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

Pulp Segment

Our pulp mills are some of the newestnewer and mostmore modern 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, sinceas a result of the relative age of 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 modernWe serve 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 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 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 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:

(5)

Our strategic pulp mill locations position us well to serve customers in Europe, Asia and North America. We primarily work directly with customers to capitalize on our geographic diversity, coordinate sales and enhance customer relationships. We believe our ability to deliver high-quality pulp on a timely basis and our customer service makemakes us a preferred supplier for many customers.

(4)

Wood Products Segment

WeOur wood products segment consists of the manufacture, sellsale and distributedistribution of lumber, electricity and other wood residuals at theour Friesau mill. It is one of Germany's largest sawmills.

Our Friesau mill whichhas an annual production capacity of approximately 550 MMfbm of lumber and 13 MW of electrical generation from a modern biomass fueled cogeneration power plant built in 2009. The Friesau mill is located approximately 16 kilometers west of our Rosenthal mill and has historically been one of the Rosenthal mill’s largest fiber suppliers.

The mill produces lumber for European, U.S. and other lumber export markets.

The 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 thefinishing. The U.S. market is driven primarily by demand from new housing starts and home renovation activities and dimensions and finishing are generally standardized.

Additionally, lumber production and sales in Europe 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 lumber revenues from April 12, 2017, beingfor the date we acquired the Friesau mill, to December 31, 2017 and the year ended December 31, 2018:periods indicated:

(5)

The Friesau mill generates electricity for minimal incremental costs, all ofwhichof which is sold,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 green power tariff that runs to 2029.

The following table sets out the amount of surplus energy we produced and sold and revenues from the sale of surplus energy by our Friesau mill for the periods indicated.

(6)

Corporate Structure, History and Development of Business

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).

The following simplified chart sets out our principal operating subsidiaries, their jurisdictions of organization, their principal activities and their annual pulp or lumberproductionlumber production 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 acquiredby acquiring our Rosenthal mill. Inmill and in 1999 we completed a major capital project to convertconverted it to the production of kraft pulp. Subsequent capital investments and efficiency improvements reduced emissions and energy costs, increased the mill’s annual production capacity and enabled the production of tall oil.

In September 2004, we completed construction ofexpanded our pulp operations by constructing the Stendal mill at a cost of approximately $1.1 billion, which was financed through a combination of government grants, long-term project debt and equity. Subsequent capital investments and efficiency improvements have increased the mill’s annual production capacity and its generation of green energy.billion. We initially had a 63.6% interest in Stendal which increased over time through acquisitions and/or further investments until September 2014, when we acquired all of the economic interest in Stendal.

We expanded our pulp operations into Western Canada in February 2005 when we acquiredby acquiring the Celgar mill for $210.0 million plus defined working capital. Since its acquisition, we have effected several capital projectsin 2005 and other initiatives at the CelgarPeace River mill to increase its annual production capacity and its generation of green energy.in 2018.

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

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.Australia.

In December 2018, we significantly expanded our pulp business whenAugust 2021, we acquired MPRa cross-laminated timber facility referred to as the “CLT Facility” located near Spokane, Washington, for approximately $344.6 million$51.3 million. The facility is a state-of-the-art, near-new facility that produces cross-laminated timber, or “CLT”, for use in cash.construction and home building. It has a capacity of approximately 140,000 cubic meters of CLT. We believe it is one of the largest CLT facilities in North America and that it currently represents approximately 30% of North American manufacturing capacity. CLT is a wood panel product, made from adhering layers of solid-sawn lumber and is used as a more sustainable alternative to steel and concrete in building projects. We are currently ramping up the operations of the CLT Facility. Currently, its results are reflected in our financial results in “Corporate and Other Revenues”.

(6)

Corporate Strategy

(7)

Corporate Strategy

Our corporate strategy is to expand our asset and earnings base through organic growth and acquisitions, primarilygrow in Europe and North America. We pursue organic growth through active management and targeted capital expenditures to generate a high return by improving efficiency, reducing costs and 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 and wood processing. We seek to acquire interests in companies and assets primarily in the forest products business and related wood extractive businesses where we can leveragehave clear competencies while maintaining modern facilities and managing the integrity of our experiencebalance sheet and expertise in adding value throughliquidity, with a focused management approach.high standard of environmental, social and governance performance. Key elements of our strategy include:

Counteracting customers’ ability to substitute lower priced hardwood pulp for NBSK pulp isHowever, the requirement for strength and formation characteristics in finished goods.goods counters customers’ ability to substitute cheaper hardwood pulp for NBSK. 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.

(8)

Kraft pulp can be made in different grades, with varying technical specifications, for different end uses. Softwood kraft pulp is an important ingredient for tissue manufacturing and tissue demand tends to increase with living standards in developing countries. Softwood kraft pulp is also 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. NBSK pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price.

Markets

We believe that over 140145 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 approximately 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 20092012 and 2018,2021, worldwide demand for chemical market pulp overall for such period 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 2%1% per annum.

(10)

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

Estimated Global Chemical Market Pulp Demand

(9)

NBSK pulp demand is significantly impacted by global macro-economic trends.

Over the last several years macro-economicthere have been several key macro trends affecting worldwide NBSKthat have had a material effect on global pulp demand include:demand. Some of the trends have had a positive effect while others have had a negative effect on pulp demand.

Overby approximately 7.7 million ADMTs over the last ten years, demand for chemical softwood market pulp has grown in the emerging markets of Asia, particularly China and Eastern Europe.five years. In China, imports of chemical softwood market pulp grew overall by approximately 6% per annum between 2009for the period from 2012 to 2021 and 2018.it is a key driver of pulp demand and consumption. We believe the emerging markets now account for approximately 55%58% of total worldglobal demand for bleached softwood kraft market pulp and China itself now accounts for approximately 32%33% of global bleached softwood kraft market pulp demand compared to approximately 23%28% in 2009.2012.

Another positive macro trend affecting pulp demand has been the increase in usage and demand for tissue and hygiene products, particularly in China and emerging markets generally. This trend was further accelerated by the COVID-19 pandemic. A further positive trend affecting pulp demand was an increase in the global reliance on online delivery of products which has increased demand for packaging and specialty products.

An important negative in pulp demand has been the material decline in graphic and printing and writing paper demand. We believe a material portion of this decline will not return.

Further, paper demand in mature markets of North America, Europe and Japan has been declining or stagnating, which negatively impacts pulp demand in those markets. Western Europe currently accounts for approximately 24%22% of global bleached softwood kraft market pulp demand compared to approximately 30%28% in 2009.2012.

(11)

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

12 Month Rolling Bleached Softwood Kraft Pulp Deliveries to China

Growth(10)

The trends and changes in NBSK pulp demand by end use are reflected in China and other emerging markets has 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 production capacity has increased by approximately 5.6 million ADMTs 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.

The following chart which compares worldwide NBSK pulp demand by end use in each of 2003 and 2017 (the latest year for which figures are currently available):the periods indicated:

NBSK Pulp Demand by End Use

We believe 20182021 NBSK demand by end use was generally consistent with the trend in the chart above.

(12)

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 whenIn 2021, there iswas an increase in global and regional levelspulp capacity 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 89%, 93% and 92% in 2018, 2017 and 2016, respectively.

Between 2013 and 2018, we believe approximately 0.52.8 million ADMTs, primarily of pulp capacity was idled or shut down through mill closures or curtailments. Further, in efforts to improve environmental and safety standards, China closed “old” mills and removed about 15.6 million ADMTs.

In 2018, chemical pulp capacity increased by approximately 0.9 million ADMTs, consisting entirely of softwoodhardwood kraft pulp. Currently, we are not aware of any material2.9 million ADMTs of announced capacity increases primarily of NBSK or NBHK pulp in 2019. However, we cannot predict whether new capacity will be announced or may come online in the future. As pulp prices are highly cyclical, there can be no assurance that pulp prices will not decline in the future as a result of increases to the supply of kraft pulp. While not a direct competitor to NBSK pulp, if any future increases of NBHK supply are not absorbed by demand growth, such supply 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.in 2022.

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.cyclical. Kraft pulp prices are generally quoted in dollars. Pricing is primarily influenced by the balance between supply and demand, as affected by global macro-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 3032 days’ supply.

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

(13)

As a corollary to changes in exchange rates between the dollar and the euro and Canadian dollar, a stronger dollar generally increases costs to customers of NBSK pulp producers and results in downward pressure on prices. Conversely, a weakening 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.

AsAlthough China is now the largest market globally for pulp, Northern Europe has also historically been the world’s largest market anda significant market. As NBSK pulp is thea premium grade of pulp, the European market NBSK list price is generallyat times used by the industry as a benchmark price by the industry.reference price. The third party industry quoted average European list prices for NBSK pulp since 20092012 have fluctuated between a low of approximately $575$760 per ADMT in 20092012 and a high of $1,230$1,345 per ADMT in 2018.2021.

(11)

The following chart sets out the changes in third party industry quoted list prices for NBSK pulp in Europe, as stated in dollars, Canadian dollars and euros for the periods indicated:

NBSK Pulp Price History (European Delivery)

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

A producer’s net sales realizations in Europe and North America are third party industry quoted list prices, net of customer discounts, rebates and other selling concessions. Over the last three years, these have increased as producers compete for customersOur sales to China and sales. The nature of the pricing structure in Asia is different in that, while quoted list prices tendgenerally are closer to bea net price with significantly lower than Europe, customeror little discounts and rebates are much lower, resulting inrebates. As a result, our net sales realizations thatin China are generally similar to other markets.

(14)The following table sets out third party industry quoted list prices for NBSK pulp in Europe and North America and net prices for NBSK pulp in China as of the dates indicated:

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 2005 and 2018:for the periods indicated:

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 kraft pulp industry. We generally have weaker pulp demand in Europe during the summer holiday months and in China in the period relating to itsthe lunar new year.year and in Europe during the summer holiday months. 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 largeThe pulp market is highly fragmented and highly competitive.competitive with many producers competing globally. Producers ranging from small independent manufacturers to large integrated companies produce pulp worldwide. OurPulp is generally a commodity product and our pulp and customer services competecompetes with similar products manufactured and distributed by others.many other producers. While many factors influence our competitive position, particularly in weak economic times, a keyprimary factor is price. Other factors include quality, service, qualityaccess to reasonably priced fiber 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 AsiaIlim, Paper Excellence, Canfor Pulp, and Paper.SCA.

(15)

Pulp Production

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

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.(13)

The NBSK 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. 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 NBSK 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 NBSK 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 Energy and Chemicals at Our Mills

General

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

(16)

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 and, in the case of the Peace River mill,or into the regional electricity market. As a result, we have benefited from green energy legislation, incentives and commercialization that have developed over the last decadedecades 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 us with a stable revenue source unrelated to pulp or lumber prices. Since our energy and chemical production areby-products of our production 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.

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

Electricity Generation and Exports

1.5 million tonnes Pulp Production & 398.7 MMfbm Lumber Production 1.5 million tonnes Pulp Production & 281.3 MMfbm Lumber Production 1.4 million tonnes Pulp Production 1.5 million tonnes Pulp Production 1.5 million tonnes Pulp Production

(14)

(17)

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

Energy and Chemical Revenue

Germany

Until December 31, 2020, all of our German Pulp Mills and Friesau Mill

Our German pulp mills and the Friesau mill participateparticipated 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 fixedprovides for stable pricing on green energy. As of January 1, 2021, the prior special tariff for such electricity for a periodin respect of 20 years. Currently we expect such tariff to expire on December 31, 2020 for our Rosenthal mill December 31, 2024expired and it has since sold its surplus power at market rates which fluctuate over time. The special tariff for our Stendal mill andis in 2029 for the Friesau mill. Recent amendments to the Renewable Energy Act will extend the initial termseffect until December 31, 2024 and for our pulp mills for a further10-year period, based upon the price received in the last year prior to renewal, regressing at a rate of 8% per annum. Such amendments are subject to compliance with European Union, referred to as the “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.Friesau mill until 2029.

In 2018,2021, energy sales for our German pulp mills and the Friesau mill were $64.0approximately $82.4 million or 582,728616,033 MWh.

In 2018,connection with our Rosenthalfocus on the growing bio-energy market, we sell tall oil, a by-product of our pulp production process which is used as both a chemical additive and Stendal millsas a green energy source. In 2021, we generated $14.4approximately $7.3 million from the sale of tall oil aby-product of our production process, and other chemicals.chemicals from our pulp segment.

Canadian Pulp MillsCanada

TheOur Celgar mill hasis party to an electricity sales agreement with the British Columbia Hydro and Power Authority, referredprovincial energy utility for a ten-year term that expires in October 2030. Pursuant to as “B.C. Hydro”, for the sale of power generated, pursuant to whichagreement, the mill agreed to supply a minimummaximum of approximately 238,000127,000 MWh of surplus electrical energy annually to the utility over aten-year term. utility. We are pursuing “market” sales and other strategic initiatives with respect to the remainder of the mill’s surplus power.

The agreement expires in 2020.Peace River mill sells its surplus electricity into the Alberta market.

(18)

In 2018,2021, our Celgar millCanadian mills sold approximately 115,463160,586 MWh of renewable electricity for proceeds of approximately $9.9$15.5 million.

The 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.(15)

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 fixed 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 option of the joint venture.

Cash Production Costs

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

Production Costs

Our major costs of pulp production are fiber, labor, chemicals and energy.

Fiber

General

Fiber, comprised of wood chips and pulp logs, is our most significant operating expense for our pulp segment, representing about 57%45% of our pulp cash production costs in 2018.

2021. Further, fiber, in the form of sawlogs, represents about 80%75% of lumber cash production costs.costs in 2021.

(19)

Given the significance of fiber to our total operating expenses and our limited ability to control its 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. The Friesau mill consumes sawlogs and waste wood, which are cyclical in both price and supply.

Generally, the cost of wood chips, pulp logs and sawlogs is primarily affected by the supply and demand for lumber. Additionally, regional factors such asincluding harvesting levels, and weather conditions and insect infestations can also have a material effect on the supply, demand and price for fiber.

In Germany, the priceWhile fiber costs and supply are subject to cyclical changes, we expect that we will be able to continue to obtain an adequate supply of wood chips has been affected by increasing demand from alternative or renewable energy producersfiber on reasonably satisfactory terms for our mills due to their locations and government initiativesour long-term relationships with suppliers. We have not historically experienced any significant fiber supply interruptions for carbon neutral energy. Declining energy prices, weaker economies or periodically warm winters tempered the demand for wood chips resulting from initiatives by European governments to promote the use of wood as a carbon neutral energy. There can be no assurance that suchnon-traditional demand for fiber will remain strong in the long-term.our operations.

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 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 to, 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. However, 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 standards continue to evolve and are not consistent from jurisdiction to jurisdiction or how they are interpreted and applied. We currently do not expect certification requirements to have a material adverse impact on our fiber procurement and 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 2018, our per unit pulp fiber costs in Germany increased compared to 2017, primarily as a result of strong demand for wood in our German mills’ procurement areas. In 2017, our per unit pulp fiber costs in Germany were flat compared to 2016, primarily as a result of a balanced wood market in Germany.

(20)

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 bothour mills. In addition, in 2016, we entered intoWe are also party to a joint wood purchasing arrangement with another significantone of the largest wood consumerconsumers in Europe, being the Mondi Group.Europe.

(16)

In 2018, the Rosenthal mill2021 our German pulp mills consumed an aggregate of approximately 1.84.9 million cubic meters of fiber. Approximately 66%58% was in the form of such consumptionpulp logs and approximately 42% was in the form of sawmill wood chipschips.

In 2021, our per unit pulp fiber costs in Germany decreased compared to 2020, primarily as a result of the availability of beetle damaged wood and approximately 34% was in the form of pulp logs. Thestrong sawmill production.

Our Rosenthal mill sources wood chips for the Rosenthal mill are sourced from approximately 3327 sawmills located primarily in the German states of Bavaria,Baden-Württemberg and ThüringiaThuringia and primarily 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. In 2018,2021, approximately 78%90% of the fiber consumed by the Rosenthal mill was spruce and the remainder was 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,Thuringia, 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.Republic.

In 2018, the Stendal mill consumed approximately 3.2 million cubic meters of fiber. Approximately 28% of such fiber was in the form of sawmill wood chips and approximately 72% was in the form of pulp logs. The core wood supply region for the Stendal mill includes most of the Northeastern and Western part of Germany, primarily within an approximate 300400 kilometer radius of the mill. We also purchase wood chips from Southwestern and Southern Germany as well as the Baltic Sea region. The fiber consumed by the Stendal mill consisted of approximately 61%63% spruce, 35% pine 38% spruce and 1%2% other species in 2018.2021. The Stendal mill has sufficient chipping capacity to almost fully operate solely using pulp logs, if required. We source pulp logs from private forest holders,and municipal forest owners and from state forest agencies inSaxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse, Brandenburg, Schleswig-Holstein, Rhineland-Palatinate and the City of Berlin. The volumes are distributed at optimal costs between the mills. In addition, over the last three years, theagencies. Our Stendal mill has historically 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 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

(21)

processed through its woodroom or chipped by a 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.

In 2018, the Celgar mill had access to approximately 24 different chip suppliers from Canada and the United States. Chips are purchased in Canada and the 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 bids on British Columbia timber sales from time to time. The Celgar mill has also commenced a pulp pricing and education process with certain licensees and contractors in most locales to increase harvesting of pulp logs that have traditionally been left as waste after harvesting operations.

MPR 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 last renewed for a20-year term expiring in 2029.

Approximately 85% of the Peace 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 surrounding sawmills.

The Cariboo mill has a secure supply of high-quality residual wood chips primarily supplied by surrounding sawmills located at a short distance. The majority of the 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%75% of its cash costs of producing lumber.lumber in 2021. Our Friesau mill is located in 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 contract purchases from state forestry agencies and private timberlandand municipal forest owners.

In Germany, over the last several years, the price and supply of wood chips has been affected from time to time by increasing demand from alternative or renewable energy producers and government initiatives for carbon neutral energy. In 2021, increasing energy prices and a stronger economy increased the demand for wood chips resulting from initiatives by European governments to promote the use of wood as a carbon neutral energy.

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 whose forests have been harvested at rates much lower than their rate of growth.

Additionally, over the last three years, there has been a material increase in the availability of harvestable wood as a result of beetle infestation of German forests. Generally, beetle-infested wood is harvested more rapidly so as to be useable before deterioration makes the wood unsuitable for its intended purposes. Most of such beetle-infested wood has now been harvested and processed. While such beetle-infested wood can increase fiber supply and lead to lower prices in the short-term, such increased harvest levels can lead to challenges in maintaining a sustainable harvest level over the long-term and can lead to periods of reduced harvest levels in the future.

We believe that Germany has the highest availability of softwood forests in Europe suitable for harvesting and manufacturing.

Canada

In 2021, our Celgar and Peace River mills consumed approximately 4.1 million cubic meters of fiber. Approximately 66% of such fiber was in the form of sawmill wood chips and the remaining 34% came from pulp logs processed through their woodrooms or chipped by a third-party. Our Canadian mills’ woodrooms are able to process about 24% of their fiber needs. The source of fiber at the mill is characterized by a mixture of species (aspen, spruce, pine, hemlock, douglas fir and cedar) and the mill sources fiber from a number of Canadian and U.S. suppliers.

(17)

Labor

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

(22)

Energy

Our energy is primarily generated from renewable carbon neutral sources, such as black liquor and wood waste. Our mills produce all of our energy requirements and generate excess energy which we sell to third-party utilities and in the case of the Peace River mill, into the Alberta market. In 2018, we generated 1,711,568 MWh and sold 701,507 MWh of surplus energy. See also “– Generation and Sales of Green Energy and Chemicals at our Mills”.to regional markets. 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. Overall, ourOur chemical costs have remained generally stable over the last three years. However, such costs increased in 2018 as a result of maintenance work and other cost increases.recent years.

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 energy source. In 2018, we generated $14.9 million from the sale of tall oil and other chemicals.(18)

Sales, Marketing and Distribution

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

(23)

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

*Excluding Germany 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 1525 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 180over 250 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 across our 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 teamteams in Germany and Vancouver. We also sell lumber through commissioned agents in certain markets.

The following table sets out our pulp revenues by geographic area for the periods indicated:

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

(19)

The following table sets out the distribution of our pulp sales volumes by end use for the periods indicated:

The following table set out our lumber revenues by geographic area for the periods indicated:

The following charts set out the geographic distribution of our lumber revenues as a percentage of our total lumber revenues for the periods indicated:

Our pulp and lumber sales are on customary industry terms. AtAs of December 31, 2018,2021, we had no material payment delinquencies. In 2018, one2021 and 2020, no customer accounted for 10% or more of our pulp segment through several of its operations accounted for 13% of our revenues. In 2017, one customer of our pulp segment through several

(24)

of its operations accounted for 13% of our revenues. In 2016, two customers through several of their operations accounted for 19% and 10%, respectively, of our pulp sales. We do not believe our pulp or lumber 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 54% of our pulp sales volume in 2018, 52% in 2017 and 50% in 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 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 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.

(20)

Our Canadian mills’ pulp is transported to customers by truck, rail and ocean carrier to ensure timely delivery. The majority of our 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, our Canadian mills are well positioned to service Asian customers. The majority of our Canadian mills’ pulp for domestic markets is shipped by rail directly to the customer or to third-party warehouses in the United States. We also operate a logistics and reload center near Trail, British Columbia to provide us with additional warehouse space 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 2018, 20172021 and 2016,2020, outbound transportation costs comprised approximately 9%, 9%12% and 8%13%, respectively, of our total consolidated cost of sales. Generally, in recent years, our transportation costs have been stable despite growing overseas shipments due to higher shipping capacity and we have also taken initiatives to target sales to the most “freight logical” customers.expenses.

Capital Expenditures

We have continued to make capital investments designed to increase pulp, green energy and chemical production, reduce costs and improve efficiency and environmental performance at our pulpmills.pulp mills. The improvements made over the years have increased the competitive position of our pulp segment. Since its acquisition, we have also made capital investments to optimize sawmill production at the Friesau mill.

(25)

TotalThe following table sets out the total capital expenditures at our millsby segment (excluding any related governmental grants) are set out in the following table for the periods indicated:

CapitalIn our pulp segment, capital investments at theour Rosenthal mill in 20182021 and 2020 primarily related to new chip screens to improve the consistency of chips for the mill’s digester, bleach plant improvementswastewater improvement and othermaintenance 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 20182021 primarily related to wastewatercapacity expansion projects. In 2020, they primarily related to capacity expansion, land for fiber storage and maintenance projects.

Capital investments at the Celgar mill in 2021 primarily related to upgrades to the woodroom and maintenance projects. In 2020, they primarily related to fiber consumption improvement projects includingand maintenance projects.

Capital investments at the extension of the effluent treatment plant and other projects. In 2017, they included a project to reduce nitrogenPeace River mill in wastewater and smaller projects and in 2016 they2021 primarily related to a wastewater reduction project consistingthe recovery boiler rebuild, which was financed with insurance proceeds of an evaporation plant upgrade$21.5 million and a projectupgrades to reduce chloride levels in the process water.woodroom. In 2020, they primarily related to large maintenance projects.

In June 2018,our wood products segment, in 2021, we commenced a Phase IIcompleted expansion and optimization projectprojects at the Friesau mill which 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 project in 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.

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:

(26)

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 pollutants in the effluent dischargesdischarge offset wastewater fees that would otherwise be required to be paid. For more information about our environmental capital expenditures, see “– Environmental”.

In 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 2019,2022, excluding amounts being financed through government grants and expected insurance proceeds, we currently expect our totalcapitaltotal capital expenditures to be approximately $130$175.0 million to $150$200.0 million.

In our pulp segment, excluding our Peace River mill,2022, we currently expect our capital expenditures in 2019our pulp segment to be principally comprised of approximately $90 million for large maintenance projects, improvementsupgrades to the Celgar mill’s bale line and other capital improvementswoodrooms at our mills. At the Peace River mill we will be undertaking significantCanadian mills, production improvement projects at our German pulp mills and maintenance to the boiler that will be funded by insurance proceeds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General”.projects.

(21)

In our wood products segment,2022, we currently expect capital expenditures in 2019 at our Friesau mill, principally comprised of approximately $50 millionwood products segment to be for further upgrades to our planer mill and large sawlineFriesau mill’s sorter line and other capital improvements.production improvement projects and maintenance projects.

Innovation

We utilize our expertise with wood, its processing andby-products to expand our product mix. As a result, we seek to develop new products based on our expertise in wood processing and working with derivatives of the kraft pulping process and wood processing.process. Currently these processes are focused on: