UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORMFORM 10-K

For the fiscal year ended December 31, 2011

OR

For the transition period from                      to                     

Commission File No.: 000-51826

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

Suite 1120, 700 West Pender Street, Vancouver,

British Columbia, Canada, 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:

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

None

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

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

Indicate by check mark whether registrantRegistrant 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 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files).  Yes  x  No  ¨

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

Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨  Yes  x  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, 2011,2014, 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 Select Market on such date, was approximately $461,949,697.$674,869,524.

As of February 17, 2012,12, 2015, the registrantRegistrant had 55,779,20464,414,322 shares of common stock, $1.00 par value per share, 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 20122015 is incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

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EXCHANGE RATES

Our3

CHANGE IN REPORTING CURRENCY

Effective October 1, 2013, we changed our reporting currency from the Euro to the U.S. dollar, as management is of the opinion that a U.S. dollar reporting currency enhances communication and understanding with our shareholders, analysts and other stakeholders and improves comparability of our financial information with our competitors and peer group companies. Consolidated financial statements issued prior to October 1, 2013 were prepared using the Euro as the reporting currency; however, subsequent to October 1, 2013, both current and historical financial information have been translated to U.S. dollars in accordance with the method described in Note 1, “The Company and Summary of Significant Accounting Policies – Foreign Operations and Currency Translation”, of the consolidated financial statements included in this annual 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.Form 10-K.

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 U.S. dollars to 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:

On February 10, 2012, the date of9, 2015, the most recent weekly publication of the daily Noon Buying Rate before the filing of this annual report on Form 10-K reported that the Noon Buying Rate as of February 6, 2015 for the conversion of U.S. dollars to Euros and Canadian dollars to U.S. dollars was €0.7583$1.1330 per U.S. dollarEuro and C$1.0016$0.7985 per U.S.Canadian dollar.

In addition, certain financial information relating to our Celgar mill included in this annual report on Form 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 (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:

On February 20, 2012, the Daily Noon Rate for the conversion of Canadian dollars to Euros was C$1.3148 per Euro.

PART I

In this document, please note the following:

The Company

General

Mercer Inc. is a Washington corporation and our shares of common stock are 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 among the largest publicly traded producerproducers of market northern bleached softwood kraft, or “NBSK”, pulp in the world. Mercer Inc. reorganized as a corporation under the laws of the State of Washington in 2006 from a Washington business trust. Its common stock is quoted and listed for trading on the NASDAQ Global Select Market (MERC) and the Toronto Stock Exchange (MRI.U).

We are the sole NBSK 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 1,039 people at our German operations, 439 people at our Celgar mill in Western Canada and 17 people at our office in Vancouver, British Columbia, Canada.1,430 people. We operate three NBSK pulp mills with a consolidated annual production capacity of approximately 1.5 million ADMTs:ADMTs of NBSK pulp and 305 MW of electrical generation:

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Organizational Chart

The following chart sets out our directly and indirectly owned principal operating subsidiaries, their jurisdictions of organization, their principal activities and their principal activities:annual pulp production and electrical generation capacity:

History and Development of Business

We acquired our initialIn 1994, we commenced pulp operations in 1994, with the acquisition of our Rosenthal mill. In late 1999, we completed a major capital project which, among other things, converted itthat 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$385.7 million, of which approximately €102.0$100.8 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 345,000360,000 ADMTs. Our Rosenthal mill completed a capital project to also produce and sell tall oil in the fourth quarter of 2014.

In September 2004, we completed construction of the Stendal mill at an aggregate cost of approximately €1.0$1.1 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$332.0 million, low-cost, long-term project debt which iswas largely severally guaranteed by the federal government and a state government in Germany, and equity contributions.

We initially had a 63.6% ownership interest in Stendal and, over time,Stendal. We subsequently increased our interest in Stendal through acquisitions and/or further investments to 70.6% in 2006, 74.9%.

We, in 2009 and 83.0% in 2013. In September 2014, we made an additional capital investment in Stendal and its 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 typesacquired all of agreements, including restrictions on transfers of share capital andthe shareholder loans and substantially all of the shares of the minority shareholder in Stendal and other thanrights. As a result of such transactions, we now consolidate all of the economic interest in Stendal.

In December 2013, our Stendal mill completed a $49.3 million project, referred to affiliates, rightsas “Project Blue Mill”, which was designed to increase production and efficiency through debottlenecking initiatives including the installation of first refusal on sharean additional 46 MW steam turbine at our Stendal mill. The debottlenecking which, among other

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things, required a new turbine in order to enhance and shareholder loan transfers, pre-emptive rightsefficiently utilize steam production was designed to increase the mill’s annual pulp production capacity by 30,000 ADMTs. The new turbine permits the mill to produce an additional 109,000 MWh annually of surplus renewable energy for sale at premium pricing 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.is fully operational.

A significant portion of the capital investments at our German mills, including the construction of the Stendal mill, were financed through government grants. Since 1999,1998, our German mills have benefited from an aggregate €384.9approximately $468.6 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.

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 September 2010, we completed520,000 ADMTs and its production of “green” energy. This includes a capital project, 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, at an aggregate cost of approximately C$64.9$60.6 million, of which approximately C$48.0$44.6 million was financed by grants from the Canadian federal government. See “—Capital Expenditures”. We have also increased the Celgar mill’s overall annual pulp production capacity to approximately 520,000 ADMTs through increased efficiencies.

Our Competitive Strengths

Our competitive strengths include the following:

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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 €52.8 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 have 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.

Corporate Strategy

Our corporate strategy is to create shareholder value by focusing on the expansion ofexpand 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, energy and chemical production, reducing costs and improving efficiency. We are also developing innovative new products based on other derivatives of the kraft pulping process. 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 featureselements of our strategy include:

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•

Operating and Maximizing Returns from our 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 three large modern pulp mills. We believe these production facilitiesmills which provide us with the besta platform to be an efficient and competitive producer of high-quality NBSK pulp without the need for significant sustaining capital. Our modern mills are also generally net exporters of renewable energy. We are constantly reviewing opportunitiesseek to enhancemake targeted capital expenditures that increase the production and maximize the usageoperational efficiency of the strengthsmills, reduce costs and improve product quality and electricity generation. Over the last five years, we have invested approximately $187.0 million (including $65.0 million in associated government grants) in growth capital expenditures for capacity expansions, operational efficiencies and renewable energy and chemical production.

The Pulp Industry

General

Pulp is used in the production of paper, tissues and paper-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 other paper-related products.

There are two main types of bleached kraft pulp, being softwood kraft made from coniferous trees and 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, list prices for softwood pulp are higher than list prices for hardwood pulp.

We produce and 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 pulp product of our mills.

The selling price of kraft pulp depends in part on the fiber used in the production process. There are two primary species of wood used as fiber: softwood and hardwood. Softwood species generally have long, flexible fibers which add strength to

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Most 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 usesusers of market kraft pulp including fine printing papers, coated and uncoated magazine papers and various tissue products, utilizeuse a mix of softwood and hardwood grades to optimize production and product qualities. In recent2014, market kraft pulp consumption was approximately 53% hardwood bleached kraft, 43% softwood bleached kraft and the remainder comprised of 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 thethis 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 ofability to substitute lower priced hardwood pulp has beenfor NBSK pulp is the requirement for strength and formation characteristics in finished goods. Paper and tissue makers focus on larger paper machines with higher machine speeds and lower basis weights for publishingcertain papers which also require the strength characteristics of softwood pulp. WeAdditionally, 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-related products.

Markets

We believe that over 125130.0 million ADMTs of kraftchemical pulp are converted annually into tissues, printing and writing papers, tissues, carton boards and other whitespecialty 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, overallOverall 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 halflatter part of that year2008 and which continued intocontinuing through the first half of 2009. Significant producer shutdowns and curtailments, along with strong demand from China, resulted in an improved supply-demand balance and improved prices in the second half of 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, continued economic uncertainty in Europe, credit tightening in China and 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. In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher prices in 2013. In 2014, demand in both European and Chinese markets was stable, while supply was slightly under-balanced throughout the year which kept prices at relatively high levels.

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Between 20002005 and 20102014, worldwide demand for softwoodchemical market pulp grew at an average rate of approximately 1.6% annually. Demand2% annually, with worldwide demand for bleached softwood kraft market pulp was negatively impacted by weakhaving grown at an average of approximately 1% per annum. The following chart illustrates the global economic conditions in 2009. However, the supply/demand balance for softwoodchemical market pulp improvedfor the periods indicated:

Two key macro-economic trends in 2010, primarily due to strongworldwide NBSK pulp demand in China,over the residual effects of the Chilean earthquake that affected millslast several years have been:

Since 2005, demand for chemical 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 15.9%11% per annum between 20002005 and 2010.2014. We believe the emerging markets now account for approximately 51% of total world demand. China now accounts for approximately 20%29% of global bleached softwood kraft market pulp demand, compared to only 5%13% in 2000.2005. Western Europe currently accounts for approximately 30%27% of global bleached softwood kraft market pulp demand.demand, compared to approximately 37% in 2005. The demand in the mature markets of Europe, North America and Japan in 2014 declined by approximately 2.8 million ADMTs from its peak in 2005.

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The following chart sets forth industry-wide bleached softwood kraft delivery levels to China for the periods indicated:

Growth in NBSK pulp demand in China and other emerging markets has, to a large extent, been driven by increased demand from tissue producers, as a result of economic growth and rising income levels and living standards in such markets. These factors generally contribute to a greater demand for personal hygiene products in such regions. In China alone, tissue producers have publicly announced plans to add a total of 30 tissue paper machines at various sites during 2015 to increase their annual tissue capacity by approximately 1.2 million ADMTs. At this time there can be no assurance as to when and 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 2013, NBSK pulp demand for tissue production increased by approximately 168%, an approximate 10% compound annual growth rate. From 2003 to 2013, a period very affected by “digital substitution” of traditional paper grades, total NBSK demand grew by 14%.

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The following chart compares NBSK pulp demand by end use in each of 2003 and 2013 (the latest year for which figures are currently available).

We believe 2014 NBSK demand by end use was generally consistent with the trend in the chart above.

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 the build-up of their own inventories. The demand/capacity ratio for softwood kraft pulp was approximately 92%93%, 94% and 94% in 2011, approximately 93% in 20102014, 2013 and approximately 91% in 2009.2012, respectively.

A significant factor affecting our market is the amount of closures of old, high-cost capacity. InOver the four-year period from 2006 to 2009, we estimate approximately 5.3 million tonnes of predominantly NBSK capacity waslast several years, mills in North America, Finland and Sweden were permanently or indefinitely closed. Such closures have been partially offset by approximately 1.9 million tonnesAlthough some capacity was restarted in late 2009 and 2010. The2010 in response to very high NBSK pulp prices, we believe the overall net effect reduced NBSK pulp supply and positively impacted markets. Between 2011 and 2014, we believe approximately 800,000 ADMTs of thesepulp capacity was idled or shut down through mill closures or curtailments. Further, in efforts to improve environmental and restartssafety standards, China has publicly stated that it will be reducing existing pulp and paper capacity in the near term by closing “old” mills, targeting a removal of 4.9 million ADMTs by the end of 2014. At this time, there can be no certainty as to the actual amount and timing of any such closures.

By the end of 2014, the global supply of bleached hardwood kraft pulp increased by approximately 1.6 million ADMTs, primarily from South America. This increase in bleached hardwood kraft pulp is largely targeted at the growing demand for pulp in developing markets, particularly in China, by producers of tissues, specialty papers and packaging. If such additional bleached hardwood kraft pulp supply is not absorbed by such demand growth, as a result of generally lower prices for bleached hardwood kraft pulp, this supply increase could

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put downward pressure on NBSK pulp prices. However, we believe customers’ ability to further substitute NBSK pulp for lower priced bleached hardwood kraft pulp is limited by the strength characteristic of NBSK pulp which is required by large modern paper machines to run lower basis-weight paper products efficiently. As pulp prices are highly cyclical, there can be no assurances that prices will not decline in the future.

In 2013, one new NBSK mill was started up in Russia, which resulted in an estimated 3.4 million tonnesincremental increase of capacity removed from the market. Weapproximately 490,000 ADMTs in annual production capacity. Currently, we are aware of only one plannedseveral publicly announced modernization and expansion projects for NBSK plantmills in Europe that may be implemented over the next three years, ranging from small expansions of existing mills to potential “greenfield” mills. We currently believe a few of these projects will be implemented while others are currently subject to various conditions including financing and further development. We believe that, because of fiber constraints, any significant expansion worldwideof NBSK capacity in the next few years.region would require the closure of older mills. At this time, we cannot predict which of the publicly announced expansion projects will be completed or how much additional NBSK production capacity may come online.

In addition, certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their NBSK pulp production on the market, if market conditions, prices and trends warrant such actions. We believe that the absence of other plant expansions is due in part to fiber supply constraints and high capital costs.

NBSK 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 price is generally used as a benchmark price by the industry.

The average European list prices for NBSK pulp since 2005 have fluctuated between a low of approximately $575 per ADMT in 2009 and a high of $1,030 per ADMT in 2011.

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:

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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.

In 2011, pulp prices remained strong in the first half of the year, 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 sharply 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. In 2012, year-end list prices were approximately $810, $870 and $655 per ADMT in Europe, North America and China, respectively.

In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher year-end list prices of $905 per ADMT in Europe and $990 and $750 per ADMT in North America and China, respectively. In 2014, demand in both Europe and China was stable, while supply was slightly under-balanced throughout the year which kept prices relatively high. At the end of 2014, list prices in Europe were approximately $935 per ADMT, while list prices in North America and China were approximately $1,020 and $700 per ADMT, 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 rebates are much 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 often 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 negative impact on our operating costs of a 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. In 2013, the U.S. dollar was 3% weaker against the Euro, compared to 2012, which reduced the operating margins of our German mills. However, by the end of 2014, the U.S. dollar was 12% and 8% stronger against the Euro and the Canadian dollar, respectively, compared to 2013, which increased the operating margins of our three mills.

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The global supply and demand balance for NBSK pulp is a key determinant in pulp pricing. Generally, we and other producers consider global NBSK pulp supply and demand to be evenly balanced when world inventory levels are at about 30 days’ supply.

The following chart sets forth changes in FOEX PIX Pulp index prices for NBSK pulp and global bleached softwood kraft inventory levels between 2005 and 2014:

Seasonality

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 our mills build up their fiber supply for the winter when there is reduced availability.

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.

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 to a high of $1,030 per ADMT.16

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 and better demand.

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 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 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 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. 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. Although 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, uncertainty concerning the economic situation in Europe, along with credit tightening in China, 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. As pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.

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 Scandinavian 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 began to strengthen again at the end of the year.

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: Pulp & Paper Week and Bloomberg

The Manufacturing Process

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

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 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 thanapproximately 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.

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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 residuals 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 high pressure steam produced by the recovery and power boilers is used to power a turbine generator to generate electricity, as well aslow pressure steam coming off the turbine is then used to provide heat for the digesting and pulp drying processes.

Research and Development

We, along with other pulp producers both individually and through industry associations, are conducting research and development focused on developing innovative new products that are based on derivatives of the kraft pulping process. Currently these derivatives are focused in two broad categories:

We are engaged with several research partners to participate in and develop new innovative products. To date, one of the most well-developed of these projects is a cellulose derivative generally referred to in the industry as “cellulose filaments”. Cellulose filaments are the result of a new process that unbinds the individual filaments that make up a cellulose fiber. In northern softwoods, there are approximately 1,000 filaments making up a single fiber. The filaments resulting from this patented process are long, ribbon-like structures that have unique strength characteristics similar to other chemical derivatives, such as aramids. We believe that this material may have commercial potential in many applications, including strength enhancers, solution stabilizers and specialty solutions for numerous other industries.

We are part of an industry association that has made considerable progress in developing a particular manufacturing process. We, along with other member companies, including certain other NBSK producers, have license rights to further develop and market existing intellectual property registered under patent to our industry association. Further, such association, in conjunction with one of its member companies, is constructing a pilot production facility and we have access to its product for development purposes. While there remains much research and development to be done, we are encouraged enough to continue to expend resources to develop this technology, both individually and in joint development arrangements with third parties. We estimate expenditures totaling approximately $3.0 million over the three-year period from 2014 to 2016.

Such research and development is still at an early stage and there has been no commercialization of the research to date. We currently estimate it may take between three and five years before we can determine if product applications can be commercialized. However, there can be no assurance that such research and development will ever result in commercialization or the production or sales of any products by us at a profit or at all.

Our Mills and Product

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

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

Rosenthal Mill.The Rosenthal mill is situated on a 230 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 360,000 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:

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

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pulp and generally obtains the highest price. The Rosenthal mill produces pulp for reinforcement fibers to the specifications of certain of our customers. We believe that a number of our customers consider us their supplier of choice.

Stendal Mill. The Stendal mill is situated on a 200 acre site owned by Stendal that is part of a larger 1,250 acre industrial park near the town of Stendal in the state ofSaxony-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 660,000 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:

The kraft pulp produced at the Stendal mill is of a slightly different grade than the pulp produced at the Rosenthal mill as the mix of softwood fiber used is slightly different. This results in a complementary product more suitable for different end uses. The Stendal mill is capable of producing both totally chlorine free and elemental chlorine free pulp.

Celgar Mill. The Celgar mill is situated on a 400 acre site near the city of Castlegar, British Columbia. The mill is located on the south bank of the Columbia River, approximately 600 kilometers east of the port city of Vancouver, British Columbia, and approximately 32 kilometers north of theCanada-U.S. border. The city of Seattle, Washington is approximately 650 kilometers southwest of Castlegar. The Celgar mill 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 Celgar mill include:

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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.

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

Climate change concerns have caused a proliferation of renewable or “green” energy legislation, incentives and commercialization in both Europe and, increasingly, 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 biofuelsbio-fuels such as black liquor and wood waste. Through the incineration of biofuelsbio-fuels in the recovery and power boilers, our mills produce sufficient steam to cover all of our steam requirements and allowsallow us to produce surplus energyelectricity which we sell to third party utilities. As a result, we have benefited from “green” energy legislation, incentives and commercialization that have developed over the last few years in Europe and Canada. In addition, in recent years we have applied considerable resources to increasing our capacity to produce and sell chemicals, primarily tall oil for use in numerous applications including bio-fuels.

Our surplus energy and chemical sales provide our mills with a new stable revenue source unrelated to pulp prices. Since our energy and chemical production are by-products of our pulp production process, there are minimal incremental costs and our surplus energy and chemical 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 and/or chemicals in a meaningful amount.

In 20112014 and 2010, we2013, our mills sold 652,113807,758 MWh and 520,005699,051 MWh of surplus energy,electricity, respectively, and recorded revenues of €58.0$88.8 million and €44.2$79.4 million, respectively, from such energy sales. Since our energy production is a by-productIn 2014 and 2013, revenues from the sale of our pulp production process, there are minimal incremental costschemicals were $12.7 million and our surplus energy sales are highly profitable. $12.8 million, respectively.

The following table sets out our electricity generation and surplus energyelectricity sales for the last three years:five years ended December 31, 2014:

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The following chart sets forth our consolidated revenues from electricity and chemical sales for the five years ended December 31, 2014:

German Mills

Since January 2009, ourOur Rosenthal and Stendal mills have participatedparticipate in a program established pursuant to the Renewable Energy Act. The Renewable EnergySuch 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 installations with a capacity of 20MW or less, effectively excluding our Rosenthal and Stendal mills. Subsequent amendments to the Renewable Energy Act have removed this restriction. Under the program, our German mills now sell their surplus energy to the local electricity grid at the rates stipulated by the Renewable Energy Act for biomass energy.

Since 2005, our German mills have also benefited from the sale of emission allowances under the European Union Carbon Emissions Trading Scheme, referred to as “EU���EU ETS”. However, our eligibility for special tariffs under the Renewable Energy Act has reduced the amount of emissions allowances granted to our German mills under the EU ETS.

In January 2012,2014, our Rosenthal and Stendal mills sold approximately 178,266 MWh and 509,773 MWh of electricity, respectively, for proceeds of $21.9 million and $56.8 million, respectively.

In December 2013, we announcedcompleted Project Blue Mill which is designed to increasepermits the Stendal mill’smill to produce an annual pulp production byincremental 30,000 ADMTs of pulp and initially produce an additional 109,000 MWMWh of surplus renewable energy. Project Blue Millelectricity and is eligiblefully operational. Sales of such incremental surplus electricity generated approximately $9.7 million in revenues for €12.0 million of non-refundable government grants and theStendal in 2014.

In 2014, our Stendal mill has securedgenerated $11.9 million from the sale of tall oil, a new €17.0 million five-year amortizing secured term debt facility,by-product of which 80% will be government guaranteed. The balance of Project Blue Mill will be funded through operating cash flow ofour production process. In 2014, our Rosenthal mill completed a capital project to also produce and sell tall oil. We estimate that, based on current pricing, the Stendalproject should permit the Rosenthal mill and up to an aggregate of €6.5generate approximately $3.5 million in pro rata shareholder loansannual revenues from Mercer Inc. and its noncontrolling shareholder.tall oil sales.

Celgar Mill

In September 2010, we completed 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 included the installation of a 48 MW condensing turbine,

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which brought the mill’s installed generating capacity up to 100 MW, and upgrades to the mill’s bark boiler and steam consuming facilities. The Celgar mill has an Electricity Purchase Agreement with B.C.British Columbia Hydro and Power Authority, referred to as “B.C. Hydro”, for the sale of power generated from such project. Under the Electricity Purchase Agreement, the Celgar mill agreed to supply a minimum of approximately 238,000 MWh of surplus electrical energy annually to the utility over a ten-year term.

We financed the Celgar Energy Project largelyprincipally with funding from the GTP. In early October 2009, we received notification from Natural Resources Canada, or “NRCan”, of the Celgar mill’s original allocation of approximately C$57.7$44.6 million in credits under the GTP. In November 2009, we entered into a non-repayable contribution agreement, referred to as the “Contribution Agreement”, with NRCan whereby NRCan provided us with approximately C$40.0 million in grants (of our allocated C$57.7 million) towards certain costs associated with the Celgar Energy Project. Subsequently, NRCan provided an additional C$8.0 million pursuant to the terms of the Contribution Agreement. In 2011, NRCan agreed to allocate approximately C$1.6 million under its Transformative Technologies Program and we entered into additional contribution agreements bringing the total received from NRCan to C$56.1 million.Canadian governmental grants.

In 2011,2014, we produced and sold roughly 140,069approximately 119,719 MWh of surplus renewable electricity at our Celgar mill which generated approximately C$14.5$10.1 million in annual revenues.

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.

Labor

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 sawmilling process and pulp logs. Wood chips are small pieces of wood used to make pulp and are either wood residuals from the sawmilling 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 prices, and weakeningweaker economies or warm winters such as in 2014 temper the first half of 2009 tempered the increased demand for wood chips that resultedresulting 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 to continue to increase.

In April 2008, the Russian government raised tariffs on the export of sawmill and pulp wood to 25% from the 20%. A further increase to 80% was initially scheduled for January 1, 2009 but was officially deferred twice and Russia’s export tariff remained unchanged at 25% in 2011. In earlyAugust 2012, Russia agreed to enterentered the World Trade Organization, or “WTO”. It is currently expected that Russia will formally enter, and, due to inclusion in the WTO, in June 2012 and will lowerRussia has lowered its export tariffs for certain softwood species to between 13% and 15%, which we believe will havehas had a positive impact on the European fiber supply.

During the past few years, certain customers have endeavored to purchase pulp that is produced using fiber that meets certain recognized wood certification requirements from forest certification agencies like FSC, PEFC, SFI-CSA. If the fiber we purchase does not meet certain wood certifications required by customers, it may make it more difficult or prevent us from selling our pulp to such customers. The chain of custody wood certification process is a voluntary process which allows a company to demonstrate that they use forest resources in accordance with strict principles and standards in the areas of sustainable forest management practices and environmental management. In an effort to procure wood only from sustainably managed sources, we employ an FSC Chain of Custody protocol which requires tracking of fiber origins and preparing risk based assessments regarding the region and operator. In the areas where we operate, we are actively engaged in the further development of certification processes. Although wood certification requirements continue to evolve and are not

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consistent from jurisdiction to jurisdiction, we currently do not expect certification requirements to have a material adverse impact on our fiber procurement and pulp sales.

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. We 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 and 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 laterduring that year. Fiber prices continued to increase through most of 2010 and 2011, driven by a weak lumber market, lower levels of harvesting in central Germany combined withand increased demand for wood from the energy sector for heating and other bio-energy purposes. In 2012, fiber prices in Germany decreased by approximately 17% (in U.S. dollar terms), mainly due to reduced demand for fiber from the European particle board industry and other regional residual fiber users and the start of a recovery in lumber markets. In 2013, fiber prices in Germany increased by approximately 13%, mainly due to strong demand from the European board producers and sawmills, along with the increased demand for pellets due to an unusually cold winter. In addition to increased demand, high snow levels and summer floods in some areas in which we operate led to lower fiber supply levels during much of 2013. In 2014, our per unit fiber costs in Germany decreased by 6% due to sawmills running at high rates, a stronger supply of logs and lower demand from pellet producers and board manufacturers.

We believe we are the largest consumer of wood chips and pulp logs in Germany and often provide the best long-term economic outlet for the sale of wood chips in Eastern Germany. We coordinate the wood procurement activities for our German mills to reduce overall personnel and administrative costs, provide greater purchasing power and coordinate buying and trading activities. This coordination and integration of fiber flows also allows us to optimize transportation costs, and the species and fiber mix for both mills.

In 2011,2014, the Rosenthal mill consumed approximately 1.8 million cubic meters of fiber. Approximately 70%69% of such consumption was in the form of sawmill wood chips and approximately 30%31% was in the form of pulp logs. The wood chips for the Rosenthal mill are sourced from approximately 3126 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 73%71% 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 supplyone-year 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 and traders 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 2011,2014, the Stendal mill consumed approximately 3.23.4 million cubic meters of fiber. Approximately 25%30% of such fiber was in the form of sawmill wood chips and approximately 75%70% 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

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Germany. The fiber base in the wood supply area for the Stendal mill consisted of approximately 68%55% pine, and 32%44% spruce and 1% other species in 2011.2014. The Stendal mill has sufficient chipping capacity to fully operate solely using pulp logs, if required. We source pulp logs partly from private forest holders, municipal forest owners and partly from state forest agencies in Thüringia,Saxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse and Brandenburg.Brandenburg, Bavaria, Schleswig-Holstein, Rhineland Palatinate and the City of Berlin. The volumes are distributed at optimal costs between the mills. In addition, in 2013 and 2014, the Stendal mill also imported fiber from Poland and the Baltic Sea region.

In 2011,2014, the Celgar mill consumed approximately 2.62.4 million cubic meters of fiber. Approximately 61%78% of such fiber was in the form of sawmill wood chips and the remaining 39%22% 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(pine, douglas fir, hemlock, cedar and cedar)spruce) and the mill sources fiber from a number of Canadian and U.S. suppliers.

As a result of the cyclical decline in sawmill chip availabilitysupply resulting from lower lumber production in British Columbia commencing in 2008, 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 ofIn 2009, the Celgar mill completed a project to upgradeupgraded its woodroom which, along with subsequent improvements during the year, increased its capacity to be able to process up to 50%40% of the mill’s fiber needs compared to only approximately 10% previously.needs. The woodroom upgrades also increased the mill’s ability to process smallsmaller 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. A recovery in U.S. housing starts which commenced in the latter part of 2012 and continued in 2013 and 2014 resulted in increased sawmill activity. This increased the supply of wood chips for the Celgar mill and reduced its need for pulp logs, which are generally a higher cost for the mill than wood chips.

The Celgar mill has access to over 35approximately 29 different suppliers from Canada and the U.S., representing approximately 75%78% of its total annual fiber requirements. The Celgar mill’s woodroom and third party chippers supplied the remaining 25%22% of the mill’s fiber requirements in 2011.2014. 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. SeveralOne 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’ writtenterminate after providing the stipulated notice. Certain non-evergreen long-term agreements provideAll other contracts are generally for renewal negotiations prior to expiry.one year with quarterly adjustments or on three-month terms.

To secure the volume of pulp logs required by its 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.

On the fiber demand side, increased competition for fiber from the growing renewable or “green” energy sector in British Columbia The Celgar mill also purchased two non-renewable licenses at a cost of $1.3 million, which will provide saw logs to sawmills in the second halfarea and pulp logs for the Celgar mill to use.

In 2014, our fiber costs per unit at the Celgar mill were approximately 11% lower than in 2013, as a result of 2011 ledthe impact of strong sawmill activity in the region.

Labor

Our labor costs are generally steady, with small overall increases due to moderately higher fiberinflation in wages and health care costs. Although not nearly as advanced as Europe, British Columbia’s growing green energy sector isOver the last three years, we have been able to largely offset such increases by increasing our efficiencies and production and streamlining operations.

In July 2013, we determined to reduce the Celgar mill’s workforce by approximately 85 employees in order to reduce the mill’s fixed costs. In 2013, we incurred pre-tax charges of approximately $5.0 million for severance and other personnel-related expenses in connection with this reduction. We estimated that our Celgar

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mill would realize approximately $8.0 million to $10.0 million in annual pre-tax costs savings once such restructuring has been completed and expected to continue to create additional competition for fiber over time.realize approximately 80% of such savings in 2014. As at December 31, 2014, we had realized the expected cost savings.

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 2011,2014, we generated 1,640,4391,853,509 MWh and we sold 652,113807,758 MWh of surplus energy. See also “—“– Generation and Sales of ‘Green’ Energy and Chemicals at our Mills”. We utilize fossil fuels, such as natural gas, in limited circumstances primarily in our lime kilns and we use a limited amount for start-up and shutdownshut-down 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.

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 2014, we generated $12.1 million from the sale of tall oil. In 2014, our Rosenthal mill completed a capital project which will allow it to process and sell tall oil. We currently expect tall oil sales to increase in future periods.

Cash Production Costs

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

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Sales, Marketing and Distribution

The distribution of ourOur pulp sales revenues by geographic area are set out in the following table for the periods indicated:

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 December 31, 20112014		Year Ended December 31, 20102013		Year Ended December 31, 20092012

*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 use are set out in the following table for the periods indicated:

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 1914 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 over 180

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approximately 209 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, 2011,2014, we had no material payment delinquencies. In 2011, no single2014, one customer at a number of its individual mills accounted for more than 10%13% of our pulp sales. In 2010,2013, two customers at a number of their individual mills accounted for 10% and 11%, respectively, of our pulp sales. In 2012, one customer which purchased for severalat a number of its individual mills accounted for 11% of pulp sales and, in 2009, no single customer accounted for more than 10% of our pulp sales. We don’tdo not believe our pulp sales are dependent upon the activities of any single customer.

Approximately 50%, 49% and 54% of our sales were to tissue and specialty paper product manufacturers in 2014, 2013 and 2012, respectively. In 2013 and 2012, our Celgar mill shifted sales of approximately 55,000 ADMTs per annum from a very large North American tissue producer to certain printing and writing customers in China as it could obtain higher margins on these particular sales volumes. Generally tissue producer customers are not as sensitive to cyclical declines in demand caused by downturns in economic activity. The balance of our sales was to other paper product manufacturers.

Transportation

We transport our NBSK pulp generally by truck, rail and ocean carriers through third-party carriers. We have a small fleet of trucks in Germany that deliver some of our German mills’ pulp.

Our German mills are currently the only significant 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 Canadian and ScandinavianNorthern 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.truck and rail. Most trucks that deliver goods into Eastern Germany generally do not have significant backhaul opportunities as the region is primarily an importer of goods. We are therefore frequently able to obtain relatively low backhaul 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 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 directly to the customer or to third party warehouses in the U.S. or directly

In each of 2014, 2013 and 2012, outbound transportation costs comprised approximately 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 to the customer.most “freight logical” customers for overseas sales.

Approximately 58%, 55% and 51% of our sales were to tissue and specialty paper product manufacturers for the years ended December 31, 2011, 2010 and 2009, respectively. The balance of our sales 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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Capital Expenditures

In 2011,2014, we continued with our capital investment programs designed to increase pulp, “green” energy and green energychemical production capacity, reduce costs and improve efficiency and environmental performance at our mills. The improvements made at our mills over the past eight 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 2011, 2010 and 2009 were €13.7 million, €4.0 million and €9.1 million, respectively. following table for the periods indicated:

Capital investments at the Rosenthal mill in 2011,2014 related primarily to an automated chip reclamation project and tall oil project, while, in 2013, they related primarily to the installationcompletion of a new chipperthe recovery upgrade project and upgradesthe replacement of capital. In 2012, capital investments related primarily to the mill’s recovery process, while in 2010 and 2009 capital expenditures related mainly to theboiler upgrade, of a bleaching line and a washer project, which helped offset three years ofreduced our wastewater fees that would otherwise be payable.fees.

Our Stendal mill’s total capital expenditures in 2011, 2010 and 2009 were €8.3 million, €3.6 million and €2.0 million, respectively. Capital investments at the Stendal mill in 20112014 related primarily to a wastewater reduction project. In 2013 and 20102012, capital investments related mainlyprimarily to relatively small projects designed to improve safety and environmental performance as well as improve the overall efficiency of the mill.Project Blue Mill.

In January 2012, Mercer announcedDecember 2013, the Stendal mill completed Project Blue Mill, which is intended to increaseincreased production and efficiency at the Stendal mill through debottlenecking initiatives, including the installation of an additional 4046 MW steam turbine. Project Blue Mill is estimated to require approximately €40.0required $49.3 million in capital expenditures over about 21 months, which will bewas primarily funded through €12.0approximately €11.3 million ($15.0 million) of non-refundable German government grants and a new €17.0 million ($22.2 million) five-year amortizing secured term facility, of which 80% will be government guaranteed.debt facility. The balance of Project Blue Mill will bewas 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 designed to be completed and start to generate power resources in or about September 2013.contributions.

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. Currently,For example, the government grants are availablereceived in connection with Project Blue Mill require us to maintain the employment of core employees for up to 15%five years after completion of the cost of qualified investments.project. 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 €0.5 million ($0.6 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 itsuch recipient 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, whereinin which case the government may refrain from reclaiming previous grants. Pursuant to such legislation in effect at the time, the Stendal mill receivedrecorded approximately €278.0$350.0 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 “Item 3. – Legal Proceedings”.

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The following table sets out, foras at the periodsdates indicated, the effect of these government grants on the recorded value of such assets in our consolidated balance sheets:Consolidated Balance Sheets:

The following table sets forth, as at the dates indicated, the gross amount of all government grants we have received and capitalized in our balance sheet, the associated amortization and the resulting net balance we include in our property, plant and equipment:

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”.

TotalIn 2014, capital expendituresinvestments at the Celgar mill included a new chip screening project, a logistics warehousing project and maintenance projects, while, in 2011, 2010 and 2009 were €15.7 million, €30.6 million and €17.8 million, respectively.2013, they included maintenance projects. In 2011,2012, capital 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”, andinvestments included a project to recover/recycle chemicals from the mill’s effluent, referredeffluent.

In January 2014, we commenced the implementation of a new enterprise resource planning, or “ERP”, system to asreplace our existing business software applications at an estimated cost of $12.0 million. The project is designed to be completed in stages over the “GAP Project”.next two years. After considerable due diligence, we selected SAP, a global leader in the development of ERP solutions for medium to large sized international businesses.

We completedThe ERP system installation will replace a suite of existing legacy systems which, while functional, will begin becoming obsolete in the Celgar Energy Project in 2010 as partnear future. The ERP solution introduces state-of-the-art, end-to-end business solutions that will provide automation for most aspects of our continued focus on energy productionbusiness including finance, payroll, inventory management, sales, fiber management, supply chain, business analytics and sales and to increaseforecasting.

To assist us through the mill’s productionimplementation, we have engaged third party advisors with extensive experience in ERP implementations using contemporary systems implementation methodologies that will address not only the technical complexities of “green” energy and optimize its power generation capacity. The project was designed as a high return capital project at a cost of approximately C$64.7 million (€49.0 million). It included the installation of a second turbine generatorsuch an implementation but also assist with a design capacity of 48 MW.

In October 2009, as part of the GTP, the Canadian government through NRCan agreed to provide approximately C$57.7 million in credits towards the capital costs associated with the Celgar mill, including the Celgar Energy Project. Such credits reduced the cost basis of the assets purchased and were not recorded in our income. The majority of the remaining credits not used for the Celgar Energy Project are available for use by the Celgar mill on other qualifying projects until March 31, 2012. To be eligible for GTP credits, projects must meet certain energy efficiency or environmental improvement requirements. Specifically, we applied to NRCan to utilize approximately C$10.9 million of our allocated GTP funding towards the Oxygen Delignification Project and several small projects at our Celgar mill. As at December 31, 2011, we had spent approximately C$8.6 million to complete the Oxygen Delignification Project. In 2011, as part of the NRCan Transformative Technologies Program, we received C$1.6 million from NRCan which was utilized towards the GAP Project. As at December 31, 2011, we had spent approximately C$2.7 million on the GAP Project and expect to spend approximately C$0.7 million in 2012.

The Celgar Energy Project increased the mill’s installed generating capacity to 100 MW, and upgraded the mill’s bark boiler and steam facilities. In January 2009, the Celgar mill finalized the Electricity Purchase Agreement under which it will sell electrical energy generated by the Celgar Energy Project to B.C. Hydro.maintaining internal controls over financial reporting.

Excluding costs for projects financed through government grants, capital expenditures, for all of our millsincluding ERP expenditures, in 20122015 are expected to be approximately €40.8$56.0 million, comprised of Project Blue Mill at our Stendal mill and an array of small projects at our other mills.principally of:

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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. In particular, the operation of our plants is subject to permits, authorizations and approvals and we have to comply with certain emission limits. Compliance with these requirements is monitored by local authorities and non-compliance may result in administrative orders, fines or closures of the non-compliant mill. Our total capital expenditures on environmental projects at our mills were approximately €7.1$6.1 million in 2011 (€2.52014, approximately $1.9 million in 2010). The Oxygen Delignification Project is intended2013 and approximately $12.0 million in 2012. In 2015, capital expenditures for environmental projects are expected to generate environmental improvements by reducing the organicbe approximately $22.1 million. These capital expenditures are expected to reduce our German mills’ effluent discharges and chemical loading on the effluent treatment system at our Celgar mill.effectively offset wastewater fees that would otherwise be payable.

We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in substantialmaterial 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 2011 as a result of environmental capital expenditures and initiatives to reduce allowable emissions and discharges at our Stendal mill was approximately €4.2 million. The estimated amount of accrued wastewater fees we expect to recover at our Rosenthal mill is approximately €2.2 million. We expect that capital investment programs and other environmental initiatives at our German mills will mostlycontinue to offset the wastewater fees that may beare payable for 2012 and we 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 absorbable organic halogen discharge at the Rosenthal mill and we believe the Rosenthal mill’s absorbable 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 been in substantial compliance with applicable environmental laws, regulations and permits. Management believes that, as the Stendal mill is a state-of-the-art facility, it will be able to continue to operate in compliance with the applicable environmental requirements.

TheManagement further believes that Celgar mill has beenwill continue to operate in substantial compliance with the requirements of all applicable environmental laws regulations and permits.

In November 2008, the Celgar mill suffered a spill of diluted weak black liquor into the nearby Columbia River. The spill was promptly reported by the mill to authorities 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 were completed to the satisfaction of the overseeing environmental authorities. However, in September 2009, the Celgar mill received a summons in connection with this spill for charges under the CanadianFisheries Act and 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 and an older site. The mill intends to decommission the older landfill and is developing a closure plan and reviewing such plan with the British Columbia Ministry of Environment, or “MOE”. Since a portion of the older landfill continues to be active, the mill has not been able to move forward with the closure. We expect to receive provincial regulatory approval for our closure plan for our older landfill in 2012 and intend to commence closure activities based on a timetable agreed to by both Celgar and the MOE. The cost of closing the landfill is expected to be approximately €2.1 million.regulations.

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

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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

ThereOver the past several years, changing weather patterns and climatic conditions due to natural and man-made causes have added to the unpredictability and frequency of natural disasters, such as hurricanes, earthquakes, hail storms, wildfires, snow storms and ice storms, which could also affect our mills or cause variations in the cost of raw materials, such as fiber. However, as there are numerous differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be occurring. As a result,occurring, we are currently unable tocannot identify and predict all of the specific consequences of climate change on our business and operations.

To date, the potential and/orThe effects and 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 their 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”, isare used for green“green” energy production. As a result of their use of wood residueresiduals and because our mills generate combined heat and power in a process known as cogeneration, 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 operational requirements.

These factors, along with governmental initiatives in respect of renewable or green“green” energy legislation, have provided business opportunities for us to enhance our generation and sales of green“green” energy and to participate in the sale of emission allowances under the EU ETS.regional utilities. In January 2012,December 2013, we announcedcompleted Project Blue Mill, a project at our Stendal mill to install a new 4046 MW steam turbine which we expect will initiallypermits the mill to produce an additional 109,000 MWh of surplus renewable energy at the mill.

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

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 change are not yet predictable, the most visible negativeadverse consequence to date is that the focus on renewable energy will continue to createhas created greater demand and competition for the wood residuals or fiber that is consumed by our mills as part of their production process.from renewable energy producers like the pellet industry in Germany.

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. Declining energy prices, weaker economies or warm winters such as in 2014 temper the demand for wood chips resulting

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from initiatives by European governments to promote the use of wood as a 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“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“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 continually engaged in 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 that over time that may affect our business include:

Human Resources

We currently employ approximately 1,4951,430 people. We have approximately 1,0391,025 employees working in our German operations, including our wood procurement, transportation and sales subsidiaries. In addition, there are approximately 1720 people workingemployed at the office we maintain in Vancouver, British Columbia, Canada. Celgar currently employs approximately 439385 people in its operations, the vast majority of which are unionized.

Rosenthal which employs approximately 444 people, isthe majority of whom are bound by collective agreements negotiated with Industriegewerkschaft Bergbau, Chemie, Energie, or “IGBCE”, a national union that represents pulp and paper

workers. In December 2011, we successfully negotiatedJuly 2013, our Rosenthal mill renewed its collective agreement for a new agreement with IGBCE substantially upon the same terms as the previous labor contract.two-year period until June 2015. The new collective agreement provided for an initial 1.8% wage increase and a one-time payment of €200 per employee, an approximately 3.0%subsequent 3% wage increase in 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 2013.2014.

Stendal and its subsidiaries employemploys approximately 589581 people. In 2011, Stendal entered into a seven-year collective agreement with IGBCE effective 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 providesprovided 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.

In 2012, Celgar entered into a five-year collective agreement with its hourly workers. The agreement provided for lump sum payments of C$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 Germany without any significant work stoppages at our German mills.

We negotiated a four-year collective agreement, effective May 1, 2008, with our hourly workers atwhen 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. The collective agreement is scheduled to expire in April 2012.

We consider the relationships with our employees at our Celgar mill to be good. Although no assurances can be provided, we have not had any significant work stoppages at our Celgar mill and we would therefore expect to enter into furthercurrent labor agreements with our Celgar mill’s employeesexpire without any significant work stoppages.

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Description of Certain Indebtedness

The following summaries ofsummarizes certain material provisions of: (i) our Senior Notes;New Stendal Revolving Credit Facility; (ii) the Stendal Loan Facility;Interest Rate Swap Contract; (iii) our new €17.0 million amortizing term facility at2019 and 2022 Senior Notes; (iv) our Stendal mill; (iv) the working capitalcredit facilities and investment loan associated withrelated to our Rosenthal mill; and (v) the Celgar Working Capital Facility, as such terms are referred to below,Facility. The summaries 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. SecuritiesSEC and Exchange Commission,incorporated by reference herein.

New Stendal Revolving Credit Facility

On November 25, 2014, our subsidiary, Stendal, entered into a €75.0 million revolving credit facility, referred to as the “SEC”.“New Stendal Revolving Credit Facility”, with UniCredit Bank AG, Credit Suisse AG, London Branch, Royal Bank of Canada and Barclays Bank PLC as original lenders. The principal terms of the New Stendal Revolving Credit Facility are as follows:

Stendal Interest Rate Swap Contract

Stendal previously entered into variable-to-fixed interest rate swaps, referred to as the “Stendal Interest Rate Swap Contract”, at a fixed interest rate of 5.28%, which matures in September 2017 and, as at December 31, 2014, had a mark-to-market termination liability of $32.8 million.

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Pursuant to the terms of the New Stendal Revolving Credit Facility, Stendal has provided €8.5 million as partial cash collateral for the Stendal Interest Rate Swap Contract. Further, the Stendal Interest Rate Swap Contract sharespari passu in the security for the New Stendal Revolving Credit Facility. For further information related to the Stendal Interest Rate Swap Contract, see “Quantitative and Qualitative Disclosures About Market Risk” and the notes to our consolidated financials included herein.

2019 and 2022 Senior Notes

InOn November 2010,26, 2014, we issued $300.0$250.0 million in aggregate principal amount of 9.5%7.000% Senior Notes due 2019, referred to as the “2019 Senior Notes”, and $400.0 million in aggregate principal amount of 7.750% Senior Notes due 2022, referred to as the “2022 Senior Notes” and, together with the 2019 Senior Notes, the “2019 and 2022 Senior Notes”, to refinance our outstanding 9.50% Senior Notes due 2017, referred to as the “Senior“2017 Senior Notes” to principally refinance our 9.25% Senior Notes due 2013,, Stendal’s senior €828.0 million project finance facility, referred to as the “2013 Senior Notes”“Prior Stendal Loan Facility”, and Stendal’s €17.0 million amortizing term facility, referred to as the “Blue Mill Facility” and, together with the Prior Stendal Loan Facility, the “Prior Stendal Facilities”. The Senior Notes bear interest at a rate of 9.5% per annum, payable semi-annually in arrears on December 1 and June 1, commencing June 1, 2011. The2019 Senior Notes mature on December 1, 2017. The2019 and interest on the 2019 Senior Notes are our senior unsecured obligationswill be payable semi-annually in arrears on each June 1 and accordingly, rank junior in rightDecember 1, commencing June 1, 2015. Interest will be payable to holders of payment to all existing and future secured indebtedness and all indebtedness and liabilitiesrecord 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 any future subordinated indebtedness. Thethe 2019 Senior Notes were issued under an indenture which,on the immediately preceding May 15 and November 15 and will be computed on the basis of a 360-day year consisting of twelve 30-day months. The 2022 Senior Notes mature on December 1, 2022 and interest on the 2022 Senior Notes will be payable semi-annually in arrears on each June 1 and December 1, commencing June 1, 2015. Interest will be payable to holders of record of the 2022 Senior Notes on the immediately preceding May 15 and November 15 and will be computed on the basis of a 360-day year consisting of twelve 30-day months.

Commencing December 1, 2016, the 2019 Senior Notes will become redeemable at our option at a price equal to 103.500% of the principal amount redeemed and declining ratably on December 1 of each year thereafter to 100.000% on or after December 1, 2018. Commencing December 1, 2017, the 2022 Senior Notes will become redeemable at our option at a price equal to 105.813% of the principal amount redeemed and declining ratably on December 1 of each year thereafter to 100.000% on or after December 1, 2020.

The indentures governing the 2019 and 2022 Senior Notes contain covenants limiting, 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)shareholders; purchase or redeem capital stock or subordinated indebtedness; (iv) make investments; (v) create liens and enter into sale and lease back transactions; (vi)liens; 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 limitationsAs of December 31, 2014, all of our subsidiaries are subjectrestricted subsidiaries.

The 2019 and 2022 Senior Notes are unsecured and are not guaranteed by any of our operating subsidiaries, all of which are located outside the United States. Our obligations under the 2019 and 2022 Senior Notes rank: effectively junior in right of payment to important qualificationsall of our existing and exceptions.

In orderfuture secured indebtedness, to take into account the natureextent of the non-recourse “project financing” of the loan facility for our Stendal millassets securing such indebtedness, and to enhance our financing flexibility, the indenture governing our Senior Notes provides for a “Restricted Group”all indebtedness and an “unrestricted group”. The terms of the indenture are applicable to the Restricted Group and are generally not applicable to the unrestricted group. Currently, the Restricted Group is comprised of Mercer Inc., the Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill. The working capital facilities at our Rosenthal and Celgar mills are obligations of the Restricted Group. The Stendal Loan Facility is an obligationliabilities of our unrestricted group.subsidiaries; equal in right of payment with all of our existing and future unsecured senior indebtedness; and senior in right of payment to any of our future subordinated indebtedness.

In the third quarter of 2011, we purchased and cancelled approximately $13.6As at December 31, 2014, $250.0 million in aggregate principal amount of our2019 Senior Notes in connection with our share and debt repurchase program. As at December 31, 2011, approximately $286.4$400.0 million in aggregate principal amount of 2022 Senior Notes remainedwere outstanding.

StendalRosenthal Loan FacilityFacilities

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 and start-up costs and working capital, as well as the financing of the 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, whichOur Rosenthal mill 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 1.69% 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 in October 2017.

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.

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, 2011 was approximately €31.8 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

revises the Stendal Loan Facility’s annual debt service cover ratio, or “Annual Debt Ratio”, requirement to be at least 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x from January 1, 2014 until Maturity.

The Amendment includes the following as events of default:credit facilities:

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The Amendment provides that Stendal and its shareholders may, once per fiscal year, cure a deficiency in each 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. Our ability to fund this cure is substantially limited by the terms of the Senior Notes.

Under 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 proceeds from an equity financing (subject to certain exceptions) and the DSRA is not Fully Funded, an event of default will occur if we fail to contribute 50% of the net proceeds raised by such a sale or issuance to Stendal’s capital (up to an aggregate limit of €10.0 million).

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 unavailable. The Stendal Loan Facility is secured by substantially all of the assets of Stendal.

As at December 31, 2011, the principal amount outstanding under the Stendal Loan Facility was €477.5 million. In order to permit Stendal to enter into the Blue 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 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 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.

Project Blue Mill Facility

In January 2012, our Stendal mill entered into a new €17.0 million amortizing term facility, referred to as the “Blue Mill 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). 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.

Rosenthal Loan Facilities

In August 2009, Rosenthal refinanced its then current revolving working capital facility with a new €25.0 million facility, referred to as the “Rosenthal Loan Facility”. The Rosenthal Loan 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 semi-annually in arrears. This facility is secured by a first ranking 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.

In August 2009, we also finalized a €4.4 million investment loan agreement, referred to as the “Investment Loan Agreement”, with a lender, relating to the new wash press 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.

In the first quarter of 2010, we entered into an additional €3.5 million revolving credit facility for our Rosenthal mill which bears interest at the rate of Euribor plus 3.5%. As of December 31, 2011, the total amount of funds available under the working capital facilities associated with the Rosenthal mill was €26.3 million and we owed €2.7 million under the Investment Loan Agreement.

Celgar Working Capital Facility

In November 2009,On October 21, 2014, we amended our Celgar amended and restated itsmill’s C$40.0 million revolving working capital credit facility with Canadian Imperial Bank of Commerce, referred to as the “Celgar Working Capital Facility”., to extend its term and reduce certain costs thereunder. The Celgar Working Capital Facility matures inon May 20132, 2019 and 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’banker’s acceptance rate plus 3.75%1.50% per annum; and/orannum and (iii) U.S. dollar LIBOR advances, which bear interest at the applicable LIBOR plus 3.75%1.50% per annum. The Celgar Working Capital Facility also incorporatesfacility includes a C$3.0 million lettersub-limit for letters of credit sub line.credit. Celgar is also required to pay a 0.5%0.25% per annum standby fee monthly in arrears on any unutilized portionunused availability under the facility and 1.25% per annum on issued but undrawn letters of the revolving facility. Availabilitycredit. The availability of drawdowns under the facility is subject to a borrowing base limit that is based uponon 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 fixedpriority charge on the current assetsinventories and receivables of Celgar.

As at December 31, 2011, C$38.3 million The facility is guaranteed by Mercer Inc. and all material subsidiaries of funds were availableCelgar. The facility includes a springing financial covenant, which is measured when excess availability under the facility is less than C$5.0 million and which requires Celgar Working Capital Facility.to comply with a 1.10:1.00 fixed charge coverage ratio. The facility also contains restrictive covenants which, among other things, restrict the ability of Celgar to declare and pay dividends, incur indebtedness, incur liens and make payments on subordinated debt. The facility contains customary events of default.

Internet Availability and Additional Information

We make available free of charge on or through our website atwww.mercerint.com annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports, as soon as reasonably practicable after we file these materials with, or furnish these materials to, 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 at 1-800-SEC-0330. The SEC maintains an internet site at www.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. RISK 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 1995.1995. Our disclosure and analysis in this annual report on Form 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, but are not limited to, the following:

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”, “should” 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 on Form 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, (thereferred to as the “Securities Act”), and Section 21E of theSecurities Exchange Act of 1934,, as amended, (thereferred to as 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 industry cycles have varied over time but generally reflect changes in macro-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.

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Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their NBSK pulp production on the market, if market conditions, prices and trends warrant such actions.

By the end of 2014, the global supply of bleached hardwood kraft pulp increased by approximately 1.6 million ADMTs, primarily from South America. This increase in bleached hardwood kraft pulp is largely targeted at the growing demand for pulp in developing markets, particularly in China, by producers of tissues, specialty papers and packaging. If such additional bleached hardwood kraft pulp supply is not absorbed by such demand growth, as a result of generally lower prices for bleached hardwood kraft pulp, this supply increase could put downward pressure on NBSK pulp prices.

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,NBSK pulp prices steadily improved. However, the global economic crisiscan fluctuate widely over time. Between 2005 and 2014, European list prices for NBSK pulp have fluctuated between a low of approximately $575 per ADMT in the latter half of 2008 resulted in a sharp decline of pulp prices from2009 to a high of €900$1,030 per ADMT to €635 per ADMT at the end of 2008. Pulp prices began to increase in the second half of 2009 and continued to increase to record levels through June of 2010, before declining slightly in the fourth quarter of 2010. Pulp prices again rebounded to record levels in2011.

In the first half of 2011, pulp prices were near record levels but declined sharply in the latter part of the year and into 2012, primarily due to economic uncertainty in Europe and credit tightening in China. We cannot predict the impact of sustained economic weakness on theEconomic uncertainty in Europe and China, respectively, impacted both demand and prices. At the end of 2012, list prices were approximately $810 per ADMT in Europe, $870 per ADMT in North America and $655 per ADMT in China. At the end of 2013, list prices were approximately $905 per ADMT in Europe, $990 per ADMT in North America and $750 per ADMT in China. In 2014, list prices were on average approximately 7% higher than 2013. At the end of 2014, list prices in Europe were approximately $935 per ADMT and in North America and China were approximately $1,020 and $700 per ADMT, respectively.

A producer’s actual sales price realizations are list prices net of customer discounts, rebates and other selling concessions. Over the last three years, these have increased as producers compete for our products.customers and sales. Our sales price realizations may also be affected by NBSK price movements between the order and shipment dates.

PricesAccordingly, 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, 2011,2014, we had approximately €734.1$687.5 million of indebtedness outstanding, of which €477.5 million relates to the Stendal Loan Facility.outstanding. 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:

The indenture governing our2022 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 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 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. Over the next several years, we will require financing to refinance maturing debt obligations (unless extended), and such refinancing may not be available on favorable terms or at all.

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.

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 the modest global economic recovery which emerged in the second half of 2009 largely continued through 2011, the overall state of the global economy remains generally weak and we remain subject to a number of risks associated with these adverse economic conditions. Price appreciation in 2010 and the first half of 2011 has been due in significant part to demand from China and other Asian countries, and any reduction in demand in these locations could exacerbate the impact of economic weakness elsewhere.

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. For example, economic weakness in Europe since the 2008 global financial crisis has adversely affected demand for pulp. Additionally, restricted credit availability restrains our customers’ ability or willingness to purchase our products resulting in lower revenues. 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.

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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. Wood chip supply in Germany was stable during the course of 2014 due to stable sawmill production and lower demand from pellet producers and board manufacturers; however, there is no assurance that wood chip supply will continue to be stable.

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 chips. A recovery in U.S. housing starts, which commenced in the latter part of 2012 and continued in 2013, resulted in increased sawmill activity. This increased the supply of wood chips for the Celgar mill and reduced its need for pulp logs, which are generally a higher cost for the mill than wood chips. Sawmill activity remained stable in Canada during 2014; however, there is no assurance that sawmill activity will continue to remain stable. 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 material long-term governmental timber concessions and we currently have few 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 price of fiber we receive could be affected 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

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are often volatile. Our profitability with respect to these products depends, in part, on managing our costs, particularly raw material and energy costs which represent significant components of our operating costs and can fluctuate based upon factors beyond our control.

The global pulp market has historically been characterized by considerable swings in prices which have and will result in variability in our earnings. Prices are typically denominated in U.S. dollars.

We are exposed to currency exchange rate and interest rate fluctuations.

The majority of our sales are in products quoted in U.S. dollars while mostMost of our operating costs and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, allEuros while the majority of theour sales are in products sold by the Celgar mill are quoted in U.S. dollars anddollars. In addition, the Celgar mill costs are primarily incurred in Canadian dollars and the pulp sold by the Celgar mill is quoted in U.S. dollars. Our results of operations and financial condition are reported in Euros.U.S. dollars. As a result, our revenuesexpenses 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 into variable-to-fixed interest rate swaps to fix interest paymentsInterest on borrowings under the Stendal mill financing facility, which has kept Stendal from benefiting from the general declineour revolving credit facilities are at “floating” rates. As a result, increases 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 as earnings or losses for the relevant reporting periods.

Increases inwill increase 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 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 equipmentborrowing and the associated downtime of the affected production line could have a material adverse effect onreduce our business, financial condition, results of operations and cash flows.operating margins.

We periodically 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 fluctuations. Concurrently with enteringIn 2002, Stendal entered into the Stendal financing, Stendal entered into variable-to-fixed rateInterest Rate Swap Contract to fix interest swaps forpayments under the full term of ourPrior Stendal Loan Facility, to manage itswhich for several years prevented Stendal from benefiting from the general decline in interest rate risk exposure with respect to the full principal amount of this facility.rates that ensued. Because we effectively fixed the rate on our Prior Stendal Loan Facility, the value of our derivative position moves inversely to interest rates. The Stendal Interest Rate Swap Contract remains in place after the Prior Stendal Loan Facility was repaid.

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 2011 included an unrealized net loss of €1.4 million on our interest rate derivative, while our operating results for 2010 included an unrealized net gain of €1.9 million. For 2009, our operating results included an unrealized net loss of €5.8 million on our interest rate derivative.

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 and regulations as well as permits, guidelines and policies. These laws, regulations, permits, guidelines and policies govern, among other things:

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 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 any such 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.

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 potential and/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 thatIn Germany, government and social focus on and demand for “carbon neutral” or “green” energy will createhas created greater demand and competition for the wood residuals or fiber that is consumed by our pulp mills as part of their production process. This has helped drive up the cost of fiber for German mills. In addition, further or new governmental initiatives or legislation may also increase both the demand and prices for wood residuals. As governments pursue green“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 residuals and/or governmental initiatives may materially increase the competition and prices for wood residuals over time. This could increase our fiber costs and/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

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negatively affect our operating margins, results of operations and financial position. If we cannot obtain the fiber required to operate our mills, we may have to curtail and/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:

The occurrence of some or all of these events could have a material adverse effect on our operations and/or financial results.

Project Blue MillOur new ERP system may not generatecost more than expected, be delayed, fail to perform as planned or interrupt operational transactions during and following the results or benefits we expect.

Project Blue Mill is subject to customary risks and uncertainties inherent for large capital projectsimplementation, which could adversely affect our operations and results of operations.

In January 2014, we commenced the implementation of a new ERP solution to replace our existing business software applications at a total estimated cost of $12.0 million. The project is designed to be completed in stages over the next two years. Such projects are inherently complex, resource intensive and lengthy. As a result, we could experience unplanned or unforeseen issues that could adversely affect the project, our business and/or our results of operations, including: