UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FormFORM 10-K

x
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

¨For the fiscal year ended December 31, 2009
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________

For the transition period fromto

Commission File No.:000-51826

MERCER INTERNATIONAL INC.

Exact name of Registrant as specified in its charter

Washington 47-0956945
Washington

State or other jurisdiction
of

incorporation or organization

 47-0956945

IRS Employer

Identification No.

Suite 2840, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada, V6B 4N8

V6C 1G8

Address of Office

Registrant’s telephone number including area code:(604) 684-1099

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $1.00 NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    o¨  Yes    þx  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.    o¨  Yes    þx  No

Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þx    No  o¨

Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ox    No  o¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’sthe registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.    xþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, or a smaller reporting company.filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨Accelerated filerx
Large acceleratedNon-accelerated fileroAccelerated filer oNon-accelerated¨  filer þ(Do not check if a smaller reporting company)Smaller reporting companyo¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).    o¨    Yes    þx    No

The aggregate market value of the Registrant’sregistrant’s voting and non-voting common equity held by non-affiliates of the Registrantregistrant as of June 30, 2009,2012, the last business day of the Registrant’sregistrant’s most recently completed second fiscal quarter, based on the closing price of the voting stock on the NASDAQ Global Market on such date, was approximately $19,510,235.

$318,707,670.

As of February 24, 2010,13, 2013, the Registrantregistrant had 36,451,16155,815,704 shares of common stock, $1.00 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information that will be contained in the definitive proxy statement for the Registrant’s annual meeting to be held in 20102013 is incorporated by reference into Part III of thisForm 10-K.


TABLE OF CONTENTS

Page
BUSINESS

   5  
ITEM 1. 

The CompanyBUSINESS

   5  
 

The Company

5

Our Competitive Strengths

   7  
 

Corporate Strategy

7
The Pulp Industry

   8  
 

Our ProductThe Pulp Industry

   129  
 

Our Mills and Product

16

Generation and Sales of “Green” Energy and Chemicals at our Mills

   1318  
 

Operating Costs

14
Cash Production Costs17
Sales, Marketing and Distribution17
Capital Expenditures19
Environmental

   20  
 

Climate ChangeCash Production Costs

21
Human Resources

   22  
 

Description of Certain IndebtednessSales, Marketing and Distribution

   23  
 

Additional InformationTransportation

24

Capital Expenditures

24

Environmental

   26  
 

RISK FACTORSClimate Change

   27  
 

UNRESOLVED STAFF COMMENTSHuman Resources

   3529  
 

PROPERTIESDescription of Certain Indebtedness

   3529  
 

LEGAL PROCEEDINGSInternet Availability and Additional Information

   3733  
ITEM 1A. 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSRISK FACTORS

   3733  
ITEM 1B.

UNRESOLVED STAFF COMMENTS

43  
PART II
ITEM 2. 

PROPERTIES

44
ITEM 3.

LEGAL PROCEEDINGS

44
ITEM 4.

MINE SAFETY DISCLOSURES

45

PART II

46
ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   3846  
 

SELECTED FINANCIAL DATA

   4148  
 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

42
Results of Operations42
Current Market Environment44
Three-Year Snapshot44
Year Ended December 31, 2009 Compared to the Year Ended December 31, 200844
Year Ended December 31, 2008 Compared to the Year Ended December 31, 200746
Sensitivities48
Liquidity and Capital Resources48
Debt

   49  
 

Debt CovenantsResults of Operations

   49  
 

Cash Flow AnalysisYear Ended December 31, 2012 Compared to Year Ended December 31, 2011

50
Capital Resources50
Future Liquidity51
Off Balance Sheet Activities51
Contractual Obligations and Commitments51
Foreign Currency

   52  
 

Results of Operations of the Restricted Group Under Our Senior Note IndentureYear Ended December 31, 2011 Compared to Year Ended December 31, 2010

   5254  
 

Restricted Group Results — Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008Sensitivities

52
Restricted Group Results — Year Ended December 31, 2008 Compared to the Year Ended December 31, 200753


2


Page
Liquidity and Capital Resources of the Restricted Group55
Critical Accounting Policies   56  
 

New Accounting StandardsLiquidity and Capital Resources

   57  
 

Cautionary Statement Regarding Forward-Looking InformationBalance Sheet Data

57
Inflation57
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   58  
 

DerivativesSources and Uses of Funds

   58  
 

Interest Rate RiskDebt and Debt Covenants

   59  
 

Foreign Currency Exchange RiskOff-Balance-Sheet Activities

59

Contractual Obligations and Commitments

   60  
 

Energy Price RiskForeign Currency

60

Results of Operations of the Restricted Group under Our Senior Note Indenture

   61  
 

Restricted Group Results

62

Liquidity and Capital Resources

65

Balance Sheet Data of the Restricted Group

66

Sources and Uses of Funds of the Restricted Group

66

Credit Ratings of Senior Notes

66

Critical Accounting Policies

67

Cautionary Statement Regarding Forward-Looking Information

70

Inflation

70

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

71

Derivatives

71

Interest Rate Risk

73

Pulp Price Risk

74

Energy Price Risk

74
ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   6174  
 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   6174  
 

CONTROLS AND PROCEDURES

   6174  
 

Evaluation of Disclosure Controls and Procedures

   6174  
 

Management’s Report on Internal Control Over Financial Reporting

   6275  
 

Changes in Internal Controls

   6275  
 

OTHER INFORMATION

   6275  

PART III

76  
PART III
 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   6376  
 

Audit Committee

   6578  
 

Compensation and Human ResourcesResource Committee

   6579  
 

Governance and Nominating Committee

   6679  
 

Environmental, Health and Safety Committee

   6679  
 

Lead Director/Deputy Chairman

   6679  
 

Code of Business Conduct and Ethics

   6680  
 

Section 16(a) Beneficial Ownership Reporting Compliance

   6780  
 

EXECUTIVE COMPENSATION

   6780  
 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   6780  
 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

   6780  
 

Review, Approval or Ratification of Transactions with Related Persons

   6780  
 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   6781  

PART IV

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

   6882  
ITEM 15. 

Financial StatementsEXHIBITS, FINANCIAL STATEMENTS

   7082  
 

SUPPLEMENTARY FINANCIAL INFORMATION

   111129  
 

SIGNATURES

   112130  
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2


3


EXCHANGE RATES

Our reporting currency and financial statements included in this report are in Euros, as a significant majority of our business transactions are originally denominated in Euros. We translate non-Euro denominated assets and liabilities at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period.

The following table sets out exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York, (thereferred to as the “Noon Buying Rate”), for the conversion of Euros and Canadian dollars to U.S. dollars in effect at the end of the following periods, the average exchange rates during these periods (based on daily Noon Buying Rates) and the range of high and low exchange rates for these periods:

                     
  Years Ended December 31, 
  2009  2008  2007  2006  2005 
  (€/$) 
 
End of period  0.6977   0.7184   0.6848   0.7577   0.8445 
High for period  0.6623   0.6246   0.6729   0.7504   0.7421 
Low for period  0.7970   0.8035   0.7750   0.8432   0.8571 
Average for period  0.7176   0.6801   0.7294   0.7962   0.8033 
  (C$/$)
End of period  1.0461   1.2240   0.9881   1.1653   1.1659 
High for period  1.0289   0.9717   0.9168   1.0989   1.1507 
Low for period  1.2995   1.2971   1.1852   1.1726   1.2704 
Average for period  1.1412   1.0669   1.0740   1.1344   1.2116 
Effective January 2009, the Noon Buying Rate is published on a weekly basis by the Federal Reserve Board.

   Year Ended December 31, 
   2012   2011   2010   2009   2008 
   (€/$) 

End of period

   0.7584     0.7708     0.7536     0.6977     0.7184  

High for period

   0.7428     0.6723     0.6879     0.6623     0.6246  

Low for period

   0.8290     0.7736     0.8362     0.7970     0.8035  

Average for period

   0.7782     0.7186     0.7541     0.7176     0.6826  
   (C$/$) 

End of period

   0.9958     1.0168     1.0009     1.0461     1.2240  

High for period

   0.9710     0.9448     0.9960     1.0289     0.9717  

Low for period

   1.0417     1.0605     1.0776     1.2995     1.2971  

Average for period

   0.9995     0.9887     1.0298     1.1412     1.0660  

On February 19, 2010,8, 2013, the date of the most recent weekly publication of the Daily Noon Buying Rate before the filing of this annual report onForm 10-K, the Noon Buying Rate for the conversion of Euros and Canadian dollars to U.S. dollars was €0.7387€0.7482 per U.S. dollar and C$1.04191.0021 per U.S. dollar.

In addition, certain financial information relating to our Celgar mill included in this annual report onForm 10-K is stated in Canadian dollars while we report our financial results in Euros. The following table sets out exchange rates, based on the noon rate provided by the Bank of Canada, (thereferred to as the “Daily Noon Rate”), for the conversion of Canadian dollars to Euros in effect at the end of the following periods, the average exchange rates during these periods (based on Daily Noon Rates) and the range of high and low exchange rates for these periods:

                     
  Years Ended December 31, 
  2009  2008  2007  2006  2005 
  (C$/€) 
 
End of period  1.5000   1.7046   1.4428   1.5377   1.3805 
High for period  1.4936   1.4489   1.3448   1.3523   1.3576 
Low for period  1.6920   1.7316   1.5628   1.5377   1.6400 
Average for period  1.5851   1.5603   1.4690   1.4244   1.5095 

   Year Ended December 31, 
   2012   2011   2010   2009   2008 
   (C$/€) 

End of period

   1.3118     1.3193     1.3319     1.5000     1.7046  

High for period

   1.2153     1.2847     1.2478     1.4936     1.4489  

Low for period

   1.3446     1.4305     1.5067     1.6920     1.7316  

Average for period

   1.2850     1.3761     1.3671     1.5851     1.5603  

On February 25, 2010,14, 2013, the Daily Noon Rate for the conversion of Canadian dollars to Euros was C$1.43841.3344 per Euro.


4


PART I

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 “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;
•    information is provided as of December 31, 2009, unless otherwise stated or the context clearly suggests otherwise;
•    all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; and
•    ‘‘€” refers to Euros; “$” refers to U.S. dollars; and “C$” refers to Canadian dollars.

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.

The Company

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. 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.

We are the sole 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:

ADMTs of NBSK pulp and 259 MW of electrical generation:

 

Rosenthal mill.mill. Our wholly-owned subsidiary, Rosenthal, owns and operates the Rosenthal mill, a modern, efficient ISO 90029001, 14001 and 50001 certified NBSK pulp mill that has a current annual production capacity of approximately 330,000 ADMTs. The Rosenthal mill is located near the town of Blankenstein, Germany, approximately 250 kilometers south of Berlin.

•    Stendal mill.  Our 74.9% owned subsidiary, Stendal, owns and operates astate-of-the-art, single-line NBSK pulp mill that has an annual production capacity of approximately 645,000 ADMTs.355,000 ADMTs and 57 MW of electrical generation. The StendalRosenthal mill generated and exported 169,613 MWh of electricity in 2012, resulting in approximately €15.1 million in annual revenues. The Rosenthal mill is situated nearlocated in the town of Stendal,Blankenstein, Germany approximately 100300 kilometers westsouth of Berlin.

 

Celgar mill.mill. Our wholly-owned subsidiary, Celgar, owns and operates the Celgar mill, a modern, efficient ISO 9001 and 14001 certified NBSK pulp mill with an annual production capacity of approximately 500,000 ADMTs.520,000 ADMTs and 100 MW of electrical generation. The Celgar mill generated and exported 171,994 MWh of electricity in 2012, resulting in approximately C$17.2 million in annual revenues. The Celgar mill is located near the city of Castlegar, British Columbia, Canada, approximately 400600 kilometers east of the port city of Vancouver, British Columbia, Canada.

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.

Rosenthal mill in 1994. In late 1999, we completed a major capital project which, among other things, converted the Rosenthalthat mill to the production of kraft pulp from sulphite pulp, increased its annual production capacity reduced costs and improved efficiencies. The aggregate cost of this project was approximately €361.0 million, of which approximately €102.0 million was financed through government grants. Subsequent minor capital investments and efficiency improvements have reduced emissions and energy costs and increased the Rosenthal mill’s annual production capacity to approximately 330,000355,000 ADMTs.


5


In September 2004, we completed construction of the Stendal mill at an aggregate cost of approximately €1.0 billion. The Stendal mill is one of the largest NBSK pulp mills in Europe. The Stendal mill was financed through a combination of government grants totaling approximately €275.0 million, of low-cost, long-term project debt which is largely severally guaranteed by the federal government and a state government in Germany, and equity contributions.

We initially hadcurrently have a 63.6%74.9% ownership interest in StendalStendal. We, and over time, increased our interest to 74.9%.

We, Stendal and its minorityStendal’s noncontrolling shareholder are parties to a shareholders’ agreement dated August 26, 2002, as amended, to govern our respective interests in Stendal. The agreement contains terms and conditions customary for these types of agreements, including restrictions on transfers of share capital and shareholder loans other than to affiliates, rights of first refusal on share and shareholder loan transfers, pre-emptive rights and piggyback rights on dispositions of our interest. The shareholders are not obligated to fund any further equity capital contributions to the project. The shareholders’ agreement provides that Stendal’s managing directors are appointed by holders of a simple majority of its share capital. Further, shareholder decisions, other than those mandated by law or for the provision of financial assistance to a shareholder, are determined by a simple majority of Stendal’s share capital.

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.

In 2007,

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”.

Organizational Chart
The following chart sets out our directly and indirectly owned principal operating subsidiaries, their jurisdictions of organization and their principal activities:


6

government.


Our Competitive Strengths

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. TheWe believe the relative age, production capacity and productionelectrical generation capacity of our NBSK pulp mills provide us with certain manufacturing cost and other advantages over many of our competitors including lower maintenance capital expenditures.competitors.

 

Stable Income Source from the Sale of Surplus Renewable Surplus Energy.Energy and Chemicals.Our modern mills generate electricity and steam in their boilers and are generally energy self-sufficient.which is surplus to their operating requirements. Such energy is primarily produced from wood residuals which are a renewable carbon neutral source. This has permitted our German mills to benefit from the sales of emission allowances. All of our mills also generate and sell surplus energy which we sell to third parties.regional utilities. Our Rosenthal and StendalGerman mills benefit from their participationspecial tariffs under Germany’sRenewable Energy Resources Act, referred to as the “Renewable Energy Act”, which has materially increased their revenues from sales of surplus power. Additionally, ourprovides for premium pricing. Our Celgar mill is in the process of completing the Celgar Energy Project and has entered into anparty to a fixed electricity purchase agreement, referred to as the “Electricity Purchase Agreement”, with British Columbia’s primarythe regional public utility provider, for the sale of surplus power for ten years. When completed, the Celgar Energy Projectpower. Our Stendal mill also produces tall oil as a by-product which is expectedsold to increasethird parties. In total, our overall salesmills produced 710,241 MWh of surplus power by 238,000 MWh per annumrenewable energy in 2012 and generated approximately €72.3 million in revenues from energy and chemical sales. These sales provide us with a stable income unrelated to over 700,000 MWh per annum.cyclical changes in pulp prices. We believe our generation and sale of surplus renewable “green” energy and chemicals provides us with a competitive energy advantage.advantage over less efficient mills.

 

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 Proximity and Service.We are the only significant producer of market pulp in Germany, which is the largest pulp import market in Europe. Due to the proximity of our German mills to most of our European customers, we benefit from lower transportation costs relative to our major competitors. Our Celgar mill, located in Western Canada, is well situated to serve Asian and North American customers. We primarily work directly with customers to capitalize on our geographic diversity, coordinate sales and enhance customer relationships. We believe our ability to deliver high quality pulp on a timely basis and our customer service makes us a preferred supplier for many customers.

 

Advantageous Capital Investments and Financing.Our German mills are eligible to receive government grants in respect of qualifying capital investments. Over the last nine13 years, our German mills have benefited from approximately €383.7€386.3 million of such government grants. In addition, in October 2009, our Celgar mill qualified to receivereceived approximately C$57.7 million of creditsgrants under the Canadian government’s new Pulp and Paper Green Transformation Program, referred to as the “GTP”. These, to fund the Celgar Energy Project and other smaller projects. All such grants reduce the cost basis of the assets purchased when the grants are received and are not reported in our income. Additionally, during the last ten years, capital investments at our German mills have reduced the amount of overall wastewater fees that would otherwise be payable by over €49.0€52.7 million. Further, our Stendal mill benefits from German governmental guarantees of its project financing, which permitted it to obtain better credit terms and lower interest costs than would otherwise behave been available. The project debt of Stendal, which matures in 2017, currently bears interest at a substantially fixed rate of 5.28% per annum plus an applicable margin and is non-recourse to our other operations and Mercer Inc.

 

CompetitiveProximity of Abundant Fiber Supply.Although fiber is cyclical in both price and supply, there is a significant amount of high-quality fiber within a close radius of each of our mills. This fiber supply, combined with our purchasing power and our current ability to meaningfully switch between whole logs chipped at our mills and sawmill residual chips, enables us to enter into contracts and arrangements which have generally provided us with a competitive fiber supply.

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.

Corporate Strategy

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:

 

FocusingMaximizing Returns from our Modern, World-Class Mills.We operate three large modern pulp mills as we believe these production facilities provide us with the best platform to be an efficient and competitive producer of high-quality NBSK pulp without the need for significant sustaining capital. We seek to make high return capital investments that increase the production and operation efficiency of the mills, reduce costs and improve product quality. We also seek to reduce operating costs by better managing certain operating activities such as fiber procurement, sales, marketing and logistics activities. We focus on increasing the production and operating efficiency of our mills through cost reductions, including targeted capital investments.

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 focus onproduce NBSK pulp because it is a premium grade kraft pulp and generally obtains the highest price relative to other kraft pulps. Although demand is cyclical, between 19982003 and 2008,2012 overall worldwide demand for softwood kraft market pulp grew at an average of approximately 2.3%2.0% per annum. We focus on servicing customers that produce tissue, specialty papers and high quality printing and writing paper


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grades grades. We believe the growth in addition todemand from tissue producers.and specifically paper customers, which utilize a significant proportion of NBSK pulp, has more than offset the secular decline in demand from printing and writing paper customers. This allows us to benefit from the stableour long-term relationships we hold with tissue and paper suppliersmanufacturers in Europe as well asand participate in strong growth markets in emerging countries such as China where we also havethere has been strong customer relationships.growth in tissue demand.

 Maximizing Renewable Energy Realizations.  In 2009 and 2008, our mills generated 478,674 MWh and 456,059 MWh, respectively, of surplus energy, primarily from a renewable carbon-neutral source. We are pursuing several initiatives to increase our overall energy generation and the amount of and price for our surplus power sales, including the Celgar Energy Project. After completing such project and, based upon the current production levels of our mills, we expect to generate and sell between 700,000 MWh and 750,000 MWh of surplus renewable energy per annum. We expect energy generation and sales to continue to be a key focus for our mills for the foreseeable future. We are also exploring other initiatives and potential high-return projects to further enhance our energy generation and revenues.
 •    

Enhancing Sustainability/Growth.Strategic Opportunities.  WithWe believe there will be continuing change and consolidation in the recentpulp and paper industry as industry participants continually seek to lower costs, refocus their product lines and react to ever changing global economic slowdown and crisis in financial and credit marketsmarket conditions. We take an opportunistic approach to opportunities that started in 2008,can expand our short-term focus has been on maintaining and enhancing the sustainability ofearnings or grow our business. To this end, we worked to reduce costs, cut discretionary spending, including capital expenditures and reduced our working capital consumption levels. As economies and markets recover and access to capital improves, we intend to grow our operations and earning capacity both through organic growth and targeted strategic acquisitions.

•    Operating Modern, World-Class Mills.  In order to keep our operating costs as low as possible, with a goal of generating positive cash flow in all market conditions, we operate large, modern NBSK pulp mills. We believe such production facilities provide us with the best platform to be an efficient and competitive producer of high-quality NBSK pulp without the need for significant sustaining capital. Such modern mills are also generally net exporters of renewable energy.

The Pulp Industry

General

Pulp is used in the production of paper, tissues 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.

There are two 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, coated

We produce and uncoated 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.

sell NBSK pulp, which is a bleached kraft pulp manufactured using species of northern softwood and is considered a premium grade because of its strength. It generally obtains the highest price relative to other kraft pulps. Southern bleached softwood kraft pulp is kraft pulp manufactured using southern softwood species and does not possess the strength found in NBSK pulp. NBSK pulp is the sole product of our mills.


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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.

Kraft pulp can be made in different grades, with varying technical specifications, for different end uses. High-quality kraft pulp is valued for its reinforcing role in mechanical printing papers, while other grades of kraft pulp are used to produce lower priced grades of paper, including tissues and paper relatedpaper-related products.

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.

2009 through 2010. Although global pulp markets continued to strengthen in the first half of 2011, mainly driven by demand from Asia, economic uncertainty in Europe and credit tightening in China resulted in a decrease in demand and weaker pulp prices in the fourth quarter of 2011. In 2012, there was continued economic uncertainty in Europe and credit tightening in China in the first half of the 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 of pulp and resulted in generally weak pulp prices.

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.

how much of such capacity expansion will be implemented.

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.

efforts to improve environmental and safety standards, China has publicly stated that it will be reducing existing pulp and paper capacity in the near term by closing “old” mills. At this time, there can be no certainty as to the amount and timing of any such closures.

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.

We do not believe there are any significantone new NBSK mill in Russia which is scheduled to start up in early 2013. When ramped up, the new mill is expected to provide a net incremental increase in annual pulp production capacity increases coming online inof approximately 490,000 ADMTs. Other than the next several yearsforegoing, we are unaware of any new material NBSK pulp capacity that has been announced. We believe that the absence of other plant expansions is due in part to fiber supply constraints and high capital costs.

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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NBSK Pulp Pricing
Pulp prices are highly cyclical. Global economic conditions, changes in production capacity, inventory levels, and currency exchange rates are the primary factors affecting NBSK pulp list prices. The average annual European list prices for NBSK pulp since 2000 have ranged from a low of approximately $447 per ADMT in 2002 to a high of approximately $900 per ADMT in 2008.
Starting 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 the closure of several pulp mills, particularly in North America, which reduced NBSK capacity by approximately 1.3 million ADMTs, better demand and the general weakness of the U.S. dollar against the Euro and the Canadian dollar.
In 2008, list prices for NBSK pulp in Europe continued to improve in the first half of the year but decreased markedly in the second half 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 price weakness continued into early 2009 as list prices in Europe fell to approximately $575 per ADMT. 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 third quarter of 2009, three price increases raised European list prices by a total of $100 per ADMT to $730 per ADMT by quarter end. Subsequently, in the fourth quarter of 2009, list prices in Europe increased by a further $70 per ADMT. 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 the fourth quarter of 2009, global producer kraft pulp inventories were reported to have fallen to approximately 22 days of supply. In December 2009, list prices for pulp were approximately $800 per ADMT in Europe, $830 per ADMT in North America and $700 per ADMT in China. Subsequently, in the first quarter of 2010, producers implemented further list price increases totaling $60 per ADMT, bringing the European list price to $860 per tonne. However, as pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.
A producer’s sales realizations will reflect 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 North American and Scandinavian, or “Norscan”, 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 and the Euro. 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 slightly offset pulp price decreases caused by the deterioration in global economic conditions. NBSK pulp prices continued to trend downwards during the first half of 2009 but increased in the latter part of the year. The increase was partially offset by the weakening of the U.S. dollar.


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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.
Price Delivered to N. Europe (C$ and € equivalent indexed to 2000)
The Manufacturing Process

The following diagram provides a simplified description of the kraft pulp manufacturing process at our pulp mills:


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In order to transform wood chips into kraft pulp, wood chips undergo a multi-step process involving the following principal stages: chip screening, digesting, pulp washing, screening, bleaching and drying.

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.

Our Mills and Product

We manufacture and sell NBSK pulp produced from wood chipswoodchips and pulp logs.logs at our three mills.

The following table sets out our pulp production capacity and actual production by mill for the periods indicated:

   Annual
Production
Capacity(1)
   Year Ended December 31, 
     2012   2011   2010 
Pulp Production by Mill:      (ADMTs) 

Rosenthal

   355,000     337,959     344,389     324,194  

Celgar

   520,000     490,018     488,007     502,107  

Stendal

   650,000     640,298     621,281     599,985  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pulp production

   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.

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. For more information about

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 Rosenthal mill see “Item 2 — Properties”.include:

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. For more information about

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 StendalCelgar mill see “Item 2 — Properties”.include:

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. For more information about the facilities at the Celgar mill, see “Item 2 — Properties”.


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Generation and Sales of “Green” Energy and Chemicals at our Mills
Climate change concerns have caused a proliferation in renewable or “green” energy legislation, incentives and commercialization in both Europe and increasingly also in North America. This has generated an increase in demand and legislated requirements for “carbon neutral” sources of energy supply.

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.

As a result, we have benefitted from “green” energy legislation, incentives and commercialization that has developed over the last few years in Europe and Canada. In 2009addition, our Stendal mill also produces tall oil as a by-product of its production processes and 2008,sells the same in the market.

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:

Mercer Electricity Generation

The following chart sets forth our consolidated revenues from electricity and Exports

Whenchemical sales for the Celgar last five years:

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.

Chemical Revenue

German Mills

Since January 2009, our

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.

As a result, revenues from the sale of surplus energy by our German mills increased by 39.7% to €41.9 million in 2009 from €30.0 million in 2008.

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.


13


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.

In 2012, our Rosenthal and Stendal mills sold approximately 169,613 MWh and 368,634 MWh of electricity, respectively, for proceeds of €15.1 million and €32.2 million, respectively.

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.

We intend to completefinanced the Celgar Energy Project principally with funding from the GTP. In early October 2009, we received notification from Natural Resources Canada, or “NRCan”, of the Celgar mill’s allocation of approximately C$57.748.0 million in credits under the GTP. Subsequently, in November 2009,of Canadian governmental grants.

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.

We expect to complete the Celgar Energy Project on or about September 2010 and commence power sales under the EPA in the following month.
Upon completion of the Celgar Energy Project and based uponsurplus renewable electricity at our Celgar mill operating at or around current production levels, we currently estimate that surplus power sales pursuant to the EPA will generate betweenwhich generated approximately C$20.0 to C$25.017.2 million in annual revenues for our Celgar mill. Such revenues will be generated without any material incremental costs to the mill.
The Celgar Energy Project is expected to provide the Celgar mill with a new stable revenue source from power sales unrelated to pulp prices. We believe that this revenue source from power sales will provide our Celgar mill with a competitive advantage over other older North American pulp mills which do not have the equipment or capacity to producerevenues.

and/or sell surplus power in a meaningful amount.

OperatingProduction Costs

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 labor costs tend to be 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 generally offset such increases by increasing our efficiencies and production and streamlining operations.
Fiber

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


14


prices and weakening economies in the first half of 2009 tempered the increased demand for wood chips that resulted from initiatives by European governments to promote the use of wood as a carbon neutral energy. Over the long-term, we expect this non-traditional demand for fiber is expectedto continue to increase.

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.

the European fiber supply.

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.

a recovery in lumber markets.

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.

Overall in 2009, prolonged and wide-spread production curtailments in the European board industry caused by weak market conditions resulted in decreased fiber demand and moderated fiber costs for our German 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


15


and other species in 2009.2012. The Stendal mill has sufficient chipping capacity to fully operate solely using pulp logs, if required. We source wood chips from sawmills within an approximate 300 kilometer radius of the Stendal mill. We source pulp logs partly from private forest holders and partly from state forest agencies in Thüringia, Saxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse and Brandenburg.

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.

In 2009, the supply of wood fiber in British Columbia was materially affected by the severe continued weakness in the U.S. housing and construction markets. This has resulted in a significant reduction in lumber production, reduced availability and higher prices for fiber. As a result, our Celgar mill has been workingone year with the provincial government and forest tenure licensees to develop alternate supplies of low-cost and low-grade logs. These logs are often destroyed by a Mountain Pine Beetle infestation currently affecting parts of British Columbia and left to decay in the forest. Discussions with the provincial government to promote access to additional sources of fiber are currently ongoing and have thus far resulted in new small harvest licenses being made available to us. Our recently completed woodroom, improved logistics and the availability of additional fiber sources resulted in improved efficiencies and lower fiber costs in 2009. On the fiber demand side, although not nearly as advanced as Europe, there is growing interest in British Columbia for renewablequarterly adjustments or “green” energy. Such initiatives are expected to create additional competition for fiber over time.
As a result of the cyclical decline in sawmill chip availability resulting from lower lumber production in British Columbia and the weakness in the U.S. dollar, the Celgar mill has 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. Additionally, in the early part of 2009, the Celgar mill completed a project to upgrade its woodroom to process up to 40% of the mill’s fiber needs compared to only approximately 10% previously. The woodroom upgrades increase 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 reduced the Celgar mill’s fiber costs. We expect to be able to further optimize production from our woodroom in 2010.
on three-month terms.

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

Chemicals
Our mills use certain chemicals which are generally available from several suppliers and sourcing is primarily based upon pricing and location. Although chemical prices have risen slightly over the last three years, we have been able to partially reduce our costs through improved efficiencies and capital expenditures.
In connection with our focus on the growing bio-energy market, we sell tall oil, a by-product of our production process which is used as both a chemical additive and as a green energy source. In 2012, we generated €11.6 million from the sale of tall oil. We currently expect the proceeds from the sale of tall oil to remain stable in future periods.

Cash Production Costs
Cash

Consolidated cash production costs per tonneADMT for our pulp mills are set out in the following table for the periods indicated:

             
  Years Ended December 31, 
Cash Production Costs
 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  
  

 

 

   

 

 

   

 

 

 

Total cash production costs(1)

  418    440    413  
  

 

 

   

 

 

   

 

 

 

(1)Cost of production per ADMT produced excluding depreciation.

Sales, Marketing and Distribution
The distribution of our

Our pulp 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) 
 
Revenues by Geographic Area
            
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  
 

 

 

   

 

 

   

 

 

 

Total(2)

 752,479    819,703    844,609  
 

 

 

   

 

 

   

 

 

 

(1)Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission.
(2)Excluding intercompany sales.sales and third party transportation revenues.


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The following charts illustrate the geographic distribution of our pulp revenues as a percentage of our total pulp revenues for the periods indicated:

Year Ended
Year Ended
Year Ended
December 31, 2009December 31, 2008December 31, 2007
(1)

Year Ended

December 31, 2012

Includes

Year Ended

December 31, 2011

Year Ended

December 31, 2010

*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.

Transportation

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.

For

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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overseas sales.


Capital Expenditures

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.

Our Stendal mill’s total capital expenditures in 2009, 2008 and 2007 were €2.0 million, €4.9 million and €4.9 million, respectively.

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.

See “Legal Proceedings”.

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  
  

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net (as shown on the Consolidated Balance Sheet)

  808,878    820,974    846,767  
  

 

 

   

 

 

   

 

 

 

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 
             
sheet, the associated amortization and the resulting net balance we include in our property, plant and equipment for the periods indicated:

   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  
  

 

 

   

 

 

   

 

 

 

Government grants less accumulated amortization

  276,715    291,665    297,992  
  

 

 

   

 

 

   

 

 

 

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”.

Total

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.

The project increased the Celgar mill’s installed generating capacity to 100 MW and upgraded the mill’s power boiler and steam facilities.

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


19


recorded in our income. All remainingThe balance of the credits not used for the Celgar Energy Project will be available for usewere utilized by the Celgar mill on other eligiblequalifying projects. We utilized approximately C$10.9 million of our allocated GTP funding towards the Oxygen Delignification Project and several small projects until March 31, 2012. To be eligible for these credits, projects must meet certain energy efficiency or environmental improvement requirements. We are currently exploring additional opportunities to utilize such funding.
Once completed, the Celgar Energy Project is expected to bring the mill’s installed generating capacity up to 100 MW, and upgrade the mill’s bark boiler and steam facilities. In January 2009 the Celgar mill finalized the EPA under which it will sell electrical energy generated by the Celgar Energy Project to BC Hydro. See “— Generation and Sales of ‘Green’ Energy at our Mills”.
Celgar mill.

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.

€32.0 million, comprised principally of expenditures on Project Blue Mill at our Stendal mill and an array of small projects at our other mills.

Environmental

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 €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.

in 2011).

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 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.

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 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.

The Stendal mill 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.

The Celgar mill has been in substantial compliance with applicable environmental laws, regulations and permits.

In 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 overseeing


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environmental authorities. However, in September 2009, the Celgar mill received a summons in connection with this spill for charges under the CanadianFisheries Actand the British ColumbiaEnvironmental Management Act, primarily relating to alleged effluent exceedances under the Celgar mill’s discharge permit. See “Legal Proceedings”.

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.

€2.4 million.

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.

Climate Change
Currently, there

There are 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,

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 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.

As part of their production process, our mills take wood 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.

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 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.

We are constantly exploring other initiatives to enhance our generation and sales of surplus green energy.energy and chemical by-products. Other potential opportunities that may result from climate change include:

•    increased growth rates for northern softwood forests due to greater atmospheric CO2 levels;
•    the expansion of softwood forests into less developed tundra areas;
•    more intensive forestry practices and timber salvaging versus harvesting standing timber;
•    greater demand for sustainable energy and cellulosic biomass fuels; and


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.

•    governmental incentivesand/or legislative requirements to enhance biomass energy production and prices.

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;

•    a greater susceptibility of northern softwood forest to disease, fire and insect infestation. This has already occurred in northern British Columbia where the pine beetle infestation is reported to have killed over 620.0 million cubic meters of harvestable timber;
•    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 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.

Human Resources

We currently employ approximately 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.

Rosenthal, which employs approximately 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.

2012 and a further 1.6% wage increase in 2013. This collective agreement has an 18-month term and is scheduled to expire in May 2013.

Stendal and its subsidiaries employ approximately 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.

We negotiated a five-year collective agreement in November 2012, effective May 1, 2012, with our hourly workers at the future.


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Celgar mill to replace the collective agreement which expired on April 30, 2012. The agreement provides for lump sum payments of $3,750 for all active employees in 2012 and 2013 and wage increases of 2.0%, 2.5% or 3.0% in each of 2014, 2015 and 2016. The collective agreement is scheduled to expire in April 2017.


We consider the relationships with our employees to be good. Although no assurances can be provided, we have not had any significant work stoppages at any of our German operations and we would therefore expect to enter into new labor agreements with our pulp workers in Germanywhen the current labor agreements expire without any significant work stoppages at our German mills.
We negotiated a new four-year collective agreement, effective May 1, 2008, with our hourly workers at the Celgar mill to replace the collective agreement which expired on April 30, 2008. The agreement provided for a retroactive wage increase of 2.0% for 2008, a wage increase of 2.5% in each of 2009 and 2010 and a wage increase of 3.0% in 2011.
stoppages.

Description of Certain Indebtedness

The following summaries of certain material provisions of: (i) our 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”.

Senior Notes

In 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.

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 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 Notes
In 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

We have purchased and cancelled an aggregate of approximately $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 such


23


holders received an aggregate of $43.8in connection with our share and debt repurchase program. As at December 31, 2012, approximately $284.4 million in aggregate principal amount of new 8.5% convertible senior subordinated notes due 2012, referred to as the “2012 Convertible Notes”. We subsequently issued an additional $22.0 million in aggregate principal amount of 2012 Convertible Notes in January 2010 as part of an exchange offer whereby an aggregate of $21.7 million in aggregate principal amount of 2010 Convertible Notes were tendered for exchange and cancelled.
As at the date hereof, we had approximately $2.3 million in aggregate principal amount of 2010 Convertible Notes outstanding and $65.8 million in aggregate principal amount of 2012 Convertible Notes outstanding.
We pay interest semi-annually on April 15 and October 15 of each year for the 2010 Convertible Notes and on January 15 and July 15 of each year, beginning on July 15, 2010 for the 2012 Convertible Notes. The 2010 Convertible Notes mature on October 15, 2010 while the 2012 Convertible Notes mature on January 15, 2012. We can redeem the 2010 Convertible Notes, in whole or in part, at our option on not less than 20 and not more than 60 days’ prior notice at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the date of redemption. The 2012 Convertible Notes will be redeemable beginning July 15, 2011, at our option in whole or in part, upon not less than 30 and not more than 60 days’ notice at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest up to, but not including, the date of redemption, subject to restrictions in the indenture governing the notes.
The 2010 Convertible Notes are convertible, at the option of the holder, unless previously redeemed, at any time on or prior to maturity into shares of our common stock at a conversion price of $7.75 per share, which is equal to a conversion rate of approximately 129 shares per $1,000 principal amount of 2010 Convertible Notes, subject to adjustment.
The 2012 Convertible Notes are convertible, at the option of the holders of the 2012 Convertible Notes, unless previously redeemed, at any time until the close of business on the last business day prior to maturity, into shares of our common stock at a conversion price of $3.30 per share, which is equal to a conversion rate of approximately 303 shares per $1,000 principal amount of 2012 Convertible Notes, subject to adjustment.
Holders of both the 2010 Convertible Notes and the 2012 Convertible Notes have the right to require us to purchase all or any part of such convertible notes 30 business days after the occurrence of a change of control with respect to us at a purchase price equal to the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase.
Both the 2010 Convertible Notes and the 2012 Convertible Notes are unsecured obligations of Mercer Inc. and are subordinated in right of payment to existing and future senior indebtedness (including our Senior Notes described above) and are effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The indentures governing each series of our convertible notes limit the incurrence by us, but not our subsidiaries, of senior indebtedness.
remained outstanding.

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


24


in October 2017. For more information, see “Item 7A — Quantitative and Qualitative Disclosures about Market Risk”.
Pursuant to the terms of the Stendal Loan Facility, Stendal reduced the aggregate advances outstanding to €531.1 million at the end of 2008 from a maximum original amount of €638.0 million.

The tranches are generally repayable in installments and mature between the fifth and 15th anniversary of the first advance under the Stendal Loan Facility.

Facility matures in September 2017.

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 DSRA balance as at December 31, 2012 was approximately €33.0 million.

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.

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 current6-month principal payment deferral right in respect of the next repayment date; and
•    failure to meet the Senior Debt/EBITDA Cover Ratio or Annual Debt Ratio as set out above.

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.

Under Our ability to fund this cure is substantially limited by the terms of the Amendment, if, from December 31, 2011 until the date when all of the loans pursuant to the Stendal Loan Facility are repaid in full, we raise aggregate actual net proceeds of €20.0 million or more from an equity financing and the DSRA is not Fully Funded, it will constitute an event of default if we do not contribute €10.0 million to the capital of Stendal.
Senior Notes.

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.

unavailable. The Stendal Loan Facility is secured by substantially all of the assets of Stendal.
As at December 31, 2009,

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.

and the Stendal Loan Facility now has a cross-default provision with the Blue Mill Facility.

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


25


lenders in order to finance the shareholders’ contribution to the Stendal mill. Under the terms of the Undertaking, we have agreed, for as long as Stendal has any liability under the Stendal Loan Facility, to retain control over at least 51% of the voting shares of Stendal.

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

In August 2009,

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;

In August 2009, we also finalized

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.

As at December 31, 2009, we had not drawn any2012, the principal amount outstanding under the Rosenthal Investment Loan Facilitywas €1.6 million; and had drawn €3.5 

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.

working capital facilities associated with the Rosenthal mill was €26.2 million.

Celgar Working Capital Facility

In November 2009,

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.

Internet Availability and Additional Information

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.


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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.  RISKRISK FACTORS

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;

•    our markets;
•    demand and prices for our products;
•    raw material costs and supply;
•    energy prices, sales and our initiatives to enhance our generation and sales of surplus energy;
•    capital expenditures and expected returns or benefits;
•    the economy;
•    foreign exchange rates — particularly the U.S. dollar and Canadian dollar;
•    our level of indebtedness;
•    climate change; and
•    derivatives.

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 cycles have varied over time but generally reflect changes in macro economicmacro-economic conditions and levels of industry capacity.
Pulp is a commodity that is generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.

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.

PricesNBSK pulp were approximately $810 in Europe, $870 in North America and $655 in China.

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;

•    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.

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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with affiliates. The terms of our indebtedness also restrict our ability to sell certain assets, apply the proceeds of such sales and reinvest in our business.

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.

Global financial markets experienced extreme and unprecedented disruption in the second half of 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Although financial markets have stabilized and signs of a global economic recovery began to emerge in the latter part of 2009, the economic environment, particularly in the United States and Europe, continues to be weak and we remain subject to a number of risks associated with these adverse economic conditions.

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.

The nature of the recovery in the financial markets and in the global economy in general remains uncertain, and there can be no assurance that market conditions will continue to improve in the near future.

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.

Although the global economy began to recover in the latter half of 2009, leading to improved pulp demand and prices, the duration and extent of such recovery is not known and there can be no assurance that we will be able to generate sufficient cash flows to service, repay or refinance our outstanding indebtedness when it matures should the world economy experience another significant economic downturn.
Cyclical fluctuations in the price and supply of our raw materials could adversely affect our business.

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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chips. The cyclical nature of pricing for these raw materials represents a potential risk to our profit margins if pulp producers are unable to pass along price increases to their customers or we cannot offset such costs through higher prices for our surplus energy.

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.

In 2009, the

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.

Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and comply with environmental laws. Our annual capital expenditures may vary due to fluctuations in requirements for maintenance, business capital, expansion and as a result of changes to environmental regulations that require capital expenditures to bring our operations into compliance with such


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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. Further, while we regularly perform maintenance on our manufacturing equipment, key pieces of equipment in our various production processes may still need to be repaired or replaced. If we do not have sufficient funds or such repairs or replacements are delayed, the costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We use derivatives to manage certain risk which has caused significant fluctuations in our operating results.

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.

Because we effectively fixed the rate on our Stendal Loan Facility, the value of our derivative position moves inversely to interest rates. We have also recently entered into fixed price pulp swap contracts with a bank.

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;

•    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;
•    theclean-up of unlawful discharges;
•    land use planning;
•    municipal zoning; and
•    employee health and safety.

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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no assurance that we will be able to maintain our profitability by offsetting any increased costs of complying with future regulatory requirements.

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.

The Celgar Energy Project 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 Celgar mill could experience operating difficulties or delays during thestart-up period when production of “green” energy is being ramped up. The Celgar Energy Project may not achieve our planned power generation or the level required under the electricity purchase agreement concluded with British Columbia’s principal power authority. Cost overruns, equipment breakdowns or failures to perform to design specifications, delays in the generation and sales of surplus energy, including contracted amounts, could have a material adverse effect on our Celgar mill’s results of operations and financial performance.
Our business is subject to risks associated with climate change and social and government responses thereto.

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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operate our mills, we may have to curtailand/or shut down production. This could have a material adverse effect on operations, financial results and financial position.

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;

•    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 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.

The EU ETS and Germany’s Renewable Energy Act.

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.

Additionally, the Renewable Energy Actall such German legislation is subject to governmental amendmentsamendment or change which could adversely affect the eligibility of our Rosenthal and Stendal mills to participate in this statutory programand/or the tariffs paid thereunder. As a result we cannot predict with any certainty the amount of future sales of surplus energy we may be able to generate.


33


We are dependent on key personnel.

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;

•    sales and marketing;
•    reducing operating costs;
•    identifying capital projects which provide a high rate of return; and
•    prioritizing expenditures and maintaining employee relations.

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;

•    unscheduled maintenance outages;
•    prolonged power failures;
•    equipment failure;
•    design error or operator error;
•    chemical spill or release;
•    explosion of a boiler;
•    disruptions in the transportation infrastructure, including roads, bridges, railway tracks and tunnels;
•    fires, floods, earthquakes or other natural catastrophes;
•    prolonged supply disruption of major inputs;
•    labor difficulties; and
•    other operational problems.

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


34


could result in claims that are excluded by, or exceed the limits of, our insurance coverage. Additionally, the weak global and financial markets have also reduced the availability and extent of credit insurance for our customers. If we cannot obtain adequate credit insurance for our customers, we may be forced to amend or curtail our planned operations which could negatively impact our sales revenues, results of operations and financial position.

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.

We are subject

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.

resources.

ITEM 1B.  UNRESOLVEDUNRESOLVED STAFF COMMENTSCOMMENTS.

None.

ITEM 2.PROPERTIES

We lease offices in Vancouver, British Columbia, Seattle, Washington, and Berlin, Germany.

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.

The Rosenthal mill is situated on For a 220 acre site near the towndescription of Blankensteinour mills, please see “Part I.—Item 1. Business—Our Mills and Product”.

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:

•    an approximately 315,000 square feet fiber storage area;
•    barking and chipping facilities for pulp logs;
•    an approximately 300,000 square feet roundwood yard;


35


•    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 system, which includes a recovery boiler, evaporation plant and recausticizing plant;
•    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 the power boiler.
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 250 kilometers north of the Rosenthal mill and 100 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 645,000 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 mill include:
•    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 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 100 MW of electric power from steam produced by the recovery boiler and a power boiler.
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 400 kilometers east of the port city of Vancouver, British Columbia, Berlin, Arneburg and approximately 32 kilometers north of the Canada-U.S. border. The city ofHamburg, Germany, and Seattle, Washington is approximately 450 kilometers southwest of Castlegar. It is a single line mill with a current annual production capacity of approximately 500,000 ADMTs of kraft pulp. Internal power generating capacity will, with certain capital improvements that are currently being constructed, enable the Celgar mill to be self-sufficient in electrical power and to sell surplus electricity. The facilities at the Celgar mill include:
•    chip storage facilities consisting of four vertical silos and an asphalt surfaced yard 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, pressure knotting and screening, single 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 system, which includes a recovery boiler, evaporation plant, recausticizing area and effluent treatment system; and
•    a turbine and generator capable of producing approximately 52 MW of electric power from steam produced by a recovery boiler and power boiler.


36

Washington.


At the end of 2009,2012, substantially all of the assets relating to the Stendal mill were pledged to secure the Stendal Loan Facility and the Blue Mill Facility. The €3.5 million Rosenthal working capital facility is secured by certain land at the Rosenthal mill. The other working capital loan facilities established for the Rosenthal and Celgar mills are secured by first charges against the inventories and receivables at the respective mills.
The following table sets out our pulp production capacity and actual production sales volumes and revenues by mill for the periods indicated:
                 
  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 
                 
(1)Capacity is the rated capacity of the plants for the year ended December 31, 2009, which is based upon production for 365 days a year. Targeted production is generally based upon 355 days per year.

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 July 2009, Zellstoff Celgar Limited filed a petition with the Supreme Court of British Columbia seeking to set aside the City of Castlegar’s 2009 property tax rate bylaw, which established the Celgar mill’s property tax levy for 2009 of approximately €1.6 million (C$2.5 million), of which €0.5 million (C$0.8 million) has been paid. In connection with this dispute, Celgar has only submitted a partial payment for its 2009 annual property tax assessment. We expect an administrative hearing to be held on this matter sometime during 2010. Although Celgar has fully accrued the maximum €0.2 million (C$0.3 million) in municipal tax penalties, we are still potentially subject to interest on the amount of taxes outstanding.

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.

mill construction in 2004. The amounts currently under review aggregate approximately €17.0 million. Investment subsidies received by the Stendal mill were generally based upon a percentage of the assessment base for subsidies of the mill. If the settlement payments received by the Stendal mill result in a reduction of the assessment base for subsidies under applicable German rules there could be a proportionate reduction in the investment subsidies and the difference could be repayable by the Stendal mill. The Stendal mill believes that it has properly recorded the settlement amounts received from the contractor and that the same do not reduce the assessment base for subsidies of the mill. However, at this time, there can be no certainty as to the outcome of the current investigation.

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.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMINE SAFETY DISCLOSURES

Not applicable.


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PART II

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 
2012:

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

Anobjectives over a performance period that commenced on January 1, 2011 and will end on December 31, 2013. The scheduled vesting dates for these performance shares units are: 18,238 shares on July 31, 2013; 370,640 shares on January 1, 2014; 197,800 shares on January 1, 2015 and 199,451 shares on January 1, 2016. 64,661 performance share units were forfeited in 2012 and 17,263 shares in 2011.
(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 253,685 restricted shares have been issued145,000 unexercised options that were previously granted under the plan. Grants for up to 565,165 shares have been made pursuant to the Performance Supplement under thethis plan (as described below).remained outstanding as of December 31, 2012.
(2)(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.

The Performance Supplement provides for the grant of restricted stock, restricted stock units and performance awards comprised of performance shares and performance units to salaried employees of the Company and its


38


affiliates. The total number of shares reserved and available for delivery for awards granted under the Performance Supplement is 565,165 shares and represents a portion of the shares which can be issued under the 2004 Plan.
We do not have any equity compensation plans that have not been approved by shareholders.
(e) In November 2009 we entered into exchange agreements, referred to as the “Exchange Agreements” with certain holders of our 2010 Convertible Notes, pursuant to which an aggregate of $43,250,000 in principal amount of the 2010 Convertible Notes were exchanged for an amount of our newly issued 2012 Convertible Notes equal to the principal amount of the 2010 Convertible Notes exchanged plus accrued and unpaid interest thereon to the closing of the exchange, which occurred in early December 2009. As a result, a total of $43,811,653 in aggregate principal amount of the 2012 Convertible Notes were issued pursuant to the Exchange Agreements.
The 2012 Convertible Notes issued in accordance with the terms of the Exchange Agreements are convertible into shares of the Company’s common stock at a conversion price of $3.30 per share, (equal to a conversion rate of approximately 303 shares per $1,000 principal amount of 2012 Convertible Notes), subject to certain adjustments. Since the Exchange Agreements were entered into with existing holders of the 2010 Convertible Notes and no commission or other remuneration was paid or given directly or indirectly for soliciting the Exchange Agreements, the 2012 Convertible Notes issued in accordance with the Exchange Agreements were exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
(f) Exchange Offer— In late December 2009, we commenced a tender offer, referred to as the “Exchange Offer”, to exchange up to $23,625,000 aggregate principal amount of our then outstanding 2010 Convertible Notes in exchange for an amount of our 2012 Convertible Notes equal to the principal amount of the 2010 Convertible Notes tendered, plus accrued and unpaid interest equaling approximately $12.75 per $1,000 principal amount of 2010 Convertible Notes tendered in the Exchange Offer. As a result of the Exchange Offer, which expired in January 2010, $21,730,000 in aggregate principal amount of our 2010 Convertible Notes was tendered in exchange for $22,012,490 in aggregate principal amount of our 2012 Convertible Notes. Since participation in the Exchange Offer was limited to existing holders of the 2010 Convertible Notes and no commission or other remuneration was paid or given directly or indirectly for soliciting the 2010 Convertible Notes tendered in the Exchange Offer, the 2012 Convertible Notes issued as part of the Exchange Offer were exempt from registration pursuant to Section 3(a)(9) of the Securities Act.


39


(g) (e)Performance Graph.The following graph shows a five-year comparison of cumulative total shareholder return, calculated on an assumed dividend reinvested basis, for our common stock, the NASDAQ Stock Market Index (the “NASDAQ Index”) and Standard Industrial Classification, or “SIC”, Code Index (SIC Code 2611 — 2611—pulp mills) (the “Industry Index”). The graph assumes $100 was invested in each of our common stock, the NASDAQ Index and the Industry Index on December 31, 2004.2007. Data points on the graph are annual.
COMPARISON OF5-YEAR CUMULATIVE TOTAL RETURN AMONG MERCER INTERNATIONAL, INC., NASDAQ MARKET INDEX, AND SIC CODE INDEX
ASSUMES $100 INVESTED ON JAN. 01, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009
                         
  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 


40


   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  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 
  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  

•    includes the operating results and financial condition of the Celgar mill from the time of its acquisition in February 2005; and
•    excludes the results of operations of our paper operations which were sold in 2006 and are accounted for as discontinued operations. Previously reported data and the financial statements and related notes included herein have been reclassified to conform to the current presentation.
                     
  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 purchased when the grants are received.purchased. See “Item 1 — Business — 1—Business—Capital Expenditures”.
(2)The presentation for 2005, 2006 and 2007 has been modifiedAttributable to conform to the presentation requirements as prescribed in theConsolidationsTopic ASC 810 (see Note 17 — Noncontrolling Interest in our consolidated financial statements).common shareholders.


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.

This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”.

Results of Operations

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 1,475,000 ADMTs.

We operate in markets that1.5 million ADMTs of NBSK pulp and 259 MW of electrical generation.

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 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.

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 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.

the end of 2012.

Our sales realizations are 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.

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 NBSK pulp prices.

During the last three years, energy production

Production and sales of surplus energy have 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.

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. 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

Celgar mill.


Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average cost by spreading fixed costs over more units. Higher operating rates also permit us to increase our generation and sales of surplus renewable energy.
energy and chemicals. Our production levels are also dependent on, among other things, the number of days of scheduled and unscheduled downtime at our mills. Unexpected production downtime, which has not materially affected us during any of the periods described in this discussion, can be particularly disruptive in our industry. Our product mix is also important because premium grades of NBSK pulp generally achieve higher prices and profit margins.

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.

Changes in interest rates can impact our operating results because the credit facilities established for our mills use floating rates of interest.
From time to time, we

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”.

Stendal, as required under the Stendal Loan Facility, entered intovariable-to-fixed rate interest swaps, referred to as the “Stendal Interest Rate Swap Contracts”Contract”, in August 2002 to fix the interest rate on approximately €612.6 million ofsuch indebtedness for the full term of the Stendal Loan Facility. In 2009 and 2008, we recorded a netChanges in long-term interest rates result in our recording unrealized non-cash loss of €5.8 million and €25.2 million, respectively, before noncontrolling interests on the mark to market valuation of the Stendal Interest Rate Swap Contracts. Such unrealizedgains or losses resulted primarily from the decrease in long-term European interest rates. In 2007, we recorded a net unrealized non-cash gain of €19.5 million before noncontrolling interests on the Stendal Interest Rate Swap Contracts. Changes in long-term interest rates could result in our recording of further unrealized non-cash losses or gains on the Stendal Interest Rate Swap Contracts in future periodsContract when they areit is marked to market.
market on a quarterly basis. See “Quantitative and Qualitative Disclosures about Market Risk”.

2009 Significant Actions

In 20092012, we took the following significant actions:

•    Amended the Stendal Loan Facility to defer €164.0 million of scheduled principal payments until the maturity of the facility in September 2017;
•    Enhanced our short-term liquidity by completing the Exchange Agreements with certain holders of our 2010 Convertible Notes and commencing the Exchange Offer, which together resulted in the exchange of $65.0 million in aggregate principal amount of our 2010 Convertible Notes for $65.8 million in aggregate principal amount of our newly issued 2012 Convertible Notes;
•    Applied for, and were allocated, a total of C$57.7 million in grants from the Canadian government under the GTP and subsequently entered into a non-repayable contribution agreement with NRCan whereby NRCan agreed to provide approximately C$40.0 million in financial assistance towards the completion of the Celgar Energy Project;
•    Worked with our lenders to refinance the Rosenthal Loan Facility and to amend the Celgar Working Capital Facility. As a result, we established a new €25.0 million revolving working capital facility and a new investment loan agreement for our the Rosenthal mill and extended the maturity of the Celgar Working Capital Facility to May 2013; and
•    Continued to focus on cost reductions and working capital management.


43


Current Market Environment
InCommenced Project Blue Mill at our Stendal mill. The project is expected to increase the latter partmill’s production of 2009, global economies began to show signs of a recovery from the unprecedented volatilitypulp and disruption that occurred in the second half of 2008. This, along with improved pulp demand from China and producer curtailments, helped pulp prices recovergreen energy. When completed in the latter part of 20092013, it should further enhance our stable stream of income from energy and chemical sales;

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 
the periods indicated:

  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)List price less discounts.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.
(3)(4)Average Bank of Canada noon spot rate over the reporting period.

Year Ended December 31, 20092012 Compared to Year Ended December 31, 20082011

In the year ended December 31, 2009,2012, 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.

In 2012, surplus energy and chemicals sales increased by approximately 6% to €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.

List prices for NBSK pulp in Europe averaged approximately $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.
Euro. At the end of 2012, reported global inventories for softwood kraft were approximately 29 days’ supply, while at the end of 2011 inventories for softwood kraft were approximately 36 days’ supply.

Pulp 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.

Pulp production increased to a 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

2013.


Costs and expenses marginally decreased to €632.6€785.1 million in the year ended December 31, 20092012 from €707.0€788.4 million in 2008,2011, primarily due to lower fiber costs.
costs, partially offset by higher pulp sales volumes in 2012. Our costs and expenses in 2012 included approximately €13.9 million for regularly scheduled maintenance costs, compared to €17.4 million in 2011. Several competing producers and members of the peer group that we benchmark our performance against now report their financial results in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs to be capitalized instead of expensed. Such costs are not charged to EBITDA by the peer group companies but instead are expensed as depreciation.

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.

In 2009, contribution to income from the saleCanada as a result of emission allowances decreased to €0.5 million, compared to €5.6 millionstrong sawmill activity in 2008. British Columbia.

Operating depreciation and amortization decreased marginallyincreased to €53.9€57.8 million in 20092012 from €55.5€55.8 million in 2008.

2011. Selling, general and administrative expenses marginally decreased to €38.3 million in 2012 from €38.8 million in 2011.

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.

average pulp sales realizations, partially offset by a stronger U.S. dollar relative to the Euro and lower fiber costs.

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.

our remaining convertible notes in 2011.

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.

2012. Under the first contract, 5,000 metric tonnes, referred to as “MT”, of pulp per month was fixed at a price of $915 per MT for each month between May and December of 2012. Under contracts entered into in November 2012, 3,000 MT of pulp per month is fixed at prices ranging from $880 to $890 per MT per month and expire in December 2013. We recorded a gain of approximately €2.0 million related to these swap contracts during the year ended December 31, 2012.

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.

In the fourth quarter of 2009, we completed an exchange of approximately €30.2 million ($43.3 million) in aggregate principal amount of our 2010 Convertible Notes for new 2012 Convertible Notes. 2011.

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 2009, we reported a net loss attributable to common shareholders of €62.2€12.2 million, or €1.71€0.22 per basic and diluted share whichshare. This included an unrealized non-cash gain of €1.7 million on Stendal interest rate derivatives and a realized gain of €1.2 million and an unrealized gain of €0.8 million on pulp price derivatives. In 2011, we reported net income of €50.1 million, or €1.00 per basic and €0.89 per diluted share. This included a non-cash loss of €3.1€1.4 million on our Stendal Interest Rate Swap Contracts and a foreign exchange gain on our long-term debt. Contract.

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.

In 2009,2012, “Operating EBITDA” was €41.4decreased to €107.1 million compared to €69.1from €167.1 million in 2008.2011. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

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


States of America, (“GAAP”)referred to as “GAAP”, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity.

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  
  

 

 

  

 

 

 

Year Ended December 31, 20082011 Compared to Year Ended December 31, 20072010

In the year ended December 31, 2008,2011, 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.

List prices for NBSK pulp in Europe 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

and $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 2007


46


because of weakening conditions in the second half of 2008. The negative market conditions, however, were partially offset by the strengthening of the2010, primarily due to a weaker U.S. dollar laterelative to the Euro. At the end of 2011, reported global inventories for softwood kraft were approximately 36 days’ supply, while at the end of 2010 inventories for softwood kraft were approximately 25 days’ supply.

Pulp sales volume marginally decreased to 1,427,924 ADMTs in the year.

2011 from 1,428,638 ADMTs in 2010.

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.

2010, primarily due to higher fiber costs.

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.

In the fourth quarter of 2008, we were required to record non-cash provisions of €4.2€38.8 million and €7.1in 2011 from €33.3 million against our finished goods and fiber inventories, respectively,in 2010, primarily as a result of weakening NBSK markets.
In 2008, contribution to incomea higher non-cash stock compensation expense resulting from the sale of emission allowancesa higher share price and increased to €5.6 million, compared to €4.6 million in 2007. foreign exchange losses.

Operating depreciation and amortization decreased marginally to €55.5€55.8 million in 20082011 from €56.4€55.9 million in 2007.

2010.

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.

a weaker U.S. dollar relative to the Euro, partially offset by higher energy revenues.

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.

In 2008,2010, primarily due to the significant decreaseconversion of our convertible notes in long-term European interest rates,2011, and reduced levels of debt associated with our Stendal mill.

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.

2010.

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.

recognizing deferred tax assets based on forecasted income.

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.

In 2008, Operating EBITDA was €69.1 million, compared to €126.2 million in 2007. Operating EBITDA in 2008 included non-cash inventory provisions totaling €11.3 million. 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 analysis of our results as reported under GAAP.2010. See the discussion of our results for the year ended December 31, 20092012 compared to the year ended December 31, 20082011 for the definition of Operating EBITDA, significant limitations in Operating EBITDA as an analytical tool and additional information relating to such limitations andof Operating EBITDA.


47


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, 
  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
  

 

 

  

 

 

 

Operating income

   111,119    167,743  

Add: Depreciation and amortization

   56,005    56,231  
  

 

 

  

 

 

 

Operating EBITDA

  167,124   223,974  
  

 

 

  

 

 

 

Sensitivities

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 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.

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 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.

Liquidity and Capital Resources
The following table is a summary

Summary of selected financial information for the periods indicated:

         
  Years Ended December 31,
  2009 2008
  (in thousands)
 
Financial Position
        
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 Flows
Our 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.


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   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
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

  (833 6,050   47,731  
  

 

 

  

 

 

  

 

 

 

In February 2009, to increase its liquidity and financial flexibility, Stendal entered into the Amendment for its Stendal Loan Facility. The Amendment revised the repayment schedule of principal payments due by deferring approximately €164.0 million of principal payments until maturity on September 30, 2017. The Deferred Amount includes approximately €20.0 million, €26.0 million and €21.0 million of scheduled principal payments in 2009, 2010 and 2011, respectively. Under the revised repayment schedule, we are required to make principal payments totaling €13.9 million during 2010. The Amendment also provided for a cash sweep of any excess cash of Stendal which will be used first to prepay the Deferred Amount and second to fund the DSRA. Not included in the cash sweep is €15.0 million which Stendal is permitted to retain for working capital purposes. For a description of the Stendal Loan Facility see “Item 1 — Business — Description of Certain Indebtedness”.
The Stendal Loan Facility is provided by a syndicate of eleven financial institutions and both our Celgar Working Capital Facility and our Rosenthal Loan Facility are each 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. For a description of the Celgar Working Capital Facility and the Rosenthal Loan Facility, see “Item 1 — Business — Description of Certain Indebtedness”.
In 2009, we extended the maturity of the Celgar Working Capital Facility from May 2009 to May 2013.
In 2009, capital expenditures related to the Celgar Energy Project totaled approximately €13.1 million and we expect costs for the project to be approximately €19.2 million in 2010, substantially all of which will be financed through a C$40.0 million grant from the Canadian federal government under the GTP. See “Item 1 — Business — Generation and Sales of ‘Green’ Energy at our Mills”.
Debt
As at December 31, 2009, the amount outstanding under Stendal Loan Facility was €514.6 million. We also had approximately C$24.0 million outstanding under the Celgar Working Capital Facility and €3.5 million under our Rosenthal investment loan. As at December 31, 2009, we had no amount drawn on the Rosenthal Loan Facility.
Additionally, we have $310.0 million (€216.3 million) in principal amount of our Senior Notes outstanding which mature in February 2013 and for which we pay interest at the rate of 9.25% on February 15 and August 15 of each year. There are no scheduled principal payments until maturity. The indenture governing the Senior Notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity.
At the conclusion of the Exchange Offer in January 2010, we had approximately $2.3 million (€1.6 million) in principal amount of our 2010 Convertible Notes which mature in October 2010 and approximately $65.8 (€45.9 million) in principal amount of our 2012 Convertible Notes which mature in January 2012. Neither the 2010 Convertible Notes nor the 2012 Convertible Notes are subject to any financial maintenance covenants.
For a description of the Senior Notes, the 2010 Convertible Notes and the 2012 Convertible Notes, see “Item 1 — Business — Description of Certain Indebtedness”.
Debt Covenants
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, which the lenders waived for 2009, 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 aonce-per-fiscal-year ratio deficiency cure through a capital contribution or subordinated loan in the amount necessary to cure such deficiency.


49


Under the Rosenthal Loan Facility, our Rosenthal mill must not exceed a ratio of net debt to EBITDA of 3:1 in any12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.2:1 for each 12 month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1.
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 each12-month period.
As at December 31, 2009, we were in full compliance with all of the covenants of our indebtedness.
Cash Flow Analysis
Cash Flows from Operating Activities.Activities.We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals and debt service.

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.

Operating

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.

2011 and a decrease in accounts payable and accrued expenses using cash of €3.1 million in 2010.

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.

various projects at our mills, used cash of €37.8 million. In 2009,2010, capital expenditures, primarily related to the Celgar Energy Project, and the renewal of a bleaching line at our Rosenthal mill, used cash of €28.8€38.3 million. In the same period last year, capital expenditures used €25.7 million.
Excluding costs for the Celgar Energy Project being financed through government grants under the GTP, we expect capital expenditures in 2010 to total approximately €6.3 million, comprised primarily of an array of small projects.

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.

Balance Sheet Data

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.

Sources and Uses of Funds

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.

Capital Resources
Other than commitments relating to the Celgar Energy Projectfacilities, respectively.

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


Future Liquidity
Our ability to make scheduled payments of principal, or to pay interest on or to refinance our indebtedness, or to fund planned expenditures will depend on our future performance, which is subject to general economic, financial and other factors that are beyond our control.
Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our Celgar Working Capital Facility and Rosenthal Loan Facility, will be adequate to meet the future liquidity needs during the next 12 months.

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.

Debt and Debt Covenants

We had the following amounts outstanding under our debt facilities as at the dates indicated:

   December 31, 
   2012   2011 
   (in thousands) 

Rosenthal Loan Facility

  —      —    

Rosenthal Investment Loan

   1,632     2,719  

Rosenthal revolving €3.5 million facility

   —       —    

Celgar Working Capital Facility

   4,574     —    

Senior Notes

   215,670     220,753  

Stendal Loan Facility

   452,907     477,490  

Blue Mill Facility

   —       n/a  

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.

Off-Balance-Sheet Activities

At December 31, 20092012 and 2008,2011, we had no off-balance-sheet arrangements.

Contractual Obligations and Commitments

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 
Contractual Obligations(8)
 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 
                     
2012.

   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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  109,592    158,550    661,219    10,399    939,760  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)This reflects the future principal payments due under our long-term debt obligations, but excludes the Stendal Loan Facility. See “Item 1 — Business — 1��Business—Description of Certain Indebtedness”, footnote 2 below and Note 78 to our annual financial statements included herein for a description of such indebtedness.
(2)This reflects principal only in connection with the Stendal Loan Facility. See “Item 1 - Business — 1—Business—Description of Certain Indebtedness” and Note 78 to our annual financial statements included herein for a description of such indebtedness. This does not include amounts associated with derivatives entered into in connection with the Stendal Loan Facility. See “Item 7A — 7A—Quantitative and Qualitative Disclosure about Market Risk” for information about our derivatives.
(3)Amounts presented for interest payments include guarantee fees, and assume that all debt outstanding as of December 31, 20092012 will remain outstanding until maturity, and interest rates on variable rate debt in effect as of December 31, 20092012 will remain in effect until maturity.
(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)Contractual This includes approximately €14.0 million of capital commitments for capital expenditures relate primarily to commitmentsin 2013 related to the Celgar Energy Project. The balance represents the value of this project remaining to be completed and will be funded by government grants received through the GTP. Although the full balance does not represent non-cancellable commitments, it is expected that this amount will be paid during 2010.our Project Blue Mill.
(8)(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 20092013 amount includes €0.3€1.5 million related to pension funding.
(9)(8)We have identified approximately €0.7 million of potential tax liabilities that are more likely than not to be paid and approximately €3.9€4.3 million of asset retirement obligations. However, due to the uncertain timing related to these potential liabilities, we are unable to allocate the payments in the contractual obligations table.


51


Foreign Currency

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.

loss.

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”.

Results of Operations of the Restricted Group Underunder Our Senior Note Indenture

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

  Year Ended December 31, 
              2012                           2011                         2010            
  (in thousands of Euros, other than per share amounts) 

Pulp revenues

 423,943   473,992   490,020  

Energy and chemical revenues

  28,489    25,473    15,145  

Operating income

  7,631    62,943    93,691  

Gain (loss) on derivative instruments

  2,028    —      —    

Foreign exchange gain (loss) on debt

  —      1,175    (6,126

Income tax benefit (provision)

  (5,482  (4,614  8,651  

Net income (loss)

  (14,221  39,809    62,327  

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:

  Year Ended December 31, 
              2012                           2011                         2010            

Restricted Group

   

Pulp Production (‘000 ADMTs)

  828.0    832.4    826.3  

Scheduled Production Downtime (‘000 ADMTs)

  32.8    24.5    25.3  

Scheduled Production Downtime (days)

  30    20    21  

Pulp Sales (‘000 ADMTs)

  826.9    823.2    826.3  

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)

 512   575   592  

Energy Production (‘000 MWh)

  930.1    893.7    718.6  

Energy Sales (‘000 MWh)

  341.6    301.4    194.2  

Average energy sales realizations (€/MWh)

 83   85   78  

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)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.

Restricted Group Results

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 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, 20082011

Pulp revenues for the Restricted Group in 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.

In 2012, revenues from the sale of excess energy 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.

record annual energy sales at both our Rosenthal and Celgar mills.

Pulp prices 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.

Pulp sales volume of the Restricted Group marginally increased to 826,921 ADMTs in 2012 from €480 per ADMT823,183 ADMTs in 2008.

2011.

Pulp production for the Restricted Group decreased to 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.

Costs and expenses for the Restricted Group in 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


Operating depreciationcosts during the year. The Restricted Group’s costs and amortizationexpenses in 2012 included approximately €7.5 million for regularly scheduled maintenance costs, compared to €9.8 million in 2011. Several competing producers and members of the peer group that we benchmark the Restricted Group decreased slightlyGroup’s performance against now report their financial results in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs to €27.5 million in 2009 from €28.6 million in 2008.
be capitalized instead of expensed. Such costs are not charged to EBITDA by the peer group companies but instead are expensed as depreciation.

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.

last year. Selling, general and administrative expenses marginally increased to €24.6 million from €24.1 million in 2011.

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.

in 2011.

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
  

 

 

  

 

 

 

Operating income

   7,631    62,943  

Add: Depreciation and amortization

   31,471    30,086  
  

 

 

  

 

 

 

Operating EBITDA

  39,102   93,029  
  

 

 

  

 

 

 

(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.

ended December 31, 2011 slightly decreased by approximately 3% to €474.0 million from €490.0 million in the comparative period of 2010, primarily due to a weaker U.S. dollar. In 2009,2011, revenues from the sale of excess energy increased by 68% to a record €25.5 million from €15.1 million in 2010, primarily due to record annual energy sales at both our Rosenthal and Celgar mills.

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.

In 2009,2010.

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.

The

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.

timing of recognizing deferred tax assets based on forecasted income. The tax recoveries in 2010 reflected our expectation that certain of our tax assets will be utilized to reduce taxable income in the future.

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
  

 

 

  

 

 

 

Operating income

   62,943    93,691  

Add: Depreciation and amortization

   30,086    30,270  
  

 

 

  

 

 

 

Operating EBITDA

  93,029   123,961  
  

 

 

  

 

 

 

(1)
(1)

See Note 1920 of the financial statements included in this annual report onForm 10-K for a reconciliation to our consolidated results.

Liquidity and Capital Resources

Summary of Cash Flows

   Year Ended December 31, 
   2012  2011  2010 
   (in thousands) 

Net cash provided by (used in) operating activities

  (2,590 66,679   54,581  

Net cash provided by (used in) investing activities

   (9,359  (38,508  (33,311

Net cash provided by (used in) financing activities

   3,937    (35,373  10,120  

Effect of exchange rate on changes in cash and cash equivalents

   (103  1,377    (1,371

Net increase (decrease) in cash and cash equivalents

   (8,115  (5,825  30,019  

Restricted Group Results — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007Cash Flows from Operating Activities

Pulp 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 NBSK


53


pulp in Europe were approximately $839 (€571) per ADMT in 2008,2012, compared to approximately $800 (€584)an increase in 2007.
Pulp sales volumeinventories using cash of the Restricted Group increased€10.2 million in 2011 and €2.9 million in 2010. A decrease in accounts payable and accrued expenses used cash of €7.4 million in 2012, compared to 833,177 ADMTsan increase in 2008accounts payable and accrued expenses providing cash of €5.9 million in 2011 and a decrease in accounts payable and accrued expenses using cash of €10.3 million in 2010.

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.

Pulp production for the Restricted Group increased slightly to 814,586 ADMTs in 2008 from 803,081 ADMTs in 2007 as our Celgar and Rosenthal mills performed generally well and our Rosenthal mill marked a record production year. We took an aggregate of 22 days scheduled annual maintenance downtimevarious projects at our Rosenthal and Celgar mills, including €9.3 million relating to the recovery upgrade project at our Rosenthal mill. Capital expenditures in 20082011 and 21 days2010 used cash of €29.5 million and €34.7 million, respectively.

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.

Pulp inventoriespayments for the Restricted Group were lower in 2008, compared to the same time last year.
Cost and expenses for the Restricted Group in 2008 increased to €415.5 million from €373.7Rosenthal Investment Loan. Financing activities used net cash of €35.4 million in the comparative period2011 and provided net cash of 2007.
Operating depreciation and amortization for the Restricted Group decreased slightly to €28.6€10.1 million in 2008 from €28.7 million in 2007.
Overall, excluding the effect of the non-cash inventory provisions on our fiber inventories, fiber costs2010.

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.

The markets and prices for emission allowances continue to be weak, and as a result our contribution to income from the sale of such emission allowances by our Rosenthal mill in 2008 was €0.4 million, compared to €1.6 million in 2007.
In 2008, operating income (loss) of the Restricted Group decreased to €(2.4) million from €36.7 million last year, primarily due to lower sales realizations resulting from deteriorating market conditions in the second half of 2008 and non-cash provisions totaling €8.6 million recorded against the fiber and finished goods inventories at our Celgar and Rosenthal mills.
Interest expense for the Restricted Group in 2008 decreased slightly to €27.0 million from €28.5 million a year ago, primarily due to lower levels of borrowing.
In 2008, the Restricted Group recorded an unrealized loss on foreign currency denominated debt of €4.1 million, compared to a gain of €10.6 million in 2007.
The Restricted Group recorded a net loss of €30.4 million for the year ended December 31, 2008, compared to net income of €17.5 million for the year ended December 31, 2007.
The Restricted Group generated “Operating EBITDA” of €26.5 million and €65.6 million in the years ended December 31, 2008 and 2007, 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 analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 2009 for additional information relating to such limitations and Operating EBITDA.


54


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, 
  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 
         
(1)See Note 19 of the financial statements included in this annual report onForm 10-K for a reconciliation to our consolidated results.
Liquidity and Capital Resources of the Restricted Group
The following table is a summary of selected financial information for the Restricted Group for the periodsdates indicated:
         
  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 1920 of the financial statements included in this annual report onForm 10-K for a reconciliation to our consolidated results.
At December 31, 2009,
(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.

2011.

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”.

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 on hand, the Rosenthal Loan Facility and the Celgar Working Capital Facility.
Critical Accounting Policies

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.

estimates, and changes in these estimates are recorded when known.

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.

exempt from mark-to-market accounting.

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.

Contract and our pulp price 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.

2012.

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;

•    future reversals of temporary differences;


56


future reversals of temporary differences;

our historical and projected earnings; and

tax planning opportunities.

•    our 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.

New Accounting Standards
See Note 1 to our consolidated financial statements included in Item 15 of this annual report onForm 10-K.
Cautionary Statement Regarding Forward-Looking Information

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, 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.

Inflation

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

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, and interest rate derivatives, pulp price derivatives and energy 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 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.

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 by


58


substantially all of the assets of the Stendal mill and has the benefit of certain German governmental guarantees. This credit facility does not have a separate margin requirement when derivatives are entered into and is subsequently marked to market each period.

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 
                     
2011:

       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 Contracts,Contract, which arevariable-to-fixed interest rate swaps, for the term of the Stendal Loan Facility, with respect to an aggregate maximum amount of approximately €612.6 million of the

principal amount of the long-term indebtedness under the Stendal Loan Facility. The swaps took effect on October 1, 2002 and are comprised of three contracts. The first contract commenced in October 2002 for a notional amount of €4.1 million, gradually increasing to €464.9 million, with an interest rate of 3.795%, and matured in May 2004. The second contract commenced in May 2004 for a notional amount of €464.9 million, gradually increasing to €612.6 million, with an interest rate of 5.28%, and matured in April 2005. The thirdremaining contract commenced in April 2005 for a notional amount of €612.6 million, with an interest rate of 5.28%, and the notional amount gradually decreases and the contract terminates upon the maturity of the Stendal Loan Facility in October 2017.
(2)In 2008, 104,000 MWhMay 2012, we entered into a fixed price pulp swap contract with a bank. Under the contract, 5,000 MTs of electricitypulp per month is fixed at a price of $915 per MT for each month between May and December of 2012. In November 2012, we entered into two additional contracts were sold forward by Rosenthal and Stendal. Subsequently 104,000 MWh were purchased forward, effectively settlingunder the forward sales. The gain associated with these contracts was recorded in 2008.terms of which 3,000 MTs of pulp per month are fixed at prices which range from $880 to $890 per MT. These contracts settledexpire in 2009. We did not enter into any new any energy forward contracts in 2009.December 2013.

Interest Rate Risk

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 rate


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financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We seek to manage our interest rate risks through the use of interest rate derivatives. For a discussion of our interest rate derivatives including maturities, notional amounts, gains or losses and swap rates, see “Derivatives” in this Item 7A.

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 due February 2013, bearing interest at 9.25%9.50%, principal amount $310.0$284.4 million.
(2)2010 Convertible Notes due October 2010, bearing interest at 8.5%, principal amount $24.0 million. On January 21, 2010, €15,162 of the 2010 Convertible Notes due October 2010 was tendered for exchange for 2012 Convertible Notes due January 2012.
(3)2012 Convertible Notes due January 2012 bearing interest at 8.5%, principal amount $43.8 million.
(4)Stendal Loan Facility bears interest at varying rates of between Euribor plus 0.90% to Euribor plus 1.85%1.80%.
(5)(3)Rosenthal investment loan bears interest at Euribor plus 2.75%. As at December 31, 2009, €3.5 million was drawn from this loan and was accruing interest at a rate of 3.71%.
(6)Celgar Working Capital Facility bears interest at bankers acceptance plus 3.75% or Canadian prime plus 2.0% on Canadian dollar denominated amounts and bears interest at LIBOR plus 3.75% or U.S. base plus 2.0% on U.S. dollar denominated amounts. As at December 31, 2009, the principal amount owing was C$24.0 million.
(7)(4)Interest rate swapsswap put in place on the Stendal Loan Facility, effectively converting it from a variable interest rate to a fixed interest rate loan.

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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information about our exposure to foreign currency exchange 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)
 
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, due February 2013, bearing interest at 9.25%9.50%, principal amount $310.0$284.4 million.
(2)2010 Convertible Notes due October 2010, principal amount $24.0 million. On January 21, 2010, €15,162 of the 2010 Convertible Notes due October 2010 was tendered for exchange for 2012 Convertible Notes due January 2012.
(3)2012 Convertible Notes due January 2012, principal amount $43.8 million.
(4)Celgar Working Capital Facility bears interest at bankers acceptance plus 3.75% or Canadian prime plus 2.0% on Canadian dollar denominated amounts and bears interest at LIBOR plus 3.75% or U.S. base plus 2.0% on U.S. dollar denominated amounts. As at December 31, 2009, the principal amount owing was C$24.0 million.

Pulp Price Risk

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.

Energy Price Risk

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.

mills to produce renewable energy.

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.

85.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure 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.


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It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.

Management’s Report on Internal Control Over Financial Reporting

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

•    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.

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, 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.

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 below.

within.

Changes in Internal Controls

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, 20092012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

Not applicable.


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PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Subsequent to our conversion to a corporate form, we

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.

Kenneth A. Shields, age 61, has been a director since August 2003. Mr. Shields is the Chairman and Chief Executive Officer of Conifex Inc., a private Canadian company operating in the forestry and sawmilling sector. Mr. Shields currently serves as a member of the board of directors of Raymond James Financial, Inc., and retired as Chief Executive Officer of its Canadian subsidiary, Raymond James Ltd., in February 2006. Mr. Shields has served as past Chairman of the Investment Dealers Association of Canada and Pacifica Papers Inc., and is a former director of each of Slocan Forest Products Ltd., TimberWest Forest Corp. and the Investment Dealers Association of Canada.
William D. McCartney, age 54, 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.
Guy W. Adams, age 58, has been a director since August 2003. Mr. Adams 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 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.

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.

Managing Director of Tasman Pulp and Paper from 1990 to 1994. Mr. Purchase is currently a director of Hardwoods Distribution Inc., which is currently listed on the Toronto Stock Exchange. Mr. Purchase was also a trustee of Tree Island Wire Income Fund from 2003 to 2007 (and Chair of the board of directors from 2006 to 2007) which is listed on the Toronto Stock Exchange and was a director of Catalyst Paper Corporation from 2001 to 2007 (and Chair of the board of directors from 2005 to 2007).

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


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1999 to August 2001 and Controller and Treasurer from June 1998 to December 1999. From June 1998 to August 31, 1998, he also served as Secretary to Pacifica Papers Inc. From March 1998 to June 1998, Mr. Gandossi served as Controller, Treasurer and Secretary of MB Paper Ltd. From April 1994 to March 1998, Mr. Gandossi held the position of Controller and Treasurer with Harmac Pacific Inc., a Canadian pulp manufacturing company previously listed on the Toronto Stock Exchange. Mr. Gandossi participated in the Pulp and Paper Advisory Committee of the British Columbia Competition Council and was a member of the British Columbia Working Roundtable on Forestry. From February 2007 to present, he has chaired the B.C. Pulp and Paper Task Force, a government industry and labor effort that is mandated to identify measures to improve the competitiveness of the British Columbia pulp and paper industry. Mr. Gandossi is a member of the Institute of Chartered Accountants in Canada.

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.

David K. Ure, age 42, has been our Vice President, Controller, since October 16, 2006. Mr. Ure was formerly the Controller of Catalyst Paper Corporation from 2001 to 2006 and Controller of Pacifica Papers Inc. from 2000 to 2001. He also served as U.S. Controller of Crown Packaging Ltd. in 1999 and the Chief Financial Officer and Secretary of Finlay Forest Industries Inc. from 1997 to 1998. He is on the Board of Trustees of the Pulp and Paper Industry Pension Plan and has over fifteen years experience in the forest products industry. Mr. Ure is a member of the Certified General Accountants’ Association of Canada.

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.

Niklaus Gruenenfelder, age 52, became the Managing Director of Stendal in January 2009. Previously, from 1989 until 2006, Mr. Gruenenfelder held a variety of positions in Switzerland, China, Germany and Pakistan with Swiss chemicals manufacturer Ciba Specialty Chemicals Holding Inc. (formerly Ciba-Geigy AG). In 2006, Huntsman Corporation, a global chemical and chemical products company, acquired the textile effects business from Ciba and Mr. Gruenenfelder was the Managing Director and Head of Technical Operations at Huntsman’s


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Langweid am Leich plant in Germany from 2006 until he joined Mercer. Mr. Gruenenfelder holds a Ph.D. in Technical Science and an MBA.
Brian Merwin, age 35,39, has been our Vice President of Strategic Initiatives since February 2009, prior to which he was our Director of Strategic and Business Initiatives since August 2007 and Business Analyst since May 2005. BrianMr. Merwin has an MBA from the Richard Ivey School of Business at the University of Western Ontario.

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.

Audit 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. 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.

2012.

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 2840, P.O. Box 11576, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada V6B 4N8.

V6C 1G8.

Compensation and Human Resource Committee

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.


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2012.


Governance and Nominating Committee

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.

2012.

Environmental, Health and Safety Committee

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.

2012.

Lead Director/Deputy Chairman

The Board appointed Mr. 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

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.

Code of Business Conduct and Ethics

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).


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Section 16(a) Beneficial Ownership Reporting Compliance

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

Review, Approval or Ratification of Transactions with Related Persons

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 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.

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 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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PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENTS

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1)Financial Statements

    Page
 

   7085  

   7287  

   7388  

   7489  

   7590  

   7691  

   7793  

(b)
(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.
2.1Agreement 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.
3.1Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006.
3.2Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006.
4.1Indenture 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.
10.7Employment 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.

10.8Employment 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.
10.92004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004.
10.102010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010.
10.11Employment 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.
10.13Employment 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.
10.15Revolving 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.
10.16Loan 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.
10.17Extension, 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.
10.18Amended 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.
14Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003.
99.1Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005.
99.2Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004.
99.3Exchange 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.
99.4Exchange 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.
99.5Exchange 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.

21List of Subsidiaries of Registrant.
23.1Consent of Independent Registered Public Accounting Firm
31.1Section 302 Certificate of Chief Executive Officer.
31.2Section 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.

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February 15, 2013

Report of Independent Registered Public Accounting Firm

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors and Shareholders of

Mercer International Inc.

We 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 statements

We have audited the accompanying consolidated balance sheets of Mercer International Inc. and its subsidiaries as atof 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.

2012. We 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 reporting
We 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.
integrated audits.

We conducted our 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.

opinions.

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 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 reasonable


70


assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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 of compliance with the policies or procedures may deteriorate.

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

Vancouver, Canada
February 26, 2010


71


MERCER INTERNATIONAL INC.


CONSOLIDATED BALANCE SHEETS
(In thousands of Euros, except per share data)

         
  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)        
The accompanying notes are an integral part of these financial statements.


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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of Euros, except per share data)
             
  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 
             
The accompanying notes are an integral part of these financial statements.


73


MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(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


MERCER INTERNATIONAL INC.


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


MERCER INTERNATIONAL INC.


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    
(1)During 2007, purchases of property, plant, and equipment include amounts received and recorded as a reduction of property, plant and equipment (approximately €9,100) upon the settlement of the Stendal engineering, procurement and construction (EPC) contract.

   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  
  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.


76


MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS

EQUITY

(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
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2012

  55,816  41,439  206,932  (3,547 25,800  25,181  295,805  (16,880 278,925 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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
  

 

 

  

 

 

  

 

 

 

Net cash from (used in) operating activities

   45,973    111,055    91,279  
  

 

 

  

 

 

  

 

 

 

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  
  

 

 

  

 

 

  

 

 

 

Net cash from (used in) investing activities

   (23,838  (46,318  (36,049
  

 

 

  

 

 

  

 

 

 

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  —    
  

 

 

  

 

 

  

 

 

 

Net cash from (used in) financing activities

   (22,865  (60,064  (6,128
  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   (103  1,377    (1,371
  

 

 

  

 

 

  

 

 

 

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  
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents, end of year

  104,239   105,072   99,022  
  

 

 

  

 

 

  

 

 

 

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Note 1.  

The Company and Summary of Significant Accounting Policies
Background

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.

Exchange.

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 disclosuresprepared in conformityaccordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant inter-company balances and transactions 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

Trading securities, consisting of marketable securities, are classified as current investments and are reported at fair values with realized gains or losses and unrealized holding gains or losses included in the results of operations.

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


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)

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.

The Company’s obligations for the proper removal and disposal of asbestos products from the Company’s mills meets the definition of a conditional asset retirement obligation as found in the Financial Accounting Standards Board (“FASB”) issued guidance as outlined in

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.

Government Investment Grants

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

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 the Consolidated Balance Sheet.


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)
type or location of the assetsand/orSignificant Accounting Policies (continued) other conditions must be met. Grants related to assets, when received, are deducted from the asset costs.

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 accordance withloss that exceeds 10% of the guidancegreater of the accrued benefit obligation and the fair value of plan assets as outlined inof theCompensation-Retirement BenefitsTopic ASC 715 (“ASC715-30” and “ASC715-60”), originally released as FASB Statement No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, beginning of the period. The Company recognizes the net funded status of the plan.
Effective December 31, 2008, the defined benefit pension plan was closed to new members and the defined benefit service accrual ceased. Members began to accrue benefits under a new defined contribution plan effective January 1, 2009. The contributions to the new plan will be charged against earnings, in the Consolidated Statement of Operations.

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.

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.

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


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)
Amounts charged to customers for shipping and handling are recognized as revenue.revenue in the Consolidated Statement of Operations. Shipping and handling costs incurred by the Company are included in “Operating costs”.
During 2008,operating costs in the Consolidated Statement of Operations.

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.

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.

Stock-Based Compensation

Under theCompensation-Stock CompensationTopic ASC 718 (“ASC 718”), originally released as FASB Statement No. 123(R),Share-Based Payment, the

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.

at each balance sheet date.

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.

units granted.

Income Taxes

Income taxes are reported under the guidance of theIncome TaxesTopic ASC 740 (“ASC740-10”), originally released as FASB Statement No. 109,Accounting for Income Taxes, and accordingly, deferred

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


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)
Derivative Financial Instruments

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.

Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

New Accounting Standards
On July 1, 2009, During the FASB officially releasedyear ended December 31, 2012, the Accounting Standards Codification (the “Codification” or “ASC”). Pursuant to FASB Statement No. 168,The FASB Accounting Standards CodificationCompany has presented revenue from the sale of chemicals within energy and the Hierarchy of Generally Accepted Accounting Principles,the Codification is effective for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP, but it is a major restructuring of how accounting and reporting standards that constitute GAAP are organized. That is, the Codification is the single source of authoritative nongovernmental GAAP. The organizational changes are expected to make GAAP easier to research by simplifying user access to all authoritative guidance. As a result, content resides in new locations within the Codification which means referencing to specific guidance has changed. For example, the pre-Codification guidance for leases is primarily found in Financial Accounting Standard No. 13,Accounting for Leasesas well as a number of other guidance such as Emerging Issue Task Force abstracts while the Codification guidance for leases is found in ASC 840. To assistchemical revenues in the transition, where a reference to the new Codification “topic” reference number is defined, the pre-Codification standard has also been noted.
In June 2009, the FASB issued guidance as outlined in theTransfers and ServicingTopic ASC 860 (“ASC 860”), originally released asConsolidated Statement of Financial Accounting Standards No. 166,AccountingOperations. This revenue had previously been presented within operating costs. Chemical revenue for Transfers of Financial Assets, an amendment of FASB Statement No. 140.FASB issued this guidance to improve the relevance, representational faithfulness,year ended December 31, 2012 was €11,643 (2011 – €10,107; 2010 – €5,063).

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

required under certain debt agreements (see Note 8(a)(d)—Debt).


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)
begins after November 15, 2009, for interim periods within

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  
  

 

 

   

 

 

   

 

 

  

 

 

 
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  
  

 

 

   

 

 

   

 

 

  

 

 

 
  12,187    29    —     12,216  
  

 

 

   

 

 

   

 

 

  

 

 

 

Long-term

       

Equity securities

  65    132    (41 156  
  

 

 

   

 

 

   

 

 

  

 

 

 

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.

Recently Implemented Accounting Standards
This section highlights recently implemented accounting standards that had a significant impact on the Company’s financial statements.
In August 2009, the FASB issued Accounting Standards Update No2009-05,Measuring Liabilities at Fair Value(“ASU2009-05”), previously exposed for comments as proposed Financial Statement Position FASBNo. 157-f,Measuring Liabilities under FASB Statement No. 157,Fair Value Measurements,to provide guidance on measuring the fair value of liabilities under ASC 820. This ASU clarifieshas concluded that the quoted price for the identical liability, when traded as an assetgross unrealized losses indicated above are temporary in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more of the valuation techniques as described in the guidance. This ASU is effective for the first interim or annual reporting period beginning after August 28, 2009. The Company adopted this guidance on October 1, 2009, and the adoption had no impact on the presentation or disclosure of these financial statements.
In December 2008, the FASB issued guidance as outlined in theDefined Benefit PlansTopic ASC 715 (“ASCnature.

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.

In March 2008, the FASB issued guidance as outlined in theDerivatives and HedgingTopic ASC 815 (“ASC815-10-50”4. Receivables and “ASC815-10-65-1”), originally released as FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities.The new guidance requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The provisions within this guidance are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this guidance effective January 1, 2009, and it had no material impact on the company’s financial statement disclosures. See Note 14 — Financial Instruments.
In December 2007, the FASB issued guidance as outlined in theConsolidationsTopic ASC 810 (“ASC810-10-65”), originally released as FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51(“FAS 160”). This guidance establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Additionally, the guidance states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of this guidance are effective for fiscal years beginning on or after December 15, 2008. The Company adopted this guidance on January 1, 2009 and amended its presentation and disclosure accordingly. See Note 17 — Noncontrolling Interest.


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   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  
  

 

 

   

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 2.  Cash and Cash Equivalents and Cash, restricted
Cash, cash equivalents and restricted cash includes restricted cash for debt service reserves as required under debt agreements (Note 7(a)). The Company maintains cash balances in foreign financial institutions in excess of insured limits.
         
  December 31, 
  2009  2008 
 
Cash and cash equivalents 51,291  42,452 
         
Cash, restricted   13,000 
         
Included in cash and cash equivalents is approximately €1,300 that was provided as part of the Canadian Federal Government’s initial instalment under the Pulp and Paper Green Transformation Program, and is expected to be spent on the Company’s Green Energy Project, currently underway at the Celgar mill, during the first quarter of 2010.
Note 3.  Receivables
         
  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.

Other relates to non-trade receivables that are individually not material.
Note 4.  Inventories
         
  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 
         
As at December 31, 2009,For certain customers the Company had not recorded any provisions against finished goods inventories (2008 — €4,200, 2007 — €nil), or against raw material inventories (2008 — €7,100; 2007 — €nil). The provisions previously recorded against finished goods and raw material inventories were included in “Operating costs”.


83

receives a letter of credit prior to shipping its product.


Note 5. Inventories

MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
   December 31, 
   2012   2011 

Raw materials

  46,028    48,063  

Finished goods

   38,169     41,392  

Spare parts and other

   34,103     31,084  
  

 

 

   

 

 

 
  118,300    120,539  
  

 

 

   

 

 

 
Note 5.  Property, Plant and Equipment
         
  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  
  

 

 

  

 

 

 
   1,324,856    1,284,425  

Less: accumulated depreciation

   (515,978  (463,451
  

 

 

  

 

 

 
  808,878   820,974  
  

 

 

  

 

 

 

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).

Included

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.

Certain ofobligations in capital leases and other in the assets at the Celgar mill are subject to a lien registered for the benefit of the province of British Columbia. The lien was registered pursuant to a property transfer tax dispute that is currently before the courts. See Note 16 — Commitments and Contingencies.
Note 6.  Consolidated Balance Sheet.Accounts Payable and Accrued Expenses
         
  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


MERCER INTERNATIONAL INC.

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  
  

 

 

   

 

 

 
  89,950    99,640  
  

 

 

   

 

 

 

(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 7.  Debt19(b)—Commitments and Contingencies).

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 
     
(1)Includes revolving credit facility principal amounts totalling €16,000.
(2)On January 21, 2010, €15,162 of the subordinated convertible notes due October 2010 were tendered for exchange for subordinated convertible notes due January 2012 and as such the Company has treated this amount as non-current. See Note 18 — Subsequent Events.

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 1.85%1.80% (rates on amounts of borrowing at December 31, 20092012 range from 1.92%1.50% to 2.52%2.25%), principal due in required


85


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 7.  Debt — (Continued)
installments beginning September 30, 2006 until September 30, 2017, collateralized by the gross assets of the Stendal mill, and at December 31, 2009, restricted cash amounting to €nil, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to €484,574€392,907 of outstanding principal, subject to a debt service reserve account required to pay(“DSRA”) for purposes of paying amounts due in the following twelve12 months under the terms of the Stendal Loan Facility; payment of dividends is only permitted if certain cash flow requirements are met.
On March 13, 2009, See Note 16—Derivative Transactions for a discussion of the Company finalized an agreement with its lendersCompany’s variable-to-fixed interest rate swap that was put in place to amend itseffectively fix the interest rate on the Stendal Loan Facility. The amendment defers approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017, including approximately €20,000, €26,000, €21,000 of scheduled principal payments that were originally due in

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, and 2011, respectively. The amendment also provides for a 100% cash sweep, referred to as the “Cash Sweep”, of any excess cash held by Stendal which will be used first to fund the debt service reserve account 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 principal amounts. Not included in the Cash Sweep is an amount of €1,500 which Stendal is permitted to retain for working capital purposes. Additionally, the Company madecompleted a €10,000 capital contribution to the Stendal mill, and incurred amendment fees totaling approximately €5,800. See Note 17 — Noncontrolling Interest.
The Company obtained a waiver from its lenders for a December 31, 2009 fixed charge ratio covenant on its Stendal Loan facility. The Company paid approximately €300private offering of $300.0 million in fees to its banking group as part of the waiver agreement.
(b) In February 2005, the Company issued $310 millionaggregate principal amount of senior notes due February 2013, which2017 (“Senior Notes”). The Senior Notes were issued at a price of 100% of their principal amount. The Senior Notes will mature on December 1, 2017 and bear interest at 9.25% accrued, are payable semi-annually, and are unsecured. On or after February 15, 2009, the Company may redeem all or a part of the notes at redemption prices (expressed as a percentage of principal amount) equal to 104.63% for the twelve month period beginning on February 15, 2009, 102.31% for the twelve month period beginning on February 15, 2010, and 100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid interest.
(c) As at December 31, 2009, the Subordinated Convertible Notes had approximately $24.0 million of principal outstanding. The subordinated convertible notes are due October 2010, bear interest at 8.5%9.50% which is accrued and payable semi-annually, are convertible at any time by the holder into common shares of the Company at $7.75 per share and are unsecured. The Company may redeem for cash all or a portion of these notes at any time at 100% of the principal amount of the notes plus accrued and unpaid interest up to the redemption date. The holders of the convertible notes will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal. See Note 7(d) — Debt and Note 18 — Subsequent Events.
(d) On December 10, 2009, the Company exchanged approximately $43.3 million of Subordinated Convertible Notes due October 2010 through a private placement for approximately $43.8 million of Subordinated Convertible Notes due January 2012. The Company recognized the refinancing of the Subordinated Convertible Notes as an extinguishment of debt in accordance with theDebt Topic ASC 470 (“ASC470-50-40-10”), originally released asEITF 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments, as the fair value of the embedded conversion option changed by more than 10%. As a result, the Company accounted for the exchange as a debt extinguishment and recognized a gain of €4,447 in the Consolidated Statement of Operations. The gain will be accreted to income through to January 2012 through interest expense yielding an effective interest rate of approximately 13%.
The Subordinated Convertible Notes due January 2012 bear interest at 8.5%, accrued and payable semi-annually, are convertible at anytime by the holder into common shares of the company at $3.30 per share andsemi-annually.


86

In August 2011, the Company’s Board of Directors authorized the purchase of up to $25.0 million in aggregate principal amount of the Company’s Senior Notes from time to time, over a period ending August 2012. In June 2012, the Company’s Board of Directors authorized the purchase of up to €50,000 in aggregate principal amount of the Company’s Senior Notes from time to time, over a period ending


MERCER INTERNATIONAL INC.

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.

Note 7.  Debt — (Continued)
are unsecured. The Company may redeem for cash all or a portion of the notes at anytime at 100% of the principal amount of the notes plus accrued interest up to the redemption date. The holders of the Subordinated Convertible Notes due January 2012 will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal. See Note 18 — Subsequent Events.
(e) (c)Credit agreement with respect to a revolving credit facility of up to C$40.0 million for the Celgar mill. In November 2009, the Company amended the revolvingThe credit facility. The amendment carries the same general structure andagreement matures May 2013. Borrowings under the credit agreement are collateralized by the mill’s inventory and receivables;receivables and are restricted by a borrowing base calculated on the mill’s inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 3.75% or Canadian prime plus 2.00%. U.S. dollar denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. As at December 31, 2009,2012, this facility was drawn by C$24.0 million and was accruing interest at a rate of approximately 4.16%.5.00%, C$6.0 million of this facility was drawn, C$1.7 million was supporting letters of credit and approximately C$24.0 million was available.

(f) (d)Loans payableA €17,000 amortizing term facility to partially finance a project, referred to as “Project Blue Mill”, to increase the Stendal mill’s annual pulp production capacity by 30,000 air-dried metric tonnes and includes the installation of an additional 40 megawatt steam turbine. The 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 available for disbursement up to August 31, 2013. The interest period for the facility, at the choice of the Company, will be of one, three or six months duration and interest is paid on the last day of the interest period selected. The facility, together with accrued interest, is scheduled to mature in September 2017. The facility will be repaid semi-annually, commencing September 30, 2013, is collateralized by the gross assets of the Stendal mill, and will be non-recourse to the Company. As at December 31, 2012, the Company had not drawn on this facility. As part of the term facility, the Company was required to open an investment account with the lender for the purpose of managing project costs and is required to deposit all funding associated with Project Blue Mill in this account. As at December 31, 2012 the balance in the investment account was €670; this cash was from shareholder loans entered into in January 2012 and operating cash flows.

(e)A loan of €25,128 payable by the Stendal mill to its noncontrolling shareholder of Stendal mill bearbears interest at 7%7.00%, and areis accrued semi-annually. The loan payable is unsecured, subordinated to all liabilities of the Stendal mill, non-recourse to the Company and its restricted subsidiaries, and is due in 2017. The balance includes principal and accrued interest.

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) (f)On August 19, 2009 the Company finalized anA four-year amortizing investment loan agreement with its lendersa lender relating to the wash press project at the Rosenthal mill with a total facility of €4,351 bearing interest at the rate of Euribor plus 2.75% that matures February 2014. Borrowings under this agreement are secured by the wash press equipment. As at December 31, 2012, the balance outstanding was €1,632 and was accruing interest at a rate of 3.42%.

(g)A €25,000 working capital facility at the Rosenthal mill. The working capital facility refinancing was completed with a new €25,000 replacement revolving facility set to maturemill that matures in December 2012.October 2016. Borrowings under the credit agreementfacility are collateralized by the mill’s inventory and receivables and bear interest at approximately Euribor plus 3.50%. As at December 31, 2009,2012, approximately €1,300 of this facility was undrawn.supporting bank guarantees leaving approximately €23,700 available.

(h)On August 19, 2009 the Company finalized an investment loan agreement with a lender relating to the new wash pressA €3,500 facility at the Rosenthal mill. The four-year amortizing investment loan was completed with a €4,351 borrowing base bearingmill that matures in December 2015. Borrowings under this facility bear interest at the rate of the three-month Euribor plus 2.75%. Borrowings under this agreement3.50% and are secured by certain land at the new wash press equipment.Rosenthal mill. As at December 31, 2009,2012 approximately €1,000 of this facility was drawn by €3,511 and was accruing interest at a rate of 3.71%.supporting bank guarantees leaving approximately €2,500 available.
Note 8.  Pension and Other Post-Retirement Benefit Obligations

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.

The largest component of this obligation is with respect to the Celgar mill which maintains a defined benefit pension plan and post-retirement benefit plans for certain employees (“Celgar Plans”).

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

this plan.


MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 8.  Pension and Other Post-Retirement Benefit Obligations — (Continued)

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 €18,469€32,954 on the consolidated balance sheetsConsolidated Balance Sheet also includes the pension liabilities of €124€109 relating to employees at the Company’s German operations.Rosenthal operation.


88


MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 8.  Pension and Other Post-Retirement Benefit Obligations — (Continued)

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 €13,356€31,953 on the consolidated balance sheetsConsolidated Balance Sheet also includes the pension liabilities of €129€112 relating to employees at the Company’s German operations.Rosenthal operation.

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 
During the year ended December 31, 2009, the Company recognized a loss of €3,128 in other comprehensive income (2008 — income of €4,079; 2007 — loss of €809). As at December 31, 2009, the pension related


89


   Amount 

2013

  2,622  

2014

   2,765  

2015

   2,890  

2016

   3,030  

2017

   3,175  

2018 – 2022

   17,482  

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 8.  Pension and Other Post-Retirement Benefit Obligations — (Continued)

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.

2013.

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


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8.  Pension and Other Post-Retirement Benefit Obligations — (Continued)
an investment allocation mix of long-term growth investments (equities) and fixed income investments (debt securities). Investment allocation targets have been established by asset class as summarized above. The asset allocation targets are set after considering the nature of the liabilities, long-term return expectations, the risks associated with key asset classes, inflation and interest rates and related management fees and expenses. In addition, the Celgar Plans’ investment strategy seeks to minimize risk beyond legislated requirements by constraining the investment managers’ investment options. There are a number of specific constraints based on investment type, but they all have the general purpose of ensuring that the investments are fully diversified and that risk is appropriately managed. For example, no more than 10% of the book value of the assets can be invested in any one entity or group, investments in any one entity cannot exceed 30% of the voting shares and all equity holdings must be listed on a public exchange. Reviews of the investment objectives, key assumptions and the independent investment managers are performed periodically.

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     
                     
2012:

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.

Note 9.  Income Taxes

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.

As at the adoption date of January 1, 2007, the Company had approximately €3,400 of total gross unrecognized tax benefits, at December 31, 2009, that balance is €700, substantially all of which would affect the Company’s effective tax rate if recognized.United States, Germany and Canada. Currently, the Company does not believeanticipate that anythe expiration of its unrecognized tax benefits will change significantlythe statue of limitations or the completion of audits in the next fiscal year.year will result in liabilities for uncertain income tax positions that are materially different than the amounts accrued or disclosed as of December 31, 2012. However, this belief could change as tax years are examined by


91


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9.  Income Taxes — (Continued)
taxing authorities, the timing of those examinations, if any, are uncertain at this time. A reconciliationDuring 2012, the German tax authorities completed examinations of the beginning2008, 2009, and ending amount of unrecognized2010 tax benefits is as follows:
         
  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 
         
years for all but one German entity. The Company recognizes interest and penaltiesexamination for this German entity will be completed in 2013. We believe that we have adequately provided for any reasonable foreseeable outcomes related to unrecognizedour tax benefits in income tax expense. Duringaudits and that any settlement will not have a material adverse effect on our consolidated results. However, there can be no assurances as to the year ended December 31, 2009, the Company recognized approximately €nil in penalties and interest. The Company had €200 for the payment of interest and penalties accrued at December 31, 2009.
The Companyand/or one or more of its subsidiaries files income tax returns in the United States, Germany and Canada.possible outcomes. The Company is generally not subject to U.S., German, or Canadian income tax examinations for tax years before 2004, 20052009, 2011 and 2004,2008, respectively.

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  
  

 

 

  

 

 

 

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  
  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 9.  Income Taxes — (Continued)

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.

strategies, and its best estimates of the timing of temporary differences, the Company believes that it is more likely than not that certain tax assets will not be realized and accordingly the Company has increased certain valuation allowances by approximately €12,000. The Company’s tax asset recognition methodology consists of forecasting taxable income into the future along with related temporary differences. The Company then estimates which tax assets, based on a variety of factors, are more likely than not to be realized, and recognizes tax assets accordingly. ASC 740 does not allow for tax assets to be recognized where the entity does not have a strong history of profitability. However, ASC 740 does not provide specific guidance with respect to what a strong history of profitability is. As a result, professional judgement is required when considering whether a company has a strong history of profitability or not. For example, the relative impact of negative and positive evidence of profitability where a company has cumulative losses in recent years. The weight given to negative and positive evidence is commensurate with the extent to which it can be objectively verified. Operating results during the most recent three-year period are generally given more weight than expectations of future profitability, which are inherently uncertain.

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

Note 10.  

Shareholders’ Equity
Common shares

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.

During the year ended December 31, 2012, the Company issued 36,500 restricted shares to directors of the Company.

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


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10.  Shareholders’ Equity — (Continued)
in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at December 31, 2009,2012, no preferred shares had been issued by the Company.

Note 11.  Stock-Based Compensation
The

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.

Performance Stock
Grants of performance stockobjectives. PSUs comprise rights to receive stockcommon shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the year ended December 31, 2009, potential stock based performance awards totaled 565,165 shares (2008 — 570,614), which vest on December 31, 2010. Expense recognized for the year was €397(2008 — €96).

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.

As at December 31, 2009,shares outstanding.

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.

Euros, except per share data)

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).

As at December 31, 2009,2012, the total remaining unrecognized compensation cost related to restricted stock amounted to approximately €7 (2008 — €45)€711 (2011 – €1,381), which will be amortized over theirthe remaining vesting period.
During the year ended December 31, 2009, there wereperiods.

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).

As at December 31, 2009, the total number of restricted stock outstanding was 253,685 (2008 — 232,685; 2007 — 211,685), of which 21,000 had not vested.


94

year:


   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  
  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 11.  Stock-Based Compensation — (Continued)
Stock Options
Following is a summary of

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 
2012:

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.

below the quoted market price. As at December 31, 2012, the Company had 100,000 options (2011 – 100,000) with an exercise price below the quoted market price resulting in an aggregate intrinsic value of €115 (2011 – €32). The Company issues new shares upon the exercise of stock options.

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


MERCER INTERNATIONAL INC.

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  
 

 

 

  

 

 

  

 

 

 

Note 11.  Stock-Based Compensation — (Continued)
Note 12.  Net Income (Loss) Per Share
             
  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 performance and196,500 restricted stockshares which have been issued, but have not vested as at December 31, 2009.2012 (2011 – 238,000 restricted shares; 2010 – 56,000 restricted shares).

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.

Stock options and awards The following table summarizes the instruments excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 928,334 for the year ended December 31, 2009 (2008 — 928,334; 2007 — nil).
Restricted stock excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 21,000 for the year ended December 31, 2009 (2008 — 21,000; 2007 — nil).


96


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 12.  Net Income (Loss) Per Share — (Continued)
Shares associated with the convertible notes excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 9,141,910 for the year ended December 31, 2009 (2008 — 8,678,065; 2007 — nil).
Performance stock excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented 369,924 for the year ended December 31, 2009 (2008 — 372,642; 2007 — nil).
were anti-dilutive.

   Year Ended December 31, 
   2012         2011              2010      

Stock options and awards

   175,000     —       190,000  

PSUs

   786,129     —       —    

Restricted shares

   196,500     —       —    
Note 13.  Business Segment Information

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 pulp business is cyclical in nature and its market is affected by fluctuations in supply and demand in each cycle. These fluctuations have significant effect on the cost of materials and the eventual sales prices of products.

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 
         
In 2009, pulp sales to the Company’s largest customer amounted to approximately 10% (2008 — 9%; 2007 — 7%) of total pulp sales.


97


   December 31, 
   2012   2011 

Germany

  636,735    638,500  

Canada

   172,143     182,474  
  

 

 

   

 

 

 
  808,878    820,974  
  

 

 

   

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 13.  Business Segment Information — (Continued)

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 14.  Financial Instruments

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 
Cash and Debt Instruments
Many of the Company’s transactions are denominated in foreign currencies, primarily the U.S. dollar. As a result of these transactions the Company and its subsidiaries has financial risk that the value of the Company’s financial instruments will vary due to fluctuations in foreign exchange rates.

   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.

The Company uses interest rate derivatives to fix the rate of interest on indebtedness under the Stendal Loan Facilities and sometimes uses foreign exchange derivatives to convert some costs (including currency swaps relating to long-term indebtedness) from Euros to U.S. dollars. As at December 31, 2009, there were only interest rate derivative instruments in place and there were no foreign exchange derivatives outstanding. The interest rate derivative contracts are with a large European bank that is the largest holder of the Stendal Loan Facility and the Company does not anticipate non-performance.
             
  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 
             
Energy Derivatives
The Company is also subject to price risk for electricity used in its manufacturing operations. During 2008, the Company entered into fixed electricity forward sales contracts in connection with the Stendal and Rosenthal mills electricity generation. The Company realized gains of €nil (2008 — €4,500). The Company entered into the electricity forward sales contracts because it saw an opportunity to sell forward at opportunistic rates. No electricity forward sales were entered into in 2009. Although the Company does not currently have plans to enter into similar transactions, should similar situations present themselves, the Company may enter into similar electricity derivative


98


MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 14.  Financial Instruments — (Continued)
contracts.

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.

Interest Rate Derivatives
During 2004, the Company entered into certainvariable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €487,043value of the principal amount of the indebtedness under the Stendal Loan Facility. Currently, the aggregate notional amount of these contracts is €487,043 at a fixed interest rate of 5.28% and they mature October 2017 (which for the most part matches the maturity of the Stendal Loan Facility). The Company recognized an unrealized loss of €5,760, with respectCompany’s financial instruments will vary due to these interest rate swaps for the year ended December 31, 2009 (2008 — an unrealized loss of €25,228; 2007 — an unrealized gain of €19,470).
Foreign Exchange Derivatives
The Company did not enter intofluctuations in foreign exchange derivatives in 2009 and 2008. During 2007, the Company had entered into certain currency swaps with an initial aggregate notional amount of €556,600 and recognized a gain of €6,820.
rates.

Credit Risk

Concentrations of credit risk on the sale of pulp products are with customers and agents based in Germany, China, Italy and the United States.
Fair Value Measurement and DisclosuresDisclosure
The Company adopted the guidance outlined in ASC 820, originally released as FAS 157,Fair Value Measurement, effective January 1, 2008. The adoption of this guidance resulted in no impact on the Company’s Consolidated Balance Sheet or the Consolidated Statement of Operations.

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.

would be held to maturity, nor did the Company intend to actively trade these investments.

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.

rates, yield curves observable at specified intervals and commodity price curves. The valuation techniques used by the Company are based upon observable inputs. Observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Company’s own credit risk, in determining the fair value of the


99


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 14.  Financial Instruments — (Continued)
derivative instruments.risk. The counterparty to our interest rate swap derivative is aand pulp price derivatives are multi-national financial institution. The fair value of the interest rate swaps represents the Company’s exposure on the derivative contracts.
institutions.

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 
                 
(a)Based on observable market data.
(b)Based on observable inputs for the liability (interest rates and yield curves observable at specific intervals).
Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification:

   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 15.  Lease Commitments

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.

Sheet.

Note 19. Commitments and Contingencies

(a)
Note 16.  CommitmentsAt December 31, 2012, the Company has liabilities for environmental conservation expenditures which include asset retirement obligations of €4,251 (2011—€4,170) and Contingencieswastewater fees of €6,648 (2011—€4,438). Management believes the accrued amounts recorded are sufficient.
At December 31, 2009, the Company recorded a liability for environmental conservation expenditures of approximately €1,852. Management believes the liability amount recorded is sufficient.


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


MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19. Commitments and Contingencies (continued)

Note 16.  Commitments(the “Guarantee Amount”), which is intended to compensate the Company for remediation work that is required at the Stendal mill, but it is less than the amount claimed by the Company under the arbitration. Consequently, the arbitration proceeding is ongoing, and Contingencies — (Continued)there is no certainty that the Company will be successful with its claims.

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.

The Company maintains industrial land fills on its premises for the disposal of waste, primarily€1,632 from the mill’s pulp processing activities. The mills have obligations under their land fill permits to decommission these disposal facilities pursuant to the requirements of its local regulations.
During the year,Guarantee Amount as part of the new Green Energy projectfinancing agreement for Project Blue Mill. This contribution was reclassified to long-term debt as part of the Celgar mill,loan payable to the Company entered into a number of contracts for the purchase of a new 48 megawatt condensing turbine-generator set, as well as other related equipment and service commitments.noncontrolling shareholder. See Note 8(e)—Debt. As at December 31, 2009,2012, the value of the project remaining to be completed and funded is approximately €19,200 (C$28.8 million), a majority of which is due to be paid within the next year and is being funded by the Canadian Federal Government’s Pulp and Paper Green Transformation Program (the “Program”). Pursuant to a contribution agreement finalized in November 2009, the Program will provide approximately C$40.0 million to complete the Green Energy Project. The Company is also eligible for an additional C$17.7 million under the Program for future qualifying projects.
The Company had also entered into certain other capital commitments at the Rosenthal mill, noneGuarantee Amount proceeds of which is individually material.
The Company is involved€1,768 remaining in a property transfer taxaccounts payable and a property tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. 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.
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 2010. Commitments under these contracts are approximately €1,000 in 2010.


101

other.


(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)

Note 16.  Commitments and Contingencies — (Continued)
Note 17.  Noncontrolling Interest
The Company adopted the guidance outlined in ASC810-10-65, originally released as FAS 160, on January 1, 2009. The adoption of this guidance resulted in retrospective presentation and disclosure changes to the December 31, 2008 Consolidated Balance Sheet. These changes are denoted in the table below:
Excerpt from Consolidated Balance Sheet
             
        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 
             
(a)As at December 31, 2008, the cumulative net losses of the Company’s 70.58% subsidiary (the “Stendal mill”) which were attributable to the noncontrolling shareholder amounted to €34,122, and were applied to the loans payable to the noncontrolling shareholder. The net obligation reported at December 31, 2008 was nil. In accordance with ASC810-10-65, the noncontrolling shareholder’s equity interest is required to be reclassified to equity in the Consolidated Balance Sheet. As a result, the Company retrospectively applied this presentation and disclosure requirement.
(b)Revised balance as at December 31, 2008 represents the Company’s Consolidated Balance Sheet reclassified in accordance with ASC810-10-65.
Commencing January 1, 2009, the Company followed the guidance in ASC810-10-65, and applied any accounting changes on a prospective basis. Pursuant to the new guidance, the noncontrolling shareholder will be attributed its share of losses even if that attribution results in a net deficit balance.
Previously, Stendal mill losses in excess of the noncontrolling shareholder’s equity interest were attributable to the Company. The resulting impact of this change in accounting is the recognition of an approximately €10,835 loss by the noncontrolling shareholder for the year ended December 31, 2009. The Company’s net loss attributable to common shareholders for the year ended December 31, 2009 would have increased by €10,835, to a net loss of €73,024 had the Company not adopted the new guidance, resulting in an increase in the net loss per share attributable to the common shareholders of €0.30 per share.
On March 13, 2009, the Company made a €10,000 capital contribution to the Stendal mill, of which €2,582 related to an increase in the Stendal mill’s stated capital, diluting the interest held by the noncontrolling shareholder and resulting in a 4.32% increase in the Company’s equity ownership in the Stendal mill from 70.58% to 74.90%. Pursuant to ASC810-10-65, the increase in equity ownership was accounted for as an equity transaction. The carrying amount of the Company’s shareholders’ equity was adjusted to reflect the 4.32% increase of ownership


102


MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 17.  Noncontrolling Interest — (Continued)
interest in the Stendal mill. As a result, the noncontrolling deficit and the Company’s Additional Paid-in Capital were reduced by €6,809.
Note 18.  Subsequent Events
On January 22, 2010, the Company announced the expiration and results of its exchange offer for up to a maximum of approximately $23.6 million aggregate principal amount of its outstanding 8.5% Subordinated Convertible Notes due October 2010. On January 21, 2010, an aggregate of approximately $21.7 million principal amount of the notes were validly tendered and accepted for exchange. This will result in the issuance of approximately $22.0 million principal amount of the Company’s 8.5% Subordinated Convertible Notes due January 2012. An aggregate of approximately $2.3 million of the Subordinated Convertible Notes due October 2010 remain outstanding.
Note 19.  Restricted Group Supplemental Disclosure

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

mill.


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 19.  Restricted Group Supplemental Disclosure — (Continued)

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 
 

 

 

  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19.  Restricted Group Supplemental Disclosure — (Continued)

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
  

 

 

  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19.  Restricted Group Supplemental Disclosure — (Continued)

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 
  

 

 

  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19.  Restricted Group Supplemental Disclosure — (Continued)

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 
  

 

 

  

 

 

  

 

 

  

 

 

 

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19.  Restricted Group Supplemental Disclosure — (Continued)

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 19.  Restricted Group Supplemental Disclosure — (Continued)

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 working capital related transactions.


109


MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of Euros, except per share data)

Note 19.  Restricted Group Supplemental Disclosure — (Continued)

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 working capital related transactions.


110


Note 19.  Restricted Group Supplemental Disclosure — (Continued)
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

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)
*On a diluted basis


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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 Mercer International Inc.MERCER INTERNATIONAL INC.
Dated: February 26, 201015, 2013 
By:
/s/ JIMMY S.H. LEE
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

 
/s/  Jimmy S.H. Lee

Jimmy S.H. Lee
Chairman, Chief Executive Officer
and Director
  Date: February 26, 2010
15, 2013  
Jimmy S.H. Lee

Chairman, Chief Executive Officer

and Director

/s/ DavidDAVID M. Gandossi

David M. Gandossi
Secretary, Executive Vice President,
Chief Financial Officer
and Principal Accounting Officer
GANDOSSI

  Date: February 26, 2010
15, 2013  

David M. Gandossi

Secretary, Executive Vice President,

Chief Financial Officer and Principal

Accounting Officer

/s/ Kenneth A. Shields

Kenneth A. Shields
Director
ERIC LAURITZEN

  Date: February 26, 2010
15, 2013  

Eric Lauritzen

Director

/s/ Eric Lauritzen

Eric Lauritzen
Director
WILLIAM D. MCCARTNEY

  Date: February 26, 2010
15, 2013  
/s/  

William D. McCartney


William D. McCartney

Director

/s/ GRAEME A. WITTS

  Date: February 26, 2010
15, 2013  
/s/  

Graeme A. Witts


Graeme A. Witts

Director

/s/ GUY W. ADAMS

  Date: February 26, 2010
15, 2013  
/s/  

Guy W. Adams


Guy W. Adams

Director

/s/ BERNARD PICCHI

  Date: February 26, 2010
15, 2013  

Bernard Picchi

Director

/s/ George Malpass

George Malpass
Director
JAMES SHEPHERD

  Date: February 26, 201015, 2013

James Shepherd

Director

/s/ KEITH PURCHASE

Date: February 15, 2013

Keith Purchase

Director


112


EXHIBIT INDEX
     
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.


114