##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 OR
 o
    
    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)
 Washington
(State or other jurisdiction 
of incorporation or organization)
    
    47-0956945(I.R.S. Employer
Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 YES þ NO o
 YES o NO o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o
 YES o NO þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSINTERIM CONSOLIDATED BALANCE SHEETSINTERIM CONSOLIDATED STATEMENTS OF OPERATIONSINTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2011
 (Unaudited)




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##### Table of Contents



MERCER INTERNATIONAL INC.
 
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands of Euros)
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCurrent assetsCash and cash equivalents
    
    
    123,241
    
    
    
    99,022Receivables
    
    
    112,991
    
    
    
    121,709Inventories (Note 4)
    
    
    96,408
    
    
    
    102,219Prepaid expenses and other
    
    
    10,787
    
    
    
    11,360Deferred income tax
    
    
    22,414
    
    
    
    22,570Total current assets
    
    
    365,841
    
    
    
    356,880Long-term assetsProperty, plant and equipment
    
    
    830,095
    
    
    
    846,767Deferred note issuance and other
    
    
    10,461
    
    
    
    11,082Note receivable
    
    
    890
    
    
    
    1,346841,446
    
    
    
    859,195Total assets
    
    
    1,207,287
    
    
    
    1,216,075LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    108,765
    
    
    
    84,873Pension and other post-retirement benefit obligations (Note 7)
    
    
    703
    
    
    
    728Debt (Note 5)
    
    
    45,393
    
    
    
    39,596Total current liabilities
    
    
    154,861
    
    
    
    125,197Long-term liabilitiesDebt (Note 5)
    
    
    713,422
    
    
    
    782,328Unrealized interest rate derivative losses (Notes 6 and 9)
    
    
    38,730
    
    
    
    50,973Pension and other post-retirement benefit obligations (Note 7)
    
    
    23,412
    
    
    
    24,236Capital leases and other
    
    
    11,607
    
    
    
    12,010Deferred income tax
    
    
    7,947
    
    
    
    7,768795,118
    
    
    
    877,315Total liabilities
    
    
    949,979
    
    
    
    1,002,512EQUITYShareholders equityShare capital (Note 8)
    
    
    227,588
    
    
    
    219,211Paid-in capital
    
    
    (5,877
    )
    
    
    (3,899
    )Retained earnings (deficit)
    
    
    18,097
    
    
    
    (10,956
    )Accumulated other comprehensive income
    
    
    35,458
    
    
    
    31,712Total shareholders equity
    
    
    275,266
    
    
    
    236,068Noncontrolling interest (deficit)
    
    
    (17,958
    )
    
    
    (22,505
    )Total equity
    
    
    257,308
    
    
    
    213,563Total liabilities and equity
    
    
    1,207,287
    
    
    
    1,216,075
 
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands of Euros, except per share data)
 Three Months EndedMarch 31,2011
    
    
    2010RevenuesPulp
    
    
    210,458
    
    
    
    171,121Energy
    
    
    13,677
    
    
    
    9,131224,135
    
    
    
    180,252Costs and expensesOperating costs
    
    
    163,355
    
    
    
    140,409Operating depreciation and amortization
    
    
    14,076
    
    
    
    13,72446,704
    
    
    
    26,119Selling, general and administrative expenses
    
    
    10,230
    
    
    
    8,095Purchase (sale) of emission allowances
    
    
    (170
    )
    
    
    Operating income (loss)
    
    
    36,644
    
    
    
    18,024Other income (expense)Interest expense
    
    
    (15,906
    )
    
    
    (16,423
    )Investment income (loss)
    
    
    327
    
    
    
    94Foreign exchange gain (loss) on debt
    
    
    1,111
    
    
    
    (5,231
    )Gain (loss) on extinguishment of debt (Note 5)
    
    
    
    
    
    
    (929
    )Gain (loss) on derivative instruments (Note 6)
    
    
    12,243
    
    
    
    (6,546
    )Total other income (expense)
    
    
    (2,225
    )
    
    
    (29,035
    )Income (loss) before income taxes
    
    
    34,419
    
    
    
    (11,011
    )Income tax benefit (provision)  current
    
    
    (819
    )
    
    
    (204
    ) deferred
    
    
    
    
    
    
    Net income (loss)
    
    
    33,600
    
    
    
    (11,215
    )Less: net loss (income) attributable to noncontrolling interest
    
    
    (4,547
    )
    
    
    3,669Net income (loss) attributable to common shareholders
    
    
    29,053
    
    
    
    (7,546
    )Net income (loss) per share attributable to common shareholders (Note 3)Basic
    
    
    0.66
    
    
    
    (0.21
    )Diluted
    
    
    0.52
    
    
    
    (0.21
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
 (Unaudited)
 (In thousands of Euros)
 Three Months EndedMarch 31,2011
    
    
    2010Net income (loss) attributable to common shareholders
    
    
    29,053
    
    
    
    (7,546
    )Retained earnings (deficit), beginning of period
    
    
    (10,956
    )
    
    
    (97,235
    )Retained earnings (deficit), end of period
    
    
    18,097
    
    
    
    (104,781
    )
 
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2011
    
    
    2010Net income (loss)
    
    
    33,600
    
    
    
    (11,215
    )Other comprehensive income (loss), net of taxesForeign currency translation adjustment
    
    
    3,464
    
    
    
    7,632Pension income (expense)
    
    
    276
    
    
    
    (366
    )Unrealized gains (losses) on securities arising during the period
    
    
    6
    
    
    
    6Other comprehensive income (loss), net of taxes
    
    
    3,746
    
    
    
    7,272Total comprehensive income (loss)
    
    
    37,346
    
    
    
    (3,943
    )Comprehensive (income) loss attributable to noncontrolling interest
    
    
    (4,547
    )
    
    
    3,669Comprehensive income (loss) attributable to common shareholders
    
    
    32,799
    
    
    
    (274
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands of Euros)
 Three Months EndedMarch 31,2011
    
    
    2010Cash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    29,053
    
    
    
    (7,546
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    (12,243
    )
    
    
    6,546Foreign exchange (gain) loss on debt
    
    
    (1,111
    )
    
    
    5,231Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    929Depreciation and amortization
    
    
    14,138
    
    
    
    13,821Accretion expense (income)
    
    
    470
    
    
    
    431Noncontrolling interest
    
    
    4,547
    
    
    
    (3,669
    )Stock compensation expense
    
    
    2,068
    
    
    
    506Pension and other post-retirement expense, net of funding
    
    
    (14
    )
    
    
    194Other
    
    
    684
    
    
    
    1,003Changes in current assets and liabilitiesReceivables
    
    
    7,177
    
    
    
    (17,144
    )Inventories
    
    
    4,313
    
    
    
    (5,259
    )Accounts payable and accrued expenses
    
    
    25,388
    
    
    
    7,955Other
    
    
    359
    
    
    
    (1,281
    )Net cash from (used in) operating activities
    
    
    74,829
    
    
    
    1,717Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (8,069
    )
    
    
    (5,850
    )Proceeds on sale of property, plant and equipment
    
    
    353
    
    
    
    387Note receivable
    
    
    396
    
    
    
    (84
    )Net cash from (used in) investing activities
    
    
    (7,320
    )
    
    
    (5,547
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (30,351
    )
    
    
    (8,250
    )Repayment of capital lease obligations
    
    
    (855
    )
    
    
    (1,004
    )Proceeds from (repayment of) credit facilities, net
    
    
    (14,652
    )
    
    
    Proceeds from government grants
    
    
    4,112
    
    
    
    9,415Net cash from (used in) financing activities
    
    
    (41,746
    )
    
    
    161Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,544
    )
    
    
    1,070Net increase (decrease) in cash and cash equivalents
    
    
    24,219
    
    
    
    (2,599
    )Cash and cash equivalents, beginning of period
    
    
    99,022
    
    
    
    51,291Cash and cash equivalents, end of period
    
    
    123,241
    
    
    
    48,692Supplemental disclosure of cash flow informationCash paid during the period forInterest
    
    
    6,514
    
    
    
    14,429Income taxes
    
    
    301
    
    
    
    102Supplemental schedule of non-cash investing and financing activitiesAcquisition of production and other equipment under capital lease obligations
    
    
    310
    
    
    
    212Decrease (increase) in accounts payable relating to investing activities
    
    
    55
    
    
    
    (983
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 1. The Company and Summary of Significant Accounting Policies
 Basis of Presentation
      Use of Estimates




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 1. The Company and Summary of Significant Accounting Policies (continued)
 Recently Implemented Accounting Standards
  Note 2. Stock-Based Compensation
  Performance Stock




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation (continued)
 Restricted Stock
     Stock Options




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months EndedMarch 31,2011
    
    
    2010Net income (loss) attributable to common shareholders  basic
    
    
    29,053
    
    
    
    (7,546
    )Interest on convertible notes, net of tax
    
    
    403
    
    
    
    Net income (loss) attributable to common shareholders 
diluted
    
    
    29,456
    
    
    
    (7,546
    )Net income (loss) per share attributable to common shareholdersBasic
    
    
    0.66
    
    
    
    (0.21
    )Diluted
    
    
    0.52
    
    
    
    (0.21
    )Weighted average number of common shares outstanding:Basic(1)
    
    
    44,076,427
    
    
    
    36,320,190Effect of dilutive instruments:Performance rights
    
    
    330,977
    
    
    
    Restricted stock
    
    
    76,979
    
    
    
    Stock options and awards
    
    
    72,197
    
    
    
    Convertible notes
    
    
    12,440,562
    
    
    
    Diluted
    
    
    56,997,142
    
    
    
    36,320,190
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock which
have been issued, but have not vested as at March 31, 2011 and 2010.   Note 4. Inventories
 March 31, 2011
    
    
    December 31, 2010Raw materials
    
    
    36,392
    
    
    
    47,179Finished goods
    
    
    31,052
    
    
    
    27,127Work in process and other
    
    
    28,964
    
    
    
    27,913
    96,408
    
    
    
    102,219




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 5. Debt
  March 31, 2011
    
    
    December 31, 2010Note payable to bank,
included in a total loan
credit facility of
827,950 to finance the
construction related to
the Stendal mill (a)
    
    
    486,074
    
    
    
    500,657Senior notes due February
2013, interest at 9.25%
accrued and payable
semi-annually, unsecured
(b)
    
    
    
    
    
    
    15,341Senior notes due December
2017, interest at 9.50%
accrued and payable
semi-annually, unsecured
(c)
    
    
    211,536
    
    
    
    224,031Subordinated convertible
notes due January 2012,
interest at 8.5% accrued
and payable semi-annually
(d)
    
    
    26,138
    
    
    
    31,707Credit agreement with a
lender with respect to a
revolving credit facility
of C$40 million (e)
    
    
    
    
    
    
    15,016Loan payable to the
noncontrolling
shareholder of the
Stendal mill (f)
    
    
    31,804
    
    
    
    31,365Credit agreement with a
bank with respect to a
revolving credit facility
of 25,000 (g)
    
    
    
    
    
    
    Investment loan
agreement with a lender
with respect to the wash
press project at the
Rosenthal mill of 4,351
(h)
    
    
    3,263
    
    
    
    3,807Credit agreement with a
bank with respect to a
revolving credit facility
of 3,500 (i)
    
    
    
    
    
    
    758,815
    
    
    
    821,924Less: current portion
    
    
    (45,393
    )
    
    
    (39,596
    )Debt, less current portion
    
    
    713,422
    
    
    
    782,328
  Matures
    
    Amount2011
    
    
    9,1262012(1)
    
    
    51,8102013
    
    
    41,0882014
    
    
    40,5442015
    
    
    44,000Thereafter
    
    
    572,247
    758,815
 
 (1)
    
    Including subordinated convertible notes due 2012 of 26,138 recorded as current debt as at
March 31, 2011.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 (a)
    
    Note payable to bank, included in a total loan facility of 827,950 to finance the
construction related to the Stendal mill (Stendal Loan Facility), interest at rates varying
from Euribor plus 0.90% to Euribor plus 1.58% (rates on amounts of borrowing at March 31, 2011
range from 2.43% to 3.22%), principal due in required installments beginning September 30,
2006 until September 30, 2017, collateralized by the assets of the Stendal mill, with 48% and
32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt,
respectively, of up to 433,573 of outstanding principal, subject to a debt service reserve
account required to pay amounts due in the following twelve months under the terms of the
Stendal Loan Facility; payment of dividends is only permitted if certain cash flow
requirements are met.
 On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan
Facility. The amendment deferred approximately 164,000 of scheduled principal payments until
the maturity date, September 30, 2017. The amendment also provided for a 100% cash sweep,
referred to as the Cash Sweep, of any cash, in excess of a 15,000 working capital reserve
and the Guarantee Amount as described in Note 10,
held by Stendal which will be used first to fund the debt service reserve account to a level
sufficient to service the amounts due and payable under the Stendal Loan Facility during the
then following 12 months, or Fully Funded, and second to prepay the deferred principal
amounts. As at March 31, 2011, the debt service reserve balance was approximately 7,000.
Effective April 1, 2011, the debt service reserve balance was increased to approximately
28,300.
 (b)
    
    In February 2005, the Company issued $310 million of senior notes due February 2013 (2013
Notes), which bore interest at 9.25% accrued and payable semi-annually, and were unsecured.
 On November 17, 2010, the Company used the proceeds from a private offering of $300 million
senior notes due 2017, described in Note 5(c) below and cash on hand to complete a tender offer
to repurchase approximately $289 million aggregate principal amount of its 2013 Notes. Pursuant
to the FASBs Accounting Standards Codification No. 405, Liabilities  Extinguishment of
Liabilities (ASC 405-20), the Company concluded that the tendering of the 2013 Notes met the
definition of a debt extinguishment. In connection with this tender offer and pursuant to FASBs
Accounting Standards Codification No. 470-50, Debt-Modifications and Extinguishments (ASC
470-50), the Company recorded approximately 7,500 to the loss on extinguishment of debt line
in the Consolidated Statement of Operations which included the tender premium paid and the
write-off of unamortized debt issue costs.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 On February 15, 2011, the Company redeemed for cash all of its outstanding 2013 Notes, for a
price equal to 100% of the principal amount of $20.5 million, plus accrued and unpaid interest
to, but not including February 15, 2011. In total, the Company paid approximately $21.5 million
(15,900) in connection with the redemption of the 2013 Notes.
 (c)
    
    On November 17, 2010, the Company completed a private offering of $300 million in aggregate
principal amount of Senior Notes due 2017 (2017 Notes). The proceeds from this offering were
used to finance the tender offer and consent solicitation for approximately $289 million of
the Companys 2013 Notes, (see Note 5(b)). The 2017 Notes were issued at a price of 100% of
their principal amount. The 2017 Notes will mature on December 1, 2017 and bear interest at
9.5% which is accrued and payable semi-annually.
 The 2017 Notes are general unsecured senior obligations of the Company. The 2017 Notes rank
equal in right of payment with all existing and future indebtedness of the Company and senior in
right of payment to any current or future subordinated indebtedness of the Company. The 2017
Notes are effectively junior in right of payment to all borrowings of the Companys restricted
subsidiaries, including borrowings under the Companys credit agreements which are secured by
certain assets of its restricted subsidiaries.
 The Company may redeem all or a part of the 2017 Notes, upon not less than 30 or more than 60
days notice, at the redemption prices (expressed as percentages of principal amount) equal to
104.75% for the twelve month period beginning on December 1, 2014, 102.38% for the twelve month
period beginning on December 1, 2015, and 100.00% beginning on December 1, 2016 and at any time
thereafter, plus accrued and unpaid interest.
 (d)
    
    In December, 2009, the Company exchanged approximately $43.3 million of Subordinated
Convertible Notes due October 2010 (the 2010 Notes) through two private exchange agreements
with the holders thereof for approximately $43.8 million of Subordinated Convertible Notes due
January 2012 (the 2012 Notes). On January 22, 2010, through an exchange offer with the
remaining holders of the 2010 Notes, the Company exchanged a further $21.7 million of 2010
Notes for approximately $22.0 million of the Companys 2012 Notes. The Company recognized both
exchange transactions of the Subordinated Convertible Notes as extinguishments of debt in
accordance with ASC 470-50,because the fair value of the embedded conversion option changed
by more than 10% in both transactions. During 2010, the Company recognized a loss of 929 as a
result of the January 22, 2010 exchange. The loss was determined using the fair market value
prevailing at the time of the transaction, and will be accreted to income through to January
2012 through interest expense yielding an effective interest rate of approximately 3% on the
January 22, 2010 exchange.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 The 2012 Notes bear interest at 8.50%, accrued and payable semi-annually, are convertible at any
time by the holder into common shares of the Company at $3.30 per share and are unsecured. The
Company may redeem for cash all or a portion of the notes on or after July 15, 2011 at 100% of
the principal amount of the notes plus accrued interest up to the redemption date. During the
three months ended March 31, 2011, approximately $6.0 million of Subordinated Convertible Notes
due January 2012 were converted into 1,828,178 shares, respectively. The Company recorded a debt
conversion expense of approximately 0.1 million during the three months ended March 31, 2011,
as a result of the conversions, which is included within interest expense in the Interim
Consolidated Statements of Operations.
 (e)
    
    Credit agreement with respect to a revolving credit facility of C$40.0 million for the Celgar
mill. The credit agreement matures May 2013. Borrowings under the credit agreement are
collateralized by the mills inventory and receivables and are restricted by a borrowing base
calculated on the mills inventory and receivables. Canadian dollar denominated amounts bear
interest at bankers acceptance plus 3.75% or Canadian prime plus 2.00%. U.S. dollar
denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. During the
three months ended March 31, 2011, the Company fully repaid this facility. As at March 31,
2011, approximately C$2.1 million of this facility was supporting letters of credit, leaving
approximately C$35.0 million undrawn.
 (f)
    
    A loan payable by the Stendal mill to its noncontrolling shareholder bears interest at 7.00%,
and is accrued semi-annually. The loan payable is unsecured, subordinated to all liabilities
of the Stendal mill, non-recourse to the Company and its restricted subsidiaries, and is due
in 2017. The balance includes principal and accrued interest. During the first quarter of
2010, the noncontrolling shareholder converted 6,275 of accrued interest into a capital
contribution.
 (g)
    
    A 25,000 working capital facility at the Rosenthal mill that matures in December 2012.
Borrowings under the facility are collateralized by the mills inventory and receivables and
bear interest at Euribor plus 3.50%. As at March 31, 2011, approximately 2,200 of this
facility was supporting bank guarantees leaving approximately 22,800 undrawn.
 (h)
    
    On August 19, 2009 the Company finalized an investment loan agreement with a lender relating
to the new wash press at the Rosenthal mill. The four-year amortizing investment loan was
completed with a total facility of 4,351 bearing interest at the rate of Euribor plus 2.75%.
Borrowings under this agreement are secured by the new wash press equipment. As at March 31,
2011, this facility was drawn by 3,263 and was accruing interest at a rate of 4.07%.
 (i)
    
    On February 8, 2010 the Rosenthal mill finalized a credit agreement with a lender for a
3,500 facility maturing in December 2012. Borrowings under this facility will bear interest
at the rate of the 3-month Euribor plus 3.50% and are secured by certain land at the Rosenthal
mill. As at March 31, 2011, this facility was undrawn.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 6. Derivative Transactions
     Note 7. Pension and Other Post-Retirement Benefit Obligations




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 7. Pension and Other Post-Retirement Benefit Obligations (continued)
  Three Months Ended March 31,2011
    
    
    2010Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    22
    
    
    
    120
    
    
    
    19
    
    
    
    93Interest cost
    
    
    385
    
    
    
    208
    
    
    
    397
    
    
    
    183Expected return on plan assets
    
    
    (395
    )
    
    
    
    
    
    
    (371
    )
    
    
    Recognized net loss (gain)
    
    
    130
    
    
    
    (18
    )
    
    
    104
    
    
    
    (74
    )Net periodic benefit cost
    
    
    142
    
    
    
    310
    
    
    
    149
    
    
    
    202
 Note 8. Share Capital
 Common shares
    Preferred shares




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (In thousands of Euros, except per share data)
 Note 9. Financial Instruments
  March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCash and cash equivalents
    
    
    123,241
    
    
    
    123,241
    
    
    
    99,022
    
    
    
    99,022Investments
    
    
    258
    
    
    
    258
    
    
    
    275
    
    
    
    275Receivables
    
    
    112,991
    
    
    
    112,991
    
    
    
    121,709
    
    
    
    121,709Note receivable
    
    
    2,428
    
    
    
    2,428
    
    
    
    2,978
    
    
    
    2,978Accounts payable and accrued expenses
    
    
    108,765
    
    
    
    108,765
    
    
    
    84,873
    
    
    
    84,873Debt
    
    
    758,815
    
    
    
    839,528
    
    
    
    821,924
    
    
    
    847,875Interest rate derivative contracts liability
    
    
    38,730
    
    
    
    38,730
    
    
    
    50,973
    
    
    
    50,973
   identical
 similar




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments (continued)
   Fair value measurements at March 31, 2011 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    258LiabilitiesDerivatives (b) Interest rate swaps
    
    
    
    
    
    
    38,730
    
    
    
    
    
    
    
    38,730
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (yield curves observable at specific intervals). Note 10. Commitments and Contingencies




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 11. Subsequent Events




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheets
 March 31, 2011Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    57,202
    
    
    
    66,039
    
    
    
    
    
    
    
    123,241Receivables
    
    
    63,063
    
    
    
    49,928
    
    
    
    
    
    
    
    112,991Inventories
    
    
    59,663
    
    
    
    36,745
    
    
    
    
    
    
    
    96,408Prepaid expenses and other
    
    
    6,582
    
    
    
    4,205
    
    
    
    
    
    
    
    10,787Deferred income tax
    
    
    22,414
    
    
    
    
    
    
    
    
    
    
    
    22,414Total current assets
    
    
    208,924
    
    
    
    156,917
    
    
    
    
    
    
    
    365,841Long-term assetsProperty, plant and equipment
    
    
    350,034
    
    
    
    480,061
    
    
    
    
    
    
    
    830,095Deferred note issuance and other
    
    
    6,437
    
    
    
    4,024
    
    
    
    
    
    
    
    10,461Due from unrestricted group
    
    
    82,303
    
    
    
    
    
    
    
    (82,303
    )
    
    
    Note receivable
    
    
    890
    
    
    
    
    
    
    
    
    
    
    
    890Total assets
    
    
    648,588
    
    
    
    641,002
    
    
    
    (82,303
    )
    
    
    1,207,287LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    53,444
    
    
    
    55,321
    
    
    
    
    
    
    
    108,765Pension and other post-retirement benefit
obligations
    
    
    703
    
    
    
    
    
    
    
    
    
    
    
    703Debt
    
    
    27,226
    
    
    
    18,167
    
    
    
    
    
    
    
    45,393Total current liabilities
    
    
    81,373
    
    
    
    73,488
    
    
    
    
    
    
    
    154,861Long-term liabilitiesDebt
    
    
    213,711
    
    
    
    499,711
    
    
    
    
    
    
    
    713,422Due to restricted group
    
    
    
    
    
    
    82,303
    
    
    
    (82,303
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    38,730
    
    
    
    
    
    
    
    38,730Pension and other post-retirement benefit
obligations
    
    
    23,412
    
    
    
    
    
    
    
    
    
    
    
    23,412Capital leases and other
    
    
    6,990
    
    
    
    4,617
    
    
    
    
    
    
    
    11,607Deferred income tax
    
    
    7,947
    
    
    
    
    
    
    
    
    
    
    
    7,947Total liabilities
    
    
    333,433
    
    
    
    698,849
    
    
    
    (82,303
    )
    
    
    949,979EQUITYTotal shareholders equity (deficit)
    
    
    315,155
    
    
    
    (39,889
    )
    
    
    
    
    
    
    275,266Noncontrolling interest (deficit)
    
    
    
    
    
    
    (17,958
    )
    
    
    
    
    
    
    (17,958
    )Total liabilities and equity
    
    
    648,588
    
    
    
    641,002
    
    
    
    (82,303
    )
    
    
    1,207,287




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheets
 December 31, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    50,654
    
    
    
    48,368
    
    
    
    
    
    
    
    99,022Receivables
    
    
    70,865
    
    
    
    50,844
    
    
    
    
    
    
    
    121,709Inventories
    
    
    60,910
    
    
    
    41,309
    
    
    
    
    
    
    
    102,219Prepaid expenses and other
    
    
    6,840
    
    
    
    4,520
    
    
    
    
    
    
    
    11,360Deferred income tax
    
    
    22,570
    
    
    
    
    
    
    
    
    
    
    
    22,570Total current assets
    
    
    211,839
    
    
    
    145,041
    
    
    
    
    
    
    
    356,880Long-term assetsProperty, plant and equipment
    
    
    362,274
    
    
    
    484,493
    
    
    
    
    
    
    
    846,767Deferred note issuance and other
    
    
    6,903
    
    
    
    4,179
    
    
    
    
    
    
    
    11,082Due from unrestricted group
    
    
    80,582
    
    
    
    
    
    
    
    (80,582
    )
    
    
    Note receivable
    
    
    1,346
    
    
    
    
    
    
    
    
    
    
    
    1,346Total assets
    
    
    662,944
    
    
    
    633,713
    
    
    
    (80,582
    )
    
    
    1,216,075LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    44,015
    
    
    
    40,858
    
    
    
    
    
    
    
    84,873Pension and other post-retirement benefit
obligations
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    728Debt
    
    
    16,429
    
    
    
    23,167
    
    
    
    
    
    
    
    39,596Total current liabilities
    
    
    61,172
    
    
    
    64,025
    
    
    
    
    
    
    
    125,197Long-term liabilitiesDebt
    
    
    273,473
    
    
    
    508,855
    
    
    
    
    
    
    
    782,328Due to restricted group
    
    
    
    
    
    
    80,582
    
    
    
    (80,582
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    50,973
    
    
    
    
    
    
    
    50,973Pension and other post-retirement benefit
obligations
    
    
    24,236
    
    
    
    
    
    
    
    
    
    
    
    24,236Capital leases and other
    
    
    7,154
    
    
    
    4,856
    
    
    
    
    
    
    
    12,010Deferred income tax
    
    
    7,768
    
    
    
    
    
    
    
    
    
    
    
    7,768Total liabilities
    
    
    373,803
    
    
    
    709,291
    
    
    
    (80,582
    )
    
    
    1,002,512EQUITYTotal shareholders equity (deficit)
    
    
    289,141
    
    
    
    (53,073
    )
    
    
    
    
    
    
    236,068Noncontrolling interest (deficit)
    
    
    
    
    
    
    (22,505
    )
    
    
    
    
    
    
    (22,505
    )Total liabilities and equity
    
    
    662,944
    
    
    
    633,713
    
    
    
    (80,582
    )
    
    
    1,216,075




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended March 31, 2011Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    115,226
    
    
    
    95,232
    
    
    
    
    
    
    
    210,458Energy
    
    
    5,846
    
    
    
    7,831
    
    
    
    
    
    
    
    13,677121,072
    
    
    
    103,063
    
    
    
    
    
    
    
    224,135Operating costs
    
    
    85,991
    
    
    
    77,364
    
    
    
    
    
    
    
    163,355Operating depreciation and amortization
    
    
    7,614
    
    
    
    6,462
    
    
    
    
    
    
    
    14,076Selling, general and administrative expenses and other
    
    
    6,191
    
    
    
    3,869
    
    
    
    
    
    
    
    10,06099,796
    
    
    
    87,695
    
    
    
    
    
    
    
    187,491Operating income (loss)
    
    
    21,276
    
    
    
    15,368
    
    
    
    
    
    
    
    36,644Other income (expense)Interest expense
    
    
    (7,273
    )
    
    
    (9,851
    )
    
    
    1,218
    
    
    
    (15,906
    )Investment income (loss)
    
    
    1,279
    
    
    
    266
    
    
    
    (1,218
    )
    
    
    327Foreign exchange gain (loss) on debt
    
    
    1,111
    
    
    
    
    
    
    
    
    
    
    
    1,111Gain (loss) on derivative instruments
    
    
    
    
    
    
    12,243
    
    
    
    
    
    
    
    12,243Total other income (expense)
    
    
    (4,883
    )
    
    
    2,658
    
    
    
    
    
    
    
    (2,225
    )Income (loss) before income taxes
    
    
    16,393
    
    
    
    18,026
    
    
    
    
    
    
    
    34,419Income tax benefit (provision)
    
    
    (524
    )
    
    
    (295
    )
    
    
    
    
    
    
    (819
    )Net income (loss)
    
    
    15,869
    
    
    
    17,731
    
    
    
    
    
    
    
    33,600Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (4,547
    )
    
    
    
    
    
    
    (4,547
    )Net income (loss) attributable to common shareholders
    
    
    15,869
    
    
    
    13,184
    
    
    
    
    
    
    
    29,053
 Three Months Ended March 31, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    106,417
    
    
    
    64,704
    
    
    
    
    
    
    
    171,121Energy
    
    
    3,375
    
    
    
    5,756
    
    
    
    
    
    
    
    9,131109,792
    
    
    
    70,460
    
    
    
    
    
    
    
    180,252Operating costs
    
    
    81,665
    
    
    
    58,744
    
    
    
    
    
    
    
    140,409Operating depreciation and amortization
    
    
    7,213
    
    
    
    6,511
    
    
    
    
    
    
    
    13,724Selling, general and administrative expenses and other
    
    
    4,841
    
    
    
    3,254
    
    
    
    
    
    
    
    8,09593,719
    
    
    
    68,509
    
    
    
    
    
    
    
    162,228Operating income (loss)
    
    
    16,073
    
    
    
    1,951
    
    
    
    
    
    
    
    18,024Other income (expense)Interest expense
    
    
    (7,320
    )
    
    
    (10,264
    )
    
    
    1,161
    
    
    
    (16,423
    )Investment income (loss)
    
    
    1,239
    
    
    
    16
    
    
    
    (1,161
    )
    
    
    94Foreign exchange gain (loss) on debt
    
    
    (5,231
    )
    
    
    
    
    
    
    
    
    
    
    (5,231
    )Gain (loss) on extinguishment of debt
    
    
    (929
    )
    
    
    
    
    
    
    
    
    
    
    (929
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    (6,546
    )
    
    
    
    
    
    
    (6,546
    )Total other income (expense)
    
    
    (12,241
    )
    
    
    (16,794
    )
    
    
    
    
    
    
    (29,035
    )Income (loss) before income taxes
    
    
    3,832
    
    
    
    (14,843
    )
    
    
    
    
    
    
    (11,011
    )Income tax benefit (provision)
    
    
    (161
    )
    
    
    (43
    )
    
    
    
    
    
    
    (204
    )Net income (loss)
    
    
    3,671
    
    
    
    (14,886
    )
    
    
    
    
    
    
    (11,215
    )Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    3,669
    
    
    
    
    
    
    
    3,669Net income (loss) attributable to common shareholders
    
    
    3,671
    
    
    
    (11,217
    )
    
    
    
    
    
    
    (7,546
    )




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Three Months Ended March 31, 2011Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    15,869
    
    
    
    13,184
    
    
    
    29,053Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    (12,243
    )
    
    
    (12,243
    )Foreign exchange (gain) loss on debt
    
    
    (1,111
    )
    
    
    
    
    
    
    (1,111
    )Depreciation and amortization
    
    
    7,676
    
    
    
    6,462
    
    
    
    14,138Accretion expense (income)
    
    
    470
    
    
    
    
    
    
    
    470Noncontrolling interest
    
    
    
    
    
    
    4,547
    
    
    
    4,547Stock compensation expense
    
    
    2,068
    
    
    
    
    
    
    
    2,068Pension and other post-retirement expense, net of funding
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Other
    
    
    133
    
    
    
    551
    
    
    
    684Changes in current assets and liabilitiesReceivables
    
    
    6,259
    
    
    
    918
    
    
    
    7,177Inventories
    
    
    (251
    )
    
    
    4,564
    
    
    
    4,313Accounts payable and accrued expenses
    
    
    10,962
    
    
    
    14,426
    
    
    
    25,388Other(1)
    
    
    (1,722
    )
    
    
    2,081
    
    
    
    359Net cash from (used in) operating activities
    
    
    40,339
    
    
    
    34,490
    
    
    
    74,829Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (5,708
    )
    
    
    (2,361
    )
    
    
    (8,069
    )Proceeds on sale of property, plant and equipment
    
    
    3
    
    
    
    350
    
    
    
    353Notes receivable
    
    
    396
    
    
    
    
    
    
    
    396Net cash from (used in) investing activities
    
    
    (5,309
    )
    
    
    (2,011
    )
    
    
    (7,320
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (15,768
    )
    
    
    (14,583
    )
    
    
    (30,351
    )Repayment of capital lease obligations
    
    
    (522
    )
    
    
    (333
    )
    
    
    (855
    )Proceeds from (repayment of) credit facilities, net
    
    
    (14,652
    )
    
    
    
    
    
    
    (14,652
    )Proceeds from government grants
    
    
    4,004
    
    
    
    108
    
    
    
    4,112Net cash from (used in) financing activities
    
    
    (26,938
    )
    
    
    (14,808
    )
    
    
    (41,746
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,544
    )
    
    
    
    
    
    
    (1,544
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,548
    
    
    
    17,671
    
    
    
    24,219Cash and cash equivalents, beginning of period
    
    
    50,654
    
    
    
    48,368
    
    
    
    99,022Cash and cash equivalents, end of period
    
    
    57,202
    
    
    
    66,039
    
    
    
    123,241
 
 (1)
    
    Includes intercompany working capital related transactions.




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Three Months Ended March 31, 2010Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    3,671
    
    
    
    (11,217
    )
    
    
    (7,546
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    6,546
    
    
    
    6,546Foreign exchange loss (gain) on debt
    
    
    5,231
    
    
    
    
    
    
    
    5,231Loss (gain) on extinguishment of debt
    
    
    929
    
    
    
    
    
    
    
    929Depreciation and amortization
    
    
    7,310
    
    
    
    6,511
    
    
    
    13,821Accretion expense (income)
    
    
    431
    
    
    
    
    
    
    
    431Noncontrolling interest
    
    
    
    
    
    
    (3,669
    )
    
    
    (3,669
    )Stock compensation expense
    
    
    506
    
    
    
    
    
    
    
    506Pension and other post-retirement expense, net of funding
    
    
    194
    
    
    
    
    
    
    
    194Other
    
    
    388
    
    
    
    615
    
    
    
    1,003Changes in current assets and liabilitiesReceivables
    
    
    (16,382
    )
    
    
    (762
    )
    
    
    (17,144
    )Inventories
    
    
    (193
    )
    
    
    (5,066
    )
    
    
    (5,259
    )Accounts payable and accrued expenses
    
    
    (2,845
    )
    
    
    10,800
    
    
    
    7,955Other(1)
    
    
    1,062
    
    
    
    (2,343
    )
    
    
    (1,281
    )Net cash from (used in) operating activities
    
    
    302
    
    
    
    1,415
    
    
    
    1,717Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (4,927
    )
    
    
    (923
    )
    
    
    (5,850
    )Proceeds on sale of property, plant and equipment
    
    
    54
    
    
    
    333
    
    
    
    387Note receivable
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Net cash from (used in) investing activities
    
    
    (4,957
    )
    
    
    (590
    )
    
    
    (5,547
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    
    
    
    
    (8,250
    )
    
    
    (8,250
    )Repayment of capital lease obligations
    
    
    (382
    )
    
    
    (622
    )
    
    
    (1,004
    )Proceeds from government investment grants
    
    
    9,415
    
    
    
    
    
    
    
    9,415Net cash from (used in) financing activities
    
    
    9,033
    
    
    
    (8,872
    )
    
    
    161Effect of exchange rate changes on cash and cash equivalents
    
    
    1,070
    
    
    
    
    
    
    
    1,070Net increase (decrease) in cash and cash equivalents
    
    
    5,448
    
    
    
    (8,047
    )
    
    
    (2,599
    )Cash and cash equivalents, beginning of period
    
    
    20,635
    
    
    
    30,656
    
    
    
    51,291Cash and cash equivalents, end of period
    
    
    26,083
    
    
    
    22,609
    
    
    
    48,692
 
 (1)
    
    Includes intercompany working capital related transactions.




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Results of Operations
 General
   Current Market Environment




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##### Table of Contents



First Quarter Operational Snapshot
  Three Months EndedMarch 31,2011
    
    
    2010Pulp Production (000 ADMTs)
    
    
    358.6
    
    
    
    329.5Scheduled Production Downtime (000 ADMTs)
    
    
    3.7
    
    
    
    18.2Pulp Sales (000 ADMTs)
    
    
    349.0
    
    
    
    332.9Pulp Revenues (in millions)
    
    
    210.5
    
    
    
    171.1NBSK pulp list prices in Europe ($/ADMT)
    
    $
    960
    
    
    $
    860NBSK pulp list prices in Europe (/ADMT)
    
    
    702
    
    
    
    621Average pulp sales realizations (/ADMT)(1)
    
    
    593
    
    
    
    507Energy Production (000 MWh)
    
    
    407.8
    
    
    
    337.7Energy Sales (000 MWh)
    
    
    157.9
    
    
    
    107.1Energy Revenue (in millions)
    
    
    13.7
    
    
    
    9.1Average energy sales realizations (/MWh)
    
    
    87
    
    
    
    85Average Spot Currency Exchange Rates / $(2)
    
    
    0.7304
    
    
    
    0.7240C$ / $(2)
    
    
    0.9856
    
    
    
    1.0401C$ / (3)
    
    
    1.3487
    
    
    
    1.4406
 
 (1)
    
    Average realized pulp prices for the periods indicated reflect customer discounts and pulp
price movements between the order and shipment date.(2)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(3)
    
    Average Bank of Canada noon spot rates over the reporting period. Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010




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Three Months EndedMarch 31,2011
    
    
    2010(in thousands)Net income (loss) attributable to common shareholders
    
    
    29,053
    
    
    
    (7,546
    )Net income (loss) attributable to noncontrolling interest
    
    
    4,547
    
    
    
    (3,669
    )Income taxes (benefits)
    
    
    819
    
    
    
    204Interest expense
    
    
    15,906
    
    
    
    16,423Investment (income) loss
    
    
    (327
    )
    
    
    (94
    )Foreign exchange (gain) loss on debt
    
    
    (1,111
    )
    
    
    5,231Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    929Loss (gain) on derivative instruments
    
    
    (12,243
    )
    
    
    6,546Operating income (loss)
    
    
    36,644
    
    
    
    18,024Add: Depreciation and amortization
    
    
    14,138
    
    
    
    13,821Operating EBITDA
    
    
    50,782
    
    
    
    31,845
 Liquidity and Capital Resources
  March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Financial PositionCash and cash equivalents
    
    
    123,241
    
    
    
    99,022Working capital
    
    
    210,980
    
    
    
    231,683Property, plant and equipment
    
    
    830,095
    
    
    
    846,767Total assets
    
    
    1,207,287
    
    
    
    1,216,075Long-term liabilities
    
    
    795,118
    
    
    
    877,315Total equity
    
    
    257,308
    
    
    
    213,563
  Sources and Uses of Funds




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Debt Covenants
  Cash Flow Analysis
 Cash Flows from Operating Activities.
   Cash Flows from Investing Activities.
 Cash Flows from Financing Activities.




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Capital Resources
  Future Liquidity
  Contractual Obligations and Commitments
  Foreign Currency
     Results of Operations of the Restricted Group under our Senior Note Indenture




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Restricted Group Results  Three Months Ended March 31, 2011 Compared to Three Months Ended March
31, 2010




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##### Table of Contents



Three Months EndedMarch 31,2011
    
    
    2010(in thousands)Restricted Group(1)Net income (loss)
    
    
    15,869
    
    
    
    3,671Income taxes (benefits)
    
    
    524
    
    
    
    161Interest expense
    
    
    7,273
    
    
    
    7,320Investment (income) loss
    
    
    (1,279
    )
    
    
    (1,239
    )Foreign exchange (gain) loss on debt
    
    
    (1,111
    )
    
    
    5,231Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    929Operating income (loss)
    
    
    21,276
    
    
    
    16,073Add: Depreciation and amortization
    
    
    7,676
    
    
    
    7,310Operating EBITDA
    
    
    28,952
    
    
    
    23,383
 
 (1)
    
    See Note 12 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.




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Liquidity and Capital Resources of the Restricted Group
  March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    57,202
    
    
    
    50,654Working capital
    
    
    127,551
    
    
    
    150,667Property, plant and equipment
    
    
    350,034
    
    
    
    362,274Total assets
    
    
    648,588
    
    
    
    662,944Long-term liabilities
    
    
    252,060
    
    
    
    312,631Total equity
    
    
    315,155
    
    
    
    289,141
 
 (1)
    
    See Note 12 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.   Critical Accounting Policies




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New Accounting Standards
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
  
    
    the highly cyclical nature of our business;
 
    
    our level of indebtedness could negatively impact our financial condition and
results of operations;
 
    
    a weak global economy could adversely affect our business and financial results and
have a material adverse effect on our liquidity and capital resources;
 
    
    in a weak pulp price and demand environment there can be no assurance that we will
be able to generate sufficient cash flows, to service, repay or refinance debt;
 
    
    cyclical fluctuations in the price and supply of our raw materials could adversely
affect our business;
 
    
    we operate in highly competitive markets;
 
    
    we are exposed to currency exchange rate and interest rate fluctuations;
 
    
    increases in our capital expenditures or maintenance costs could have a material
adverse effect on our cash flow and our ability to satisfy our debt obligations;
 
    
    we use derivatives to manage certain risks which has caused significant fluctuations
in our operating results;
 
    
    we are subject to extensive environmental regulation and we could have environmental
liabilities at our facilities;
 
    
    our Celgar energy project may not generate the results or benefits we expect;
 
    
    our business is subject to risks associated with climate change and social
government responses thereto;
 
    
    we are subject to risks related to our employees;
 
    
    we rely on German federal and state government grants and guarantees;




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
    
    risks relating to our participation in the European Union Emissions Trading Scheme
and the application of Germanys Renewable Energy Resources Act;
 
    
    we are dependent on key personnel;
 
    
    we may experience material disruptions to our production;
 
    
    we may incur losses as a result of unforeseen or catastrophic events, including the
emergence of a pandemic, terrorist attacks or natural disasters;
 
    
    our insurance coverage may not be adequate; and
 
    
    we rely on third parties for transportation services.
  Cyclical Nature of Business
 Revenues




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Costs
  Currency




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




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##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures. Securities Exchange Act of 1934
  Changes in Internal Controls.




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PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    
    Section 302 Certification of Chief Executive Officer31.2
    
    
    Section 302 Certification of Chief Financial Officer32.1
    *
    
    Section 906 Certification of Chief Executive Officer32.2
    *
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein.




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SIGNATURES
 Securities Exchange Act of 1934
 MERCER INTERNATIONAL INC.By:
    /s/ David M. GandossiDavid M. GandossiSecretary and Chief Financial Officer