UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-K

[X]☒        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20152018

OR

[    ]☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                        

Commission File No.:000-51826

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

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 Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[    ]  Yes  [X]☒  No  ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  [    ]☐  Yes  [ X ]☒  No

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during1934during the preceding 12 months (or for such shorter period that the Registrant 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 the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes  [ X ]☒  No  [    ]☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.  [ X ]☒

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Act).  [    ]☐  Yes  [X]☒  No

The aggregate market value of the Registrant’s voting andnon-voting common equity held bynon-affiliates of the Registrant as of June 30, 2015,2018, the last business day of the Registrant’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 $882.4$1,072.5 million.

As of February 11, 2016,13, 2019, the Registrant had 64,656,13865,201,661 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 20162019 is incorporated by reference into Part III of this Form10-K.

TABLE OF CONTENTS

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CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS

This annual report on Form10-K includes “forward-looking” statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “seeks” or words of similar meaning, or future or conditional verbs, such as “will”, “should”, “could”, “may”, “aims”, “intends” or “projects”. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this annual report on Form10-K. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under Item 1. “Business”, Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this annual report on Form10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

INDUSTRY AND MARKET DATA

In this document,annual report on Form10-K, we rely on and refer to information and statistics regarding our market share and the markets in which we compete. We have obtained some of this market share information and industry data from internal surveys, market research, publicly available information and industry publications. Such reports generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy or completeness of such information is not guaranteed. Although we believe this information is reliable, we have not independently verified, and cannotnor can we guarantee, the accuracy or completeness of that information,information.

Statements in this annual report on Form10-K concerning the production capacity of our mills are management estimates based primarily on historically achieved levels of production and readers should use cautionassumptions regarding maintenance downtime. Statements concerning electrical generating capacity at our mills are also management estimates based primarily on our expected production (which largely determines the amount of electricity we can generate) and assumptions regarding maintenance downtime, in placing reliance on such information.

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CURRENCY

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, referred to as the “Noon Buying Rate”, for the conversion of U.S. dollars to euros and Canadian 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 8, 2016,11, 2019, the most recent weekly publication of the daily Noon Buying Rate before the filing of this annual report on Form10-K reported that the Noon Buying Rate as of February 5, 20168, 2019 for the conversion of U.S. dollars to euros and Canadian dollars was $1.1131$1.1326 per euro and $0.7207$0.7532 per Canadian dollar.

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PART I

In this document, please note the following:

Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures.

Mercer

General

Mercer Inc. is a corporation organized under the laws of the State of Washington whose common stock is quoted and listed for trading on the NASDAQ Global Select Market (MERC).

We have two reporting operating segments, being Pulp and Wood Products.

We are one of the world’s largest producers of market“market” NBSK pulp, which leads tois pulp that is sold on the open market. Our size provides us increased presence, and better industry information in our markets and provides for close customer relationships with many large pulp consumers. We operateUntil December 10, 2018, we operated two modern and highly efficient NBSK mills in Eastern Germany and one NBSK mill in Western CanadaCanada.

On December 10, 2018, we acquired all of the shares of Mercer Peace River Pulp Ltd. (formerly Daishowa-Marubeni International Ltd.), referred to as “MPR”. MPR owns 100% of a bleached kraft pulp mill near Peace River, Alberta and have our headquartershas a 50% joint venture interest in Vancouver, Canada. the Cariboo Pulp & Paper Company, referred to as “CPP”, which owns the Cariboo NBSK mill in Quesnel, British Columbia.

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We are the sole NBSK pulp producer, and the only significant producer ofmarket pulp for resale, known as “market pulp”,producer in Germany, which is the largest pulp import market in Europe. We are able to supply the growing pulp demand in China both through our Canadian mill’smills’ ready access to the Port of Vancouver and through our Stendal mill’s existing logistics arrangements. In addition, as a result of the significant investments we have made in co-generationcogeneration equipment, all of our mills generate and sell a significant amount of surplus “green” energy to regional utilities.energy. We also produce and sell tall oil, aby-product of our production process, which is used as both a chemical additive and as a “green”green energy source.

We currently employ approximately 1,469 people. Our three NBSK pulp millsentered the Wood Products segment in April 2017 when we acquired substantially all of the assets of the Friesau mill, one of Germany’s largest sawmills.

As at December 31, 2018 and after giving effect to the acquisition of MPR, we have consolidated annual production capacity of approximately 1.52.2 million ADMTs of NBSKkraft pulp, 550 million board feet of lumber and are capable of generating 305approximately 411.5 MW of electricity. Of our pulp capacity, approximately 1.9 million ADMTs or 86% is NBSK and the balance is NBHK.

Key operating details for each of our mills are as follows:

•

Celgar mill. Our Celgar mill is a modern, efficient ISO 9001 and 14001 certified NBSK pulp mill withthat has an annual production capacity of approximately 520,000 ADMTs and 100 MW of electrical generation. The Celgar mill generated and exported 115,463 MWh of electricity in 2018, resulting in approximately $9.9 million in revenues. The Celgar mill is located near the city of Castlegar, British Columbia, Canada, approximately 600 kilometers east of Vancouver.

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We currently employ approximately 2,210 people and have our headquarters in Vancouver, Canada.

Pulp Segment

Our pulp mills are some of the newest and most modern and newest NBSK pulp mills in Europe and North America. We believe the relative age, production capacity and electrical generation capacity of our mills provide us with certain manufacturing cost and other advantages over many of our competitors. We believe our competitors’ older mills do not have the equipment or capacity to produce or sell surplus power or chemicals in a meaningful amount. In addition, since our mills are relatively new, they benefit from lower maintenance capital requirements and higher efficiency relative to many of our competitors’ mills.

The following table sets out our pulp production and pulp revenues for the periods indicated:

Our modern pulp mills generate electricity, which is surplus to their operating requirements, providing our mills with a stable revenue source unrelated to pulp prices. Additionally, our German pulp mills generate tall oil from black liquor, which is sold to third parties for use in numerous applications includingbio-fuels. Since our energy and chemical production areby-products of our pulp production process, there are minimal incremental costs and our surplus energy and chemical sales are highly profitable. All of our mills generate and sell surplus energy to regional utilities.utilities or the regional electrical market. Our German mills benefit from special tariffs under Germany’sRenewable Energy Sources Act, referred to as the “Renewable Energy Act”, which provides for premium pricing on “green”green energy. Our recently acquired Peace River mill sells surplus energy to its regional electrical market. Each of our Celgar mill and the Cariboo mill is party to a fixed electricity purchase agreement with the regional public utility provider for the sale of surplus power through 2020.2020 and 2022, respectively, and, in the case of the Cariboo mill, renewable at the option of the joint venture for an additionalten-year term.

The following table sets out the amount of surplus energy we produced and sold and revenues from the sale of suchsurplus energy and chemicals in our pulp segment for the periods indicated:

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Our strategic pulp mill locations position us well to serve customers in Europe, Asia and North America. Due to the proximity of our German mills to most of our European customers, we benefit from lower transportation costs relative to most of our major competitors. Our Celgar mill, located in Western Canada, is well situated to serve Asian and North American customers, specifically in China, which is the world’s largest and fastest-growing pulp import market. Our Stendal mill also supplies customers in China through its existing logistics arrangements. We primarily work directly with customers to capitalize on our geographic diversity, coordinate sales and enhance customer relationships. We believe our ability to deliver high qualityhigh-quality pulp on a timely basis and our customer service make us a preferred supplier for many customers.

Wood Products Segment

We manufacture, sell and distribute lumber, electricity and other wood residuals at the Friesau mill which produces lumber for European, U.S. and other lumber export markets.

FiberThe Friesau mill also expanded our biomass energy profile and provides synergies relating to the sharing of wood and biomass fuel resources and the optimization of staffing and services with our Rosenthal mill.

The European and U.S. lumber markets are very different. In the European market, lumber is generally customized in terms of dimensions and finishing, whereas the largestU.S. market is driven primarily by demand from new housing starts and dimensions and finishing are generally standardized.

Additionally, lumber production costand sales in manufacturing NBSK pulp. Although fiberEurope are commonly measured in cubic meters, whereas in the U.S. they are measured in thousand board feet or Mfbm.

The following table sets out our lumber production and revenues from April 12, 2017, being the date we acquired the Friesau mill, to December 31, 2017 and the year ended December 31, 2018:

The Friesau mill generates electricity for minimal incremental costs, all ofwhich is cyclical in bothsold,providing a stable revenue source unrelated to lumber prices. The Friesau mill’s modern biomass fueled cogeneration power plant has an annual production capacity of approximately 13 MW of electricity. The plant sells electricity pursuant to a long-term fixed price and supply, there is a significantgreen power tariff that runs to 2029.

The following table sets out the amount of high-quality fiber within a close radiussurplus energy we produced and sold and revenues from the sale of each ofsurplus energy by our mills. This fiber supply, combined with our purchasing power and our ability to switch between whole logs chipped at our mills and sawmill residual chips, enables us to enter into contracts and arrangements which have generally provided us with sufficient fiber supply.Friesau mill for the periods indicated.

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Corporate Structure, History and Development of Business

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). As at December 31, 2015, we had 64,501,896 shares of common stock outstanding.

The following simplified chart sets out our principal operating subsidiaries, their jurisdictions of organization, their principal activities and their annual pulp productionor lumberproduction and electrical generation capacity:

MERCER INTERNATIONAL INC. Washington, U.S.A. 100% 100% 100% 100% 100% 100% Zellstoff-und Papierfabrik Rosenthal GmbH Pulp production and sales Germany 360,000 ADMTs 57 MW Zellstoff Stendal GmbH Pulp production and sales Germany 660,000 ADMTs 148 MW Zellstoff Celgar Limited Partnership Pulp production and sales British Columbia, Canada 520,000 ADMTs 100 MW Mercer Timber Products GmbH Lumber production and sales Germany 550 MMfbm 13 MW Mercer Holz GmbH Wood procurement and logistics Germany Mercer Peace River Pulp Ltd.(1) Pulp production and sales British Columbia, Canada 645,000 ADMTs 93.5 MW

We entered into the pulp business in 1994 when we acquired our Rosenthal mill in 1994 and, inmill. In 1999, we completed a major capital project to convert it to the production of kraft pulp from sulphite pulp, increase its production capacity and improve efficiencies. The project cost approximately $385.7 million, of which approximately $100.8 million was financed through government grants.pulp. Subsequent capital investments and efficiency improvements have reduced emissions and energy costs, and increased the mill’s annual production capacity and enabled the production of tall oil.

In September 2004, we completed construction of the Stendal mill at a cost of approximately $1.1 billion, which was financed through a combination of government grants, of approximately $332.0 million, low-cost, long-term project debt which was largely severally guaranteed by governments in Germany, and equity. Subsequent capital investments and efficiency improvements have increased the mill’s annual production capacity and its generation of “green”green energy.

We initially had a 63.6% ownership interest in Stendal which increased over time through acquisitions and/or further investments to 83.0% in 2013. Inuntil September 2014, when we made an additional capital investment in Stendal and acquired all of the shareholder loans and substantially all of the shares of the minority shareholder in Stendal and other rights. As a result of such transactions, we now consolidate all of the economic interest in Stendal.

InWe expanded our pulp operations into Western Canada in February 2005 when we acquired the Celgar mill for $210.0 million plus defined working capital. The Celgar mill was completely rebuilt in the early 1990s through a C$850.0 million modernization and expansion project. Since its acquisition, we have effected several capital projects and other initiatives at the Celgar mill to increase its annual production capacity and its generation of “green”green energy.

In April 2017, we entered into the wood products segment when we acquired the Friesau mill for $61.6 million in cash.

In October 2018, we acquired the Santanol Group, which operates Indian sandalwood plantations and an oil extractives plant in Australia, for $35.7 million in cash.

In December 2018, we significantly expanded our pulp business when we acquired MPR for approximately $344.6 million in cash.

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Corporate Strategy

Our corporate strategy is to expand our asset and earnings 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,improving efficiency, reducing costs and improving efficiency.increasing production of pulp, lumber, energy andby-products such as chemicals. We are also leveraging our fiber and process expertise to develop innovative new products based on other derivatives of the kraft pulping process.process and wood processing. We seek to acquire interests in companies and assets primarily in the pulp industryforest products business and related wood extractive businesses where we can leverage our experience and expertise in adding value through a focused management approach. Key elements of our strategy include:

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as fiber procurement, sales, marketing and logistics activities. We believe that our continued focus on operational excellence should allow us to achieve improved profitability and cash flows.

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. KraftSoftwood 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.

We primarily produce and sell NBSK pulp, which is a bleached kraft pulp manufactured using 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 and does not possess

Prior to our recent acquisition of the strength found in NBSK pulp.Peace River mill, NBSK pulp iswas the sole pulp product of our mills. The Peace River mill is a “swing mill” as it produces both NBSK and NBHK pulp. Generally, approximately 37% of the Peace River mill’s production is NBSK and 63% is NBHK. The mill expands our product offering and its swing capabilities allow us to adjust our production mix to respond to market developments and take advantage of pricing differentials between NBSK and NBHK.

Most paper users of market kraft pulp use a mix of softwood and hardwood grades to optimize production and product qualities. In 2015,2018, market kraft pulp consumption was approximately 54%56% hardwood bleached kraft and 43%41% softwood bleached kraft, with 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, based on fiber that has longer growth cycles. Hardwood kraft generally has a cost advantage over softwood kraft as a result of lower fiber costs, higher wood yields and, for newer hardwood mills, economies of scale. As a result of this growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp.

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Counteracting customers’ ability to substitute lower priced hardwood pulp for NBSK pulp is the requirement for strength and formation characteristics in finished goods. Paper and tissue makers focus on larger paper machines with higher speeds and lower basis weights for certain papers which require the strength characteristics of softwood pulp. Additionally, where paper products are lightweight or specialized, like direct mail, magazine paper or premium tissue, or where strength or absorbency are important, softwood kraft forms a significant proportion of the fiber used. As a result, we believe that the ability of kraft pulp users to 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. KraftSoftwood 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. KraftSoftwood kraft pulp is also an important ingredient for tissue manufacturing and tissue demand tends to increase with living standards in developing countries. KraftNBSK pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price.

Markets

We believe that over 130140 million ADMTs of chemical pulp are converted annually into tissues, printing and writing papers, carton boards and other specialty grades of paper and paperboard around the world. We also believe that over one thirdapproximately 45% 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.

The pulp business is highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn affect 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.

Between 20062009 and 2015,2018, worldwide demand for chemical market pulp grew at an average rate of approximately 2% annually, with worldwide demand for bleached softwood kraft market pulp having grown at an average of approximately 1%2% per annum.

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The following chart illustrates the global demand for chemical market pulp for the periods indicated:

Estimated Global Chemical Market Pulp Demand

Two keyOver the last several years, macro-economic trends inaffecting worldwide NBSK pulp demand over the last several years have been:include:

Since 2006,Over the last ten years, demand for chemical softwood market pulp has grown in the emerging markets of Asia, particularly China and Eastern Europe and Latin America.Europe. In China, in particular has experienced substantial growth and its imports of chemical softwood market pulp grew by approximately 12%6% per annum between 20062009 and 2015.2018. We believe the emerging markets now account for approximately 52%55% of total world demand. China now accountsdemand for approximately 30% of global bleached softwood kraft market pulp demand, compared to only 13% in 2006. Western Europe currentlyand China itself now accounts for approximately 26%32% of global bleached softwood kraft market pulp demand compared to approximately 36%23% in 2006. The2009. Western Europe currently accounts for approximately 24% of global bleached softwood kraft market pulp demand compared to approximately 30% in the mature markets of Europe, North America and Japan in 2015 declined by approximately 2.9 million ADMTs from 2006.2009.

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

12 Month Rolling Bleached Softwood Kraft Pulp Deliveries to China

Growth in NBSK pulp demand in China and other emerging markets has to a large extent, been primarily driven by increased demand from tissue and specialty paper 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 increase their annual tissueproduction capacity has increased by approximately 1.05.6 million ADMTs during 2016. At this time there can be no assurance as to when and how much of such capacity expansion will be implemented.over the last five years.

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 2006 to 2014, a period very affected by “digital substitution” of traditional paper grades, total NBSK demand grew by 3%.

The following chart compares worldwide NBSK pulp demand by end use in each of 2003 and 20132017 (the latest year for which figures are currently available).:

NBSK Pulp Demand by End Use

We believe 2014 and 20152018 NBSK demand by end use was generally consistent with the trend in the chart above.

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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 rely on existing pulp inventories. As a result, producers run at lower operating rates by taking downtime to limit thebuild-up of their own inventories. The demand/capacity ratio for bleached softwood kraft pulp was approximately 92%89%, 93% and 94%92% in 2015, 20142018, 2017 and 2013,2016, respectively.

Between 20112013 and 2015,2018, we believe approximately 0.80.5 million ADMTs of pulp capacity was idled or shut down through mill closures or curtailments. Further, in efforts to improve environmental and safety standards, China has publicly stated that itclosed “old” mills and removed about 15.6 million ADMTs.

In 2018, chemical pulp capacity increased by approximately 0.9 million ADMTs, consisting entirely of softwood kraft pulp. Currently, we are not aware of any material announced capacity increases of NBSK or NBHK pulp in 2019. However, we cannot predict whether new capacity will be reducing existing pulp and paper capacityannounced or may come online in the near term by closing “old” mills, targeting a removal of 3.4 million ADMTs by the end of 2015. At this time,future. As pulp prices are highly cyclical, there can be no certaintyassurance that pulp prices will not decline in the future as a result of increases to the actual amount and timing of any such closures.

Producers have publicly announced plans to expand the global supply of bleached hardwood kraft pulp in the 2016 and 2017 period by about 3.6 million ADMTs, primarily from South America and Asia. Further capacity increases of about 2.7 million ADMTs have been announced for 2018. We cannot ascertain with any certainty how much such capacity increases will be actually realized, given capital, fiber and other restraints. 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. Althoughpulp. While not a direct competitor to NBSK pulp, if such additional bleached hardwood kraft pulpany future increases of NBHK supply isare not absorbed by such demand growth, as a result of generally lower prices for bleached hardwood kraft

pulp, thissuch supply increase could put downward pressure on NBSK pulp prices. However, we believe customers’ ability to further substitute lower priced bleached hardwood kraft pulp for NBSK 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.

Producers have also publicly announced modernization and expansion projects for NBSK mills in Europe, including Russia, to be implemented in 2016 and 2017, ranging from small expansions of existing mills to potential “greenfield” mills. We estimate that if all of these projects were completed, they would increase NBSK pulp capacity by about 1.1 million ADMTs per annum. Further capacity increases of about 0.9 million ADMTs of NBSK pulp have been announced for 2018. We currently believe a number of the projects announced for 2016 and 2017 will be implemented while others are currently subject to various conditions including financing and further development. We believe that, because of fiber constraints, such a significant expansion of NBSK capacity in the region would likely require the closure of older mills. However, at this time, we cannot predict which of the publicly announced expansion projects will be completed or how much additional NBSK pulp production capacity may come online and when. As pulp prices are highly cyclical, there can be no assurance that NBSK pulp prices will not decline in the future as a result of increases to the supply of kraft pulp.

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.

NBSK Pulp Pricing

Kraft pulp is a globally traded commodity and prices are highly cyclical and volatile. Kraft pulp prices are generally quoted in U.S. dollars. Pricing is primarily influenced by the balance between supply and demand, as affected by global macroeconomicmacro-economic conditions, changes in consumption and capacity, the level of customer and producer inventories and fluctuations in exchange rates. 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.

General macroeconomicmacro-economic conditions are closely tied to overall global business activity, which helps determine pulp demand and, in turn, impacts pricing.

As 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, pricing is often affected by fluctuations in the currency exchange rates for the U.S. dollar versus the euro and the Canadian dollar. As NBSK pulp producers generally incur costs in their local currency, while pulp is quoted in U.S. dollars, a U.S. dollar strengthening generally benefits producers’ businesses and operating margins. Conversely, a weakening of the U.S. dollar versus the local currency of producers generally adversely affects producers’ businesses and operating margins.

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As a corollary to changes in exchange rates between the U.S. dollar and the euro and Canadian dollar, a stronger U.S. dollar generally increases costs to customers of NBSK pulp producers and results in downward pressure on prices. Conversely, a weakening U.S. dollar generally supports higher pulp pricing. However, there is invariably a time lag between changes in currency exchange rates and pulp prices. This lag can vary and is not predictable with any certainty.

As Northern Europe has historically been the world’s largest market and NBSK pulp is the premium grade, the European market NBSK price is generally used as a benchmark price by the industry. The average European list prices for NBSK pulp since 20062009 have fluctuated between a low of approximately $575 per ADMT in 2009 and a high of $1,030$1,230 per ADMT in 2011.2018.

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:

NBSK Pulp Price History (European Delivery)

In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher year-end list prices. In 2014, demand from both Europe and China was stable, while supply was slightly under-balanced throughout the year which kept prices relatively high. In 2015, demand was generally stable. However, the strength of the dollar resulted in lower pulp prices.

The following table sets out list prices for NBSK pulp in the regions indicated at the dates indicated:

A producer’s net sales realizations are list prices, net of customer discounts, commissionsrebates and other selling concessions. While there are differences between NBSK list prices in Europe, North AmericaOver the last three years, these have increased as producers compete for customers and Asia, European prices are generally regarded as the global benchmark and pricing in other regions tends to follow European trends.sales. 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.

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The following chart sets forth changes in FOEX PIX Pulp Index prices for NBSK pulp in Europe and global bleached softwood kraft inventory levels between 20032005 and 2015:2018:

Pulp Price and Global Inventory History

Seasonality

We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These factors are common in the NBSKkraft 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 seasonalbuild-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 and include Canfor Pulp, Stora Enso, Metsä Fibre, Ilim, Södra Cell and Asia Pulp and Paper.

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Pulp Production

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

The following table sets out ourOur pulp production capacity and actual production by mill for the periods indicated:indicated is set out below:

Softwood 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. Softwood kraft pulp is also an important ingredient for tissue manufacturing, and tissue demand tends to increase with living standards in developing countries. NBHK provides bulk and opacity for customers.

The kraftNBSK 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 the mill’s effluent. 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.

The kraftNBSK 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.

The Celgar mill produces high-quality kraftNBSK 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.

The Peace River mill produces NBHK, NBSK and a small amount of “transitional” pulp, a lower grade pulp that is produced during the period when the mill transitions between NBSK and NBHK pulp.

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

Our pulp mills are large scalebio-refineries that, in addition to pulp, also produce surplus “carbon neutral” or “green”green energy. As part of the pulp production process our mills generate “green”green energy using carbon-neutral carbon neutralbio-fuels such as black liquor and wood waste. Through the incineration ofbio-fuels in the

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recovery and power boilers, our mills produce sufficient steam to cover all of our steam requirements and allow us to produce surplus electricity which we sell to third party utilities.third-party utilities and, in the case of the Peace River mill, into the regional electricity market. As a result, we have benefited from “green”green energy legislation, incentives and commercialization that have developed over the last decade 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 includingbio-fuels.

Our Friesau mill also generates and sells green energy produced from its biomass cogeneration power plant.

Our surplus energy and chemical sales provide our millsus with a new stable revenue source unrelated to pulp or lumber prices. Since our energy and chemical production areby-products of our pulp production

process, processes, there are minimal incremental costs and our surplus energy and chemical sales are highly profitable. We believe that this revenue source 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 December 2013, we completed a $49.3 million capital project at our Stendal mill, referred to as “Project Blue Mill”, to increase production and efficiency through debottlenecking initiatives including the installation of an additional 46 MW steam turbine at the mill. The debottlenecking which, among other things, required a new turbine in order to enhance and efficiently 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.

In September 2010, we completed a $60.6 million capital project at our Celgar mill, referred to as the “Celgar Energy Project”, to increase the production of “green” energy and optimize its power generation capacity. Approximately $44.6 million of the project cost was financed by grants from the Canadian federal government. The project included the installation of a 48 MW condensing turbine which increased the mill’s installed generating capacity to 100 MW and upgraded its bark boiler and steam consuming facilities.

The following table sets out our electricity generation and surplus electricity sales for the five years ended December 31, 2015:2018:

Electricity Generation and Exports

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The following chart sets forth our consolidated revenues from electricity and chemical sales for the five years ended December 31, 2015:2018:

Energy and Chemical Revenue

German Pulp Mills and Friesau Mill

Our German pulp mills and the Friesau mill participate in a program established pursuant to the Renewable Energy Act, which requires that public electric utilities give priority to electricity produced from renewable energy sources by independent power producers and pay a fixed tariff for such electricity for a period of 20 years. SuchCurrently we expect such tariff expiresto expire on December 31, 20192020 for our Rosenthal mill, and December 31, 2024 for our Stendal mill and in 2029 for the Friesau mill. Under the program, our German mills now sell their surplus energyRecent amendments to the local electricity grid at the rates stipulated by the Renewable Energy Act will extend the initial terms for biomass energy.

Since 2005, our Germanpulp mills have also benefited fromfor a further10-year period, based upon the saleprice received in the last year prior to renewal, regressing at a rate of emission allowances under the8% per annum. Such amendments are subject to compliance with European Union, Carbon Emissions Trading Scheme, referred to as the “EU ETS”. However, our eligibility“EU”, state aid rules. While we expect them to be effective, we can provide no assurance that the current proposed amendments will be implemented or when.

In 2018, energy sales for special tariffs under the Renewable Energy Act has reduced the amount of emissions allowances granted to our German pulp mills underand the EU ETS.Friesau mill were $64.0 million or 582,728 MWh.

In 2015, our Rosenthal and Stendal mills sold approximately 165,852 MWh and 500,050 MWh of electricity, respectively, for proceeds of $16.8 million and $46.7 million, respectively.

In 2015,2018, our Rosenthal and Stendal mills generated $2.3$14.4 million and $9.4 million, respectively, from the sale of tall oil, aby-product of our production process. In 2014, our Rosenthal mill completed a capital project which allowed it to process, and sell tall oil. We currently expect tall oil sales to increase in the future.other chemicals.

Celgar MillCanadian Pulp Mills

The Celgar mill has an electricity sales agreement with the British Columbia Hydro and Power Authority, referred to as “B.C. Hydro”, for the sale of power generated, pursuant to which the mill agreed to supply a minimum of approximately 238,000 MWh of surplus electrical energy annually to the utility over aten-year term. The agreement expires in 2020.

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In 2015,2018, our Celgar mill sold approximately 149,064115,463 MWh of renewable electricity for proceeds of approximately $11.2$9.9 million.

In 2012, we initiatedThe Peace River mill has an annual production capacity of approximately 65 MW of electrical generation. The mill’s surplus electricity is sold into the Alberta market.

The Cariboo mill has two generators, only one of which is used for pulp production. The other generator produces and sells electricity to B.C. Hydro at a claim againstfixed rate pursuant to a long-term electricity purchase agreement that runs until December 2022 and may be extended for an additionalten-year term at the Government of Canada under the North American Free Trade Agreement, referred to as “NAFTA”, relating to our investment in Celgar and unfair and discriminatory treatment regarding its ability to purchase and sell energy. See Item 3. “Legal Proceedings”.

In 2015, our Celgar mill’s energy costs benefited from a recovery of $6.1 million as a result of a successful appeal before the British Columbia Utilities Commission of certain elementsoption of the mill’s energy purchase agreement.joint venture.

Cash Production Costs

ConsolidatedThe following table sets forth our consolidated cash production costs and cash production costs per ADMT for our pulp mills are set outsegment, and a reconciliation of such amounts to cost of sales, excluding depreciation and amortization, as presented in the following tableour consolidated financial statements, for the periods indicated:

Production Costs

Our major costs of pulp production are fiber, labor, energychemicals and chemicals.energy. Fiber, comprised of wood chips and pulp logs, is our most significant operating expense for our pulp segment, representing about 62%57% of our pulp cash production costs in 2018.

Further, fiber, in the form of sawlogs, represents about 80% of lumber cash production costs.

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Given the significance of fiber to our total operating expenses and our limited ability to control its costs,cost compared with our other operating costs, volatility in fiber costs can materially affect our margins and results of operations.

Fiber

Our mills are situated in regions which generally provide a relatively stable supply of fiber. The fiber consumed by our pulp mills consists of wood chips produced by sawmills as aby-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 pulp logs chipped especially for this purpose. Pulp logs consist of lower quality logs not used in the production of lumber. Wood chipsThe Friesau mill consumes sawlogs and pulp logswaste wood, which are cyclical in both price and supply.

Generally, the cost of wood chips, and pulp logs and sawlogs is 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, 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, weaker economies or periodically warm winters such as in 2014 and 2015 tempered the demand for wood chips resulting from initiatives by European governments to promote the use of wood as a carbon neutral energy. Over the long-term, we expect this There can be no assurance that suchnon-traditional demand for fiber is likely to continue to increase.

In August 2012, Russia enteredwill remain strong in the World Trade Organization and, as a result, lowered its export tariffs for pine and spruce to 15% and 13%, respectively, which we believe has had a positive impact on European fiber supply.long-term.

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.the Forest Stewardship Council (FSC), the Programme for the Endorsement of Forest Certification (PEFC), the Sustainable Forestry Initiative (SFI) and the Canadian Standards Association (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 for controlled wood and PEFC certification, 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. AlthoughHowever, there is competition among private certification systems along with efforts by supporters to further these systems by having customers of forest products require products to be certified to their preferred system. Such wood certification requirementsstandards continue to evolve and are not consistent from jurisdiction to jurisdiction weor how they are interpreted and applied. We currently do not expect certification requirements to have a material adverse impact on our fiber procurement and pulp sales. However, if sufficient marketplace demand requires wood raw materials to be sourced from standards that are inconsistent with those in our fiber supply regions, it could increase our operating costs and available harvest levels.

Offsetting some of the increases in demand for wood fiber have been initiatives 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 48%. Many of these forest ownership stakes are very small and have been harvested at rates much lower than their rate of growth.

In 2013,2018, our per unit 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 unitpulp fiber costs in Germany decreased by approximately 6% dueincreased compared to sawmills running at high rates,2017, primarily as a stronger supplyresult of logs and lowerstrong demand from pellet producers and board manufacturers.for wood in our German mills’ procurement areas. In 2015,2017, our per unit pulp fiber costs in Germany decreased by approximately 17% duewere flat compared to the strength of the U.S. dollar. In 2015, in local currency terms, average fiber prices in Germany were marginally lower2016, primarily as a result of a generally balanced wood market.market in Germany.

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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 addition, in 2016, we entered into a joint wood purchasing arrangement with another significant wood consumer in Europe, being the Mondi Group.

In 2015,2018, the Rosenthal mill consumed approximately 1.8 million cubic meters of fiber. Approximately 64%66% of such consumption was in the form of sawmill wood chips and approximately 36%34% was in the form of pulp logs. The wood chips for the Rosenthal mill are sourced from approximately 3433 sawmills located primarily in the states of Bavaria,Baden-Württemberg and Thüringia and areprimarily 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 63%In 2018, approximately 78% of the fiber consumed by the Rosenthal mill iswas spruce and the remainder iswas 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 underone-year contracts with quarterly adjustments for market pricing. Substantially all of our chip supply is sourced from suppliers with which we have long-standing relationships. Pulp logs are sourced from the state forest agencies in Thüringia, Saxony and Bavaria and from private and municipal forest owners. In addition, the Rosenthal mill buys relevant volumes from traders and via imports from the Czech Republic and Poland.

In 2015,2018, the Stendal mill consumed approximately 3.33.2 million cubic meters of fiber. Approximately 27%28% of such fiber was in the form of sawmill wood chips and approximately 73%72% was in the form of pulp logs. The core wood supply region for the Stendal mill includes most of the NorthernNortheastern and Western part of Germany primarily within an approximate 300 kilometer radius of the mill. We also purchase wood chips from Southwestern and Southern Germany.Germany as well as the Baltic Sea region. The fiber consumed by the Stendal mill consisted of approximately 41%61% pine, 57%38% spruce and 2%1% other species in 2015.2018. The Stendal mill has sufficient chipping capacity to fully operate solely using pulp logs, if required. We source pulp logs from private forest holders, municipal forest owners and from state forest agencies inSaxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse, Brandenburg, Schleswig-Holstein, Rhineland PalatinateRhineland-Palatinate and the City of Berlin. The volumes are distributed at optimal costs between the mills. In addition, over the last three years, the Stendal mill also imported fiber from Poland and the Baltic Sea region.

The availability of fiber for the Celgar mill is in large part influenced by the strength of the lumber market. Lumber markets are primarily driven by U.S. housing starts and, to a lesser degree, demand from China.

In 2015,2018, our Celgar mill’s per unit fiber costs increased compared to 2017, due to strong demand from coastal pulp mills and limited pulp log availability. In 2017, our Celgar mill’s per unit fiber costs were flat compared to 2016, due to a balanced wood market in the Celgar mill’s fiber basket.

In 2018, the Celgar mill consumed approximately 2.4 million cubic meters of fiber. Approximately 69% of such fiber was in the form of sawmill wood chips and the remaining 31% came from pulp logs

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processed through its woodroom or chipped by a third party.third-party. Celgar’s woodroom is able to process about 40% of the mill’s fiber needs. The source of fiber at the mill is characterized by a mixture of species (pine, douglas fir, hemlock, cedar and spruce) and the mill sources fiber from a number of Canadian and U.S. suppliers.

The availability of fiber forIn 2018, the Celgar mill is in large part influenced by the strength of the lumber market. Lumber markets are primarily driven by U.S. housing starts and, to a lesser degree, demand from China.

The Celgar mill hashad access to approximately 3324 different chip suppliers from Canada and the U.S., representing approximately 69% of its total annual fiber requirements. The Celgar mill’s woodroom and third party chippers supplied the remaining 31% of the mill’s fiber requirements in 2015.United States. Chips are purchased in Canada and the U.S.United States in accordance with chip purchase agreements. Generally, pricing is reviewed and adjusted periodically to reflect market prices. One of the longer-term contracts is aso-called “evergreen” agreement, where the contract remains in effect until one of the parties elects to terminate after providing the stipulated notice. All other contracts are generally for one year with quarterly adjustments or on three-month terms.

To secure the volume of pulp logs required by its woodroom and field chippers, the Celgar mill has entered into pulp log supply agreements, which can range from three-month toone-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. 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 area and pulp logs for the Celgar mill to use. The Celgar mill also bids on British Columbia timber sales from time to time.

In 2015, our Celgar mill’s per unit fiber costsMPR holds two20-year renewable governmental forest management agreements and three deciduous timber allocations in Alberta with an aggregate allowable annual cut of approximately 2.4 million cubic meters of hardwood, of which it currently harvests approximately 44%, and 400,000 cubic meters of softwood, which it sells to sawmills surrounding the Peace River mill in exchange for wood chips. The forest management agreements were flat compared to 2014, as the strengthlast renewed for a20-year term expiring in 2029.

Approximately 85% of the dollar largely offset higher prices inPeace River mill’s hardwood fiber requirements are satisfied through MPR’s forest management agreements and timber allocations with the remainder sourced from trees harvested from third-party owned timberlands. The supply of hardwood fiber at the Peace River mill is characterized by a mix of aspen and balsam poplar. Softwood fiber supply is from residual sawmill chips from local currency terms. However, in Canadian dollar terms, in 2015 average fiber prices for our Celgarsurrounding sawmills.

The Cariboo mill were approximately 17% higher than in 2014, due tohas a secure supply of high-quality residual wood chips primarily supplied by surrounding sawmills located at a short distance. The majority of the impact of a stronger U.S. dollar, as a portion of our Celgar mill’s fiber is currently sourced from sawmills owned by MPR’s joint venture partner. The supply of fiber is characterized by a mix of lodgepole pine, white spruce and interior douglas fir.

Our Friesau mill is dependent on the consistent supply of sawlog fiber. Wood fiber is the single largest input cost and accounts for about 80% of its cash costs of producing lumber. Our Friesau mill is located in U.S. dollars,an area where there is a significant amount of high-quality fiber within economic reach. The wood fiber requirements of the Friesau mill are met primarily through open market purchases and due to increased demand for chips in our Celgar mill’s procurement areacontract purchases from coastal pulp mills.state forestry agencies and private timberland owners.

Labor

Our labor costs are generally steady, with small overall increases due to inflation in wages and health care costs. Over the last three years, weWe have been able to largely offset such increases by increasing our efficiencies and production and streamlining operations.operations; however, such costs increased in 2018 as a result of maintenance work at the mills.

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Energy

Our energy is primarily generated from renewable carbon neutral sources, such as black liquor and wood waste. Our mills produce all of our steamenergy requirements and generate excess energy which we sell to third party utilities.third-party utilities and, in the case of the Peace River mill, into the Alberta market. In 2015,2018, we generated 1,846,8421,711,568 MWh and sold 814,966701,507 MWh of surplus energy. See also “– Generation and Sales of ‘Green’Green Energy and Chemicals at our Mills”. We utilize fossil fuels, such as natural gas, primarily in our lime kilns and we use a limited amount forstart-up and shut-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 pulp mills use certain chemicals which are generally available from several suppliers and sourcing is primarily based upon pricing and location. OurOverall, our chemical costs have declinedremained generally stable over the last three years through improved efficienciesyears. However, such costs increased in 2018 as a result of maintenance work and capital expenditures and the strength of the dollar.other cost increases.

In connection with our focus on the growingbio-energy market, we sell tall oil, aby-product of our pulp production process which is used as both a chemical additive and as a “green”green energy source. In 2015,2018, we generated $11.7$14.9 million from the sale of tall oil.oil and other chemicals.

Sales, Marketing and Distribution

Our pulp revenues by geographic area are set out in the following table for the periods indicated:

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

2018 Geographically Segmented Pulp Sales		2017 Geographically Segmented Pulp Sales		2016 Geographically Segmented Pulp Sales

*Not includingExcluding Germany or Italy; includes new entrant countries to the European Union from their time of admission.and Italy.

The distribution of our pulp sales by end use are set out in the following table for the periods indicated:

In 2018, our wood products segment revenues were: (i) 32% from Germany; (ii) 22% from other EU countries; (iii) 31% from the United States; and (iv) 15% from other countries.

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 1415 employees. 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 approximately 190180 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 pulp sales from the Celgar mill withacross 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 lumber sales are handled by our sales team in Germany and Vancouver. We also sell lumber through commissioned agents in certain markets.

Our pulp and lumber sales are on customary industry terms. At December 31, 2015,2018, we had no material payment delinquencies. In 2015,2018, one customer through several of its operations accounted for 16% of our pulp sales. In 2014, one customersegment through several of its operations accounted for 13% of our revenues. In 2017, one customer of our pulp sales.segment through several

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of its operations accounted for 13% of our revenues. In 2013,2016, two customers through several of their operations accounted for 10%19% and 11%10%, respectively, of our pulp sales. We do not believe our pulp sales are dependent upon the activities of any single customer and the loss of any single customer would not have a material adverse effect on us.

Our sales to tissue and specialty paper product manufacturers were approximately 50%54% of our pulp sales volume in 20152018, 52% in 2017 and 2014 and about 49% of our pulp sales50% in 2013.2016. 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 and lumber 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 pulp 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 Northern European pulp producers when shipping to customers in Europe. Due to the location of our German mills, we are able to deliver pulp to many of our customers primarily by truck 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’sOur Canadian mills’ pulp is transported to customers by truck, rail truck and ocean carrier to ensure timely delivery. The majority of Celgar’sour Canadian mills’ 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 isour Canadian mills are well positioned to service Asian customers. The majority of the Celgar mill’sour Canadian mills’ pulp for domestic markets is shipped by rail directly to the customer or to third partythird-party warehouses in the U.S. In 2015, we establishedUnited States. We also operate a logistics and reload center near Trail, British Columbia. The center providesColumbia to provide us with additional warehouse space for our Celgar mill and greater transportation flexibility in terms of access to rail and trucking options.

The Friesau mill’s lumber is transported to customers by truck, rail and ocean carriers through third-party carriers.

In each of 2015, 20142018, 2017 and 2013,2016, outbound transportation costs comprised approximately 9%, 9% and 8%, respectively, of our total consolidated cost of sales. Generally, in recent years, our transportation costs have decreasedbeen stable despite growing overseas shipments due to the positive impact of a stronger dollar, decreases in fuel costs and higher shipping capacity. Wecapacity and we have also taken initiatives to target sales to the most “freight logical” customers.

Capital Expenditures

In 2015, weWe have continued with ourto make capital investment programsinvestments designed to increase pulp, “green”green energy and chemical generation,production, reduce costs and improve efficiency and environmental performance at our mills.pulpmills. The improvements made at our mills over the years have increased the competitive position of our facilities.pulp segment. Since its acquisition, we have also made capital investments to optimize sawmill production at the Friesau mill.

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Total capital expenditures at our mills (excluding any related governmental grants) are set out in the following table for the periods indicated:

Capital investments at the Rosenthal mill in 20152018 primarily related to new chip screens to improve the consistency of chips for the mill’s digester, bleach plant improvements and other projects. In 2017, they related to the purchase of additional land for raw material storage and a railcar acceptance system for logs and, in 2016, they related to a railcar acceptance system for logs and a lime kiln retrofit.

Capital investments at the Stendal mill in 2018 primarily related to wastewater improvement projects including the extension of the effluent treatment plant and other projects. In 2017, they included a project to reduce nitrogen in wastewater and smaller projects and in 2016 they related to a wastewater reduction project consisting of an evaporation plant upgrade and completion of an automated chip storage project. a project to reduce chloride levels in the process water.

In 2014, they related primarily to the automated chip storageJune 2018, we commenced a Phase II expansion and optimization project and a tall oil project. In 2013, capital expenditures at the RosenthalFriesau mill, related primarilywhich is designed to, among other things, increase annual lumber production to approximately 750 million board feet and improve production grade capabilities and efficiencies. We currently expect to substantially complete the completion of the recovery upgrade project and the replacement of capital.

Capital investments at the Stendal mill in 2015 related primarily to a wastewater reduction project consisting of an evaporation plant upgrade. In 2014, they related primarily to the evaporation plant upgrade. In 2013, capital investments at the Stendal mill related primarily to Project Blue Mill, which was completed in December 2013. Project Blue Mill required $49.3 million in capital expenditures, which was primarily funded through approximately €11.3 million ($15.0 million) of non-refundable German government grants, a €17.0 million ($22.2 million) five-year amortizing secured term debt facility, operating cash flow of the Stendal mill and shareholder contributions.2020.

Certain of our capital investment programs in Germany were partially financed through government grants made available by German federal and state governments. Under legislation adopted by the federal and certain state governments of Germany, government grants are provided to qualifying businesses operating in Eastern Germany to finance capital investments. The grants are made to encourage investment and job creation. For example, the government grants received in connection with Project Blue Mill require us to maintain the employment of core employees for five years after completion of the project, among certain other terms. Previously, government grants were available for up to 35% of the cost of qualified investments. 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 such recipient fails to complete the proposed capital investment or, if applicable, fails to create or maintain the requisite amount of jobs or comply with other applicable terms. 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, in which case the government may refrain from reclaiming previous grants. Pursuant to legislation in effect at the time, the Stendal mill recorded approximately $350.0 million of government grants. We believe that we are currently 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”.

The following table sets out, as at the dates indicated, the effect of government grants on the recorded value of such assets in our Consolidated Balance Sheets:

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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”.

In 2015,2018, capital investments at the Celgar mill primarily related to improvements to its digester and large maintenance projects. In 2017, capital investments at the Celgar mill included apre-bleach press system upgrade and large maintenance projects. In 2016, they included new wood harvesting equipment, a logistics and reload center and other maintenance projects. In 2014, they included a new chip screening project, the logistics and reload center and maintenance projects. In 2013, capital expenditures at the Celgar mill related primarily to a variety of maintenance projects.

In January 2014, we commenced the implementation of a new enterprise resource planning, or “ERP”, system to replace our existing business software applications at an estimated cost of $12.0 million. The project was designed to be completed in stages over the following two years. The ERP system installation will replace a suite of existing legacy systems which, while functional, will begin becoming obsolete in the near future. The ERP solution introduces state-of-the-art, end-to-end business solutions that will provide automation for most aspects of our business including finance, payroll, inventory management, sales, fiber management, supply chain, business analytics and forecasting.

To assist us through the implementation, 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 such an implementation but also assist with maintaining internal controls over financial reporting.

Excluding costs for projects2019, excluding amounts being financed through government grants capitaland expected insurance proceeds, we expect our totalcapital expenditures including ERP expenditures, in 2016 are expected to be approximately $56.0$130 million to $150 million.

In our pulp segment, excluding our Peace River mill, we currently expect our capital expenditures in 2019 to be principally comprised principally of approximately:

Innovation

We are well positioned to capitalize onutilize our expertise with fiber andwood, its processing andby-products to expand our product mix and intomix. As a result, we seek to develop new markets. Accordingly, we have a number of initiatives focused on developing innovative new products that are based on derivatives of the kraft pulping process.process and wood processing. Currently these derivativesprocesses are focused in two broad categories:on:

We are working on some of these initiatives on our own and somewith others in conjunction with industry associations and others withor joint venture partners. Currently, oneOne of the more well-developedbetter-developed of these projects is a cellulose derivative generally referredprocess to in the industry as “cellulose filaments”. Cellulose filaments are the result of a new process that unbindsunbind 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

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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 haveare working to create commercial potential in many applications therefor, including as strength enhancers, solution stabilizers and specialty solutions for numerous other industries.products and applications.

We are part ofThrough an industry association, that has made considerable progress inwe are developing a particularproven manufacturing process.process able to supply commercial quantities of cellulose filaments. We, along with other member companies, including certain other NBSKpulp producers, have license rights to further develop and market existing intellectual property registered under patent to our industry association. The association and one of its member companies have constructed a pilot production facility and we have access to its product for development purposes. While there remains much work to be done, we continue to be encouraged with the results to date and intend to continueWe expect to expend resources to further develop this technology, both individually and in joint development arrangements with third parties. We currently estimate expenditures totaling approximately $0.5$1 million in 2016.2019.

Such research and development is stillof various end use applications are at an early stagedifferent levels of development and, to date, there has been no commercialization of any products to date. We currently estimate it may take between two and four years before we can determine if product applications can be commercialized. However, thereproducts. 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.

We haveare also worked with suppliers to develop new customized formsresearching potential higher use products that may be derived from processing different species of railcarstrees. In particular, we recently acquired the Santanol Group which harvests and processes sandalwood trees in Germany designed to better handle the transportation of logs and chips to our German mills. These customized cars are larger than existing ones and are expected to reduce transportation and handling costs at our German mills.Australia. We expect to take delivery of about 300 to 400 cars over the next 18 months.

We have also worked with equipment suppliers to develop innovative logging equipment to permit us to effect second pass harvesting in the fiber procurement areawill be processing these trees for the Celgar mill. Such equipment includes customized processingproduction of sandalwood oil. This product is valued by the fragrance and chipping equipmentessential oil industries for its scent and trailers for haulage.health benefits.

Environmental

Our operations are subject to a wide range of environmental laws and regulations, dealing primarily with:

Compliance with water, airthese laws and land pollution control. regulations generally involves capital expenditures as well as additional operating costs. We cannot easily quantify the future amounts of capital expenditures we might have to make to comply with these laws and regulations or the effects on our operating costs because in some instances compliance standards have not been developed, have not become final or definitive or may be amended in the future. In addition, it is difficult to isolate the environmental component of most manufacturing capital projects.

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 certainprescribed emission limits. Compliance with these requirements is monitored by local authorities andnon-compliance may result in administrative orders, fines or closures of thenon-compliant mill. Our total capital expenditures on environmental projects at our mills were approximately $19.4$20.6 million in 2015,2018, approximately $6.1$4.6 million in 20142017 and approximately $1.9$2.9 million in 2013.2016. In 2016,2019, capital expenditures for environmental projects, principally comprised of projects to improve wastewater quality, are expected to be approximately $1.3$6.0 million.

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

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environmental audits of operational sites and procedures both with our internal personnel and outside consultants. These capital expenditures are expectedaudits identify opportunities for improvement and allow us to reduce wastewater fees and upgradetake proactive measures at the effluent system.mills as considered appropriate.

We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in material 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 expect capital investment programs and other environmental initiatives at our German mills will continue to offset the wastewater fees that are payable and we believe they will ensure that our operations continue in substantial compliance with prescribed standards.

Environmental compliance isIn Canada, in addition to existing provincial air quality regulations, the federal government has proposed an air quality management system, referred to as “AQMS”, as a prioritycomprehensive national approach for improving air quality in Canada. The federal proposed AQMS includes:

In 2016, Environment Canada released thePan-Canadian Framework on Clean Growth and Climate Change. The framework put in place a national, sector-based greenhouse gas reduction program applicable to a number of industries. In addition, the provincial governments of Alberta and British Columbia:

In addition, British Columbia has adopted a carbon tax and Alberta has a mandatory greenhouse gas emission reduction regulation.

We believe that these air emission measures in Germany and Canada have not had, and in 2019 will not have, a significant effect on our operations. To ensure complianceAlthough these measures could have a material adverse effect on our operations in the future, we expect that we will not be disproportionately affected by these measures as compared with environmental laws and regulations, we regularly monitor emissions atowners of comparable operations. We also expect that these measures will not significantly disrupt 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.planned operations.

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 discharges are in compliance with the standards currently mandated by the German government.

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.(29)

Future regulations or permits may place lower limits on allowable types of emissions, including air, water, waste and hazardous materials, and may increase the financial consequences of maintaining compliance with environmental laws and regulations or conducting remediation. Our ongoing monitoring and policies have enabled us to develop and implement effective measures to maintain emissions in substantial compliance with environmental laws and regulations to date in a cost-effective manner. However, there can be no assurancesassurance that this will be the case in the future.

Climate Change

Over the past several years, changing weather patterns and climatic conditions due to natural andman-made causes have added to the unpredictability and frequency of natural disasters, such as hurricanes, earthquakes, hail storms, wildfires and wind, snow storms and ice storms, which could alsostorms. Such changes and resulting conditions can adversely affect our operations, including variations in the cost and availability of raw materials, such as fiber. However, asfiber, unplanned downtime, operating rates and transportation and logistics. As there are

differing scientific studies relating to the severity, extent and speed at which climate change is occurring, we cannot identify and predict all of the consequences of climate change on our business and operations.

The effects and perceived effects of climate change and social and governmental responses have created both opportunities and negative consequences for our business.

The focus on climate change has generated a substantial increase in demand and in legislative requirements for “carbon neutral”carbon neutral or “green” energy in both Europe and, increasingly, in North America.green energy. Pulp mills consume wood residuals, being wood chips and pulp logs, as the base raw material for their production process. Wood chips are residuals 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. Sawmills consume sawlogs and residuals like wood chips that are generally sold to other industrial consumers like pulp and pellet producers.

As part of their production process, our pulp mills take wood residuals and process them through a digester where cellulose is separated from the wood to be used in pulp production and the remaining residuals, called “black liquor”,black liquor, are used for “green”green energy production. As a result of their use of wood residuals and because our mills generate combined heat and power in a process known as cogeneration, they are efficient producers of energy. Our Friesau mill utilizes residual bark and shavings from consumed logs to produce 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 to regional utilities.

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

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At this time, we cannot predict which, if any, of these potential opportunities will be realized by us or their economic effect on our business.

While not all of the specific consequences to our business from climate change are not predictable, the most visible adverse consequence to date is that the focus on renewable energy has created greater demand and competition for wood residuals or fiber from renewable energy producers like the pellet industry in Germany.

In Germany, 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 2015 and 2014 temper the demand for wood chips resulting from initiatives by European governments to promote the use of wood as a carbon neutral energy. Over the long term, this There can be no assurance that suchnon-traditional demand for fiber is expected to increasewill remain strong in Europe.the long-term. Additionally, the growing interest and focus in British Columbia for renewable “green”green energy is also

expected to createhas created additional competition for such fiber in that region over time.fiber. Such additional demand for wood residuals may increase the competition and prices for wood residuals over time.

GovernmentalIn response to climate change risks, there have been governmental initiatives and legislation on the international, national, state and local levels. Such governmental action or legislation may alsocan have an important effect on the demand and prices for wood residuals.fiber. 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 traditional users, such as lumber and pulp and paper producers. We are continually engaged in dialogue with governments 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 may affect our business include:

Human Resources

We currently employ approximately 1,469 people. We have2,210 people, of which approximately 1,0281,395 employees workingwork in our German operations includingand approximately 780 employees work in our wood procurement, transportation and sales subsidiaries. In Canada, we haveCanadian operations.

Our pulp mills employ approximately 441 employees,1,790 people, the majority of which 21whom are employed at our Vancouver, British Columbia, office.

Rosenthalbound by collective agreements. The Friesau mill employs approximately 438340 people, the majority of whom are bound by a collective agreement. In July 2015, the Rosenthal mill revised its collective agreement for a two-year period until June 2017. The agreement provides for an initial 2.4% wage increase and a subsequent increase of 2.4% in September 2016.

Stendal employs approximately 584 people, the majority of which are bound by a collective agreement. In 2011, Stendal entered into a seven-year collective agreement, effective July 2011 and expiring in 2018. Since, prior to entering into this collective agreement, Stendal’s employees had relatively lower wages compared to their peers at other German pulp mills, this agreement provided for an approximately 5.5% wage increase in 2012 and a further 2.5% minimum annual wage increase from 2013 to 2015.

Celgar employs approximately 420 people, the majority of which are bound by a collective agreement. Celgar entered into a five-year collective agreement with its hourly workers in 2012, which expires in April 2017. 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.(31)

We consider the relationships with our employees to be good. Although no assurancesassurance can be provided, we have not had any significant work stoppages at any of our operations and we would therefore expect to enter into new labor agreements with our workers when the current labor agreements expire without any significant work stoppages.

Our directorssenior managers and senior managersdirectors have extensive experience in the pulp, lumber and forestry industries, along with experienced managers at all of our mills. Our management has a proven track record of implementing new initiatives and capital projects in order to reduce costs throughout our operations as well as identifying and harnessing new revenue opportunities.

Wood Products Industry

General

With approximately 3.7 billion cubic meters, Germany has the largest timber reserves in Europe. The principal trees are spruce, pine, beech and oak. Approximately 70 to 80 million cubic meters are harvested annually. Many of the German forest areas have been certified according to PEFC or FSC standards. Modern solid wood products include sawn and planed lumber which are used in different areas.

Demand for softwood lumber is cyclical and influenced by transportation costs, exchange rates, government tariffs and competitiveness of substitute products, as well as factors that affect consumer confidence and drive demand for residential construction, such as interest rates, disposable income, unemployment rates, perceived job security and other indicators of general economic conditions. Demand can vary from region to region within a country and seasonal factors that determine optimal building conditions can also affect demand.

Lumber Products and Markets

Our Friesau mill, which was built in 1992 and has two high-volume Linck sawlines, has the ability to produce both rough and planed products. The sawmill principally manufactures finished sawn lumber milled from spruce and pine, including European metric and specialty lumber, U.S. dimensional lumber andJ-grade lumber, in various sizes and grades.

The process for manufacturing lumber results in a significant percentage of each sawlog ending up asby-products or residuals such as wood chips, trim blocks, sawdust shavings and bark.By-products are typically sold to a wide variety of customers. In addition, we utilize a significant portion of the chips from the Friesau mill at our Rosenthal pulp mill.

The main markets for our lumber products are in Europe, the United States and the Far East.

Our Friesau mill fosters a diverse customer base in each of its key markets. Customers include national and regional distributors, large construction firms, secondary manufacturers, retail yards and home centers.

Competition

The markets for our lumber products are highly competitive on a global basis and producers compete generally on price, quality and service. Factors influencing our competitive position include, among others, the availability, quality and cost of raw materials, including fiber, energy and labor and the efficiency and productivity of the Friesau mill in relation to its competitors. The Friesau mill competes in international markets subject to currency fluctuations and global business conditions.

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Our Friesau mill competes against many producers, a number of whom own and operate more mills than we do and numerous competitors have greater financial resources or lower production costs than us.

Description of Certain Indebtedness

The following summarizes certain material provisions of: (i)of our 2019senior notes and 2022 Senior Notes; (ii) our Stendal Revolving Credit Facility; (iii) our credit facilities related to our Rosenthal mill; and (iv) the Celgar Working Capital Facility.revolving working capital facilities. The summaries are not complete and are qualified by reference to the applicable documents and the applicable amendments to such documents on file with the SECU.S. Securities and Exchange Commission, referred to as the “SEC”, and incorporated by reference herein.

2019 and 2022 Senior Notes

On November 26, 2014, we issued $250.0 million in aggregate principal amountWe currently have outstanding the following issues of 7.000% Senior Notes due 2019,senior notes, collectively referred to as the “2019 Senior“Senior Notes”, and $400.0:

The 2019 Senior Notes mature on December 1, 2019 and interest on the 2019 Senior Notes is payable semi-annually in arrears on each June 1 and December 1. Interest is payable to holders of record of the 2019 Senior Notes on the immediately preceding May 15 and November 15 and is 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 is payable semi-annually in arrears on each June 1 and December 1. Interest is payable to holders of record of the 2022 Senior Notes on the immediately preceding May 15 and November 15 and is computed on the basis of a360-day year consisting of twelve30-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 becomebecame 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 2024 Senior Notes mature on February 1, 2024 and interest on the 2024 Senior Notes is payable semi-annually in arrears on each February 1 and August 1. Interest is payable to holders of record of the 2024 Senior Notes on the immediately preceding January 15 and July 15 and is computed on the basis of a360-day year consisting of twelve30-day months. Commencing February 1, 2020, the 2024 Senior Notes will become redeemable at our option at a price equal to 103.250% of the principal amount redeemed and declining ratably on February 1 of each year thereafter to 100.000% on or after February 1, 2022.

The 2025 Senior Notes mature on January 15, 2025 and interest on the 2025 Senior Notes is payable semi-annually in arrears on each January 15 and July 15. Commencing July 15, 2019, interest is payable to holders of record of the 2025 Senior Notes on the immediately preceding January 1 and July 1 and is computed on the basis of a360-day year consisting of twelve30-day months. Commencing January 15, 2021, the 2025 Senior Notes will become redeemable at our option at a price equal to 103.688% of the principal amount redeemed and declining ratably on January 15 of each year thereafter to 100.000% on or after January 15, 2023.

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The 2026 Senior Notes mature on January 15, 2026 and interest on the 2026 Senior Notes is payable semi-annually in arrears on each January 15 and July 15. Commencing July 15, 2018, interest is payable to holders of record of the 2026 Senior Notes on the immediately preceding January 1 and July 1 and is computed on the basis of a360-day year consisting of twelve30-day months. Commencing January 15, 2021, the 2026 Senior Notes will become redeemable at our option at a price equal to 102.750% of the principal amount redeemed and declining ratably on January 15 of each year thereafter to 100.000% on or after January 15, 2023.

The indentures governing the 2019 and 2022 Senior Notes contain covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to: incur additional indebtedness or issue preferred stock; pay dividends or make other distributions to our shareholders; purchase or redeem capital stock or subordinated indebtedness; make investments; create liens; incur restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; sell assets; consolidate or merge with or into other companies or transfer all or substantially all of our assets; and engage in transactions with affiliates. As of December 31, 2015,2018, all of our subsidiaries arewere restricted 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 all of our existing and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of

our subsidiaries; equal in right of payment with all of our existing and future unsecured senior indebtedness; and senior in right of payment to any of our future subordinated indebtedness.

As at December 31, 2015, $250.0 million in aggregate principal amount of 2019 Senior Notes and $400.0 million in aggregate principal amount of 2022 Senior Notes were outstanding.

StendalPan-German Revolving Credit Facility

On November 25, 2014,In December 2018, certain of our Stendal millGerman subsidiaries entered into a €75.0new €200.0 million joint revolving credit facility, referred to as the “Stendal Revolving Credit“German Facility”, with a syndicategroup of four banks as originalbank lenders. The German Facility, which will be used for general corporate purposes, replaced three existing revolving credit facilities of certain of our German subsidiaries which aggregated €170.0 million. The principal terms of the Stendal Revolving CreditGerman Facility are as follows:include:

Rosenthal Credit Facilities

Our Rosenthal mill has the following credit facilities:

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a €25.0 million revolving working capital facility which we extended in 2016The German Facility is available to mature in October 2019, 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 interest payable on cash advances is Euribor plus 2.95%, plus certain other costs incurred by the lenders in connection with the facility. Each cash advance is to be repaid on the last dayall 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 periodborrowers, subject to maximum borrowingsub-limits 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 0.90% per annum commitment fee on the unused and uncancelled amountcertain of the revolving facility which is payable semi-annually in arrears. This facility is secured by a first ranking security interest on the inventories and receivables 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. borrowers.

As at December 31, 2015, €3.12018, approximately €51.5 million ($59.0 million) of the German Facility was drawn and approximately €11.9 million ($13.6 million) of the German Facility was supporting bank guarantees leaving approximately €21.9€136.6 million available under this facility; and($156.5 million) available.

Internet Availability and Additional Information

We make available free of charge, on or through our website at www.mercerint.com, annual reports on Form10-K, quarterly reports on Form10-Q and current reports on Form8-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, DCD.C. 20549. The public may also obtain information on the

operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an internet site at www.sec.gov that also contains our current and periodic reports, including our proxy and information statements.

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.

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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 Form10-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:

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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 Form10-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 and Section 21E of theSecurities Exchange Act of 1934, as amended.amended, referred 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

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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 isand lumber businesses are highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can materially affect prices. Pulp and lumber markets 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 commodityand lumber are commodities that isare generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. 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.

Currently, there have been publiclywe are not aware of any material announced significant increases to expand chemical pulp capacity worldwide. Producers have announced projects to increase hardwood kraft pulp capacity by an aggregate of about 3.6 million ADMTs in 2016 and 2017, primarily in South America and Asia. Further capacity increases of about 2.7 million ADMTs have been announced for 2018. This increase in bleached hardwood kraft pulp is largely targeted at the growing demand forNBSK or NBHK 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.

Producers have also announced increases to NBSK pulp capacity in 2016 and 2017 of an estimated 1.1 million ADMTs, along with another 0.8 million ADMTs of southern softwood and fluff pulp capacity. Further capacity increases of about 0.9 million ADMTs have been announced for 2018. At this time,2019. However, we cannot predict how much of the publiclywhether new capacity will be announced capacityor will come on line and when.in the future. If suchany new capacity, particularly for NBSK pulp, is not absorbed in the market or offset by curtailments or closures of older, high-cost NBSK pulp mills, the increase could put downward pressure on NBSK pulp prices and materially adversely affect our results of operations, margin, and profitability.

Demand for each of pulp and lumber has historically been determined primarily by general global macroeconomicmacro-economic conditions and has been closely tied to overall business activity. NBSK pulpPulp prices have been and are likely to continue to be volatile and can fluctuate widely over time. Between 20052009 and 2015,2018, European list prices for NBSK pulp have fluctuated between a low of approximately $575 per ADMT in 2009 to a high of $1,030$1,230 per ADMT in 2011.2018. In the same period, the average North American NBHK price has fluctuated between a low of $520 per ADMT in 2009 to a high of $1,235 per ADMT in 2018.

Our mills and operations voluntarily subject themselves to third-party certification as to compliance with internationally recognized, sustainable management standards because end use paper and lumber customers have shown an increased interest in understanding the origin of products they purchase. Demand for our products could be adversely affected if we, or our suppliers, are unable to achieve compliance or are perceived by the public as failing to comply with these standards or if our customers require compliance with alternate standards for which our operations are not certified.

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 for pulp sales as pulp producers compete for customers and sales. Our sales price realizations may also be affected by NBSK price movements between the order and shipment dates.

Accordingly, prices for pulp and lumber 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 priceprices for pulp and lumber, 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

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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.

A weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources.

As demand for pulpour products has principally historically been determined by general global macroeconomicmacro-economic activities, demand and prices for our productproducts have historically decreased substantially during economic slowdowns. A significant economic downturn may affect our sales and profitability. Further, our suppliers and customers may also be adversely affected by an economic downturn. Additionally, restricted credit and capital 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.

Our level of indebtedness could negatively impact our financial condition, results of operations and liquidity.

As of December 31, 2015,2018, we hadhave approximately $638.0$1,041.4 million of indebtedness 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 indentures that govern our 2019 and 2022 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, 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.

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Certain of the agreements governing our indebtedness have covenants that require us to maintain prescribed financial ratios and tests. Failure to comply with such covenants 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 may depend in significant part on the extent to which we can successfully implement 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.

Cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business.

Our main raw material which is fiber in the form of wood chips, and pulp logs representsand sawlogs. Fiber represented approximately 62%57% of our pulp cash production costs.costs and approximately 80% of our lumber cash production costs in 2018. Fiber is a commodity and both prices and supply are cyclical. Fiber pricing is subject to regional market influences and our costs of fiber may increase in a region as a result of local market shifts. The cost of wood chips, and pulp logs and sawlogs 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 and wood products produced globally and regionally. Governmental regulations related to the environment, forest stewardship and “green”green or renewable energy can also affect the supply of fiber. In Germany, governmental initiatives to increase the supply of renewable energy have led to more 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 pulp mills and such trend could continue to put further upward pressure on wood chip prices. Wood chip supply in Germany was generally stable during the course of 2014 and 2015last three years 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 or that supply will not be reduced or that fiber costs will not increase in the future.

Similarly, North American sawmill activity declined significantly during the recession, reducing the supply of chips and availability of pulp logs to pulp mills, including 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 has continued through 2015,the first half of 2018, 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 was stableHowever, a slowdown in Canada during 2014sawmilling activities that commenced in the second half of 2018 reduced the availability of both wood chips and 2015; however, therepulp logs and put upward pressure on fiber costs. There is no assurance that sawmill activity will continue to remainimprove or become stable or that fiber prices will not increase in the future.

The 2006 Softwood Lumber Agreement, which governed softwood lumber exports from Canada to the United States, expired in 2015, and aone-year post-expiration period during which the United States agreed not to impose trade sanctions expired in October 2016. In November 2016, a petition was filed by a coalition of U.S. lumber producers to the U.S. Department of Commerce and the U.S. International Trade Commission requesting an investigation into alleged subsidies provided to Canadian lumber producers. In December 2017, the U.S. International Trade Commission published its final injury determination. In late

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2017, the U.S. Department of Commerce announced its final countervailing and anti-dumping duty rates, which set out a countervailing duty of 14.19% and an anti-dumping rate of 6.04% for “all other” Canadian lumber producers. The U.S. Department of Commerce also concluded that critical circumstances did not exist for countervailing duties, but did exist for anti-dumping duties. The Canadian forest products industry and Canadian federal and provincial governments have denied the U.S. Department of Commerce’s allegations. Canada has announced an appeal of the duties to the North American Free Trade Agreement appeal panel and the World Trade Organization. It is uncertain when or if the United States and Canada may settle a new agreement and what terms or restrictions it may contain. Any duties or other restrictions imposed on Canadian softwood lumber exports by the United States could negatively impact Canadian sawmill production in our Canadian mills’ supply area and result in reduced availability and increased costs for wood chips for the mill. While we believe this may be partially offset by increased wood chip supply from U.S. sawmills and pulp log availability, we cannot currently predict the overall effect on our Canadian mills’ overall fiber costs.

Availability of fiber may be further limited by adverse responses to and prevention of wildfires, weather, insect infestation, disease, ice storms, wind storms, flooding and other natural causes. In addition, the quantity, quality and price of fiber we receive could be affected byman-made causes such as those resulting from industrial disputes, material curtailments or shut-down of operations by suppliers,

government orders and legislation (including new taxes or tariffs). Any or a combination of these can affect fiber prices in a region.

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

WeOther than the renewable forest licenses of MPR, we do not own any timberlands or have any material long-term governmental timber concessions and weconcessions. We also currently have few long-term fiber contracts at our German operations. Fiber is available from a number of suppliers and we have not historically experienced material supply interruptions or substantial sustained price increases. However, our requirements have increased and may continue to do so as we expand 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. 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.flows.

In addition to the supply of fiber, we are, to a lesser extent, 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 face intense competition in our markets.

We sell our pulp and lumber globally, with a large percentage sold in Europe, Asia and North America. The markets for pulp and lumber are highly competitive. A number of other global companies compete in each of these markets and no company holds a dominant position. Our pulp isand lumber are considered a commoditycommodities because many companies produce similar and largely standardized products. As a result, the primary basis for competition in our markets has been price. Many of our competitors have greater resources and lower leverage than we do and may be able to adapt more quickly to industry or market changes or devote greater resources to the sale of products than we can. There can be no assurance that we will continue to be competitive in the future. Prices for our products are affected by many factors outside of our control and we have no influence over the timing and extent of price changes, which are often

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volatile. Our ability to maintain satisfactory marginmargins depends, in large 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 globalGlobal pulp market hasand lumber markets have historically been characterized by considerable swings in prices which have and will result in variability in our earnings.

We are exposed to currency exchange rate fluctuations.

We have manufacturing operations in Germany and Canada. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Celgar millCanadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such shiftsdeclines in currenciesthe dollar 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.

Further, while a strengthening dollar generally lowers our costs and expenses, it increases the cost of NBSK pulp to our customers and generally puts downward pressure on pulp prices and reduces our European lumber, energy and chemical sales revenues as they are sold in euros and Canadian dollars.

Although we report in dollars, we hold certain assets and liabilities, including our mills, in euros and Canadian dollars. We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our Consolidated Statement of Comprehensive Income (Loss)other comprehensive income (loss) and do not affect our net earnings, operating income or Operating EBITDA.

Certain intercompany dollar advances between Mercer Inc. and its foreign subsidiaries are held in euros.euros and Canadian dollars and certain foreign subsidiaries hold some cash and other balances in dollars. When such advances and cash and other balances are translated by thethese subsidiaries into dollarsthe applicable local currency at the end of each reporting period, the gains or losses thereon are reflected in net earnings.

Political uncertainty, the rise of populist political parties and an increase in trade protectionism could have a material adverse effect on global macro-economic activities and trade and adversely affect our business, results of operations and financial condition.

The current rise of populist political parties, economic nationalist sentiments and trade protectionism has led to increasing political uncertainty and unpredictability throughout the world. In 2016, the United Kingdom held a referendum at which the electorate voted to leave the Council of the European Union and is currently seeking to settle the terms of its departure and future trade relationship with the European Union. Currently there is no certainty as to what terms may be implemented, if at all, and the overall effect on European and world economies. The current U.S. presidential administration has imposed tariffs on various goods from various countries, including China and announced intentions to impose further, more significant tariffs. These potential developments, market perceptions concerning these and related issues and the attendant regulatory uncertainty regarding, for example, the posture of governments with respect to international trade, could have a material adverse effect on global trade and economic growth which, in turn, can adversely affect our business, results of operation and financial condition.

The rise of populist political parties in some countries and the dominance of single-party political power in other countries may also lead to increased trade barriers, trade protectionism and restrictions on trade. Increased trade protectionism could materially adversely affect our business. If the current continuing global recovery is undermined by downside risks and there is a prolonged economic downturn,

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governments, especially populist governments, may turn to trade barriers to protect their domestic industries against imports, thereby depressing demand. Changes in U.S. trade policy, such as the announcement of unilateral tariffs on imported products, have already triggered retaliatory actions from affected countries, resulting in “trade wars” that could have a material adverse effect on global trade and economic growth.

Protectionist developments, or the perception they may occur, may have a material adverse effect on global economic conditions, and may significantly reduce global trade. Increasing trade protectionism in the markets could increase the risks associated with exporting goods to such markets. These developments could have a material adverse effect on our business, results of operations and financial condition.

We are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations.

Our operations are subject to numerous environmental laws and regulations as well as permits, guidelines and policies relating to the protection of the environment. 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-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 fromnon-compliance

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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.

We have incurred, and we expect to continue to incur, significant capital, operating and other expenditures as a result of complying with applicable environmental laws and regulations.

Further, enactment of new environmental laws or regulations, changes in existing laws or regulations or the interpretation of these laws and 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.

Our operations and those of our suppliers are subject to climate change variations which can impact the productivity of forests, the abundance of species, harvest levels and lumber. Further, over the last few years, changing weather patterns and climate conditions due to natural andman-made causes have added to the frequency and unpredictability of natural disasters like earthquakes, storms, wildfires and wind, snow and ice storms. One or a combination of these factors could adversely affect our fiber supply which is our largest cash production cost. 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.

Further, governmental initiatives in response to climate change also have an impact on operations. There continue to be numerous international, country level and regional initiatives to address global and country specific climate issues.

In Germany, government and social focus on and demand for “carbon neutral”carbon neutral or “green”green energy has created greater demand and competition for the wood residuals or fiber that is consumed by our pulp mills as part of their production process.processes. 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 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:

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

Our new ERP system may cost more than expected, be delayed, fail to perform as planned and interrupt operational transactions during and following the implementation, 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 was designed to be completed in stages over the following 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:

We periodically use derivatives to manage certain risks which has caused significant fluctuations in our operating results.

In 2002, Stendal entered into the Stendal Interest Rate Swap Contract to fix interest payments under its indebtedness until 2017, which prevented Stendal from benefiting from the general decline in interest

rates that ensued. Because we effectively fixed the rate on Stendal’s indebtedness under such contract, the value of our derivative position moves inversely to interest rates. The Stendal Interest Rate Swap Contract remains in place after we refinanced Stendal’s indebtedness in 2014.

We also periodically use other derivatives related to currency exchange rates, pulp prices and energy prices.

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.

If any of the variety of instruments and strategies we utilize is not effective, we may incur losses which may have a materially adverse effect on our business, financial condition, results of operations and cash flow. 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.

Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements.

Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and, as a result of changes to environmental regulations that require capital expenditures, bring our operations into compliance with such regulations. In addition, we may approve projects in the future that will require significant capital expenditures. Increased capital expenditures could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. Our indebtedness could adversely affect our financial health, limit our operations or impair our ability to raise additional capital. If this occurs, we may not be able to obtain additional funds on favorable terms or at all. If we cannot maintain or upgrade our equipment as may be required from time to time, we may become unable to manufacture products that compete effectively. An inability to make required capital expenditures in a timely fashion could have a material adverse effect on our growth, business, financial condition or results of operations.

FutureOur acquisition of MPR and other future acquisitions may result in additional risks and uncertainties in our business.

Our future performance will depend in part on whether we can integrate MPR with our operations in an effective and efficient manner. The acquisition of MPR is larger than the other acquisitions we have made. Integrating MPR with our operations will be a complex, time consuming and potentially expensive process.

In order to grow our business, we may seek to acquire additional assets or companies. Our ability to pursue selective and accretive acquisitions will be dependent on management’s ability to identify, acquire and develop suitable acquisition targets in both new and existing markets. In pursuing acquisition and investment opportunities, we face competition from other companies having similar growth strategies, many of which may have substantially greater resources than us. Competition for these acquisitions or investment targets could result in increased acquisition or investment prices, higher risks and a diminished pool of businesses or assets available for acquisition.

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could have a material adverse effect on our operating results. Furthermore, the costs of integrating acquired businesses (including restructuring charges associated with the acquisitions, as well as other acquisition costs, such as accounting fees, legal fees and investment banking fees) could significantly impact our operating results.

Although we perform diligence on the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. We may

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not be able to ascertain the value or understand the potential liabilities of the acquired businesses and their operations until we assume operating control of the assets and operations of these businesses.

Furthermore, anyour acquisition of MPR and other future acquisitions of businesses or facilities could entail a number of risks, including:

All of the pulp produced by the MPR mills was previously sold by a third-party agent that was a shareholder of MPR. We intend to take over a majority of its sales functions over time. Our internal sales staff and cost savings.third-party agents may not be able to sell such pulp production on terms as favorable as those achieved by the existing agent.

partner in respect of the Cariboo mill, including anynon-performance, default or bankruptcy of such party. Anynon-performance by MPR’s joint venture partner or other actions taken by the joint venture partner in connection with theday-to-day operation of the Cariboo mill may adversely affect our results of operations and financial condition.

We may not be able to enhance the operating performance and financial results or lower the costs of MPR’s operations as planned.

While we believe that there are a number of opportunities to reduce operating costs, increase production and improve the financial results of MPR, we may not be able to achieve our planned operating improvements, cost reductions, capacity increases or improved price realizations in our expected time periods, if at all. In addition, some of the improvements that we hope to achieve depend upon capital expenditure projects that we plan to implement at the Peace River mill. Such capital projects may not be completed in our expected time periods, if at all, may not achieve the results that we have estimated or may have a cost substantially in excess of our planned amounts.

Fluctuations in prices and demand for lumber could adversely affect our business.

The financial performance of the Friesau mill depends on the demand for and selling price of lumber, which is subject to significant fluctuations. The markets for lumber are highly volatile and are affected by economic conditions in Europe, Asia and the United States, the strength of housing markets in such regions, the growing importance of the Asian market, changes in industry production capacity, changes in inventory levels and other factors beyond our control. Additionally, interest rates have a significant impact on residential construction and renovation activity, which in turn influence the demand for and price of lumber.

Adverse housing market conditions may increase the credit risk from customers of our wood products segment.

Our wood products segment generally extends credit to customers who are generally susceptible to the same economic business risks that we are. Unfavorable housing market conditions could result in financial failures of one or more of such customers. If such customers’ financial position becomes impaired, our ability to fully collect receivables from such customers could be impaired and negatively affect our operating results, cash flows and liquidity.

Our wood products segment lumber products are vulnerable to declines in demand due to competing technologies or materials.

Our lumber products may compete with alternative products. For example, plastic, wood/plastic or composite materials may be used by builders as alternatives to the lumber products produced by our wood products segment. Changes in the prices for oil, chemicals and other products can change the competitive position of our wood products segment lumber products relative to available alternatives and could increase substitution of those products for our wood products segment products. If use of these alternative products grows, demand for and pricing of our wood products segment products could be adversely affected.

Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities.

Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing the company on a watch list for possible future downgrading. Downgrading the

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credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to the credit markets, increase our cost of financing and have an adverse effect on the market price of our securities, including the 2019 and 2022our Senior Notes.

We rely on government grants and participate in German statutory energy programs.

We currently benefit from a subsidized capital expenditure program as a result of German federal and state government grants. Should either the German federal or state governments be prohibited from honoring legislative grants, or should we be required to repay any such legislative grants, this may have a material adverse effect on our business, financial condition, results of operations and cash flow.

Since 2005, ourOur German mills have benefited from sales of emission allowances under the EU ETS. Since our German mills receive stipulated special tariffs undersell surplus green energy at fixed prices or “tariffs” pursuant to the Renewable Energy Act, the amount of emissions allowances granted to our German mills under the EU ETS has been reduced. Additionally, such emission allowances are subject to statutory amendment or change in the future.Act.

In 2014, in response to an investigation by the European Commission into whether portions of the Renewable Energy Act constituted unpermitted state aid, the German government amended the Renewable Energy Act. After such amendment,same, which amendments permitted our German mills continuedto continue to sell “green”green energy into the market at stipulated prices or “tariffs”. Furthermore, they and were exempted, as “existing installations”, from certain surcharges on the consumption of energy that they generate, or “auto-generation”. This exemption is set to be re-considered in 2017.

The German government has publicly announced that it intends to further amend

amended the Renewable Energy Act in 2016effective January 1, 2017, so that funding for renewable energy is to be allocated through an auction system, starting in 2017. The auction system is expected to be primarily designed to create a competitive bidding process for new installations of wind, solar and solarbiomass energy. WhileOur Friesau mill’s tariff expires in 2029. However, the current funding system is expectedamendments provide that existing pulp mills, including our German pulp mills, are ineligible for such auction process and instead will have their tariffs renewed upon expiry of their initial20-year terms for a further10-year period, based upon the price received in the last year prior to continuerenewal, regressing at a rate of 8% per annum. Currently we expect our Rosenthal mill’s initial20-year tariff to applyexpire on December 31, 2020 and our Stendal mill’s initial20-year tariff to biomass energy,expire on December 31, 2024. Such10-year extensions for such pulp mills have been notified by the currentGerman government to the European Commission for review for compliance with applicable state aid rules. We have been advised by German governmental paper proposes to develop tender mechanisms for biomass installations, for which fundingauthorities that such extensions may not be permitted under the current system has run out. At this time, the final proposedEU rules. As a result, we cannot currently predict whether such promulgated amendments to the Renewable Energy Act and in particular those that affect biomass producers like our German mills, havewill become effective. If they do not been released. As a result,become effective, we cannot predict what further resulting amendments the German government may put into effect of any promulgated amendments to the Renewable Energy Actand their effect on our German mills’ sale or consumption of energy.energy after the expiry of their current terms on December 31, 2020 for Rosenthal and December 31, 2024 for Stendal.