||||
| Deferred income taxes | (6,003 | ) | 1,976 | 8,144 | ||||||||
| Stock compensation expense | 455 | 264 | 243 | |||||||||
| Pension and other post-retirement expense, net of funding | 282 | (758 | ) | (215 | ) | |||||||
| Inventory provisions | — | 11,272 | — | |||||||||
| Other | �� | 2,485 | 3,025 | 3,442 | ||||||||
| Changes in current assets and liabilities | ||||||||||||
| Receivables | 32,105 | (14,811 | ) | (11,890 | ) | |||||||
| Inventories | 32,158 | (13,331 | ) | (38,703 | ) | |||||||
| Accounts payable and accrued expenses | (2,950 | ) | (1,091 | ) | 2,088 | |||||||
| Other | (2,060 | ) | 1,904 | 447 | ||||||||
| Net cash from (used in) operating activities | 37,319 | (11,866 | ) | 19,149 | ||||||||
| Cash flows from (used in) investing activities | ||||||||||||
| Purchase of property, plant and equipment(1) | (28,828 | ) | (25,704 | ) | (4,864 | ) | ||||||
| Proceeds on sale of property, plant and equipment | 436 | 2,000 | 881 | |||||||||
| Cash, restricted | 13,000 | 20,000 | 24,000 | |||||||||
| Note receivable | 152 | 5,708 | 4,954 | |||||||||
| Net cash from (used in) investing activities | (15,240 | ) | 2,004 | 24,971 | ||||||||
| Cash flows from (used in) financing activities | ||||||||||||
| Repayment of notes payable and debt | (20,771 | ) | (34,023 | ) | (26,719 | ) | ||||||
| Repayment of capital lease obligations | (3,178 | ) | (3,312 | ) | (5,562 | ) | ||||||
| Proceeds from borrowings of notes payable and debt | 3,511 | 5,837 | — | |||||||||
| Proceeds from government investment grants | 9,058 | 266 | 1,236 | |||||||||
| Issuance of common shares | — | — | 305 | |||||||||
| Payment of deferred note issuance costs | (1,969 | ) | — | — | ||||||||
| Net cash from (used in) financing activities | (13,349 | ) | (31,232 | ) | (30,740 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 109 | (1,302 | ) | 1,664 | ||||||||
| Net increase (decrease) in cash and cash equivalents | 8,839 | (42,396 | ) | 15,044 | ||||||||
| Cash and cash equivalents, beginning of period | 42,452 | 84,848 | 69,804 | |||||||||
| Cash and cash equivalents, end of period | € | 51,291 | € | 42,452 | € | 84,848 | ||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Cash paid (received) during the period for | ||||||||||||
| Interest | € | 62,022 | € | 60,652 | € | 73,318 | ||||||
| Income taxes | 377 | 1,100 | 452 | |||||||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||||||
| Acquisition of production and other equipment under capital lease obligations | € | 625 | € | 5,318 | € | 2,110 | ||||||
| Increase (decrease) in accounts payable relating to investing activities | (1,471 | ) | 2,627 | — | ||||||||
| For the Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Net income (loss) | € | (10,491 | ) | € | 54,006 | € | 94,748 | |||||
Other comprehensive income (loss), net of taxes | ||||||||||||
Foreign currency translation adjustments, net of tax benefit of €353 (2011 – expense of €683; 2010 – €nil) | 4,464 | (2,305 | ) | 11,333 | ||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans, net of tax benefit of €nil (2011 – €nil; 2010 – €nil) (Note 9) | (628 | ) | (8,049 | ) | (3,314 | ) | ||||||
Change in unrealized losses on marketable securities, net of tax benefit of €nil (2011 – €nil; 2010 – €nil) | (1 | ) | (12 | ) | (2 | ) | ||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), net of taxes | 3,835 | (10,366 | ) | 8,017 | ||||||||
|
|
|
|
|
| |||||||
Total comprehensive income (loss) | (6,656 | ) | 43,640 | 102,765 | ||||||||
Comprehensive income attributable to noncontrolling interest | (1,694 | ) | (3,931 | ) | (8,469 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) attributable to common shareholders | € | (8,350 | ) | € | 39,709 | € | 94,296 | |||||
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|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
76
(In thousands of Euros)
| Common shares | ||||||||||||||||||||||||||||||||||||
| Number of Shares (thousands of shares) | Par Value | Amount Paid in Excess of Par Value | Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Shareholders’ Equity | Noncontrolling Interest (Deficit) | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2009 | 36,443 | € | 27,576 | € | 175,268 | € | (6,082 | ) | € | (97,235 | ) | € | 23,695 | € | 123,222 | € | (37,249 | ) | € | 85,973 | ||||||||||||||||
Shares issued on grants of restricted shares | 56 | — | — | 153 | — | — | 153 | — | 153 | |||||||||||||||||||||||||||
Shares issued on conversion of convertible notes | 6,500 | 4,961 | 11,406 | — | — | — | 16,367 | — | 16,367 | |||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 2,030 | — | — | 2,030 | — | 2,030 | |||||||||||||||||||||||||||
Net income | — | — | — | — | 86,279 | — | 86,279 | 8,469 | 94,748 | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 11,333 | 11,333 | — | 11,333 | |||||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | (3,314 | ) | (3,314 | ) | — | (3,314 | ) | ||||||||||||||||||||||||
Conversion of shareholder loans to a capital contribution | — | — | — | — | — | — | — | 6,275 | 6,275 | |||||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (2 | ) | (2 | ) | — | (2 | ) | ||||||||||||||||||||||||
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| |||||||||||||||||||
Balance at December 31, 2010 | 42,999 | 32,537 | 186,674 | (3,899 | ) | (10,956 | ) | 31,712 | 236,068 | (22,505 | ) | 213,563 | ||||||||||||||||||||||||
Shares issued on grants of restricted shares | 238 | 74 | 296 | (370 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Shares issued on grants of performance shares | 358 | 243 | 3,585 | (3,828 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Shares issued on conversion of convertible notes | 13,447 | 9,499 | 21,076 | — | — | — | 30,575 | — | 30,575 | |||||||||||||||||||||||||||
Treasury shares retired | (1,263 | ) | (971 | ) | (5,371 | ) | — | (1,134 | ) | — | (7,476 | ) | — | (7,476 | ) | |||||||||||||||||||||
Stock compensation expense | — | — | — | 3,240 | — | — | 3,240 | — | 3,240 | |||||||||||||||||||||||||||
Net income | — | — | — | — | 50,075 | — | 50,075 | 3,931 | 54,006 | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | (2,305 | ) | (2,305 | ) | — | (2,305 | ) | ||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | (8,049 | ) | (8,049 | ) | — | (8,049 | ) | ||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (12 | ) | (12 | ) | — | (12 | ) | ||||||||||||||||||||||||
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| |||||||||||||||||||
Balance at December 31, 2011 | 55,779 | 41,382 | 206,260 | (4,857 | ) | 37,985 | 21,346 | 302,116 | (18,574 | ) | 283,542 | |||||||||||||||||||||||||
Shares issued on grants of restricted shares | 37 | 57 | 672 | (729 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 2,039 | — | — | 2,039 | — | 2,039 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (12,185 | ) | — | (12,185 | ) | 1,694 | (10,491 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 4,464 | 4,464 | — | 4,464 | |||||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | (628 | ) | (628 | ) | — | (628 | ) | ||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||||||||||||||
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Balance at December 31, 2012 | 55,816 | € | 41,439 | € | 206,932 | € | (3,547 | ) | € | 25,800 | € | 25,181 | € | 295,805 | € | (16,880 | ) | € | 278,925 | |||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Euros)
| For the Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | € | (10,491 | ) | € | 54,006 | € | 94,748 | |||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | (2,477 | ) | 1,418 | (1,899 | ) | |||||||
Foreign exchange loss (gain) on debt | — | (1,175 | ) | 6,126 | ||||||||
Loss on extinguishment of debt | 81 | 71 | 7,494 | |||||||||
Depreciation and amortization | 58,052 | 56,005 | 56,231 | |||||||||
Deferred income taxes | (118 | ) | (2,377 | ) | (9,760 | ) | ||||||
Stock compensation expense | 2,039 | 3,310 | 2,394 | |||||||||
Pension and other post-retirement expense, net of funding | 284 | (269 | ) | 418 | ||||||||
Other | 3,801 | 1,905 | 7,682 | |||||||||
Changes in working capital | ||||||||||||
Receivables | 8,394 | (1,604 | ) | (40,038 | ) | |||||||
Inventories | 1,342 | (17,713 | ) | (24,462 | ) | |||||||
Accounts payable and accrued expenses | (13,990 | ) | 14,252 | (3,089 | ) | |||||||
Other | (944 | ) | 3,226 | (4,566 | ) | |||||||
|
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| |||||||
Net cash from (used in) operating activities | 45,973 | 111,055 | 91,279 | |||||||||
|
|
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| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (36,704 | ) | (37,809 | ) | (38,300 | ) | ||||||
Proceeds on sale of property, plant and equipment | 653 | 813 | 1,138 | |||||||||
Purchase of marketable securities | — | (12,187 | ) | — | ||||||||
Proceeds on maturity of marketable securities | 12,213 | — | — | |||||||||
Note receivable | — | 2,865 | 1,113 | |||||||||
|
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| |||||||
Net cash from (used in) investing activities | (23,838 | ) | (46,318 | ) | (36,049 | ) | ||||||
|
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| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (27,254 | ) | (49,193 | ) | (234,582 | ) | ||||||
Proceeds from borrowings of note payable and debt | — | — | 222,177 | |||||||||
Repayment of capital lease obligations | (2,125 | ) | (2,942 | ) | (2,920 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | 4,559 | (14,652 | ) | (2,660 | ) | |||||||
Payment of note issuance costs | (1,933 | ) | — | (6,095 | ) | |||||||
Proceeds from government grants | 3,888 | 14,199 | 17,952 | |||||||||
Purchase of treasury shares | — | (7,476 | ) | — | ||||||||
|
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| |||||||
Net cash from (used in) financing activities | (22,865 | ) | (60,064 | ) | (6,128 | ) | ||||||
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| |||||||
Effect of exchange rate changes on cash and cash equivalents | (103 | ) | 1,377 | (1,371 | ) | |||||||
|
|
|
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|
| |||||||
Net increase (decrease) in cash and cash equivalents | (833 | ) | 6,050 | 47,731 | ||||||||
Cash and cash equivalents, beginning of year | 105,072 | 99,022 | 51,291 | |||||||||
|
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|
| |||||||
Cash and cash equivalents, end of year | € | 104,239 | € | 105,072 | € | 99,022 | ||||||
|
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|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of Euros)
| For the Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the year for | ||||||||||||
Interest | € | 51,845 | € | 57,725 | € | 65,167 | ||||||
Income taxes | 3,890 | 3,197 | 461 | |||||||||
Supplemental schedule of non-cash investing and financing activities | ||||||||||||
Acquisition of production and other equipment under capital lease obligations | € | 2,059 | € | 2,782 | € | 2,087 | ||||||
Increase (decrease) in accounts payable for property, plant and equipment | 6,210 | 324 | (1,070 | ) | ||||||||
Increase (decrease) in receivables of government grants for long-term assets | (2,559 | ) | (6,835 | ) | 7,492 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies
|
Mercer International Inc. (“Mercer Inc.” or the “Company”) is a Washington corporation and the Company’s shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange, respectively. The Company converted its corporate form from a Washington business trust to a corporation effective March 1, 2006 without effecting any changes to its business, management, accounting practices, assets or liabilities.
Mercer Inc. operates three pulp manufacturing facilities, one in Canada and two in Germany, and is one of the largest producers of market northern bleached softwood kraft or “NBSK”,(“NBSK”) pulp in the world.
In these consolidated financial statements,Consolidated Financial Statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.
Basis of Presentation
These consolidated financial statementsConsolidated Financial Statements contained herein include the accounts of the Company and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). All significant inter-company balances and transactionsThe Company’s consolidated financial statements have been eliminated upon consolidation.
Use of Estimates
Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgementjudgment is required in determining the accounting for, among other things, the accounting for doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in bank accounts and highly liquid money market investments with original maturities of three months or less.
Investments
Investments in entities where the Company hasdebt securities and equity investments in publicly traded companies in which it has less than 20% of the voting interest and in which itCompany does not exercise significant influence are classified asavailable-for-sale securities. These securities are reported in long-term assets at fair values; based upon quoted market prices, with the unrealized gains or losses included in accumulated other comprehensive income as a separate component of shareholders’ equity, until realized. If a loss in value inavailable-for-sale securities is considered to be other than temporary, the loss is recognized in the determination of net income. The cost of all securities sold is based on the specific identification method to determine realized gains or losses.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Inventories
Inventories of pulpraw materials, finished goods and logs and wood chipswork in progress are valued at the lower of cost, using the weighted-average cost method, or net realizable value. Other materials and suppliesspare parts are valued at the lower of cost and replacement cost. Cost includes labor, materials and production overhead and is determined by using the weighted average cost method. InventoriesRaw materials inventories include both roundwood (logs) and wood chips. These inventories are located both at the pulp millmills and at various offsite locations. In accordance with industry practice, physical inventory counts utilize standardized techniques to estimate quantities of roundwood and wood chip inventory volumes. These techniques historically have provided reasonable estimates of such inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production equipment and other equipment primarily over 25 years.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset.
The costs of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized, as well as interest costs associated with major capital projects until ready for their intended use. The cost of repairs and maintenance as well as planned shutdown maintenance performed on manufacturing facilities, composed of labor, materials and other incremental costs, is charged to operations as incurred.
Leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term. Operating lease payments are recognized as an expense in the Consolidated Statement of Operations on a straight-line basis over the lease term.
The Company provides for asset retirement obligations when there areis a legislated or contractual basesbasis for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increase to property, plant, and equipment, and are amortized over the remaining useful life of the related assets. The liability is accreted using a risk freerisk-free interest rate.
Asset Retirement and EnvironmentTopic ASC 410, (“ASC 410”), originally released as FASB Statement Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations(“FIN 47”). Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout its older facilities. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to estimate the fair value of its asbestos removal and disposal obligation.
The Company records investment grants from federal and state governments when theythe conditions of their receipt are complied with and there is reasonable assurance that the grants will be received. Grants related to assets are government grants whose primary condition is that the company qualifying for them should purchase, construct or otherwise acquire long-term assets. Secondary conditions may also be attached, including restricting the
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. | The Company and Summary |
Grants related to income are government grants which are either unconditional, related to reduced environmental emissions or related to the Company’s normal business operations, and are reported as a reduction of related expenses in the Consolidated Statement of Operations when received.
The Company is required to pay certain fees based on water consumption levels at its German mills. Accrued fees can be reduced by wastewater grants upon the mills’ demonstration of reduced environmental emissions. The fees are expensed as incurred and the grants are recognized once the German regulators have evaluated and accepted the measurement of the wastewater emission reduction. There may be a significant period of time between recognition of the wastewater expense and recognition of the wastewater grant.
To the extent that government grants have been received and not applied, these grants are recorded in cash with a corresponding adjustment to accounts payable and other in the “Accounts Payable and accrued expenses”Consolidated Balance Sheet due to the short-term nature of the related payments.
Deferred Note Issuance Costs
Note issuance costs are deferred and amortized as a component of interest expense in the Consolidated Statement of Operations over the term of the related debt instrument.
Pensions
The Company maintains a defined benefit pension plan for its salaried employees at its Celgar mill which is funded and non-contributory. The cost of the benefits earned by the salaried employees is determined using the projected benefit method pro ratedprorated on services. The pension expense reflects the current service cost, the interest on the unfunded liability and the amortization over the estimated average remaining service life of the employees of (i) the unfunded liabilityprior service costs, and (ii) experience gainsthe net actuarial gain or losses.
In addition, hourly-paid employees at the Celgar mill are covered by a multi-employer defined contributionmultiemployer pension plan for which contributions are charged against earnings in the Consolidated Statement of Operations.
Foreign Operations and Currency Translation
The Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in Euros, at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Transaction gains and losses related to net assets primarily located in Canada are recognized as unrealized foreign currency translation adjustments within accumulated other comprehensive income (loss) in shareholders’ equity, until all of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax when the Company expects earnings of the foreign subsidiary to reinvestbe indefinitely reinvested. The income tax effect on currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes in the amounts indefinitely in operations.Consolidated Balance Sheet with an offset to other comprehensive income. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in “Costscosts and expenses”expenses in the Consolidated Statement of Operations.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Revenue and Related Cost Recognition
The Company recognizes revenue from product, sales, transportation, chemical and other sales when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, title of ownership and risk of loss have passed to the customer and collectability is reasonably assured. Sales are reported net of discounts and allowances.
79
The Company increased its focus on the production and sale of surplus electricity. Accordingly, management no longer considered this activity to be a by-product and, commencing in 2008, the Company began reportingreports revenue from sales of surplus electricity and the sale of chemicals as “Energy revenue”energy and chemical revenues in the Consolidated Statement of Operations. In previous years, these revenues were being reported within “Operating costs”. Consequently, the presentation in the Consolidated Statement of Operations has been revised for the Company’s energy sales. Energy revenues are recognized as the electricity is consumed by the customers are invoiced at agreed upon rates and when collection is reasonably assured. These revenues include an estimate of the value of electricity consumed bytransferred to customers in the year but billed subsequent to year-end. Customer bills are based on agreed upon rates and meter readings that indicate electricity consumption. This activity does not meet the tests to be considered an operating segment, as defined in the
Segment ReportingTopic ASC 280 (“ASC280-10”), originally released as FASB No. 131,Disclosures about Segments of an Enterprise and Related Information.
Liabilities for environmental conservation are recorded when it is probable that obligations have been incurred and their fair value can be reasonably estimated. Any potential recoveries of such liabilities are recorded when there is an agreement with the reimbursing entity and recovery is assessed as likely to occur.
Stock-Based Compensation
The Company recognizes stock-based compensation expense over an award’s vesting period based on the award’s fair value. Stock based compensation expense has been recordedvalue in “Selling,selling, general, and administrative expenses” inexpenses within the Consolidated Statement of Operations.
The fair value of performance stock awardsshare units is re-measured at each balance sheet date.date by multiplying the market price of a share of Mercer Inc. common shares by the expected number of common shares to be awarded. The cumulative effect of the change in fair value is recognized in the period of the change as an adjustment to compensation cost. The Company estimates forfeitures of performance stock awardsshare units based on management’s expectations and recognizes compensation cost only for those awards expected to vest. Estimated forfeitures are adjusted to actual experience as needed.
The fair value of restricted stockshare awards areis determined by multiplying the market price of a share of Mercer Inc. common shares on the grant date by the number of units.
Income Taxes
Deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided if, after considering available evidence, both positive and negative available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Deferred income taxes are determined separately for each tax-paying component of the Company. For each tax-paying component, all current deferred tax liabilities and assets shall beare offset and presented as a single net amount and all noncurrent deferred tax liabilities and assets shall beare offset and presented as a single net amount.
80
The Company occasionally enters into derivative financial instruments, including foreign currency forward contracts, electricity forward contracts, and interest rate swaps, and pulp price swaps to limit exposures to changes in foreign currency exchange rates, energy prices, interest rates, and interest rates.pulp prices. These derivative instruments are not designated as hedging instruments under the guidance of theDerivatives and HedgingTopic ASC 815 (“ASC815-25”), originally released as FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activitiesand, accordingly, anyinstruments. The change in themarked-to-marketfair value of electricity derivative contracts is included in operating costs in the Consolidated Statement of Operations and any changes in the fair value of foreign currency, interest rate, and pulp price derivative contracts are recognized as either ain gain or loss(loss) on derivative financial instruments in the Consolidated Statement of Operations. Periodically, the Company enters into derivative contracts to supply materials for its own use and as such are exempt from mark to marketmark-to-market accounting.
Net Income (Loss) Per Share Attributable to Common Shareholders
Basic net income (loss) per share attributable to common shareholders (“EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted income (loss) per share attributable to common shareholders is calculated to give effect to all potentially dilutive common shares outstanding (computed under basic EPS) by applying the “Treasury Stock” and “If Converted”“If-Converted” methods. Outstanding stock options, restricted stock, awards such as restricted stock awards withshares, performance conditions (known as “performance stock”),shares, performance share units, and convertible notes represent the only potentially dilutive effects on the Company’s weighted average shares. See
Note 12-NetReclassifications Income (Loss) Per Share.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
Note 2. Cash and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance,Cash Equivalents
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Cash and cash equivalents | € | 104,239 | € | 105,072 | ||||
|
|
|
| |||||
Cash and cash flows;equivalents includes cash allocated for debt service reserves and for a transferor’s continuing involvement, if any, in transferred financial assets. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. This guidance must be appliedcapital project as of the beginning of the first annual reporting period that
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 3. Marketable Securities
The Company’s marketable securities at December 31, 2012 and 2011 are summarized as follows:
| December 31, 2012 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Long-term | ||||||||||||||||
Equity securities | € | 65 | € | 154 | € | (35 | ) | € | 184 | |||||||
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| |||||||||
| December 31, 2011 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Current | ||||||||||||||||
0.50% German federal government bonds due June 2012 | € | 2,008 | € | 3 | € | — | € | 2,011 | ||||||||
0.75% German federal government bonds due September 2012 | 7,036 | 19 | — | 7,055 | ||||||||||||
5.00% German federal government bonds due July 2012 | 3,143 | 7 | — | 3,150 | ||||||||||||
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| € | 12,187 | € | 29 | € | — | € | 12,216 | |||||||||
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Long-term | ||||||||||||||||
Equity securities | € | 65 | € | 132 | € | (41 | ) | € | 156 | |||||||
|
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In order to maintain the Company’s liquidity requirements and manage risk, the Company periodically invests in low risk and highly liquid marketable debt securities that first annual reporting periodare classified as available-for-sale investments and for interimaccordingly are carried at fair value. As at December31,2012, all debt securities had matured and annual reporting periods thereafter. Earlier application is prohibited. This guidance must be applied to transfers occurring on or after the effective date. Company realized a gain of €26 in other income (expense) in the Consolidated Statement of Operations.
The Company ishas also invested nominal amounts in equity securities. The equity securities are classified as available-for-sale investments and accordingly are carried at fair value. The Company recognizes any gross unrealized gains or losses through accumulated other comprehensive income, and records investments in long-term marketable securities in the process of determining the impact, if any, the adoption of this guidance will haveConsolidated Balance Sheet within deferred note issuance and other.
The Company reviews for other-than-temporary losses on its financial statementsa regular basis and disclosures.
715-20”), originally released as FASB Staff Position No. 132(R)-1,Employers’ Disclosures about Pensions and Other Postretirement Benefits. This topic provides guidance with respect to an employer’s (sponsor’s) disclosures about plan assets of a defined benefit pension or other postretirement plan and also requires disclosures about fair value measurements of plan assets. This guidance is effective for financial statements issued for fiscal years ending after December 15, 2009, and implementation is required to be prospective. Earlier application of the provisions is permitted. The Company adopted this guidance on December 31, 2009 and amended its presentation and disclosure accordingly. See Note 8 — Pension and Other Post-Retirement Obligations.
82
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Sale of pulp, energy and chemicals, net of allowance of €112 (2011 – €105) | € | 101,451 | € | 108,094 | ||||
Value added tax | 4,290 | 7,411 | ||||||
Other non-trade receivables | 4,346 | 4,982 | ||||||
|
|
|
| |||||
| € | 110,087 | € | 120,487 | |||||
|
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|
| |||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Cash and cash equivalents | € | 51,291 | € | 42,452 | ||||
| Cash, restricted | € | — | € | 13,000 | ||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sale of pulp (net of allowance of €952 and €614, respectively) | € | 64,864 | € | 85,120 | ||||
| Value added tax | 3,001 | 3,433 | ||||||
| Other | 3,658 | 11,605 | ||||||
| € | 71,523 | € | 100,158 | |||||
Note 4. Receivables (continued)
The Company reviews the collectability of receivables on a periodic basis.at each reporting date. The Company maintains an allowance for doubtful accounts at an amount estimated to cover the potential losses on certain uninsured receivables. Any amounts that are determined to be uncollectible and uninsured are offset against the allowance. The allowance is based on the Company’s evaluation of numerous factors, including the payment history and financial position of the debtors. The Company does not generally require collateral for any of its receivables.
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Raw materials | € | 24,888 | € | 38,225 | ||||
| Finished goods | 24,198 | 37,881 | ||||||
| Work in process and other | 23,543 | 22,351 | ||||||
| € | 72,629 | € | 98,457 | |||||
83
Note 5. Inventories
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Raw materials | € | 46,028 | € | 48,063 | ||||
Finished goods | 38,169 | 41,392 | ||||||
Spare parts and other | 34,103 | 31,084 | ||||||
|
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| |||||
| € | 118,300 | € | 120,539 | |||||
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| |||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Land | € | 24,921 | € | 24,661 | ||||
| Buildings | 126,570 | 125,046 | ||||||
| Production equipment and other | 1,098,380 | 1,061,991 | ||||||
| 1,249,871 | 1,211,698 | |||||||
| Less: Accumulated depreciation | (381,313 | ) | (329,994 | ) | ||||
| € | 868,558 | € | 881,704 | |||||
Note 6. Property, Plant and Equipment
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Land | € | 25,188 | € | 25,156 | ||||
Buildings | 134,394 | 133,316 | ||||||
Production equipment and other | 1,165,274 | 1,125,953 | ||||||
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| |||||
| 1,324,856 | 1,284,425 | |||||||
Less: accumulated depreciation | (515,978 | ) | (463,451 | ) | ||||
|
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| |||||
| € | 808,878 | € | 820,974 | |||||
|
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| |||||
As at December 31, 20092012, property, plant and equipment was net of €283,730€276,715 of unamortized government investment grants (2008 — €290,187)(2011 – €291,655).
As at December31,2012, included in production equipment and other is equipment under capital leases which had gross amounts of €17,465 as at December 31, 2009 (2008 — €17,682)€16,466 (2011 – €17,036), and accumulated depreciation of €9,280 as at December 31, 2009 (2008 — €6,837)€8,375 (2011 – €9,096). During the year, 2009 production equipment and other totalling €625€2,059 was acquired under capital lease obligations (2008 — €5,318; 2007 — €3,286)(2011 – €2,782; 2010 – €2,087).
The Company maintains industrial landfills on its premises for the disposal of waste, primarily from the mill’s pulp processing activities. The mills have obligations under their landfill permits to decommission these disposal facilities pursuant to certain regulations. As at December31, 2009,2012, the Company had recorded €3,912 (2008 — €4,107)€4,251 (2011 – €4,170) of asset retirement obligations.
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Trade payables | € | 31,771 | € | 31,140 | ||||
| Accounts payable and other | 1,225 | 4,559 | ||||||
| Accrued expenses | 31,441 | 31,181 | ||||||
| Accrued interest | 18,039 | 17,202 | ||||||
| Capital leases, current portion | 2,709 | 3,435 | ||||||
| € | 85,185 | € | 87,517 | |||||
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 7. Accounts Payable and Other
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Trade payables | € | 30,259 | € | 45,751 | ||||
Accrued expenses | 35,852 | 28,422 | ||||||
Accrued interest | 8,739 | 10,054 | ||||||
Capital leases, current portion (Note 18) | 1,958 | 2,505 | ||||||
Current taxes payable (Note 10) | 7,217 | 2,541 | ||||||
Other (a) | 5,925 | 10,367 | ||||||
|
|
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| |||||
| € | 89,950 | € | 99,640 | |||||
|
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|
| |||||
| (a) | |
| On January 28, 2011, the Company received approximately €10,000, which was intended to compensate the Company for remediation work that is required at the Stendal mill. The payment was recognized as an increase in cash and cash equivalents, and a corresponding increase in other accounts payable. As at December 31, 2012, the Company had €1,768 (2011 – €9,150) remaining in other accounts payable (see Note |
Note 8. Debt
Debt consists of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a) | € | 514,574 | € | 531,073 | ||||
Senior notes due February 2013, interest at 9.25% accrued and payablesemi-annually, unsecured (b) | 216,299 | 222,718 | ||||||
| Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (c)(2) | 16,749 | 48,319 | ||||||
| Subordinated convertible notes due January 2012, interest at 8.5% accrued and payable semi-annually (d) | 26,160 | — | ||||||
| Credit agreement with a lender with respect to a revolving credit facility of C$40 million (e) | 16,000 | 18,186 | ||||||
| Loan payable to the noncontrolling shareholder of the Stendal mill (f) | 35,881 | 34,122 | ||||||
| Credit agreement with a bank with respect to a revolving credit facility of €25,000 (g) | — | — | ||||||
| Investment loan agreement with a lender with respect to the wash press project at the Rosenthal mill of €4,351 (h) | 3,511 | — | ||||||
| 829,174 | 854,418 | |||||||
| Less: current portion | (16,032 | ) | (16,500 | ) | ||||
| Debt, less current portion(2) | € | 813,142 | € | 837,918 | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a) | € | 452,907 | € | 477,490 | ||||
Senior notes, interest at 9.50% accrued and payable semi-annually, unsecured (b) | 215,670 | 220,753 | ||||||
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (c) | 4,574 | — | ||||||
Term bank facility for a project at the Stendal mill of €17,000 (d) | — | — | ||||||
Loans payable to the noncontrolling shareholder of the Stendal mill (e) | 36,620 | 33,124 | ||||||
Investment loan agreement with a lender with respect to a project at the Rosenthal mill of €4,351 (f) | 1,632 | 2,719 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (g) | — | — | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €3,500 (h) | — | — | ||||||
|
|
|
| |||||
| 711,403 | 734,086 | |||||||
Less: current portion | (45,662 | ) | (25,671 | ) | ||||
|
|
|
| |||||
Debt, less current portion | € | 665,741 | € | 708,415 | ||||
|
|
|
| |||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
The Company made scheduled principal repayments under these facilities of €16,500€27,254 in 2009,2012, and expects the principal repayments to be €16,032€45,662 in 2010.2013. As of December 31, 2009,2012, the principal maturities of debt are as follows:
Matures | Amount | |||
| 2010 | € | 16,032 | ||
| 2011 | 24,223 | |||
| 2012 | 66,961 | |||
| 2013(1) | 273,170 | |||
| 2014 | 40,000 | |||
| Thereafter | 408,788 | |||
| € | 829,174 | |||
Matures | Amount | |||
2013 | € | 45,662 | ||
2014 | 40,544 | |||
2015 | 44,000 | |||
2016 | 44,000 | |||
2017 | 537,197 | |||
Thereafter | — | |||
|
| |||
| € | 711,403 | |||
|
| |||
Certain of the Company’s debt agreementsinstruments were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to other important qualifications andspecific exceptions. As at December 31, 2009,2012, the Company was in compliance with the terms of the indenture.
| (a) | Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus |
85
| installments beginning September 30, 2006 until September 30, 2017, collateralized by the gross assets of the Stendal mill, |
On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment deferred approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017. The amendment also provided for a 100% cash sweep, referred to as the “Cash Sweep”, of any cash, in excess of a €15,000 working capital reserve and the Guarantee Amount, as discussed in Note 19(b)—Commitments and Contingencies, and other amounts as contemplated in the amendment, held by Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Stendal Loan Facility during the then following 12 months, which means the DSRA is “Fully Funded”, and second to prepay the deferred principal amounts. As at December 31, 2012, the DSRA balance was €32,982 and was not Fully Funded.
| (b) | On November 17, 2010, | |
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
June 2013. During the year ended December 31, 2012, the Company purchased $2.0 million of its outstanding Senior Notes. During the year ended December 31, 2011, the Company purchased $13.6 million of its outstanding Senior Notes.
The Senior Notes are general unsecured senior obligations of the Company. The Senior Notes rank equal in right of payment with all existing and future senior unsecured indebtedness of the Company and senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all borrowings of the Company’s restricted subsidiaries, including borrowings under the Company’s credit agreements which are secured by certain assets of its restricted subsidiaries.
The Company may redeem all or a part of the Senior Notes, upon not less than 30 days’ or more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) equal to 104.75% for the twelve month period beginning on December 1, 2014, 102.38% for the twelve month period beginning on December 1, 2015, and 100.00% beginning on December 1, 2016 and at any time thereafter, plus accrued and unpaid interest.
| Credit agreement with respect to a revolving credit facility of up to C$40.0 million for the Celgar mill. |
| (e) | A loan of €25,128 payable by the Stendal mill to its noncontrolling shareholder |
In January 2012, the Stendal mill entered into two additional loans payable by the Stendal mill to its noncontrolling shareholder as part of the financing for Project Blue Mill. The first loan has a principal amount of €1,192 and the second loan has a principal amount of €440. Both loans bear interest at 7.00% per annum and are due in 2017, provided that the Project Blue Mill facility (Note 8(d)) and the Stendal Loan
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
Facility (Note 8(a)) have been fully repaid on such date. The second loan may be repaid prior to October 1, 2017 if the DSRA has been Fully Funded for the first time. The first loan is subordinated to all liabilities of the Stendal mill and the second loan is subordinated to all liabilities of the Stendal mill only until such time as the DSRA is Fully Funded for the first time.
As at December 31, 2012, accrued interest on these loans was €9,860 (2011 – €7,996).
| (g) | A €25,000 working capital facility at the Rosenthal |
| (h) |
Note 9. Pension and Other Post-Retirement Benefit Obligations
Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and GermanRosenthal mills.
Pension benefits are based on employee’semployees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions forduring the twelve month periodyear ended December 31, 2009 totalled €963 (2008 — €2,414)2012 totaled €2,288 (2011 – €2,039).
Effective December 31, 2008, the defined benefit plan was closed to new members. In addition, the defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the year ended December 31, 2012, the Company made contributions of approximately €1,844€618 (2011 – €524) to its defined contribution plans.
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Information about the Celgar Plans, in aggregate for the year ended December 31, 20092012 is as follows:
| 2009 | ||||||||||||
| Other | ||||||||||||
| Post-Retirement | ||||||||||||
| Benefit | ||||||||||||
| Pension | Obligations | Total | ||||||||||
| Change in benefit obligation | ||||||||||||
| Benefit obligation, December 31, 2008 | € | 20,028 | € | 10,297 | € | 30,325 | ||||||
| Service cost | 56 | 305 | 361 | |||||||||
| Interest cost | 1,513 | 785 | 2,298 | |||||||||
| Benefit payments | (1,715 | ) | (373 | ) | (2,088 | ) | ||||||
| Past service cost (credit) | — | (70 | ) | (70 | ) | |||||||
| Actuarial (gains) losses | 4,366 | (295 | ) | 4,071 | ||||||||
| Foreign currency exchange rate changes | 2,971 | 1,424 | 4,395 | |||||||||
| Benefit obligation, December 31, 2009 | 27,219 | 12,073 | 39,292 | |||||||||
| Reconciliation of fair value of plan assets | ||||||||||||
| Fair value of plan assets, December 31, 2008 | 17,098 | — | 17,098 | |||||||||
| Actual returns | 2,561 | — | 2,561 | |||||||||
| Contributions | 589 | 373 | 962 | |||||||||
| Benefit payments | (1,715 | ) | (373 | ) | (2,088 | ) | ||||||
| Foreign currency exchange rate changes | 2,414 | — | 2,414 | |||||||||
| Fair value of plan assets, December 31, 2009 | 20,947 | — | 20,947 | |||||||||
| Funded status, December 31, 2009(1) | € | (6,272 | ) | € | (12,073 | ) | € | (18,345 | ) | |||
| Components of the net benefit cost recognized | ||||||||||||
| Service cost | € | 56 | € | 305 | € | 361 | ||||||
| Interest cost | 1,513 | 785 | 2,298 | |||||||||
| Expected return on plan assets | (1,272 | ) | — | (1,272 | ) | |||||||
| Amortization of recognized items | 141 | (279 | ) | (138 | ) | |||||||
| Net benefit costs | € | 438 | € | 811 | € | 1,249 | ||||||
| 2012 | ||||||||||||
| Pension | Other Post- Retirement Benefit Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2011 | € | 35,778 | € | 19,797 | € | 55,575 | ||||||
Service cost | 112 | 564 | 676 | |||||||||
Interest cost | 1,525 | 875 | 2,400 | |||||||||
Benefit payments | (1,905 | ) | (605 | ) | (2,510 | ) | ||||||
Actuarial losses | 1,193 | 762 | 1,955 | |||||||||
Foreign currency exchange rate changes | 186 | 81 | 267 | |||||||||
|
|
|
|
|
| |||||||
Benefit obligation, December 31, 2012 | 36,889 | 21,474 | 58,363 | |||||||||
|
|
|
|
|
| |||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2011 | 23,734 | — | 23,734 | |||||||||
Actual returns | 1,905 | — | 1,905 | |||||||||
Contributions | 1,683 | 605 | 2,288 | |||||||||
Benefit payments | (1,905 | ) | (605 | ) | (2,510 | ) | ||||||
Foreign currency exchange rate changes | 101 | — | 101 | |||||||||
|
|
|
|
|
| |||||||
Fair value of plan assets, December 31, 2012 | 25,518 | — | 25,518 | |||||||||
|
|
|
|
|
| |||||||
Funded status, December 31, 2012(1) | € | (11,371 | ) | € | (21,474 | ) | € | (32,845 | ) | |||
|
|
|
|
|
| |||||||
Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 112 | € | 564 | € | 676 | ||||||
Interest cost | 1,525 | 875 | 2,400 | |||||||||
Expected return on plan assets | (1,637 | ) | — | (1,637 | ) | |||||||
Amortization of unrecognized items | 1,130 | 5 | 1,135 | |||||||||
|
|
|
|
|
| |||||||
Net benefit costs | € | 1,130 | € | 1,444 | € | 2,574 | ||||||
|
|
|
|
|
| |||||||
| (1) | The total of |
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Information about the Celgar Plans, in aggregate for the year ended December 31, 20082011 is as follows:
| 2008 | ||||||||||||
| Other | ||||||||||||
| Post-Retirement | ||||||||||||
| Benefit | ||||||||||||
| Pension | Obligations | Total | ||||||||||
| Change in benefit obligation | ||||||||||||
| Benefit obligation, December 31, 2007 | € | 27,832 | € | 16,137 | € | 43,969 | ||||||
| Service cost | 789 | 501 | 1,290 | |||||||||
| Interest cost | 1,356 | 800 | 2,156 | |||||||||
| Benefit payments | (1,417 | ) | (381 | ) | (1,798 | ) | ||||||
| Past service cost (credit) | 973 | (1,152 | ) | (179 | ) | |||||||
| Actuarial (gains) losses | (5,557 | ) | (3,442 | ) | (8,999 | ) | ||||||
| Foreign currency exchange rate changes | (3,948 | ) | (2,166 | ) | (6,114 | ) | ||||||
| Benefit obligation, December 31, 2008 | 20,028 | 10,297 | 30,325 | |||||||||
| Reconciliation of fair value of plan assets | ||||||||||||
| Fair value of plan assets, December 31, 2007 | 23,903 | — | 23,903 | |||||||||
| Actual returns | (4,084 | ) | — | (4,084 | ) | |||||||
| Contributions | 2,077 | 381 | 2,458 | |||||||||
| Benefit payments | (1,417 | ) | (381 | ) | (1,798 | ) | ||||||
| Foreign currency exchange rate changes | (3,381 | ) | — | (3,381 | ) | |||||||
| Fair value of plan assets, December 31, 2008 | 17,098 | — | 17,098 | |||||||||
| Funded status, December 31, 2008 | € | (2,930 | ) | € | (10,297 | ) | € | (13,227 | )(1) | |||
| Components of the net benefit cost recognized | ||||||||||||
| Service cost | € | 789 | € | 501 | € | 1,290 | ||||||
| Interest cost | 1,356 | 800 | 2,156 | |||||||||
| Expected return on plan assets | (1,542 | ) | — | (1,542 | ) | |||||||
| Amortization of recognized items | (6 | ) | 83 | 77 | ||||||||
| Net benefit costs | € | 597 | € | 1,384 | € | 1,981 | ||||||
| 2011 | ||||||||||||
| Pension | Other Post- Retirement Benefit Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2010 | € | 32,068 | € | 16,643 | �� | 48,711 | ||||||
Service cost | 87 | 469 | 556 | |||||||||
Interest cost | 1,511 | 815 | 2,326 | |||||||||
Benefit payments | (1,716 | ) | (461 | ) | (2,177 | ) | ||||||
Actuarial losses | 3,382 | 2,049 | 5,431 | |||||||||
Foreign currency exchange rate changes | 446 | 282 | 728 | |||||||||
|
|
|
|
|
| |||||||
Benefit obligation, December 31, 2011 | 35,778 | 19,797 | 55,575 | |||||||||
|
|
|
|
|
| |||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2010 | 23,863 | — | 23,863 | |||||||||
Actual returns | (204 | ) | — | (204 | ) | |||||||
Contributions | 1,578 | 461 | 2,039 | |||||||||
Benefit payments | (1,716 | ) | (461 | ) | (2,177 | ) | ||||||
Foreign currency exchange rate changes | 213 | — | 213 | |||||||||
|
|
|
|
|
| |||||||
Fair value of plan assets, December 31, 2011 | 23,734 | — | 23,734 | |||||||||
|
|
|
|
|
| |||||||
Funded status, December 31, 2011(1) | € | (12,044 | ) | € | (19,797 | ) | € | (31,841 | ) | |||
|
|
|
|
|
| |||||||
Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 87 | € | 469 | € | 556 | ||||||
Interest cost | 1,511 | 815 | 2,326 | |||||||||
Expected return on plan assets | (1,549 | ) | — | (1,549 | ) | |||||||
Amortization of unrecognized items | 511 | (69 | ) | 442 | ||||||||
|
|
|
|
|
| |||||||
Net benefit costs | € | 560 | € | 1,215 | € | 1,775 | ||||||
|
|
|
|
|
| |||||||
| (1) | The total of |
The Company anticipates that it will make contributions to the pension planCelgar Plans of approximately €277€1,509 in 2010.2013. Estimated future benefit payments under the Celgar Plans are as follows:
| Amount | ||||
| 2010 | € | 2,047 | ||
| 2011 | 2,138 | |||
| 2012 | 2,227 | |||
| 2013 | 2,350 | |||
| 2014 | 2,490 | |||
| 2015 — 2019 | 14,872 | |||
89
| Amount | ||||
2013 | € | 2,622 | ||
2014 | 2,765 | |||
2015 | 2,890 | |||
2016 | 3,030 | |||
2017 | 3,175 | |||
2018 – 2022 | 17,482 | |||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
During the year ended December 31, 2012, the Company recognized a loss, net of tax of €628 in other comprehensive income (2011 – loss of €8,049; 2010 – loss of €3,314). As at December 31, 2012, the pension related accumulated other comprehensive income balance of €3,978 (2008 — €850)€15,969 (2011 – €15,341) is primarily a result of net actuarial losses. These amounts have been stated net of tax. The Celgar Plans do not have any net transition asset or obligation recognized as a reclassification adjustment of other comprehensive income. The amount included in other comprehensive income which is expected to be recognized in 20102013 is approximately €117€1,221 of net actuarial losses. There are no plan assets that are expected to be returned to the Company in 2009.
Summary of key assumptions:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Benefit obligations | ||||||||
| Discount rate | 5.75 | % | 7.25 | % | ||||
| Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
| Net benefit cost for year ended | ||||||||
| Discount rate | 7.25 | % | 5.25 | % | ||||
| Rate of compensation increase | 2.75 | % | 3.00 | % | ||||
| Expected rate of return on plan assets | 7.00 | % | 7.00 | % | ||||
| Assumed health care cost trend rate at | ||||||||
| Initial health care cost trend rate | 11.00 | % | 12.00 | % | ||||
| Annual rate of decline in trend rate | 1.00 | % | 1.00 | % | ||||
| Ultimate health care cost trend rate | 4.50 | % | 4.50 | % | ||||
| Medical services plan premiums trend rate | �� | 6.00 | % | 2.50 | % | |||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Benefit obligations | ||||||||
Discount rate | 4.00 | % | 4.25 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Net benefit cost for year ended | ||||||||
Discount rate | 4.25 | % | 5.00 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Expected rate of return on plan assets | 6.75 | % | 6.75 | % | ||||
Assumed health care cost trend rate at | ||||||||
Initial health care cost trend rate | 8.50 | % | 9.00 | % | ||||
Annual rate of decline in trend rate | 0.50 | % | 0.50 | % | ||||
Ultimate health care cost trend rate | 4.50 | % | 4.50 | % | ||||
Medical services plan premiums trend rate | 6.00 | % | 6.00 | % | ||||
The expected rate of return on plan assets is a management estimate based on, among other factors, historical long-term returns, expected asset mix and active management premium.
The discount rate assumption is adjusted annually to reflect the rates available on high-quality debt instruments, with a duration that is expected to match the timing of expected pension and other post-retirement benefit obligations. High-quality debt instruments are corporate bonds with a rating of “AA” or better.
A one-percentage point change in assumed health care cost trend rate would have the following effect on the post-retirement benefit obligations:
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| 1% increase | 1% decrease | 1% increase | 1% decrease | |||||||||||||
| Effect on total service and interest rate components | € | 37 | € | (38 | ) | € | 235 | € | (178 | ) | ||||||
| Effect on post-retirement benefit obligation | € | 436 | € | (419 | ) | € | 1,598 | € | (1,251 | ) | ||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| 1% Increase | 1% Decrease | 1% Increase | 1% Decrease | |||||||||||||
Effect on total service and interest rate components | € | 39 | € | (41 | ) | € | 39 | € | (40 | ) | ||||||
Effect on post-retirement benefit obligation | € | 744 | € | (716 | ) | € | 621 | € | (600 | ) | ||||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Asset allocation of funded plans:
| Target | 2009 | 2008 | ||||||||||
| Equity securities | 60 | % | 63 | % | 61 | % | ||||||
| Debt securities | 35 | % | 35 | % | 36 | % | ||||||
| Cash and cash equivalents | 5 | % | 2 | % | 3 | % | ||||||
| 100 | % | 100 | % | |||||||||
| Target | 2012 | 2011 | ||||||||||
Equity securities | 60 | % | 58 | % | 56 | % | ||||||
Debt securities | 40 | % | 42 | % | 44 | % | ||||||
Cash and cash equivalents | 0 | % | 0 | % | 0 | % | ||||||
|
|
|
| |||||||||
| 100 | % | 100 | % | |||||||||
|
|
|
| |||||||||
Investment Objective:Objective
The investment objective for the Celgar Plans is to sufficiently diversify invested plan assets to maintain a reasonable level of risk without imprudently sacrificing the return on the invested funds, and ultimately to achieve a long-term total rate of return, net of fees and expenses, at least equal to the long-term interest rate assumptions used for funding actuarial valuations. To achieve this objective, the Company’s overall investment strategy is to maintain
90
Celgar Plans’ asset fair value measurements at December 31, 2009:
| Quoted | ||||||||||||||||||||
| prices | ||||||||||||||||||||
| in active | Significant | |||||||||||||||||||
| markets | other | Significant | ||||||||||||||||||
| for identical | observable | unobservable | ||||||||||||||||||
| assets | inputs | Inputs | Total | |||||||||||||||||
Asset Category | ||||||||||||||||||||
| Leith Wheeler Diversified Balanced Fund | € | 10,374 | € | — | € | — | € | 10,374 | ||||||||||||
| Phillips, Hagar and North Balanced Pension Trust | 10,573 | — | — | 10,573 | ||||||||||||||||
| Total assets | € | 20,947 | € | — | € | — | € | 20,947 | ||||||||||||
Asset category | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Total | ||||||||||||
Leith Wheeler Diversified Funds | € | 14,626 | € | — | € | — | € | 14,626 | ||||||||
Phillips, Hagar and North Bond Fund | 10,766 | — | — | 10,766 | ||||||||||||
Cash | 126 | — | — | 126 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | € | 25,518 | € | — | € | — | € | 25,518 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Concentrations of Risk in the Celgar Plans’ Assets:Plans’ Assets
The Company has reviewed the Celgar Plans’ investments and determined that they are allocated based on the specific investment manager’s stated investment strategy with only slight over- or under-weightings within any specific category, and that those investments are within the constraints that have been set by the Company. Those constraints include a limitation on the value that can be invested in any one entity or group and the investment category targets noted above. In addition, we have two independent investment managers. The Company has concluded that there are no significant concentrations of risk.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Multiemployer Plan
The Company adoptedparticipates in a multiemployer plan for the guidance as outlinedhourly-paid employees at the Celgar mill. The contributions to the plan are determined based on an amount per hour worked pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of theIncomeTaxes Topic ASC 740(“740-10”), originally released as FASB Interpretation No. 48,Accounting for Uncertainty contractual contributions. Plan details are included in the following table:
| Provincially Registered Plan Number | Expiration Date of Collective Bargaining Agreement | |||||||||||||||
| Are the Company’s Contributions Greater Than 5% of Total Contributions | ||||||||||||||||
| Company Contributions | ||||||||||||||||
Legal name | 2012 | 2011 | 2012 | 2011 | ||||||||||||
The Pulp and Paper Industry Pension Plan | P085324 | April 30, 2017 | € | 2,056 | € | 1,760 | Yes | Yes | ||||||||
Note 10. Income Taxes, on January 1, 2007. As a
The Company’s effective income tax rate can be affected by many factors, including but not limited to, changes in the mix of earnings in tax jurisdictions with differing statutory rates, changes in corporate structure, changes in the valuation of deferred tax assets and liabilities, the result of audit examinations of previously filed tax returns and changes in tax laws. The asset and liability approach is used to recognize deferred tax assets and liabilities for the implementationexpected future tax consequences of ASC 740,temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The Company recognized no adjustmentand/or one or more of its subsidiaries file income tax returns in the liability for unrecognized tax benefits.
91
| 2009 | 2008 | |||||||
| Balance at January 1 | € | 800 | € | 4,000 | ||||
| Reductions — prior year tax positions | — | (3,200 | ) | |||||
| Lapse of statute of limitations | (100 | ) | — | |||||
| Balance at December 31 | € | 700 | € | 800 | ||||
As at December 31, 2012, the Company had approximately €62,900 of total gross unrecognized tax benefits, substantially all of which would affect the Company’s effective tax rate if recognized. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:
| 2012 | 2011 | |||||||
Balance at January 1 | € | 1,100 | € | 500 | ||||
Reduction prior year tax positions | (1,100 | ) | (500 | ) | ||||
Addition of current year tax positions | 62,900 | 1,100 | ||||||
|
|
|
| |||||
Balance at December 31 | € | 62,900 | € | 1,100 | ||||
|
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|
| |||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
The liability in the Consolidated Balance Sheet related to unrecognized tax benefits was €6,526 as at December 31, 2012 (2011 – €200). The Company recognizes interest and penalties related to unrecognized tax benefits in income tax benefit (provision) in the Consolidated Statement of Operations. During the year ended December 31, 2012, the Company recognized approximately €104 in interest and penalties (2011 – €nil), which was accrued at December 31, 2012 (2011 – €nil).
Subsequent to year end, the Company resolved an outstanding issue with the German tax authorities. As a result, the Company will reduce its unrecognized tax benefit from €6,526 to €nil and will record a current tax expense of approximately €3,200. Additionally, the Company will increase its valuation allowance by approximately €3,100, thereby reducing the deferred tax asset and increasing the deferred tax expense by this amount.
The provision for current income taxes consists entirelyprimarily ofnon-U.S. taxes for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.
Differences between the U.S. Federal Statutory and the Company’s effective rates are as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| U.S. Federal statutory rate | 34 | % | 34 | % | 34 | % | ||||||
| U.S. Federal statutory rate on (income) loss from continuing operations before income tax and noncontrolling interest | € | 26,526 | € | 28,241 | € | (11,544 | ) | |||||
| Tax differential on foreign income (loss) | (3,412 | ) | (2,966 | ) | 2,902 | |||||||
| Effect of foreign earnings | — | (17,800 | ) | — | ||||||||
| Valuation allowance | (20,806 | ) | (5,530 | ) | 15,021 | |||||||
| Other | 3,561 | (4,422 | ) | (16,693 | ) | |||||||
| € | 5,869 | € | (2,477 | ) | € | (10,314 | ) | |||||
| Comprised of: | ||||||||||||
| Current | € | (134 | ) | € | (501 | ) | € | (2,170 | ) | |||
| Deferred | 6,003 | (1,976 | ) | (8,144 | ) | |||||||
| € | 5,869 | € | (2,477 | ) | € | (10,314 | ) | |||||
92
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
U.S. Federal statutory rate | 35 | % | 35 | % | 34 | % | ||||||
U.S. Federal statutory rate on (income) loss before income taxes and noncontrolling interest | € | 1,119 | € | (18,659 | ) | € | (30,206 | ) | ||||
Tax differential on foreign income | 680 | 5,670 | 8,754 | |||||||||
Effect of foreign earnings | (6,518 | ) | (9,906 | ) | (6,721 | ) | ||||||
Valuation allowance | (11,972 | ) | 7,069 | 13,326 | ||||||||
Tax benefit of partnership structure | 5,276 | 5,234 | 5,076 | |||||||||
Pension adjustment | 135 | 1,864 | 937 | |||||||||
Non-taxable foreign subsidiaries | 1,475 | 4,024 | — | |||||||||
Research and development expense | 2,672 | — | — | |||||||||
Change in undistributed earnings | — | — | 15,186 | |||||||||
Other | (160 | ) | 5,399 | (473 | ) | |||||||
|
|
|
|
|
| |||||||
| € | (7,293 | ) | € | 695 | € | 5,879 | ||||||
|
|
|
|
|
| |||||||
Comprised of: | ||||||||||||
Current | € | (7,411 | ) | € | (1,682 | ) | € | (3,881 | ) | |||
Deferred | 118 | 2,377 | 9,760 | |||||||||
|
|
|
|
|
| |||||||
| € | (7,293 | ) | € | 695 | € | 5,879 | ||||||
|
|
|
|
|
| |||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
Deferred income tax assets and liabilities are composed of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| German tax loss carryforwards | € | 83,362 | € | 67,930 | ||||
| U.S. tax loss carryforwards | 9,409 | 5,909 | ||||||
| Canadian tax loss carryforwards | 10,653 | 4,924 | ||||||
| Basis difference between income tax and financial reporting with respect to operating pulp mills | (15,960 | ) | (17,118 | ) | ||||
| Derivative financial instruments | 14,844 | 13,227 | ||||||
| Long-term debt | (2,407 | ) | (1,726 | ) | ||||
| Payables and accrued expenses | (1,454 | ) | (780 | ) | ||||
| Reserve for deferred pension liability | 3,358 | 2,079 | ||||||
| Capital leases | 530 | 531 | ||||||
| Other | 620 | 956 | ||||||
| 102,955 | 75,932 | |||||||
| Valuation allowance | (99,529 | ) | (78,723 | ) | ||||
| Net deferred tax (liability) asset | € | 3,426 | € | (2,791 | ) | |||
| Comprised of: | ||||||||
| Deferred income tax asset | € | 3,426 | € | 3,036 | ||||
| Deferred income tax liability | — | (5,827 | ) | |||||
| € | 3,426 | € | (2,791 | ) | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
German tax loss carryforwards | € | 76,034 | € | 87,023 | ||||
U.S. tax loss carryforwards | 27,372 | 27,914 | ||||||
Canadian tax loss carryforwards | 31,090 | 33,891 | ||||||
Basis difference between income tax and financial reporting with respect to operating pulp mills | (53,994 | ) | (77,440 | ) | ||||
Derivative financial instruments | 14,228 | 14,709 | ||||||
Long-term debt | 1,567 | 1,367 | ||||||
Payable and accrued expenses | (195 | ) | (89 | ) | ||||
Deferred pension liability | 8,199 | 7,381 | ||||||
Capital leases | 2,136 | 1,941 | ||||||
Research and development expense pool | 2,672 | — | ||||||
Other | 1,004 | 1,623 | ||||||
|
|
|
| |||||
| 110,113 | 98,320 | |||||||
Valuation allowance | (93,840 | ) | (81,868 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | € | 16,273 | € | 16,452 | ||||
|
|
|
| |||||
Comprised of: | ||||||||
Deferred income tax asset—current | € | 4,465 | € | 6,750 | ||||
Deferred income tax asset—non-current | 17,565 | 12,287 | ||||||
Deferred income tax liability—non-current | (5,757 | ) | (2,585 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | € | 16,273 | € | 16,452 | ||||
|
|
|
| |||||
The Company is subject to income tax audits on a continuing basis which may result in changes to the amounts in the above table.deferred tax assets and liabilities. Due to this and other uncertainties regarding future amounts of taxable income in Germany, Canada and the United States, the Company has provided a valuation allowance for the majorityagainst a portion of its deferred tax assets, which primarily consist of tax losses carried forwardforward. However, during the year, based on forecasted taxable income for the entities in each tax jurisdiction, income tax purposes.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
The Company’s German tax loss carryforward amount includes corporate and trade tax losses totalling approximately €452,400€313,800 at December 31, 20092012 which have no expiration date. In addition, the Company has approximately €104,400 of German interest carryforwards which have no expiration date and can be used to reduce taxable income, with certain limitations. The Company’s U.S. loss carryforwards amount is approximately €70,300€78,200 at December 31, 2009,2012, of which approximately €4,800 and €73,400, if not used, will expire in the tax years ending 2011 through 2028, if not used.2018 to 2023 and 2024 to 2030, respectively. The Company’s Canadian tax loss carryforward amount is approximately €42,600€124,400 at December 31, 20092012 of which approximately €10,000 will expire in 2016 and approximately €114,400 will begin to expire in the tax year ending 2026, if not used. The Company has Canadian investment tax credits for scientific research and experimental development of approximately €10,700 which begin to expire in the taxation year 2031. Management is generally unable to concludehas concluded that these losses areit is more likely than not tothat a portion of the above noted losses will be utilized, under current circumstances, and accordingly has fully reserved any resulting potential tax benefit that is not expected to be realized in the near future.
The Company’s policy is to indefinitely reinvest undistributed earnings of Mercer’s foreign subsidiaries. Accordingly, no provision for U.S. income taxes has been made for such undistributed earnings. Note 11. Share Capital
|
The Company has authorized 200,000,000 common shares (2008 —(2011 – 200,000,000) with a par value of $1 per share.
As at December 31, 2009,2012, the Company had 36,443,487 (2008 — 36,422,487)55,815,704 common shares (2011 – 55,779,204) issued and outstanding.
Share Repurchase Program
In August 2011, the Company’s Board of Directors authorized a share repurchase program (the “Program”) to repurchase up to $25.0 million worth of the Company’s outstanding common shares from time to time over a period ending August 2012. In July 2012, the Company’s Board of Directors re-authorized the Program to allow for the repurchase of up to approximately $14.4 million of the Company’s outstanding common shares over a period ending August 2013. During the year ended December 31, 2012, the Company did not repurchase any of its common shares. During the year ended December 31, 2011, the Company repurchased 1,263,401 of its common shares at an aggregate cost of $10.6 million. The Company recorded these as treasury shares.
The Company retired all outstanding treasury shares prior to December 31, 2011. The retired treasury shares had a carrying value of approximately €6,342. Upon the formal retirement of treasury shares, the Company reduced its share capital based on the estimated average cost of the common shares and reduced the treasury share account based on the repurchase price. The difference between the repurchase price and the original issue value was recorded as a reduction to retained earnings.
The Company may make additional repurchases of common shares under its Program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate a purchase of common shares and the amount of common shares purchased is at the Company’s discretion. As at December 31, 2012, the Company had an authorized amount of $14.4 million remaining to repurchase its common shares.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 11. Share Capital (continued)
Preferred shares
The Company has authorized 50,000,000 preferred shares (2008 —(2011 – 50,000,000) with U.S. $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued
93
Note 12. Stock-Based Compensation
In June 2010, the Company hadadopted a non-qualified stock option plan which provided for options to be granted to officers and employees to acquire a maximum of 3,600,000 common shares including options for 130,000 shares to directors who are not officers or employees. This plan expired in 2008 but unexercised options that were previously granted under this plan remain outstanding. The Company also has anew stock incentive plan (the “2010 Plan”) which provides for options, restricted stock rights, restricted shares, performance shares, performance share units (“PSUs”) and stock appreciation rights and restricted stock to be awarded to employees, consultants and outside directorsnon-employee directors. As at December 31, 2012, after factoring in all allocated shares, there remain approximately 1.1 million common shares available for grant pursuant to a maximum of 1,000,000the 2010 Plan.
Performance Shares and PSUs
Performance shares are common shares. Duringshares granted to an employee which have restrictive conditions, such as the first quarter of 2008,ability to sell the shares, until the Company implemented a new form of stock-based compensation calledand the grantee achieve certain performance stock under its existing stock incentive plan.
The fair value of the performance stockshares and PSUs is recorded as compensation expense over the vesting period. The fair value is determined based upon the targeted number of shares awarded and the quoted price of the Company’s stock. Performance stock generally cliff vest three years fromshares at the awardreporting date. The target number of shares is determined using management’s best estimate. The final determination of the number of shares to be granted or unrestricted will be made by the Company’s Board of Directors. For the year ended December 31, 2012, the Company recognized an expense of €1,207 related to the PSUs (2011 – €916; 2010 – €2,255).
As at December 31, 2009,2012, there are no performance stock had vested.
The following table summarizes PSU activity during the total remaining unrecognized compensation cost associated with the performance stock totaled approximately €286 which will be amortized over their remaining vesting period. During the twelve month period ended December 31, 2009, 39,991 performance stock were forfeited due to the departureyear:
| Number of PSUs | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Outstanding at January 1 | 795,312 | 534,783 | 565,165 | |||||||||
Granted | 55,478 | 812,575 | 13,000 | |||||||||
Vested and issued | — | (474,728 | ) | — | ||||||||
Cancelled | — | (60,055 | ) | — | ||||||||
Forfeited | (64,661 | ) | (17,263 | ) | (43,382 | ) | ||||||
|
|
|
|
|
| |||||||
Outstanding at December 31 | 786,129 | 795,312 | 534,783 | |||||||||
|
|
|
|
|
| |||||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of an employee. On April 28, 2009, 34,542 performance stock were awarded to two employees.
Note 12. Stock-Based Compensation (continued)
Restricted StockShares
The fair value of restricted stockshares is determined based upon the number of shares granted and the quoted price of the Company’s stockshares on the date of grant. Restricted stockshares generally vestsvest over one year. Expenseyear; however, 200,000 restricted shares granted during the year ended December 31, 2011 vest in equal amounts over a five-year period commencing in 2012. The fair value of the restricted shares is recognizedrecorded as compensation expense on a straight-line basis over the vesting period.
Expense recognized for the year ended December 31, 20092012 was €58 (2008 — €168; 2007 — €312)€832 (2011 – €998; 2010 – €139).
The following table summarizes restricted stock awards of 21,000 shares (2008 — 21,000; 2007 — 21,000) granted to independent directors and officers of the Company and no restricted stock was cancelledshare activity during the year (2008 — nil; 2007 — nil).
94
| Number of Restricted Shares | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Outstanding at January 1 | 238,000 | 56,000 | 21,000 | |||||||||
Granted | 36,500 | 238,000 | 56,000 | |||||||||
Vested | (78,000 | ) | (56,000 | ) | (21,000 | ) | ||||||
|
|
|
|
|
| |||||||
Outstanding at December 31 | 196,500 | 238,000 | 56,000 | |||||||||
|
|
|
|
|
| |||||||
The following table summarizes the status of options outstanding at December 31, 2009:
| Outstanding Options | ||||||||||||||||||||
| Weighted | Exercisable Options | |||||||||||||||||||
| Exercise | Average | Weighted | Weighted | |||||||||||||||||
| Price | Remaining | Average | Average | |||||||||||||||||
| Range | Number | Contractual Life | Exercise Price | Number | Exercise Price | |||||||||||||||
| (In U.S. Dollars) | (Years) | (In U.S. Dollars) | ||||||||||||||||||
| $5.65 – $6.375 | 830,000 | 0.50 | $6.29 | 830,000 | $6.29 | |||||||||||||||
| 7.30 | 30,000 | 5.50 | 7.30 | 30,000 | 7.30 | |||||||||||||||
| 7.92 | 60,000 | 5.75 | 7.92 | 60,000 | 7.92 | |||||||||||||||
| Outstanding Options | Exercisable Options | |||||||||||||||||||||
Exercise Price | Number | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||||||
| $ | 5.65 | 100,000 | 0.69 | $ | 5.65 | 100,000 | $ | 5.65 | ||||||||||||||
| $ | 7.30 | 30,000 | 2.57 | $ | 7.30 | 30,000 | $ | 7.30 | ||||||||||||||
| $ | 7.92 | 45,000 | 2.69 | $ | 7.92 | 45,000 | $ | 7.92 | ||||||||||||||
During the yearsyear ended December 31, 20092012 and 2008,2011, no options were granted, exercised cancelled, or expired.cancelled. During the year ended December 31, 2012, no options expired (2011 – 15,000). The aggregate intrinsic value of options outstanding and currently exercisableis calculated as the difference between the quoted market price for the Company’s common stock as at December 31, 20092012, and the exercise price of the stock options for those options where the exercise price is $nil per option.
Stock compensation expense recognized for the year ended December 31, 20092012 was €nil (2008 -(2011 – €nil; 2010 – €nil). As at December 31, 2009, all stock options had fully vested.
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 13. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are as follows:
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
Foreign currency translation adjustments | € | 41,031 | € | 36,567 | ||||
Unrecognized losses and prior service costs related to defined benefit plans | (15,969 | ) | (15,341 | ) | ||||
Unrealized gains on marketable securities | 119 | 120 | ||||||
|
|
|
| |||||
Accumulated other comprehensive income | € | 25,181 | € | 21,346 | ||||
|
|
|
| |||||
Note 14. Net Income (Loss) Per Share Attributable to Common Shareholders
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Net income (loss) attributable to common shareholders—basic | € | (12,185 | ) | € | 50,075 | € | 86,279 | |||||
Interest on convertible notes, net of tax | — | 797 | 2,439 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common shareholders—diluted | € | (12,185 | ) | € | 50,872 | € | 88,718 | |||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to common shareholders | ||||||||||||
Basic | € | (0.22 | ) | € | 1.00 | € | 2.24 | |||||
|
|
|
|
|
| |||||||
Diluted | € | (0.22 | ) | € | 0.89 | € | 1.56 | |||||
|
|
|
|
|
| |||||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic(1) | 55,596,761 | 50,116,982 | 38,590,797 | |||||||||
Effect of dilutive shares: | ||||||||||||
Performance shares and PSUs | — | 544,853 | 442,844 | |||||||||
Restricted shares | — | 87,923 | 26,683 | |||||||||
Stock options and awards | — | 57,483 | — | |||||||||
Convertible notes | — | 6,178,778 | 17,902,638 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 55,596,761 | 56,986,019 | 56,962,962 | |||||||||
|
|
|
|
|
| |||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net income (loss) attributable to common shareholders from continuing operations — basic | € | (62,189 | ) | € | (72,465 | ) | € | 22,389 | ||||
| Interest on convertible notes, net of tax | — | — | 3,930 | |||||||||
| Net income (loss) attributable to common shareholders from continuing operations — diluted | € | (62,189 | ) | € | (72,465 | ) | € | 26,319 | ||||
| Net income (loss) per share attributable to common shareholders from continuing operations: | ||||||||||||
| Basic | € | (1.71 | ) | € | (2.00 | ) | € | 0.62 | ||||
| Diluted | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | ||||
| Net income (loss) attributable to common shareholders from continuing operations | € | (62,189 | ) | € | (72,465 | ) | € | 22,389 | ||||
| Net loss attributable to common shareholders from discontinued operations | — | — | (210 | ) | ||||||||
| Net income (loss) attributable to common shareholders — basic | (62,189 | ) | (72,465 | ) | 22,179 | |||||||
| Interest on convertible notes, net of tax | — | — | 3,930 | |||||||||
| Net income (loss) attributable to common shareholders — diluted | € | (62,189 | ) | € | (72,465 | ) | € | 26,109 | ||||
| Net income (loss) per share attributable to common shareholders: | ||||||||||||
| Basic | € | (1.71 | ) | € | (2.00 | ) | € | 0.61 | ||||
| Diluted | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | ||||
| Weighted average number of common shares outstanding: | ||||||||||||
| Basic(1) | 36,296,649 | 36,285,027 | 36,080,931 | |||||||||
| Effect of dilutive shares: | ||||||||||||
| Stock options and awards | — | — | 362,774 | |||||||||
| Convertible notes | — | — | 8,859,036 | |||||||||
| Diluted | 36,296.649 | 36,285,027 | 45,302,741 | |||||||||
| (1) | The basic weighted average number of shares excludes |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 14. Net Income (Loss) Per Share Attributable to Common Shareholders (continued)
The calculation of diluted net income (loss) per share attributable to common shareholders does not assume the exercise of stock options and awards or the conversion of convertible notesany instruments that would have an anti-dilutive effect on earnings per share.
96
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Stock options and awards | 175,000 | — | 190,000 | |||||||||
PSUs | 786,129 | — | — | |||||||||
Restricted shares | 196,500 | — | — | |||||||||
Note 15. Business Segment Information
The Company has three operating segments, the individual pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are those of the one reportable business segment.
The following table presents net sales from continuing operations to external customers by geographic area based on location of the customer.
| 2009 | 2008 | 2007 | ||||||||||
| Germany | € | 154,323 | € | 198,340 | € | 198,575 | ||||||
| China | 146,613 | 131,412 | 159,553 | |||||||||
| Italy | 44,616 | 56,487 | 50,177 | |||||||||
| Other European Union countries(1) | 107,276 | 133,621 | 136,434 | |||||||||
| Other Asia | 38,946 | 65,192 | 58,242 | |||||||||
| North America | 68,213 | 78,718 | 66,229 | |||||||||
| Other countries | 8,312 | 17,146 | 26,639 | |||||||||
| 568,299 | 680,916 | 695,849 | ||||||||||
| Energy revenues | 42,501 | 30,971 | 22,904 | |||||||||
| Third party transportation revenues | 8,999 | 8,404 | 8,542 | |||||||||
| € | 619,799 | € | 720,291 | € | 727,295 | |||||||
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
China | € | 230,007 | € | 234,654 | € | 196,022 | ||||||
Germany | 228,402 | 256,563 | 278,348 | |||||||||
Other European Union countries(1) | 168,616 | 175,937 | 182,246 | |||||||||
North America | 47,513 | 69,345 | 92,628 | |||||||||
Italy | 43,112 | 51,509 | 56,301 | |||||||||
Other Asia | 33,197 | 30,872 | 37,561 | |||||||||
Other countries | 1,632 | 823 | 1,503 | |||||||||
|
|
|
|
|
| |||||||
| 752,479 | 819,703 | 844,609 | ||||||||||
Energy and chemical revenues | 72,289 | 68,079 | 49,288 | |||||||||
Third party transportation revenues | 9,375 | 11,693 | 11,702 | |||||||||
|
|
|
|
|
| |||||||
| € | 834,143 | € | 899,475 | € | 905,599 | |||||||
|
|
|
|
|
| |||||||
| (1) | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. |
The following table presents total long-lived assets from continuing operations by geographic area based on location of the asset.
| 2009 | 2008 | |||||||
| Germany | € | 689,545 | € | 732,766 | ||||
| Canada | 178,941 | 161,850 | ||||||
| Other | 2,934 | 4,036 | ||||||
| € | 871,420 | € | 898,652 | |||||
97
| December 31, | ||||||||
| 2012 | 2011 | |||||||
Germany | € | 636,735 | € | 638,500 | ||||
Canada | 172,143 | 182,474 | ||||||
|
|
|
| |||||
| € | 808,878 | € | 820,974 | |||||
|
|
|
| |||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 15. Business Segment Information (continued)
In 2012, one customer accounted for 11% of the Company’s total pulp sales (2011—no single customer accounted for 10% or more; 2010—one customer—11%).
Note 16. Derivative Transactions
The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk management policies as well as, from time to time, the use of derivatives. The Company currently manages its interest rate risk and a small portion of its pulp sales price risk with the use of derivative instruments. The derivatives are measured at fair value with changes in fair value immediately recognized in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
Derivative assets are presented in prepaid expenses and other, and derivative liabilities are presented in unrealized interest rate derivative losses in the Consolidated Balance Sheet.
Interest Rate Derivatives
During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612,600 of the principal amount of the indebtedness under the Stendal Loan Facility. Under the remaining interest rate swap, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Currently, the contract has an aggregate notional amount of €357,576 at a fixed interest rate of 5.28% and it matures in October 2017 (which for the most part matches the maturity of the Stendal Loan Facility).
The interest rate derivative contract is with a bank that is part of a banking syndicate that holds the Stendal Loan Facility and the Company does not anticipate non-performance by the bank.
Pulp Price Derivative
During May 2012, the Company entered into a fixed price pulp swap contract with a bank. Under the terms of the contract, 5,000 metric tonnes (“MT”) of pulp per month was fixed at a price of $915 per MT. The contract expired in December 2012. In November 2012, the Company entered into two additional contracts. Under the terms of the contracts, 3,000 MT of pulp per month is fixed at prices which range from $880 to $890 per MT. The contracts expire in December 2013.
Energy Derivatives
The Company is also subject to price risk for electricity used in its manufacturing operations. The Company enters into electricity forward sales contracts when it sees an opportunity to sell forward electricity at opportunistic rates. No electricity forward sales contracts were entered into in 2012, 2011 or 2010. Although the Company does not currently have plans to enter into such transactions, the Company may enter into similar electricity derivative contracts in the future.
Foreign Exchange Derivatives
The Company did not enter into foreign exchange derivatives in 2012, 2011 and 2010.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 16. Derivative Transactions (continued)
Credit Risk
The Company’s credit risk is primarily attributable to cash held in bank accounts and receivables. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp products is managed through establishing long-term contractual relationships with its customers, setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping its product. Concentrations of credit risk on the sale of pulp products are with customers and agents based in Germany, China, Italy and the United States.
The carrying amount of cash and cash equivalents of €104,239 and receivables of €110,087 recorded in the Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk.
The following table shows our gains and losses by type of derivative recognized in gain (loss) on derivative instruments in the Consolidated Statement of Operations:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Interest rate derivative contract | € | 1,713 | € | (1,418 | ) | € | 1,899 | |||||
Pulp price derivative contracts | 2,028 | — | — | |||||||||
|
|
|
|
|
| |||||||
| € | 3,741 | € | (1,418 | ) | € | 1,899 | ||||||
|
|
|
|
|
| |||||||
Note 17. Financial Instruments
The fair value of financial instruments as at December 31 is summarized as follows:
| 2009 | 2008 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
| Cash and cash equivalents | € | 51,291 | € | 51,291 | € | 42,452 | € | 42,452 | ||||||||
| Cash, restricted | — | — | 13,000 | 13,000 | ||||||||||||
| Investments | 135 | 135 | 419 | 419 | ||||||||||||
| Receivables | 71,523 | 71,523 | 100,158 | 100,158 | ||||||||||||
| Notes receivable | 3,819 | 3,819 | 4,171 | 4,171 | ||||||||||||
| Accounts payable and accrued expenses | 85,185 | 85,185 | 87,517 | 87,517 | ||||||||||||
| Debt | 829,174 | 769,207 | 854,418 | 704,901 | ||||||||||||
| Interest rate derivative contracts — liability | 52,873 | 52,873 | 47,112 | 47,112 | ||||||||||||
| 2012 | 2011 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Cash and cash equivalents | € | 104,239 | € | 104,239 | € | 105,072 | € | 105,072 | ||||||||
Marketable securities(1) | 184 | 184 | 12,372 | 12,372 | ||||||||||||
Receivables | 110,087 | 110,087 | 120,487 | 120,487 | ||||||||||||
Pulp price derivative contracts—asset | 745 | 745 | — | — | ||||||||||||
Accounts payable and other | 89,950 | 89,950 | 99,640 | 99,640 | ||||||||||||
Debt | 711,403 | 700,001 | 734,086 | 717,522 | ||||||||||||
Interest rate derivative contract—liability | 50,678 | 50,678 | 52,391 | 52,391 | ||||||||||||
| (1) | Includes equity securities of €184 (2011 – €156) recorded in the Consolidated Balance Sheet within deferred note issuance and other. |
The carrying value of cash and cash equivalents restricted cash and accounts payable and accrued expensesother approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. The fair value of notes receivable was estimated using discounted cash flows at prevailing market rates. The fair value of debt reflects recent market transactions and discounted cash flow estimates. Marketable securities are recorded at fair value based on quoted prices in active markets. See the Fair Value Measurement and DisclosuresDisclosure section below for details on how the fair value of the pulp price derivative contracts and interest rate derivative contractscontract was determined.
| 2009 | 2008 | 2007 | ||||||||||
| Realized net gain on foreign exchange derivatives | € | — | € | — | € | 6,820 | ||||||
| Unrealized net gain (loss) on interest rate derivatives | € | (5,760 | ) | € | (25,228 | ) | € | 19,470 | ||||
| Unrealized net gain (loss) on foreign exchange derivatives | — | — | (5,933 | ) | ||||||||
| Unrealized net gain (loss) on derivative financial instruments | € | (5,760 | ) | € | (25,228 | ) | € | 13,537 | ||||
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 17. Financial Instruments (continued)
Many of the Company’s transactions are denominated in foreign currencies, primarily the U.S. dollar. As at December 31, 2009,a result of these transactions the Company had no outstanding electricity derivative contracts. Gains from energy derivatives are included within “Operating costs” inand its subsidiaries have financial risk that the Consolidated Statement of Operations.
Credit Risk
The fair value methodologies and, as a result, the fair value of the Company’s investments and derivative instruments are determined based on the fair value hierarchy provided in ASC 820. The fair value hierarchy per ASC 820 isthe Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification, and are as follows:
Level 1 — 1—Valuations based on quoted prices in active markets foridenticalassets and liabilities.
Level 2 — 2—Valuations based on observable inputs in active markets forsimilarassets and liabilities, other than Level 1 prices, such as quoted commodity prices or interest or currency exchange rates.
Level 3 — 3—Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The Company classified its investmentsmarketable securities within Level 1 of the valuation hierarchy wherebecause quoted prices are available in an active market. Level 1market for both exchange-traded equities and the German federal government bonds. The Company classified the German federal government bonds as available-for-sale as it was not certain these investments include exchange-traded equities.
The Company’s interest rate and pulp price derivatives are classified within Level 2 of the valuation hierarchy, as they are traded on theover-the-counter market and are valued using internal models that use as their basis readily observable market inputs, such as forward interest rates.
99
The following table presents a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in ASC 820:
| Fair value measurements at December 31, 2009 using: | ||||||||||||||||
| Quoted prices | Significant | |||||||||||||||
| in active | other | Significant | ||||||||||||||
| markets for | observable | unobservable | ||||||||||||||
| identical assets | inputs | inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Assets | ||||||||||||||||
| Investments(a) | € | 135 | € | — | € | — | € | 135 | ||||||||
Liabilities | ||||||||||||||||
| Derivatives(b) | ||||||||||||||||
| — Interest rate swaps | € | — | € | 52,873 | € | — | € | 52,873 | ||||||||
| Fair value measurements at December 31, 2012 using: | ||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Marketable securities | ||||||||||||||||
Exchange traded equities | € | 184 | € | — | € | — | € | 184 | ||||||||
Pulp price derivative contracts | — | 745 | — | 745 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| € | 184 | € | 745 | € | — | € | 929 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Interest rate derivative contract | € | — | € | 50,678 | € | — | € | 50,678 | ||||||||
|
|
|
|
|
|
|
| |||||||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 17. Financial Instruments (continued)
| Fair value measurements at December 31, 2011 using: | ||||||||||||||||
| Description | Level 1 | Level 2 �� | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Marketable securities | ||||||||||||||||
German federal government bonds | € | 12,216 | € | — | € | — | € | 12,216 | ||||||||
Exchange traded equities | 156 | — | — | 156 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| € | 12,372 | € | — | € | — | € | 12,372 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Interest rate derivative contract | € | — | € | 52,391 | € | — | € | 52,391 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Note 18. Lease Commitments
Minimum lease payments, primarily for various vehicles, and plant and equipment under capital and non-cancellable operating leases and the present value of net minimum payments at December 31, 2009 were2012 is as follows:
| Capital | Operating | |||||||
| Leases | Leases | |||||||
| 2010 | € | 2,839 | € | 3,034 | ||||
| 2011 | 3,195 | 2,400 | ||||||
| 2012 | 1,579 | 1,896 | ||||||
| 2013 | 224 | 871 | ||||||
| 2014 | 221 | 869 | ||||||
| Thereafter | 1,529 | 4,987 | ||||||
| Total | € | 9,587 | € | 14,057 | ||||
| Less imputed interest | 1,284 | |||||||
| Total present value of minimum capitalized payments | 8,303 | |||||||
| Less current portion of capital lease obligations | 2,709 | |||||||
| Long-term capital lease obligations | € | 5,594 | ||||||
| Capital Leases | Operating Leases | |||||||
2013 | € | 1,998 | € | 2,973 | ||||
2014 | 1,367 | 1,612 | ||||||
2015 | 1,440 | 1,468 | ||||||
2016 | 1,202 | 915 | ||||||
2017 | 846 | 888 | ||||||
Thereafter | 2,900 | 1,553 | ||||||
|
|
|
| |||||
Total | 9,753 | € | 9,409 | |||||
|
| |||||||
Less: imputed interest | 1,510 | |||||||
|
| |||||||
Total present value of minimum capitalized payments | 8,243 | |||||||
Less: current portion of capital lease obligations | 1,958 | |||||||
|
| |||||||
Long-term capital lease obligations | € | 6,285 | ||||||
|
| |||||||
Rent expense under operating leases was €1,218€3,006 for 2009 (2008 — €1,011; 2007 — €749)the year ended December 31, 2012 (2011—€3,313; 2010—€2,246). The current portion of the capital lease obligations is included in accounts payable and accrued expensesother and the long-term portion is included in capital leases and other in the Consolidated Balance Sheets.
Note 19. Commitments and Contingencies
| (a) | |
100
| (b) | Pursuant to an arbitration proceeding with the general construction contractor (the noncontrolling shareholder) of the Stendal mill regarding certain warranty claims, the Company acted upon a bank guarantee for defect liability on civil works that was about to expire as provided in the engineering, procurement, and construction contract. On January 28, 2011, the Company received approximately €10,000 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Commitments and Contingencies (continued)
The Company€10,000 was initially recognized as an increase in cash and a corresponding increase in accounts payable and other. As civil works remediation steps are agreed to with the noncontrolling shareholder an agreed to portion of the payable is reversed with the offset recorded in operating costs to offset the remediation expenditures. In January 2012, the noncontrolling shareholder contributed its required to pay certain fees based on water consumption levels at its German mills. Unpaid fees can be reduced by the mills’ demonstration of reduced environmental emissions. To the extent that the Company has not agreed with regulatory authorities for fee reductions, a liability for these water charges has been recognized.
101
| (c) | The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. Celgar had previously paid the property transfer tax assessment, and the court date is scheduled during the first quarter of 2013 to appeal the assessment. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
| (d) | The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company’s obligation for the proper removal and disposal of asbestos products from the Company’s mills is a conditional asset retirement obligation. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value. |
| (e) | As at December 31, 2012, the Company had entered into capital commitments of approximately €14,000 at the Stendal mill as part of Project Blue Mill. |
| (f) | The Company entered into certain minimum or fixed purchase commitments primarily related to the purchase of raw materials, none of which are individually material, that extend beyond 2013. Commitments under these contracts are approximately €808 in 2014, approximately €676 in 2015, approximately €568 in 2016, and approximately €615 in 2017 and beyond. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
| Revised | ||||||||||||
| balance as at | ||||||||||||
| Balance as at | Application of new | December 31, | ||||||||||
| December 31, | accounting standard | 2008 | ||||||||||
Description | 2008 | (a) | (b) | |||||||||
| Long-term liabilities | ||||||||||||
| Debt, less current portion | € | 803,796 | € | 34,122 | € | 837,918 | ||||||
| Total liabilities | 985,375 | 34,122 | 1,019,497 | |||||||||
Equity | ||||||||||||
| Shareholders’ equity | ||||||||||||
| Share capital | 202,844 | — | 202,844 | |||||||||
| Paid-in capital | 299 | — | 299 | |||||||||
| Retained earnings (deficit) | (35,046 | ) | — | (35,046 | ) | |||||||
| Accumulated other comprehensive income | (1,872 | ) | — | (1,872 | ) | |||||||
| Total shareholders’ equity | 166,225 | — | 166,225 | |||||||||
| Noncontrolling interest | — | (34,122 | ) | (34,122 | ) | |||||||
| Total equity | 166,225 | (34,122 | ) | 132,103 | ||||||||
| Total liabilities and equity | € | 1,151,600 | € | — | € | 1,151,600 | ||||||
102
Note 20. Restricted Group Supplemental Disclosure
The terms of the indenture governing our 9.25% senior unsecured notes requiresSenior Notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the years ended December 31, 20092012 and 2008,2011, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill and, up to December 31, 2006, the discontinued paper business.
103
Combined Condensed Balance Sheets
| December 31, 2012 | ||||||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | € | 36,714 | € | 67,525 | € | — | € | 104,239 | ||||||||
Receivables | 61,212 | 48,875 | — | 110,087 | ||||||||||||
Inventories | 74,786 | 43,514 | — | 118,300 | ||||||||||||
Prepaid expenses and other | 5,811 | 2,096 | — | 7,907 | ||||||||||||
Deferred income tax | 2,188 | 2,277 | — | 4,465 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 180,711 | 164,287 | — | 344,998 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 345,311 | 463,567 | — | 808,878 | ||||||||||||
Deferred note issuance and other | 6,607 | 5,555 | — | 12,162 | ||||||||||||
Deferred income tax | 9,179 | 8,386 | — | 17,565 | ||||||||||||
Due from unrestricted group | 102,311 | — | (102,311 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | € | 644,119 | € | 641,795 | € | (102,311 | ) | € | 1,183,603 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | € | 42,106 | € | 47,844 | € | — | € | 89,950 | ||||||||
Pension and other post-retirement benefit obligations | 813 | — | — | 813 | ||||||||||||
Debt | 5,662 | 40,000 | — | 45,662 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 48,581 | 87,844 | — | 136,425 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 216,214 | 449,527 | — | 665,741 | ||||||||||||
Due to restricted group | — | 102,311 | (102,311 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 50,678 | — | 50,678 | ||||||||||||
Pension and other post-retirement benefit obligations | 32,141 | — | — | 32,141 | ||||||||||||
Capital leases and other | 6,073 | 7,863 | — | 13,936 | ||||||||||||
Deferred income tax | 5,757 | — | — | 5,757 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 308,766 | 698,223 | (102,311 | ) | 904,678 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 335,353 | (39,548 | ) | — | 295,805 | |||||||||||
Noncontrolling deficit | — | (16,880 | ) | — | (16,880 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | € | 644,119 | € | 641,795 | € | (102,311 | ) | € | 1,183,603 | |||||||
|
|
|
|
|
|
|
| |||||||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Balance SheetSheets
| December 31, 2009 | ||||||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||||||
| Group | Subsidiaries | Eliminations | Group | |||||||||||||
ASSETS | ||||||||||||||||
| Current | ||||||||||||||||
| Cash and cash equivalents | € | 20,635 | € | 30,656 | € | — | € | 51,291 | ||||||||
| Receivables | 34,588 | 36,935 | — | 71,523 | ||||||||||||
| Inventories | 52,897 | 19,732 | — | 72,629 | ||||||||||||
| Prepaid expenses and other | 4,323 | 2,039 | — | 6,362 | ||||||||||||
| Total current assets | 112,443 | 89,362 | — | 201,805 | ||||||||||||
| Property, plant and equipment | 362,311 | 506,247 | — | 868,558 | ||||||||||||
| Deferred note issuance and other | 2,517 | 4,798 | — | 7,315 | ||||||||||||
| Deferred income tax | 3,426 | — | — | 3,426 | ||||||||||||
| Due from unrestricted group | 72,553 | — | (72,553 | ) | — | |||||||||||
| Note receivable | 2,727 | — | — | 2,727 | ||||||||||||
| Total assets | € | 555,977 | € | 600,407 | € | (72,553 | ) | € | 1,083,831 | |||||||
| LIABILITIES | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Accounts payable and accrued expenses | € | 51,875 | € | 33,310 | € | — | € | 85,185 | ||||||||
| Pension and other post-retirement benefit obligations | 567 | — | — | 567 | ||||||||||||
| Debt | 2,115 | 13,917 | — | 16,032 | ||||||||||||
| Total current liabilities | 54,557 | 47,227 | — | 101,784 | ||||||||||||
| Debt | 276,604 | 536,538 | — | 813,142 | ||||||||||||
| Due to restricted group | — | 72,553 | (72,553 | ) | — | |||||||||||
| Unrealized interest rate derivative losses | — | 52,873 | — | 52,873 | ||||||||||||
| Pension and other post-retirement benefit obligations | 17,902 | — | — | 17,902 | ||||||||||||
| Capital leases and other | 6,667 | 5,490 | — | 12,157 | ||||||||||||
| Deferred income tax | — | — | — | — | ||||||||||||
| Total liabilities | 355,730 | 714,681 | (72,553 | ) | 997,858 | |||||||||||
EQUITY | ||||||||||||||||
| Total shareholders’ equity (deficit) | 200,247 | (77,025 | ) | — | 123,222 | |||||||||||
| Noncontrolling interest (deficit) | — | (37,249 | ) | — | (37,249 | ) | ||||||||||
| Total liabilities and equity | € | 555,977 | € | 600,407 | € | (72,553 | ) | € | 1,083,831 | |||||||
104
| December 31, 2011 | ||||||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | € | 44,829 | € | 60,243 | € | — | € | 105,072 | ||||||||
Marketable securities | 12,216 | — | — | 12,216 | ||||||||||||
Receivables | 62,697 | 57,790 | — | 120,487 | ||||||||||||
Inventories | 71,692 | 48,847 | — | 120,539 | ||||||||||||
Prepaid expenses and other | 5,019 | 3,143 | — | 8,162 | ||||||||||||
Deferred income tax | 5,179 | 1,571 | — | 6,750 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 201,632 | 171,594 | — | 373,226 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 353,925 | 467,049 | — | 820,974 | ||||||||||||
Deferred note issuance and other | 5,971 | 4,792 | — | 10,763 | ||||||||||||
Deferred income tax | 8,492 | 3,795 | — | 12,287 | ||||||||||||
Due from unrestricted group | 88,824 | — | (88,824 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | € | 658,844 | € | 647,230 | € | (88,824 | ) | € | 1,217,250 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | € | 49,815 | € | 49,825 | € | — | € | 99,640 | ||||||||
Pension and other post-retirement benefit obligations | 756 | — | — | 756 | ||||||||||||
Debt | 1,088 | 24,583 | — | 25,671 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 51,659 | 74,408 | — | 126,067 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 222,384 | 486,031 | — | 708,415 | ||||||||||||
Due to restricted group | — | 88,824 | (88,824 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 52,391 | — | 52,391 | ||||||||||||
Pension and other post-retirement benefit obligations | 31,197 | — | — | 31,197 | ||||||||||||
Capital leases and other | 6,604 | 6,449 | — | 13,053 | ||||||||||||
Deferred income tax | 2,585 | — | — | 2,585 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 314,429 | 708,103 | (88,824 | ) | 933,708 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 344,415 | (42,299 | ) | — | 302,116 | |||||||||||
Noncontrolling deficit | — | (18,574 | ) | — | (18,574 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | € | 658,844 | € | 647,230 | € | (88,824 | ) | € | 1,217,250 | |||||||
|
|
|
|
|
|
|
| |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Balance SheetStatements of Operations
| December 31, 2008 | ||||||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||||||
| Group | Subsidiaries | Eliminations | Group | |||||||||||||
ASSETS | ||||||||||||||||
| Current | ||||||||||||||||
| Cash and cash equivalents | € | 26,176 | € | 16,276 | € | — | € | 42,452 | ||||||||
| Cash, restricted | — | 13,000 | — | 13,000 | ||||||||||||
| Receivables | 57,258 | 42,900 | — | 100,158 | ||||||||||||
| Inventories | 59,801 | 38,656 | — | 98,457 | ||||||||||||
| Prepaid expenses and other | 3,215 | 1,619 | — | 4,834 | ||||||||||||
| Total current assets | 146,450 | 112,451 | — | 258,901 | ||||||||||||
| Property, plant and equipment | 351,009 | 530,695 | — | 881,704 | ||||||||||||
| Deferred note issuance and other | 4,425 | 5 | — | 4,430 | ||||||||||||
| Deferred income tax | 3,036 | — | — | 3,036 | ||||||||||||
| Due from unrestricted group | 55,925 | — | (55,925 | ) | — | |||||||||||
| Note receivable | 3,529 | — | — | 3,529 | ||||||||||||
| Total assets | € | 564,374 | € | 643,151 | € | (55,925 | ) | € | 1,151,600 | |||||||
| LIABILITIES | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Accounts payable and accrued expenses | € | 44,450 | € | 43,067 | € | — | € | 87,517 | ||||||||
| Pension and other post-retirement benefit obligations | 510 | — | — | 510 | ||||||||||||
| Debt | — | 16,500 | — | 16,500 | ||||||||||||
| Total current liabilities | 44,960 | 59,567 | — | 104,527 | ||||||||||||
| Debt | 289,222 | 548,696 | — | 837,918 | ||||||||||||
| Due to restricted group | — | 55,925 | (55,925 | ) | — | |||||||||||
| Unrealized interest rate derivative losses | — | 47,112 | — | 47,112 | ||||||||||||
| Pension and other post-retirement benefit obligations | 12,846 | — | — | 12,846 | ||||||||||||
| Capital leases and other | 7,167 | 4,100 | — | 11,267 | ||||||||||||
| Deferred income tax | — | 5,827 | — | 5,827 | ||||||||||||
| Total liabilities | 354,195 | 721,227 | (55,925 | ) | 1,019,497 | |||||||||||
EQUITY | ||||||||||||||||
| Total shareholders’ equity (deficit) | 210,179 | (43,954 | ) | — | 166,225 | |||||||||||
| Noncontrolling interest (deficit) | — | (34,122 | ) | — | (34,122 | ) | ||||||||||
| Total liabilities and equity | € | 564,374 | € | 643,151 | € | (55,925 | ) | € | 1,151,600 | |||||||
105
| Year Ended December 31, 2012 | ||||||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 423,943 | € | 337,911 | € | — | € | 761,854 | ||||||||
Energy and chemicals | 28,489 | 43,800 | — | 72,289 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 452,432 | 381,711 | — | 834,143 | |||||||||||||
Operating costs | 388,966 | 300,086 | — | 689,052 | ||||||||||||
Operating depreciation and amortization | 31,195 | 26,581 | — | 57,776 | ||||||||||||
Selling, general and administrative expenses | 24,640 | 13,670 | — | 38,310 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 444,801 | 340,337 | — | 785,138 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 7,631 | 41,374 | — | 49,005 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (23,425 | ) | (38,050 | ) | 5,670 | (55,805 | ) | |||||||||
Gain (loss) on derivative instruments | 2,028 | 1,713 | — | 3,741 | ||||||||||||
Loss on extinguishment of debt | (81 | ) | — | — | (81 | ) | ||||||||||
Other income (expense) | 5,108 | 504 | (5,670 | ) | (58 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (16,370 | ) | (35,833 | ) | — | (52,203 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | (8,739 | ) | 5,541 | — | (3,198 | ) | ||||||||||
Income tax benefit (provision) | (5,482 | ) | (1,811 | ) | — | (7,293 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | (14,221 | ) | 3,730 | — | (10,491 | ) | ||||||||||
Less: net income attributable to noncontrolling interest | — | (1,694 | ) | — | (1,694 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | € | (14,221 | ) | € | 2,036 | € | — | € | (12,185 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of Operations
| Year Ended December 31, 2009 | ||||||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||||||
| Group | Subsidiaries | Eliminations | Group | |||||||||||||
| Revenues | ||||||||||||||||
| Pulp | € | 318,448 | € | 258,850 | € | — | € | 577,298 | ||||||||
| Energy | 15,183 | 27,318 | — | 42,501 | ||||||||||||
| 333,631 | 286,168 | — | 619,799 | |||||||||||||
| Operating costs | 310,537 | 241,244 | — | 551,781 | ||||||||||||
| Operating depreciation and amortization | 27,453 | 26,466 | — | 53,919 | ||||||||||||
| Selling, general and administrative expenses and other | 16,541 | 10,357 | — | 26,898 | ||||||||||||
| 354,531 | 278,067 | — | 632,598 | |||||||||||||
| Operating income (loss) | (20,900 | ) | 8,101 | — | (12,799 | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (27,351 | ) | (41,932 | ) | 4,513 | (64,770 | ) | |||||||||
| Investment income (loss) | 5,002 | (2,293 | ) | (4,513 | ) | (1,804 | ) | |||||||||
| Foreign exchange gain (loss) on debt | 2,692 | — | — | 2,692 | ||||||||||||
| Gain on extinguishment of convertible note | 4,447 | — | — | 4,447 | ||||||||||||
| Gain (loss) on derivative instruments | — | (5,760 | ) | — | (5,760 | ) | ||||||||||
| Total other income (expense) | (15,210 | ) | (49,985 | ) | — | (65,195 | ) | |||||||||
| Income (loss) before income taxes | (36,110 | ) | (41,884 | ) | — | (77,994 | ) | |||||||||
| Income tax benefit (provision) | 183 | 5,686 | — | 5,869 | ||||||||||||
| Net income (loss) | (35,927 | ) | (36,198 | ) | — | (72,125 | ) | |||||||||
| Less: net (income) loss attributable to noncontrolling interest | — | 9,936 | — | 9,936 | ||||||||||||
| Net income (loss) attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | — | € | (62,189 | ) | |||||
106
| Year Ended December 31, 2011 | ||||||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 473,992 | € | 357,404 | € | — | € | 831,396 | ||||||||
Energy and chemicals | 25,473 | 42,606 | — | 68,079 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 499,465 | 400,010 | — | 899,475 | |||||||||||||
Operating costs | 382,555 | 311,270 | — | 693,825 | ||||||||||||
Operating depreciation and amortization | 29,841 | 25,919 | — | 55,760 | ||||||||||||
Selling, general and administrative expenses | 24,126 | 14,645 | — | 38,771 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 436,522 | 351,834 | — | 788,356 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 62,943 | 48,176 | — | 111,119 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (24,886 | ) | (39,074 | ) | 4,965 | (58,995 | ) | |||||||||
Gain (loss) on derivative instruments | — | (1,418 | ) | — | (1,418 | ) | ||||||||||
Foreign exchange gain (loss) on debt | 1,175 | — | — | 1,175 | ||||||||||||
Loss on extinguishment of debt | (71 | ) | — | — | (71 | ) | ||||||||||
Other income (expense) | 5,262 | 1,204 | (4,965 | ) | 1,501 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (18,520 | ) | (39,288 | ) | — | (57,808 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | 44,423 | 8,888 | — | 53,311 | ||||||||||||
Income tax benefit (provision) | (4,614 | ) | 5,309 | — | 695 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | 39,809 | 14,197 | — | 54,006 | ||||||||||||
Less: net income attributable to noncontrolling interest | — | (3,931 | ) | — | (3,931 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | € | 39,809 | € | 10,266 | € | — | € | 50,075 | ||||||||
|
|
|
|
|
|
|
| |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of Operations
| Year Ended December 31, 2008 | ||||||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||||||
| Group | Subsidiaries | Eliminations | Group | |||||||||||||
| Revenues | ||||||||||||||||
| Pulp | € | 400,969 | € | 288,351 | € | — | € | 689,320 | ||||||||
| Energy | 12,119 | 18,852 | — | 30,971 | ||||||||||||
| 413,088 | 307,203 | — | 720,291 | |||||||||||||
| Operating costs | 369,923 | 257,010 | — | 626,933 | ||||||||||||
| Operating depreciation and amortization | 28,589 | 26,895 | — | 55,484 | ||||||||||||
| Selling, general and administrative expenses and other | 16,973 | 7,572 | — | 24,545 | ||||||||||||
| 415,485 | 291,477 | — | 706,962 | |||||||||||||
| Operating income (loss) | (2,397 | ) | 15,726 | — | 13,329 | |||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (27,027 | ) | (43,117 | ) | 4,388 | (65,756 | ) | |||||||||
| Investment income (loss) | 6,834 | (3,620 | ) | (4,388 | ) | (1,174 | ) | |||||||||
| Foreign exchange gain (loss) on debt | (4,114 | ) | (120 | ) | — | (4,234 | ) | |||||||||
| Gain (loss) on derivative instruments | — | (25,228 | ) | — | (25,228 | ) | ||||||||||
| Total other income (expense) | (24,307 | ) | (72,085 | ) | — | (96,392 | ) | |||||||||
| Income (loss) before income taxes | (26,704 | ) | (56,359 | ) | — | (83,063 | ) | |||||||||
| Income tax benefit (provision) | (3,728 | ) | 1,251 | — | (2,477 | ) | ||||||||||
| Net income (loss) | (30,432 | ) | (55,108 | ) | — | (85,540 | ) | |||||||||
| Less: net (income) loss attributable to noncontrolling interest | — | 13,075 | — | 13,075 | ||||||||||||
| Net income (loss) attributable to common shareholders | € | (30,432 | ) | € | (42,033 | ) | € | — | € | (72,465 | ) | |||||
107
| Year Ended December 31, 2010 | ||||||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 490,020 | € | 366,291 | € | — | € | 856,311 | ||||||||
Energy and chemicals | 15,145 | 34,143 | — | 49,288 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 505,165 | 400,434 | — | 905,599 | |||||||||||||
Operating costs | 361,272 | 287,320 | — | 648,592 | ||||||||||||
Operating depreciation and amortization | 29,971 | 25,961 | — | 55,932 | ||||||||||||
Selling, general and administrative expenses | 20,231 | 13,101 | — | 33,332 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 411,474 | 326,382 | — | 737,856 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 93,691 | 74,052 | — | 167,743 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (31,498 | ) | (40,852 | ) | 4,729 | (67,621 | ) | |||||||||
Gain (loss) on derivative instruments | — | 1,899 | — | 1,899 | ||||||||||||
Foreign exchange gain (loss) on debt | (6,126 | ) | — | — | (6,126 | ) | ||||||||||
Loss on extinguishment of debt | (7,494 | ) | — | — | (7,494 | ) | ||||||||||
Other income (expense) | 5,103 | 94 | (4,729 | ) | 468 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (40,015 | ) | (38,859 | ) | — | (78,874 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | 53,676 | 35,193 | — | 88,869 | ||||||||||||
Income tax benefit (provision) | 8,651 | (2,772 | ) | — | 5,879 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | 62,327 | 32,421 | — | 94,748 | ||||||||||||
Less: net income attributable to noncontrolling interest | — | (8,469 | ) | — | (8,469 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | € | 62,327 | € | 23,952 | € | — | € | 86,279 | ||||||||
|
|
|
|
|
|
|
| |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of OperationsCash Flows
| Year Ended December 31, 2007 | ||||||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||||||
| Group | Subsidiaries | Eliminations | Group | |||||||||||||
| Revenues | ||||||||||||||||
| Pulp | € | 401,251 | € | 303,140 | € | — | € | 704,391 | ||||||||
| Energy | 9,118 | 13,786 | — | 22,904 | ||||||||||||
| 410,369 | 316,926 | — | 727,295 | |||||||||||||
| Operating costs | 328,954 | 246,284 | — | 575,238 | ||||||||||||
| Operating depreciation and amortization | 28,661 | 27,739 | — | 56,400 | ||||||||||||
| Selling, general and administrative expenses and other | 17,650 | 13,064 | — | 30,714 | ||||||||||||
| Purchase (sale) of emission allowances | (1,566 | ) | (3,077 | ) | — | (4,643 | ) | |||||||||
| Operating income (loss) | 36,670 | 32,916 | — | 69,586 | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (28,472 | ) | (46,653 | ) | 3,725 | (71,400 | ) | |||||||||
| Investment income (loss) | 5,303 | 2,875 | (3,725 | ) | 4,453 | |||||||||||
| Foreign exchange gain (loss) on debt | 10,629 | 329 | — | 10,958 | ||||||||||||
| Gain (loss) on derivative instruments | — | 20,357 | — | 20,357 | ||||||||||||
| Total other income (expense) | (12,540 | ) | (23,092 | ) | — | (35,632 | ) | |||||||||
| Income (loss) from continuing operations before income taxes | 24,130 | 9,824 | — | 33,954 | ||||||||||||
| Income tax benefit (provision) | (6,428 | ) | (3,886 | ) | — | (10,314 | ) | |||||||||
| Income (loss) from continuing operations after income taxes | 17,702 | 5,938 | — | 23,640 | ||||||||||||
| Discontinued operations after income taxes | (210 | ) | — | — | (210 | ) | ||||||||||
| Net income (loss) | 17,492 | 5,938 | — | 23,430 | ||||||||||||
| Less: net loss (income) attributable to noncontrolling interest | — | (1,251 | ) | — | (1,251 | ) | ||||||||||
| Net income (loss) attributable to common shareholders | € | 17,492 | € | 4,687 | € | — | € | 22,179 | ||||||||
108
| Year Ended December 31, 2012 | ||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | € | (14,221 | ) | € | 3,730 | € | (10,491 | ) | ||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | (764 | ) | (1,713 | ) | (2,477 | ) | ||||||
Loss on extinguishment of debt | 81 | — | 81 | |||||||||
Depreciation and amortization | 31,471 | 26,581 | 58,052 | |||||||||
Deferred income taxes | 5,179 | (5,297 | ) | (118 | ) | |||||||
Stock compensation expense | 2,039 | — | 2,039 | |||||||||
Pension and other post-retirement expense, net of funding | 284 | — | 284 | |||||||||
Other | 1,144 | 2,657 | 3,801 | |||||||||
Changes in working capital | ||||||||||||
Receivables | (587 | ) | 8,981 | 8,394 | ||||||||
Inventories | (3,991 | ) | 5,333 | 1,342 | ||||||||
Accounts payable and accrued expenses | (7,446 | ) | (6,544 | ) | (13,990 | ) | ||||||
Other(1) | (15,779 | ) | 14,835 | (944 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | (2,590 | ) | 48,563 | 45,973 | ||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (21,937 | ) | (14,767 | ) | (36,704 | ) | ||||||
Proceeds on sale of property, plant and equipment | 365 | 288 | 653 | |||||||||
Proceeds on maturity of marketable securities | 12,213 | — | 12,213 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (9,359 | ) | (14,479 | ) | (23,838 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (2,671 | ) | (24,583 | ) | (27,254 | ) | ||||||
Repayment of capital lease obligations | (735 | ) | (1,390 | ) | (2,125 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | 4,559 | — | 4,559 | |||||||||
Payment of note issuance costs | (312 | ) | (1,621 | ) | (1,933 | ) | ||||||
Proceeds from government grants | 3,096 | 792 | 3,888 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 3,937 | (26,802 | ) | (22,865 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (103 | ) | — | (103 | ) | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (8,115 | ) | 7,282 | (833 | ) | |||||||
Cash and cash equivalents, beginning of year | 44,829 | 60,243 | 105,072 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 36,714 | € | 67,525 | € | 104,239 | ||||||
|
|
|
|
|
| |||||||
| (1) | Includes intercompany related transactions. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of Cash Flows
| Year Ended December 31, 2009 | ||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||
| Group | Group | Group | ||||||||||
| Cash flows from (used in) operating activities | ||||||||||||
| Net income (loss) attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | (62,189 | ) | |||
| Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
| Loss (gain) on derivative instruments | — | 5,760 | 5,760 | |||||||||
| Foreign exchange (gain) loss on debt | (2,692 | ) | — | (2,692 | ) | |||||||
| Gain on extinguishment of convertible notes | (4,447 | ) | — | (4,447 | ) | |||||||
| Depreciation and amortization | 27,704 | 26,466 | 54,170 | |||||||||
| Accretion (income) expense | 181 | — | 181 | |||||||||
| Noncontrolling interest | — | (9,936 | ) | (9,936 | ) | |||||||
| Deferred income taxes | (176 | ) | (5,827 | ) | (6,003 | ) | ||||||
| Stock compensation expense | 455 | — | 455 | |||||||||
| Pension and other post-retirement expense, net of funding | 282 | — | 282 | |||||||||
| Other | 934 | 1,551 | 2,485 | |||||||||
| Changes in current assets and liabilities | ||||||||||||
| Receivables | 26,140 | 5,965 | 32,105 | |||||||||
| Inventories | 13,234 | 18,924 | 32,158 | |||||||||
| Accounts payable and accrued expenses | 5,839 | (8,789 | ) | (2,950 | ) | |||||||
| Other(1) | (18,265 | ) | 16,205 | (2,060 | ) | |||||||
| Net cash from (used in) operating activities | 13,262 | 24,057 | 37,319 | |||||||||
| Cash flows from (used in) investing activities | ||||||||||||
| Purchase of property, plant and equipment | (26,839 | ) | (1,989 | ) | (28,828 | ) | ||||||
| Proceeds on sale of property, plant and equipment | 158 | 278 | 436 | |||||||||
| Cash, restricted | — | 13,000 | 13,000 | |||||||||
| Note receivable | 152 | — | 152 | |||||||||
| Net cash from (used in) investing activities | (26,529 | ) | 11,289 | (15,240 | ) | |||||||
| Cash flows from (used in) financing activities | ||||||||||||
| Repayment of notes payable and debt | (4,272 | ) | (16,499 | ) | (20,771 | ) | ||||||
| Repayment of capital lease obligations | (680 | ) | (2,498 | ) | (3,178 | ) | ||||||
| Proceeds from borrowings of notes payable and debt | 3,511 | — | 3,511 | |||||||||
| Proceeds from government investment grants | 9,058 | — | 9,058 | |||||||||
| Payment of deferred note issuance costs | — | (1,969 | ) | (1,969 | ) | |||||||
| Net cash from (used in) financing activities | 7,617 | (20,966 | ) | (13,349 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 109 | — | 109 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (5,541 | ) | 14,380 | 8,839 | ||||||||
| Cash and cash equivalents, beginning of period | 26,176 | 16,276 | 42,452 | |||||||||
| Cash and cash equivalents, end of period | € | 20,635 | € | 30,656 | € | 51,291 | ||||||
| Year Ended December 31, 2011 | ||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | € | 39,809 | € | 14,197 | € | 54,006 | ||||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | — | 1,418 | 1,418 | |||||||||
Foreign exchange loss (gain) on debt | (1,175 | ) | — | (1,175 | ) | |||||||
Loss on extinguishment of debt | 71 | — | 71 | |||||||||
Depreciation and amortization | 30,086 | 25,919 | 56,005 | |||||||||
Deferred income taxes | 2,989 | (5,366 | ) | (2,377 | ) | |||||||
Stock compensation expense | 3,310 | — | 3,310 | |||||||||
Pension and other post-retirement expense, net of funding | (269 | ) | — | (269 | ) | |||||||
Other | 1,413 | 492 | 1,905 | |||||||||
Changes in working capital | ||||||||||||
Receivables | 3,255 | (4,859 | ) | (1,604 | ) | |||||||
Inventories | (10,175 | ) | (7,538 | ) | (17,713 | ) | ||||||
Accounts payable and accrued expenses | 5,868 | 8,384 | 14,252 | |||||||||
Other(1) | (8,503 | ) | 11,729 | 3,226 | ||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | 66,679 | 44,376 | 111,055 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (29,513 | ) | (8,296 | ) | (37,809 | ) | ||||||
Proceeds on sale of property, plant and equipment | 327 | 486 | 813 | |||||||||
Purchase of marketable securities | (12,187 | ) | — | (12,187 | ) | |||||||
Note receivable | 2,865 | — | 2,865 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (38,508 | ) | (7,810 | ) | (46,318 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (26,026 | ) | (23,167 | ) | (49,193 | ) | ||||||
Repayment of capital lease obligations | (1,310 | ) | (1,632 | ) | (2,942 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (14,652 | ) | — | (14,652 | ) | |||||||
Proceeds from government grants | 14,091 | 108 | 14,199 | |||||||||
Purchase of treasury shares | (7,476 | ) | — | (7,476 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | (35,373 | ) | (24,691 | ) | (60,064 | ) | ||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | 1,377 | — | 1,377 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (5,825 | ) | 11,875 | 6,050 | ||||||||
Cash and cash equivalents, beginning of year | 50,654 | 48,368 | 99,022 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 44,829 | € | 60,243 | € | 105,072 | ||||||
|
|
|
|
|
| |||||||
| (1) | Includes intercompany |
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 20. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of Cash Flows
| Year Ended December 31, 2008 | ||||||||||||
| Restricted | Unrestricted | Consolidated | ||||||||||
| Group | Group | Group | ||||||||||
| Cash flows from (used in) operating activities | ||||||||||||
| Net income (loss) attributable to common shareholders | € | (30,432 | ) | € | (42,033 | ) | € | (72,465 | ) | |||
| Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
| Loss (gain) on derivative instruments | — | 25,228 | 25,228 | |||||||||
| Foreign exchange (gain) loss on debt | 4,114 | 120 | 4,234 | |||||||||
| Gain on extinguishment of convertible notes | — | — | — | |||||||||
| Depreciation and amortization | 28,868 | 26,894 | 55,762 | |||||||||
| Accretion (income) expense | — | — | — | |||||||||
| Noncontrolling interest | — | (13,075 | ) | (13,075 | ) | |||||||
| Deferred income taxes | 3,464 | (1,488 | ) | 1,976 | ||||||||
| Stock compensation expense | 264 | — | 264 | |||||||||
| Pension and other post-retirement expense, net of funding | (758 | ) | — | (758 | ) | |||||||
| Inventory provisions | 8,637 | 2,635 | 11,272 | |||||||||
| Other | 2,046 | 979 | 3,025 | |||||||||
| Changes in current assets and liabilities | ||||||||||||
| Receivables | (24,427 | ) | 9,616 | (14,811 | ) | |||||||
| Inventories | (12,207 | ) | (1,124 | ) | (13,331 | ) | ||||||
| Accounts payable and accrued expenses | 861 | (1,952 | ) | (1,091 | ) | |||||||
| Other(1) | (2,321 | ) | 4,225 | 1,904 | ||||||||
| Net cash from (used in) operating activities | (21,891 | ) | 10,025 | (11,866 | ) | |||||||
| Cash flows from (used in) investing activities | ||||||||||||
| Purchase of property, plant and equipment | (20,776 | ) | (4,928 | ) | (25,704 | ) | ||||||
| Proceeds on sale of property, plant and equipment | 189 | 1,811 | 2,000 | |||||||||
| Cash, restricted | — | 20,000 | 20,000 | |||||||||
| Note receivable | 5,708 | — | 5,708 | |||||||||
| Net cash from (used in) investing activities | (14,879 | ) | 16,883 | 2,004 | ||||||||
| Cash flows from (used in) financing activities | ||||||||||||
| Repayment of notes payable and debt | — | (34,023 | ) | (34,023 | ) | |||||||
| Repayment of capital lease obligations | (1,226 | ) | (2,086 | ) | (3,312 | ) | ||||||
| Proceeds from borrowings of notes payable and debt | 5,837 | — | 5,837 | |||||||||
| Proceeds from government investment grants | 266 | — | 266 | |||||||||
| Payment of deferred note issuance costs | — | — | — | |||||||||
| Net cash from (used in) financing activities | 4,877 | (36,109 | ) | (31,232 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,302 | ) | — | (1,302 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | (33,195 | ) | (9,201 | ) | (42,396 | ) | ||||||
| Cash and cash equivalents, beginning of period | 59,371 | 25,477 | 84,848 | |||||||||
| Cash and cash equivalents, end of period | € | 26,176 | € | 16,276 | € | 42,452 | ||||||
| Year Ended December 31, 2010 | ||||||||||||
| Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | € | 62,327 | € | 32,421 | € | 94,748 | ||||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | — | (1,899 | ) | (1,899 | ) | |||||||
Foreign exchange loss (gain) on debt | 6,126 | — | 6,126 | |||||||||
Loss on extinguishment of debt | 7,494 | — | 7,494 | |||||||||
Depreciation and amortization | 30,270 | 25,961 | 56,231 | |||||||||
Deferred income taxes | (9,760 | ) | — | (9,760 | ) | |||||||
Stock compensation expense | 2,394 | — | 2,394 | |||||||||
Pension and other post-retirement expense, net of funding | 418 | — | 418 | |||||||||
Other | 5,011 | 2,671 | 7,682 | |||||||||
Changes in working capital | ||||||||||||
Receivables | (25,913 | ) | (14,125 | ) | (40,038 | ) | ||||||
Inventories | (2,885 | ) | (21,577 | ) | (24,462 | ) | ||||||
Accounts payable and accrued expenses | (10,304 | ) | 7,215 | (3,089 | ) | |||||||
Other(1) | (10,597 | ) | 6,031 | (4,566 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | 54,581 | 36,698 | 91,279 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (34,675 | ) | (3,625 | ) | (38,300 | ) | ||||||
Proceeds on sale of property, plant and equipment | 251 | 887 | 1,138 | |||||||||
Note receivable | 1,113 | — | 1,113 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (33,311 | ) | (2,738 | ) | (36,049 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (220,665 | ) | (13,917 | ) | (234,582 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 222,177 | — | 222,177 | |||||||||
Repayment of capital lease obligations | (589 | ) | (2,331 | ) | (2,920 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (2,660 | ) | — | (2,660 | ) | |||||||
Payment of note issuance costs | (6,095 | ) | — | (6,095 | ) | |||||||
Proceeds from government grants | 17,952 | — | 17,952 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 10,120 | (16,248 | ) | (6,128 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (1,371 | ) | — | (1,371 | ) | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 30,019 | 17,712 | 47,731 | |||||||||
Cash and cash equivalents, beginning of year | 20,635 | 30,656 | 51,291 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 50,654 | € | 48,368 | € | 99,022 | ||||||
|
|
|
|
|
| |||||||
| (1) | Includes intercompany |
110
Quarterly Financial Data
(Thousands of Euros, except per share amounts)
| Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| �� | ||||||||||||||||
2009 | ||||||||||||||||
| Revenues | € | 139,572 | € | 158,884 | € | 156,231 | € | 165,112 | ||||||||
| Gross profit | (12,413 | ) | (9,736 | ) | (493 | ) | 9,843 | |||||||||
| Net income (loss) attributable to common shareholders | (39,350 | ) | (11,476 | ) | (14,112 | ) | 2,749 | |||||||||
| Net income (loss) per share attributable to common shareholders* | (1.08 | ) | (0.32 | ) | (0.39 | ) | 0.07 | |||||||||
2008 | ||||||||||||||||
| Revenues | € | 186,816 | € | 176,651 | € | 184,828 | € | 171,996 | ||||||||
| Gross profit | 18,643 | 6,216 | 9,854 | (21,384 | ) | |||||||||||
| Net income (loss) attributable to common shareholders | 2,869 | 871 | (17,173 | ) | (59,032 | ) | ||||||||||
| Net income (loss) per share attributable to common shareholders* | 0.08 | 0.02 | (0.47 | ) | (1.63 | ) | ||||||||||
111
| Quarters Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
2012 | ||||||||||||||||
Revenues | € | 218,358 | € | 204,062 | € | 223,275 | € | 188,448 | ||||||||
Gross profit | 16,243 | 18,296 | 7,214 | 7,252 | ||||||||||||
Net income (loss) attributable to common shareholders | 1,173 | 1,515 | (9,712 | ) | (5,161 | ) | ||||||||||
Net income (loss) per share attributable to common shareholders* | 0.02 | 0.03 | (0.17 | ) | (0.09 | ) | ||||||||||
2011 | ||||||||||||||||
Revenues | € | 226,330 | € | 234,495 | € | 207,065 | € | 231,585 | ||||||||
Gross profit | 36,644 | 36,211 | 35,307 | 2,957 | ||||||||||||
Net income (loss) attributable to common shareholders | 29,053 | 14,383 | 8,440 | (1,801 | ) | |||||||||||
Net income (loss) per share attributable to common shareholders* | 0.52 | 0.26 | 0.15 | (0.03 | ) | |||||||||||
* On a diluted basis
SIGNATURES
| Dated: February | By: | /s/ JIMMY S.H. LEE | ||||
| Jimmy S.H. Lee | ||||||
| Chairman | ||||||
Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ JIMMY S.H. LEE | ||||||
| Date: February | ||||||
| 15, 2013 | ||||||
Jimmy S.H. Lee | ||||||
Chairman, Chief Executive Officer and Director | ||||||
/s/ | Date: February | |||||
| 15, 2013 | ||||||
David M. Gandossi | ||||||
Secretary, Executive Vice President, | ||||||
Chief Financial Officer and Principal | ||||||
Accounting Officer | ||||||
/s/ | Date: February | |||||
| 15, 2013 | ||||||
Eric Lauritzen | ||||||
Director | ||||||
/s/ | Date: February | |||||
| 15, 2013 | ||||||
William D. McCartney | ||||||
Director | ||||||
/s/ GRAEME A. WITTS | Date: February | |||||
| 15, 2013 | ||||||
Graeme A. Witts | ||||||
Director | ||||||
/s/ GUY W. ADAMS | Date: February | |||||
| 15, 2013 | ||||||
Guy W. Adams | ||||||
Director | ||||||
/s/ BERNARD PICCHI | Date: February | |||||
| 15, 2013 | ||||||
Bernard Picchi | ||||||
Director | ||||||
/s/ | Date: February | |||||
James Shepherd | ||||||
Director | ||||||
/s/ KEITH PURCHASE | Date: February 15, 2013 | |||||
Keith Purchase | ||||||
Director | ||||||
112
| Exhibit | ||||
No. | Description of Exhibit | |||
| 2 | .1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | ||
| 3 | .1 | Articles of Incorporation of the Company, as amended. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
| 3 | .2 | Bylaws of the Company. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
| 4 | .1 | Indenture dated as of October 10, 2003 between Mercer International Inc. and Wells Fargo Bank Minnesota, N.A. Incorporated by reference fromForm 8-K dated October 15, 2003. | ||
| 4 | .2 | Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference fromForm S-3 filed December 10, 2004. | ||
| 4 | .3 | First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference fromForm 8-K dated February 17, 2005. | ||
| 4 | .4 | Indenture dated as of December 10, 2009 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated December 11, 2009. | ||
| 10 | .1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009. | ||
| 10 | .2 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated September 10, 2002. | ||
| 10 | .3* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. | ||
| 10 | .4* | Contract for the Engineering, Design, Procurement, Construction, Erection andStart-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | ||
| 10 | .5* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | ||
| 10 | .6 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference fromForm 8-K dated August 11, 2003. | ||
| 10 | .7 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference fromForm 8-K dated April 28, 2004. | ||
| 10 | .8 | 2004 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 15, 2004. | ||
| 10 | .9 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference fromForm 8-K dated October 2, 2006. | ||
| 10 | .10 | Employment Agreement effective October 16, 2006 between Mercer International Inc. and David Ure dated September 22, 2006. Incorporated by reference fromForm 8-K dated October 13, 2006. | ||
| 10 | .11* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | ||
| 10 | .12 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference fromForm 10-Q dated May 6, 2008. | ||
113
| Exhibit | ||||
No. | Description of Exhibit | |||
| 10 | .13* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | ||
| 10 | .14 | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
| 10 | .15 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
| 10 | .16 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference fromForm 8-K dated November 30, 2009. | ||
| 14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |||
| 99 | .1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | ||
| 99 | .2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | ||
| 99 | .3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 99 | .4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 99 | .5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
| 21 | List of Subsidiaries of Registrant. | |||
| 23 | .1 | Consent of Independent Registered Chartered Accountants — PricewaterhouseCoopers LLP. | ||
| 31 | .1 | Section 302 Certificate of Chief Executive Officer. | ||
| 31 | .2 | Section 302 Certificate of Chief Financial Officer. | ||
| 32 | .1** | Section 906 Certificate of Chief Executive Officer. | ||
| 32 | .2** | Section 906 Certificate of Chief Financial Officer. | ||
Exhibit No. | Description of Exhibit | |
| 2.1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | |
| 3.1 | Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006. | |
| 3.2 | Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006. | |
| 4.1 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference from Form 8-K dated November 19, 2010. | |
| 10.1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2011. | |
| 10.2* | Project Blue Mill Financing Facility Agreement dated January 20, 2012 between Zellstoff Stendal GmbH and Unicredit Bank AG and IKB Deutsche Industriebank AG. | |
| 10.3* | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG as amended by the Amendment Restatement and Undertaking Agreement dated January 20, 2012. | |
| 10.4* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG as amended by the Amendment Restatement and Undertaking Agreement dated January 20, 2012. | |
| 10.5* | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | |
| 10.6* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | |
| 10.7 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003. | |
| 10.8 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004. | |
| 10.9 | 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004. | |
| 10.10 | 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010. | |
| 10.11 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006. | |
| 10.12* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | |
| 10.13 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008. | |
| 10.14* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | |
| 10.15 | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated August 24, 2009. | |
| 10.16 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference from Form 8-K dated August 24, 2009. | |
| 10.17 | Extension, Amendment and Confirmation Letter dated October 4, 2012 among Zellstoff- und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, D&Z Beteiligungs GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-Q dated November 2, 2012. | |
| 10.18 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated November 30, 2009. | |
| 14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |
| 99.1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | |
| 99.2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | |
| 99.3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 99.4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 99.5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference from Form 8-K filed November 27, 2009. | |
| 21 | List of Subsidiaries of Registrant. | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 31.1 | Section 302 Certificate of Chief Executive Officer. | |
| 31.2 | Section 302 Certificate of Chief Financial Officer. | |
| 32.1** | Section 906 Certificate of Chief Executive Officer. | |
| 32.2** | Section 906 Certificate of Chief Financial Officer. | |
| * | Filed inForm 10-K for prior years. |
| ** | In accordance with Release33-8212 of the SEC, these Certifications: (i) are “furnished” to the SEC and are not “filed” for the purposes of liability under the Exchange Act; and (ii) are not to be subject to automatic incorporation by reference into any of the Company’s registration statements filed under the Securities Act for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein. |
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