UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________ Commission File No.: 000-51826

MERCER INTERNATIONAL INC.

Exact name of Registrant as specified in its charter

Washington
State or other jurisdiction of incorporation or organization

47-0956945
IRS Employer Identification No.

Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8
Address of Office

Registrants telephone number including area code: (604) 684-1099 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $1.00 Name of each exchange on which registered NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. n Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. n Yes No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. Large accelerated filer n Accelerated filer Non-accelerated filer n Smaller reporting company n Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). n Yes No The aggregate market value of the Registrants voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2008, the last business day of the Registrants most recently completed second fiscal quarter, based on the closing price of the voting stock on the NASDAQ Global Market on such date, was approximately $136,769,915. As of February 27, 2009, the Registrant had 36,422,487 shares of common stock, $1.00 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information that will be contained in the definitive proxy statement for the Registrants annual meeting to be held in 2009 is incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS
Page

Item 1.

PART I BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competitive Strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Pulp Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy and Recent Energy Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Production Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Description of Certain Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . Item 5. Item 6. Item 7. PART II MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007 . . . . . . Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006 . . . . . . Sensitivities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources and Uses of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual Obligations and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Operations of the Restricted Group Under Our Senior Note Indenture . . . . . . . . . Restricted Group Results Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted Group Results Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Capital Resources of the Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . 2

... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

5 5 7 8 8 12 12 13 17 17 18 19 21 21 24 24 25 33 33 35 35

. . . 36 . . . 38 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 38 39 41 43 45 46 46 46 47 47 48 48 49 49 50 50

. . . 50 . . . 52 . . . 54

Page

Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cautionary Statement Regarding Forward-Looking Information . . . . . . . . . . . . . . . . . . . . . . . . Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplementary Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54 56 56 56 57 60 60 60 61 62 66 66 66 66

. . . 67 . . . 67 . . .108 . . .109

EXCHANGE RATES Our reporting currency and financial statements included in this report are in Euros, as a significant majority of our business transactions are originally denominated in Euros. We translate non-Euro denominated assets and liabilities at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period. The following table sets out exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) for the conversion of Euros and Canadian dollars to U.S. dollars in effect at the end of the following periods, the average exchange rates during these periods (based on daily Noon Buying Rates) and the range of high and low exchange rates for these periods:
2008 Years Ended December 31, 2007 2006 2005 (E/$) 2004

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High for period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High for period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.7184 0.8035 0.6246 0.6801 1.2240 0.9717 1.2971 1.0669

0.6848 0.7750 0.6729 0.7294 0.9881 0.9168 1.1852 1.0740

0.7577 0.8432 0.7504 0.7962

(C$/$)

0.8445 0.8571 0.7421 0.8033 1.1659 1.1507 1.2704 1.2116

0.7942 0.8473 0.7339 0.8040 1.2034 1.1775 1.3970 1.3017

1.1653 1.0989 1.1726 1.1344

Effective January 2009, the Noon Buying Rate is now published on a weekly basis by the Federal Reserve Board. On February 20, 2009, the date of the most recent weekly publication of the Daily Noon Buying Rate before the filing of this annual report on Form 10-K, the Noon Buying Rate for the conversion of Euros and Canadian dollars to U.S. dollars was A0.7880 per U.S. dollar and C$1.2543 per U.S. dollar. In addition, certain financial information relating to our Celgar mill included in this annual report on Form 10-K is stated in Canadian dollars while we report our financial results in Euros. The following table sets out exchange rates, based on the noon rate provided by the Bank of Canada (the Daily Noon Rate), for the conversion of Canadian dollars to Euros in effect at the end of the following periods, the average exchange rates during these periods (based on daily noon rates) and the range of high and low exchange rates for these periods:
Years Ended December 31, 2008 2007 2006 (C$/E) 2005 2004

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High for period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average for period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.7046 1.4489 1.7316 1.5603

1.4428 1.3448 1.5628 1.4690

1.5377 1.3523 1.5377 1.4244

1.3805 1.3576 1.6400 1.5095

1.6292 1.5431 1.6915 1.6169

On February 27, 2009, the Daily Noon Rate for the conversion of Canadian dollars to Euros was C$1.6088 per Euro.

PART I ITEM 1. BUSINESS

In this document, please note the following: references to we, our, us, the Company or Mercer mean Mercer International Inc. and its subsidiaries, unless the context clearly suggests otherwise, and references to Mercer Inc. mean Mercer International Inc. excluding its subsidiaries; references to ADMTs mean air-dried metric tonnes; information is provided as of December 31, 2008, unless otherwise stated or the context clearly suggests otherwise; all references to monetary amounts are to Euros, the lawful currency adopted by most members of the European Union, unless otherwise stated; and A refers to Euros; $ refers to U.S. dollars; and C$ refers to Canadian dollars.

The Company General Mercer Inc. is a Washington corporation and our shares of common stock are quoted and listed for trading on the NASDAQ Global Market (MERC) and the Toronto Stock Exchange (MRI.U). We operate in the pulp business and are the second largest producer of market northern bleached softwood kraft, or NBSK, pulp in the world. We are the sole kraft pulp producer, and the only producer of pulp for resale, known as market pulp, in Germany, which is the largest pulp import market in Europe. Our operations are located in Eastern Germany and Western Canada. We currently employ approximately 1,094 people at our German operations, 403 people at our Celgar mill in Western Canada and 18 people at our office in Vancouver, British Columbia, Canada. We operate three NBSK pulp mills with a consolidated annual production capacity of approximately 1.5 million ADMTs: Rosenthal mill. Our wholly-owned subsidiary, Rosenthal, owns and operates a modern, efficient ISO 9002 certified NBSK pulp mill that has a current annual production capacity of approximately 325,000 ADMTs. The Rosenthal mill is located near the town of Blankenstein, Germany. Stendal mill. Our 70.6% owned subsidiary, Stendal, owns and operates a state-of-the-art, single-line NBSK pulp mill that has an annual production capacity of approximately 635,000 ADMTs. The Stendal mill is situated near the town of Stendal, Germany, approximately 300 kilometers north of the Rosenthal mill. Celgar mill. Our wholly owned subsidiary, Celgar, owns and operates the Celgar mill, a modern, efficient ISO 9001 certified NBSK pulp mill with an annual production capacity of approximately 495,000 ADMTs. The Celgar mill is located near the city of Castlegar, British Columbia, Canada, approximately 600 kilometers east of the port city of Vancouver, British Columbia, Canada.

History and Development of Business We originally invested in various real estate assets with the intention of becoming a real estate investment trust, but in 1985 changed our operational direction to acquiring controlling interests in operating companies. We acquired our initial pulp and paper operations in 1993. In late 1999, we completed a major capital project which, among other things, converted the Rosenthal mill to the production of kraft pulp from sulphite pulp, increased its annual production capacity, reduced costs and improved efficiencies. The aggregate cost of this project was approximately A361.0 million, of which approximately A102.0 million was financed through government grants. Subsequent minor capital investments and 5

efficiency improvements have reduced emissions and energy costs and increased the Rosenthal mills annual production capacity to approximately 325,000 ADMTs. In September 2004, we completed construction of the Stendal mill at an aggregate cost of approximately A1.0 billion. The Stendal mill is one of the largest NBSK pulp mills in Europe. The Stendal mill was financed through a combination of government grants totaling approximately A275.0 million, low-cost, long-term project debt which is largely severally guaranteed by the federal government and a state government in Germany, and equity contributions. We initially had a 63.6% ownership interest in Stendal and, in October 2006, increased our interest to 70.6% by acquiring a 7% minority interest therein for A8.1 million. The Stendal mill was constructed under a A716.0 million fixed-price turn-key engineering, procurement and construction, or EPC, contract between Stendal and the EPC contractor. Pursuant to the EPC contract, construction of the Stendal mill was completed substantially on its planned schedule and budget in September 2004. The mill then underwent extensive testing and evaluation to determine whether certain performance requirements had been met. Although the tests were generally successful, in the first quarter of 2005, the EPC contractor implemented remedial measures at the mill, including the installation of two additional digesters and related equipment, improvements to the non-condensable gas, or NCG, boiler and water treatment plant. These digesters enhanced the reliability and overall operating performance of the Stendal mill and, along with other measures, increased its annual production capacity to approximately 635,000 ADMTs. Subsequently, each department of the mill was tested on a stand-alone basis for compliance with its design specifications and, in September 2007, Stendal settled substantially all outstanding matters with its contractors under the EPC contract in consideration of, among other things, a payment of approximately A11.0 million. We, Stendal and its minority shareholder are parties to a shareholders agreement dated August 26, 2002, as amended, to govern our respective interests in Stendal. The agreement contains terms and conditions customary for these types of agreements, including restrictions on transfers of share capital and shareholder loans other than to affiliates, rights of first refusal on share and shareholder loan transfers, pre-emptive rights and piggyback rights on dispositions of our interest. The shareholders are not obligated to fund any further equity capital contributions to the project. The shareholders agreement provides that Stendals managing directors are appointed by holders of a simple majority of its share capital. Further, shareholder decisions, other than those mandated by law or for the provision of financial assistance to a shareholder, are determined by a simple majority of Stendals share capital. A significant portion of the capital investments at our German mills, including the construction of the Stendal mill, were financed through government grants. Since 1999, our German mills have benefited from an aggregate A383.1 million in government grants. These grants are not reported in our income. These grants reduce the cost basis of the assets purchased when the grants are received. See Capital Expenditures. In February 2005, we acquired the Celgar mill for $210.0 million, of which $170.0 million was paid in cash and $40.0 million was paid in our shares, plus $16.0 million for the defined working capital at the mill on closing. The Celgar mill was completely rebuilt in the early 1990s through a C$850.0 million modernization and expansion project, which transformed it into a modern and competitive producer. In 2007, we completed a C$28.0 million capital project commenced in 2005 which improved efficiencies and reliability and, with other measures, increased the Celgar mills annual production capacity to 495,000 ADMTs. In 2008, we commenced a new green energy project at our Celgar mill to increase the mills production of green energy and optimize its power generation capacity. For more information, see Capital Expenditures. In 2006, we divested two paper mills in Germany which were non-core operations and account for this business as discontinued operations. As a result, certain previously reported amounts and the financial statements and related notes herein have been reclassified to conform to the current presentation. In 2006, we also divested our equity interest in a non-consolidated Swiss specialty paper mill. These divestitures were effected so that we could focus on our core pulp business. 6

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

MERCER INTERNATIONAL INC.

Washington, U.S.A.

100%

70.6%

100%

Zellstoff Celgar Limited Partnership Pulp production and sales British Columbia, Canada

Zellstoff Stendal GmbH Pulp production and sales Saxony-Anhalt, Germany

Zellstoff-und Papierfabrik Rosenthal GmbH Pulp production and sales Thringia, Germany

Competitive Strengths Our competitive strengths include the following: Modern and Competitive Mills. We operate three large, modern, competitive NBSK pulp mills that produce high quality NBSK pulp which is a premium grade of kraft pulp. The relative age and production capacity of our NBSK pulp mills provide us with certain manufacturing cost advantages over many of our competitors including lower maintenance capital expenditures. Customer Proximity and Service. We are the only producer of market pulp in Germany, which is the largest pulp import market in Europe. Due to the proximity of our German mills to most of our European customers, we benefit from lower transportation costs relative to our major competitors. Our Celgar mill, located in Western Canada, is well situated to serve Asian and North American customers. We primarily work directly with customers to capitalize on our geographic diversity, coordinate sales and enhance customer relationships. We believe our ability to deliver high quality pulp on a timely basis and our customer service makes us a preferred supplier for many customers. Renewable and Surplus Energy. Our modern mills generate electricity and steam in their boilers and are generally energy self-sufficient. Such energy is primarily produced from wood residuals which are a renewable carbon neutral source. This has permitted our German mills to benefit from the sales of emission allowances. All of our mills also generate surplus energy which we sell to third parties. Our Rosenthal and Stendal mills now benefit from recent amendments to Germanys Renewable Energy Resources Act which have raised the tariff for the sale of biomass energy. Additionally, our Celgar mill has signed a contract for the sale of power from its new green energy project. We believe our generation of surplus renewable green energy and high energy prices provide us with a competitive energy advantage. Advantageous Capital Investments and Financing. Our German mills are eligible to receive government grants in respect of qualifying capital investments. Over the last nine years, our German mills have benefited from approximately A383.1 million of such government grants. These grants are not reported in our income but reduce the cost basis of the assets purchased when the grants are received. During the last nine years, capital investments at our German mills have reduced the amount of overall wastewater fees that would otherwise be payable by over A43 million. Further, our Stendal mill benefits from German governmental guarantees of its project financing which permitted it to obtain better credit terms and lower interest costs than would otherwise be available. The project debt of Stendal matures in 2017 and is nonrecourse to our other operations and Mercer Inc. 7

Competitive Fiber Supply. Although fiber is cyclical in both price and supply, there is a significant amount of high-quality fiber within a close radius of each of our mills. This fiber supply, combined with our purchasing power, enables us to enter into contracts and arrangements which have generally provided us with a competitive fiber supply.

Corporate Strategy Our corporate strategy is to create shareholder value by focusing on the expansion of our asset and earnings base. Key features of our strategy include: Focusing on NBSK Market Pulp. We focus on NBSK pulp because it is a premium grade kraft pulp and generally obtains the highest price relative to other kraft pulps. Although demand is cyclical, between 1997 and 2007, worldwide demand for softwood kraft market pulp grew at an average of approximately 3.3% per annum. Since 2007, demand for softwood pulp has grown in emerging markets such as Asia, in particular China, and Eastern Europe. Maximizing Energy Realizations. In 2008, our mills generated 456,059 megawatt hours, or MWh, of surplus energy, primarily from a renewable carbon-neutral source. We are pursuing several initiatives to increase our overall energy generation and the amount of and price for our surplus power sales. Such initiatives include targeted high return capital projects to increase generation and connectivity to the electric grid including the installation of a 48 megawatt, or MW, condensing turbine at our Celgar mill to substantially increase the mills generating capacity. Enhancing Sustainability/Growth. With the recent global economic slowdown and well reported crisis in financial and credit markets, our short-term focus is on maintaining and enhancing the sustainability of our business. To this end, we are working to reduce costs, cut discretionary spending, including capital expenditures, reduce our working capital consumption and otherwise enhance our liquidity. When economies and markets recover and access to capital improves, we intend to grow our operations and earning capacity both through organic growth and targeted strategic acquisitions. Operating Modern, World-Class Mills. In order to keep our operating costs as low as possible, with a goal of generating positive cash flow in all market conditions, we operate large, modern NBSK pulp mills. We believe such production facilities provide us with the best platform to be an efficient and competitive producer of high-quality NBSK pulp without the need for significant sustaining capital.

The Pulp Industry General Pulp is used in the production of paper, tissues and paper related products. Pulp is generally classified according to fiber type, the process used in its production and the degree to which it is bleached. Kraft pulp is produced through a sulphate chemical process in which lignin, the component of wood which binds individual fibers, is dissolved in a chemical reaction. Chemically prepared pulp allows the woods fiber to retain its length and flexibility, resulting in stronger paper products. Kraft pulp can be bleached to increase its brightness. Kraft pulp is noted for its strength, brightness and absorption properties and is used to produce a variety of products, including lightweight publication grades of paper, tissues and paper related products. The selling price of kraft pulp depends in part on the fiber used in the production process. There are two primary species of wood used as fiber: softwood and hardwood. Softwood species generally have long, flexible fibers which add strength to paper while fibers from species of hardwood contain shorter fibers which lend bulk and opacity. Generally, prices for softwood pulp are higher than for hardwood pulp. Currently, the kraft pulp market is roughly evenly split between softwood and hardwood grades. Most uses of market kraft pulp, including fine printing papers, coated and uncoated magazine papers and various tissue products, utilize a mix of softwood and hardwood grades to optimize production and product qualities. In recent years, production of hardwood pulp, based on fast growing plantation fiber primarily from Asia and South America, has increased much more rapidly than that of softwood grades that have longer growth cycles. As a result of the growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp. Counteracting customers 8

increased proportionate usage of hardwood pulp has been the requirement for strength characteristics in finished goods. Paper and tissue makers focus on higher machine speeds and lower basis weights for publishing papers which also require the strength characteristics of softwood pulp. We believe that the ability of kraft pulp users to continue to further substitute hardwood for softwood pulp is limited by such requirements. NBSK pulp, which is a bleached kraft pulp manufactured using species of northern softwood, is considered a premium grade because of its strength. It generally obtains the highest price relative to other kraft pulps. Southern bleached softwood kraft pulp is kraft pulp manufactured using southern softwood species and does not possess the strength found in NBSK pulp. NBSK pulp is the sole product of our mills. Kraft pulp can be made in different grades, with varying technical specifications, for different end uses. Highquality kraft pulp is valued for its reinforcing role in mechanical printing papers, while other grades of kraft pulp are used to produce lower priced grades of paper, including tissues and paper related products. Markets We believe that over 125 million ADMTs of kraft pulp are converted annually into printing and writing papers, tissues, cartonboards and other white grades of paper and paperboard around the world. Approximately 70% of this pulp is produced for internal purposes by integrated paper and paperboard manufacturers and approximately 30% is market pulp produced for sale on the open market. Demand for our product is cyclical in nature and demand for kraft pulp is related to global and regional levels of economic activity. In 2008, overall global demand for all kraft pulp types, including softwood, was negatively impacted by the weak global economic conditions and global financial and credit turmoil the world began to experience in the second half of the year and which has continued into 2009. Between 1997 and 2007 worldwide demand for softwood market pulp grew at an average rate of approximately 3.3% annually. Since 2007, demand for softwood market pulp has grown in the emerging markets of Asia, Eastern Europe and Latin America. China in particular has experienced substantial growth and its demand for softwood market pulp grew by approximately 12.2% between 2002 and 2008. China now accounts for approximately 16% of global softwood market pulp demand compared to only 9.0% in 2002. Western Europe currently accounts for approximately 30% of global softwood market pulp demand. Within Europe, Eastern Europe has experienced significant demand growth with the regions demand for softwood market pulp increasing by approximately 12% between 2007 and 2008. A measure of demand for kraft pulp is the ratio obtained by dividing the worldwide demand of kraft pulp by the worldwide capacity for the production of kraft pulp, or the demand/capacity ratio. An increase in this ratio generally occurs when there is an increase in global and regional levels of economic activity. An increase in this ratio 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 relying on existing pulp inventories. As a result, producers run at lower operating rates by taking downtime to limit the build-up of their own inventories. The demand/capacity ratio for softwood kraft pulp was approximately 90% in 2008, approximately 95% in 2007 and approximately 96% in 2006. We do not believe there are any significant new NBSK pulp production capacity increases coming online in the next several years due in part to fiber supply constraints and high capital costs. Competition Pulp markets are large and highly competitive. Producers ranging from small independent manufacturers to large integrated companies produce pulp worldwide. Our pulp and customer services compete with similar products manufactured and distributed by others. While many factors influence our competitive position, particularly in slowing economic times, a key factor is price. Other factors include service, quality and convenience of location. Some of our competitors are larger than we are in certain markets and have substantially greater financial resources. These resources may afford those competitors more purchasing power, increased financial flexibility, more capital 9

resources for expansion and improvement and enable them to compete more effectively. Our key NBSK pulp competitors are principally located in Northern Europe and Canada. NBSK Pulp Pricing Pulp prices are highly cyclical. Global economic conditions, changes in production capacity, inventory levels, and currency exchange rates are the primary factors affecting NBSK pulp list prices. The average annual European list prices for NBSK pulp since 2000 have ranged from a low of approximately $447 per ADMT in 2002 to a high of approximately $900 per ADMT in 2008. Starting in 2006, pulp prices increased steadily from approximately $600 per ADMT in Europe to $870 per ADMT at the end of 2007. These price increases resulted from the closure of several pulp mills, particularly in North America, which reduced NBSK capacity by approximately 1.3 million ADMTs, better demand and the general weakness of the U.S. dollar against the Euro and the Canadian dollar. In 2008, list prices for NBSK pulp in Europe continued to improve in the first half of the year but decreased markedly in the second half due to weak global economic conditions. As a result, list prices for NBSK pulp in Europe decreased from $900 per ADMT in mid-2008 to $635 per ADMT at the end of the year. Such price weakness has continued into early 2009. A producers sales realizations will reflect customer discounts, commissions and other selling concessions. While there are differences between NBSK list prices in Europe, North America and Asia, European prices are generally regarded as the global benchmark and pricing in other regions tends to follow European trends. The nature of the pricing structure in Asia is different in that, while quoted list prices tend to be lower than Europe, customer discounts and commissions tend to be lower resulting in net sales realizations that are generally similar to other markets. The majority of market NBSK pulp is produced and sold by North American and Scandinavian, or Norscan, producers, while the price of NBSK pulp is generally quoted in U.S. dollars. As a result, NBSK pricing is affected by fluctuations in the currency exchange rates for the U.S. dollar versus the Canadian dollar and the Euro. NBSK pulp price increases during 2006, 2007 and the first half of 2008 were in large part offset by the weakening of the U.S. dollar. Similarly, the strengthening of the U.S. dollar against the Canadian dollar and the Euro towards the end of 2008 helped slightly offset pulp price decreases caused by the deterioration in global economic conditions. The following chart sets out the changes in list prices for NBSK pulp in Europe, as stated in U.S. dollars, Canadian dollars and Euros for the periods indicated.
1,000

USD

CAD

EURO

900

NBSK Price Per Tonne

800

700

600

500

400
2000 2001 2002 2003 2004 2005 2006 2007 2008

300

1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4

10

The Manufacturing Process The following diagram provides a simplified description of the kraft pulp manufacturing process at our pulp mills:
Wood Chips and Pulplogs

Turbogenerators Chip Screens Evaporators Steam Used in Process Electricity

Steam

Digester Weak Black Liquor

Strong Black Liquor

Cooking Chemicals Unbleached Pulp Washer Pulp Screens

Recausticizing Plant Recovered Chemicals

Biomass

Bleaching

Washing Bleached Pulp

Pulp Machine Market Pulp

Washed Pulp

Bleaching Chemicals

In order to transform wood chips into kraft pulp, wood chips undergo a multi-step process involving the following principal stages: chip screening, digesting, pulp washing, screening, bleaching and drying. In the initial processing stage, wood chips are screened to remove oversized chips and sawdust and are conveyed to a pressurized digester where they are heated and cooked with chemicals. This occurs in a continuous process at the Celgar and Rosenthal mills and in a batch process at the Stendal mill. This process softens and eventually dissolves the phenolic material called lignin that binds the fibers to each other in the wood. Cooked pulp flows out of the digester and is washed and screened to remove most of the residual spent chemicals, called black liquor, and partially cooked wood chips. The pulp then undergoes a series of bleaching stages where the brightness of the pulp is gradually increased. Finally, the bleached pulp is sent to the pulp machine where it is dried to achieve a dryness level of more than 90%. The pulp is then ready to be baled for shipment to customers. A significant feature of kraft pulping technology is the recovery system, whereby chemicals used in the cooking process are captured and extracted for re-use, which reduces chemical costs and improves environmental performance. During the cooking stage, dissolved organic wood materials and black liquor are extracted from the digester. After undergoing an evaporation process, black liquor is burned in a recovery boiler. The chemical compounds of the black liquor are collected from the recovery boiler and are reconstituted into cooking chemicals used in the digesting stage through additional processing in the recausticizing plant. The heat produced by the recovery boiler is used to generate high-pressure steam. Additional steam is generated by a power boiler through the combustion of biomass consisting of bark and other wood residues from sawmills and our woodrooms and residue generated by the effluent treatment system. Additionally, during times of 11

upset, we may use natural gas to generate steam. The steam produced by the recovery and power boilers is used to power a turbogenerator to generate electricity, as well as to provide heat for the digesting and pulp drying processes. Our Product We manufacture and sell NBSK pulp produced from wood chips and pulp logs. The kraft pulp produced at the Rosenthal mill is a long-fibered softwood pulp produced by a sulphate cooking process and manufactured primarily from wood chips and pulp logs. A number of factors beyond economic supply and demand have an impact on the market for chemical pulp, including requirements for pulp bleached without any chlorine compounds or without the use of chlorine gas. The Rosenthal mill has the capability of producing both totally chlorine free and elemental chlorine free pulp. Totally chlorine free pulp is bleached to a high brightness using oxygen, ozone and hydrogen peroxide as bleaching agents, whereas elemental chlorine free pulp is produced by substituting chlorine dioxide for chlorine gas in the bleaching process. This substitution virtually eliminates complex chloro-organic compounds from mill effluent. Kraft pulp is valued for its reinforcing role in mechanical printing papers and is sought after by producers of paper for the publishing industry, primarily for magazines and advertising materials. Kraft pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price. The Rosenthal mill produces pulp for reinforcement fibers to the specifications of certain of our customers. We believe that a number of our customers consider us their supplier of choice. For more information about the facilities at the Rosenthal mill, see Item 2 Properties. The kraft pulp produced at the Stendal mill is of a slightly different grade than the pulp produced at the Rosenthal mill as the mix of softwood fiber used is slightly different. This results in a complementary product more suitable for different end uses. The Stendal mill is capable of producing both totally chlorine free and elemental chlorine free pulp. For more information about the facilities at the Stendal mill, see Item 2 Properties. The Celgar mill produces high-quality kraft pulp that is made from a unique blend of slow growing/long-fiber Western Canadian tree species. It is used in the manufacture of high-quality paper and tissue products. We believe the Celgar mills 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 producers in Asia. For more information about the facilities at the Celgar mill, see Item 2 Properties. Energy and Recent Energy Initiatives Climate change concerns have caused a proliferation in renewable or green energy legislation, incentives and commercialization in both Europe and increasingly also in North America. As part of the pulp production process our mills generate green energy using carbon-neutral biofuels such as black liquor and wood waste. Through the incineration of black liquor in recovery boilers, our mills produce sufficient steam to cover all of our steam requirements and generally produce excess energy which we sell to third party utilities. In 2008, we sold 456,059 MWh of excess energy and recorded revenues of A31.0 million from such energy sales. We no longer consider the sale of surplus electricity to be a by-product and, commencing in 2008, report revenue from the sale of surplus energy as Energy revenue in the Consolidated Statement of Operations. In previous years, these revenues were reported within Operating costs. German Mills Beginning January 2009, our Rosenthal and Stendal mills now participate in a program established pursuant to Germanys Renewable Energy Resources Act, or Renewable Energy Act. The Renewable Energy Act, in existence since 2000, requires that public electric utilities give priority to electricity produced from renewable energy resources by independent power producers and pay a fixed tariff for a period of 20 years. Previously, this legislation was only applicable to installments with a capacity of 20MW or less, effectively excluding our Rosenthal and Stendal mills. Recent amendments to the Renewable Energy Act have removed this restriction. Under the program, our German mills now sell their surplus energy to the local electricity grid at the rates stipulated by the Renewable Energy Act for biomass energy. 12

Since 2005 our German mills have benefited from the sale of emission allowances under the European Union carbon emissions trading scheme, referred to as EU ETS. As a result of our participation under the Renewable Energy Act, the amount of emissions allowances granted to our German mills under the EU ETS may be reduced.

Celgar In April 2008 we commenced a new green energy project at our Celgar mill, referred to as the Celgar Energy Project, to increase the mills production of green energy and optimize its power generation capacity. The project includes the installation of a 48 MW condensing turbine which is expected to bring the mills installed generating capacity up to 100 MW, as well as upgrades to the mills bark boiler and steam consuming facilities. Completion of the Celgar Energy Project is currently estimated for early 2010. In January 2009 the Celgar mill finalized an electricity purchase agreement with British Columbias primary public utility provider, for the sale of power generated from the Celgar Energy Project. Under the agreement, the Celgar mill will supply a minimum of approximately 238,000 MWh of electrical energy annually to the utility over a ten-year term, with deliveries to commence in the first quarter of 2010. In February 2009 the Celgar mill signed a contribution agreement, referred to as the Contribution Agreement, with the Canadian federal government pursuant to Canadas ecoEnergy for Renewable Power Program. The programs purpose is to increase Canadas supply of clean electricity from renewable sources, such as biomass, by providing funding for renewable energy projects such as the Celgar Energy Project. Under the Contribution Agreement, the Celgar mill is eligible to receive incentive payments of up to a maximum of C$29.9 million over a period of ten years based on the delivery of a certain level of energy production by the Celgar Energy Project. The incentive payments are payable quarterly and are formula based. Receipt of the incentive payments is also subject to the Celgar Energy Project meeting certain environmental requirements. The following table sets out our electricity generation and surplus energy sales for the last three years:
Electricity generation 1,600,000 1,400,000 Electricity exports

1,456,630

Total Electricity per Year (MWh)

1,401,881

1,200,000 1,000,000 800,000 600,000

456,059

430,437

200,000 2008

2007
1.4 million tonnes Pulp Production

2006
1.3 million tonnes Pulp Production

1.4 million tonnes Pulp Production

Operating Costs Our major costs of production are labor, fiber, energy and chemicals. Fiber comprised of wood chips and pulp logs is our most significant operating expense. Given the significance of fiber to our total operating expenses and our limited ability to control its costs, compared with our other operating costs, volatility in fiber costs can materially affect our margins and results of operations. 13

414,411

400,000

1,297,437

Labor Our labor costs tend to be generally steady, with small overall increases due to inflation in wages and health care costs. Over the last three years, we have been able to generally offset such increases by increasing our efficiencies and production and streamlining operations. Fiber Our mills are situated in regions which generally provide a relatively stable supply of fiber. The fiber consumed by our mills consists of wood chips produced by sawmills as a by-product of the sawmilling process and pulp logs. Wood chips are small pieces of wood used to make pulp and are a by-product of either wood residuals from sawmills or logs or pulp logs chipped especially for this purpose. Pulp logs consist of lower quality logs not used in the production of lumber. Wood chips and pulp logs are cyclical in both price and supply. Generally, the cost of wood chips and pulp logs are primarily affected by the supply and demand for lumber. Additionally, regional factors can also have a material effect on both the supply, demand and price for fiber. In Germany, since 2006, the price and supply of wood chips has been affected by increasing demand from alternative or renewable energy producers, changes in supply resulting from weather conditions and government initiatives and a move to increase harvesting levels. High energy prices, along with initiatives by European governments to promote the use of wood as a carbon neutral energy, generally increased demand for wood usage for energy production and for wood fiber. Declining energy prices and weakening economies in the latter part of 2008 tempered such demand. Over the long-term, this non-traditional demand for fiber is expected to increase. In 2008, prolonged and wide-spread production curtailments in the European board industry caused by weak market conditions resulted in decreased fiber demand and moderated prices. In the early part of 2008, weather patterns also affected short-term fiber supply and pricing as wood from damaged forests caused by storms in Germany and Austria increased availability of fiber. In April 2008, the Russian government raised tariffs on the export of sawmill and pulp wood to 25% from the 20% effective since July 2007. A further increase to 80%, initially scheduled to become effective on January 1, 2009, has been deferred until late 2009. If and when implemented, the additional tariff increase is expected to reduce the export of Russian wood to Europe, in particular to Scandinavian producers who import a significant amount of their wood from Russia. This may put upward pressure on pricing as such producers try to replace these volumes from other regions. Offsetting some of the increases in demand for wood fiber have been initiatives in which we and other producers are participating to increase harvest levels in Germany, particularly from small private forest owners. We believe that Germany has the highest availability of softwood forests suitable for harvesting and manufacturing. Private ownership of such forests is approximately 50%. Many of these forest ownership stakes are very small and have been harvested at rates much lower than their rate of growth. In the latter part of 2008, in response to slowing economies in Germany and elsewhere and the related weaker demand for pulp logs, forest owners reduced their harvesting rates slightly. At the same time, the price of pulp logs has continued to decrease. It is expected that prices for pulp logs in Germany will remain low in the first half of 2009 but that further reductions in harvesting rates could lead to an undersupply and upward pressure on fiber prices later in the year. We believe we are the largest consumer of wood chips and pulp logs in Germany and often provide the best, long-term economic outlet for the sale of wood chips in Eastern Germany. We coordinate the wood procurement activities for our German mills to reduce overall personnel and administrative costs, provide greater purchasing power and coordinate buying and trading activities. This coordination and integration of fiber flows also allows us to optimize transportation costs, and the species and fiber mix for both mills. In 2008, the Rosenthal mill consumed approximately 1.8 million cubic meters of fiber. Approximately 65% of such consumption was in the form of sawmill wood chips and approximately 35% was in the form of pulp logs. The wood chips for the Rosenthal mill are sourced from approximately 21 sawmills located primarily in the states of Bavaria, Baden-Wurttemberg and Thuringia and are within a 150 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 14

often the best economic outlet for the sale of wood chips in the area. Approximately 91% of the fiber consumed by the Rosenthal mill is spruce and the remainder is pine. While fiber costs and supply are subject to cyclical changes largely in the sawmill industry, we expect that we will be able to continue to obtain an adequate supply of fiber on reasonably satisfactory terms for the Rosenthal mill due to its location and our long-term relationships with suppliers. We have not historically experienced any significant fiber supply interruptions at the Rosenthal mill. Wood chips for the Rosenthal mill are normally sourced from sawmills under one year or quarterly supply contracts with fixed volumes, which provide for price adjustments. More than 99% of our chip supply is sourced from suppliers with which we have a long-standing relationship. We generally enter into annual contracts with such suppliers. Pulp logs are sourced from the state forest agencies in Thuringia, Saxony and Bavaria on a contract basis and partly from private holders on the same basis as wood chips. Like the wood chip supply arrangements, these contracts tend to be of less than one-year terms with quarterly adjustments for market pricing. We organize the harvesting of pulp logs sourced from the state agencies in Thuringia, Saxony and Bavaria after discussions with the agencies regarding the quantities of pulp logs that we require. In 2008, the Stendal mill consumed approximately 3.0 million cubic meters of fiber. Approximately 34% of such fiber was in the form of sawmill wood chips and approximately 66% in the form of pulp logs. The core wood supply region for the Stendal mill includes most of the Northern part of Germany within an approximate 300 kilometer radius of the mill. We also purchase wood chips from Southwestern and Southern Germany. The fiber base in the wood supply area for the Stendal mill consisted of approximately 41% pine and 59% spruce and other species in 2008. The Stendal mill has sufficient chipping capacity to fully operate solely using pulp logs, if required. We source wood chips from sawmills within an approximate 300 kilometer radius of the Stendal mill. We source pulp logs partly from private forest holders and partly from state forest agencies in Thuringia, Saxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse and Brandenburg. Stendal has its own wood procurement division to handle its fiber requirements. This division focuses on three principal activities, being wood procurement and sales, harvesting and transportation. The procurement and sales main activity is to procure the required wood chip and pulp log assortments for the mills annual production. In conjunction with this activity, it may also procure higher quality sawlogs, either through harvesting or through purchases that it can sell or trade with others for wood chips in order to optimize the mills fiber mix. In British Columbia, in 2008, the supply of wood fiber was materially affected by the severe continued weakness in the U.S. housing and construction markets. This has resulted in a significant reduction in lumber production, reduced availability and higher prices for fiber. As a result, our Celgar mill is currently working with the provincial government and forest tenure licensees to develop alternate supplies of fiber. The weak lumber market has highlighted weaknesses in the provincial governments regulations with respect to pulp manufacturers access to pulp logs. The Celgar mill has focused on enabling the supply of low-cost and low-grade logs. These are often destroyed by the Mountain Pine Beetle infestation and left to decay in the forest. Discussions with the provincial government are ongoing to find solutions to extract value from a source of fiber that may otherwise be wasted. On the fiber demand side, although not nearly as advanced as Europe, there is growing interest in British Columbia for renewable or green energy. Such initiatives are expected to create additional competition for fiber. In 2008, the Celgar mill consumed approximately 2.7 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 processed through its woodroom or chipped by a third party. The source of fiber at the mill is characterized by a mixture of species (whitewoods and cedar) and the mill sources fiber from a number of Canadian and U.S. suppliers. The Celgar mill has long and short-term chip supply agreements with over 30 different suppliers from Canada and the U.S., representing approximately 90% of its total annual fiber requirements. The woodroom supplies the remaining chips to meet the Celgar mills fiber requirements. Chips are purchased in Canada and the U.S. in accordance with chip purchase agreements. Generally, pricing is reviewed and adjusted periodically to reflect market prices. The majority of the agreements are for periods ranging between two and five years. Several of the longer-term contracts are so-called evergreen agreements, where the contract remains in effect until one of the parties elects to terminate. Termination requires a minimum of two, and in some cases, five years written notice. Certain non-evergreen long-term agreements provide for renewal negotiations prior to expiry. 15

As a result of the cyclical decline in sawmill chip availability resulting from lower lumber production in British Columbia and the weakness in the U.S. dollar throughout most of 2008, the Celgar mill has increased its U.S. purchases of fiber, diversified its suppliers and, where possible, increased chip production through third party field chipping contracts and existing sawmill suppliers. In 2008, the Celgar mill also increased its production of chips from pulp logs processed through its woodroom by 20% compared to 2007. Additionally, in the fourth quarter of 2008, the Celgar mill began a project to upgrade its woodroom and enable it to process up to 36% of the mills fiber needs. Previously, the woodrooms configuration permitted for the processing of approximately only 10% of the mills needs. The woodroom upgrades are designed to increase the ability to process small diameter logs and facilitate the efficient flow of fiber, thereby increasing the overall volume of fiber being processed and ultimately reducing fiber costs. The project is complete and the woodroom is expected to ramp up operations in the first half of 2009. As a result of the upgrade, we expect to significantly increase the amount of pulp log chipping at our Celgar mill in 2009. To secure the volume of pulp logs required by the woodroom, the Celgar mill has entered into annual pulp log supply agreements with a number of different suppliers, many of whom are also contract chip suppliers to the mill. All of the pulp log agreements can be terminated by either party for any reason, upon seven days written notice. In 2008, as part of a creditor protection settlement agreement, a regional forest products company sold the two sawmills with which our Celgar mill had contracts for the supply of approximately 20% of its annual fiber requirements. Subsequent to the sale, these sawmills were curtailed. In late 2008, one of the sawmills was restarted and we have negotiated a new chip contract with the mill. The other sawmill has remained curtailed and is not expected to start up in the foreseeable future. If it does restart the Celgar mill intends to negotiate a new fiber agreement. There is no guarantee that the Celgar mill will be able to negotiate a fiber contract on acceptable terms or at all. However, given the proximity of the Celgar mill to this sawmill, there is a logistical advantage to the sawmill in supplying its chips to the Celgar mill. Energy Our energy is primarily generated from renewable carbon neutral sources, such as black liquor and wood waste. Our mills produce all of our steam requirements and generally generate excess energy which we sell to third party utilities. In 2008, we generated 1,456,630 MWh and we sold 456,059 MWh of surplus energy. See also Energy and Recent Energy Initiatives. We utilize fossil fuels, such as natural gas, in limited circumstances including in our kiln and for start-up and shutdown operations. Additionally, from time to time, mill process disruptions occur and we consume small quantities of purchased electricity and fossil fuels to maintain operations. As a result, all of our mills are subject to fluctuations in the prices for fossil fuels. Chemicals Our mills use certain chemicals which are generally available from several suppliers and sourcing is primarily based upon pricing and location. Although chemical prices have risen slightly over the last three years, we have been able to reduce our costs through improved efficiencies and capital expenditures. However, the current global economic slowdown may reduce the supply of certain chemicals which are manufactured as a by-product of other manufacturing processes and as a result place upward pressure on pricing for such chemicals. We are working with our suppliers to minimize these price pressures.

16

Cash Production Costs Cash production costs per tonne for our pulp mills are set out in the following table for the periods indicated:
Cash Production Costs Years Ended December 31, 2008 2007 2006 (per ADMT)

Fiber . . . . . . . . . . . . . . . . . . . . . . Labor . . . . . . . . . . . . . . . . . . . . . . Chemicals . . . . . . . . . . . . . . . . . . Energy . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . .

..................................... ..................................... ..................................... ..................................... .....................................

A 247 36 44 21 43 A 391

A 247 43 39 18 46 A 393

A 192 46 42 23 41 A 344

Total cash production costs(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Sales, Marketing and Distribution The distribution of our pulp sales revenues by geographic area are set out in the following table for the periods indicated:
2008 Years Ended December 31, 2007 2006 (in thousands)

Revenues by Geographic Area Germany . . . . . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . Other European Union countries(1) . . . . Other Asia . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . . Other countries . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . A 198,340 .................... 131,412 .................... 56,487 .................... 133,621 .................... 65,192 .................... 78,718 .................... 17,146

A 198,575 159,553 50,177 136,434 58,242 66,229 26,639 A 695,849

A 154,388 141,296 60,057 117,016 75,522 39,761 28,586 A 616,626

Total(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 680,916

(1) Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. (2) Excluding intercompany sales volumes of nil, nil and 13,234 tonnes of pulp and intercompany net sales revenues of Anil, Anil and A6.4 million in 2008, 2007 and 2006, respectively.

The following charts illustrate the geographic distribution of our revenues for the periods indicated: Year Ended December 31, 2008
Other Asia 9.6% Italy 8.3% Other countries 2.5%

Year Ended December 31, 2007

Other Asia 8.3% Italy 7.2% Other countries 3.8%

Year Ended December 31, 2006

Other Asia 12.3% Italy 9.7% Other European Union countries(1) 19.0% North America 6.4% China 22.9% Other countries 4.7%

Germany 29.1%

Germany 28.5%

Germany 25.0%

Other European Union countries(1) 19.6% North America 11.6%

China 19.3%

Other European Union countries(1) 19.6% North America 9.5%

China 22.9%

(1) Includes new entrant countries to the European Union from their time of admission.

17

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 17 employees engaged full time in such activities. The global sales and marketing group handles sales to over 230 customers. We coordinate and integrate the sales and marketing activities of our German mills to realize on a number of synergies between them. These include reduced overall administrative and personnel costs and coordinated selling, marketing and transportation activities. We also coordinate sales from the Celgar mill with our German mills on a global basis, thereby providing our larger customers with seamless service across all major geographies. In marketing our pulp, we seek to establish long-term relationships by providing a competitively priced, high-quality, consistent product and excellent service. In accordance with customary practice, we maintain long-standing relationships with our customers pursuant to which we periodically reach agreements on specific volumes and prices. Our pulp sales are on customary industry terms. At December 31, 2008, we had no material payment delinquencies. In 2008, 2007 and 2006, no single customer accounted for more than 10% of our pulp sales. Our pulp sales are not dependent upon the activities of any single customer. Our German mills are currently the only market kraft pulp producers in Germany, which is the largest import market for kraft pulp in Europe. We therefore have a competitive transportation cost advantage compared to Norscan pulp producers when shipping to customers in Europe. Due to the location of our German mills, we are able to deliver pulp to many of our customers primarily by truck. Most trucks that deliver goods into Eastern Germany generally do not also haul goods out of the region as Eastern Germany is primarily an importer of goods. We are therefore able to obtain relatively low back haul freight rates for the delivery of our products to many of our customers. Since many of our customers are located within a 500 kilometer radius of our German mills, we can generally supply pulp to customers of these mills faster than our competitors because of the short distances between the mills and our customers. The Celgar mills pulp is transported to customers by rail, truck and ocean carrier using strategically located third party warehouses to ensure timely delivery. The majority of Celgars pulp for overseas markets is initially delivered primarily by rail to the Port of Vancouver for shipment overseas by ocean carrier. Based in Western Canada, the Celgar mill is well positioned to service Asian customers. The majority of the Celgar mills pulp for domestic markets is shipped by rail to third party warehouses in the U.S. or directly to the customer. For the year ended December 31, 2008, approximately 47% of our consolidated sales were to tissue and specialty paper product manufacturers and approximately 53% to other paper product manufacturers. In 2007 and 2006 sales to tissue and specialty paper product manufacturers were approximately 44% and 38%, respectively, and sales to other paper product manufacturers represented approximately 56% and 62% of consolidated sales, respectively. Tissue and specialty paper product manufacturers generally are not as sensitive to declines in demand caused by downturns in economic activity. Capital Expenditures In 2008, we continued with our capital investment programs designed to increase production capacity, improve efficiency and reduce effluent discharges and emissions at our manufacturing facilities. The improvements made at our mills over the past five years have reduced operating costs and increased the competitive position of our facilities. Total capital expenditures at the Rosenthal mill in 2008, 2007 and 2006 were A8.7 million, A5.2 million and A13.4 million, respectively. Capital investments at the Rosenthal mill in 2008 related mainly to the renewal of a bleaching line. In addition, we initiated a washer project at a total cost of approximately A2.5 million which will help offset three years of wastewater fees that would otherwise be payable. Our Stendal mills total capital expenditures in 2008, 2007 and 2006 were A4.9 million, A4.9 million and A2.5 million, respectively. Capital investments at the Stendal mill in 2008 related mainly to fiber handling optimization projects and equipment to increase the efficiency and capacity of the mills black liquor production. Certain of our capital investment programs in Germany were partially financed through government grants made available by German federal and state governments. Under legislation adopted by the federal and certain state governments of Germany, government grants are provided to qualifying businesses operating in Eastern Germany to finance capital investments. The grants are made to encourage investment and job creation. Currently, grants are 18

available for up to 15% of the cost of qualified investments. Previously, government grants were available for up to 35% of the cost of qualified investments, such as for the construction of our Stendal mill. These grants at the 35% of cost level required that at least one permanent job be created for each A500,000 of capital investment eligible for such grants and that such jobs be maintained for a period of five years from the completion of the capital investment project. Generally, government grants are not repayable by a recipient unless it fails to complete the proposed capital investment or, if applicable, fails to create or maintain the requisite amount of jobs. In the case of such failure, the government is entitled to revoke the grants and seek repayment unless such failure resulted from material unforeseen market developments beyond the control of the recipient, wherein the government may refrain from reclaiming previous grants. Pursuant to such legislation in effect at the time, the Stendal mill received approximately A275.0 million of government grants. We believe that we are in compliance in all material respects with all of the terms and conditions governing the government grants we have received in Germany. The following table sets out for the periods indicated the effect of these government grants on the recorded value of such assets in our consolidated balance sheets:
As at December 31, 2008 2007 (in thousands) 2006

Properties, net (as shown on consolidated balance sheets) . . . . . . . Add back: government grants less amortization, deducted from properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties, gross amount including government grants less amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

881,704 290,187

933,258 304,366

972,143 341,710

A 1,171,891

A 1,237,624

A 1,313,853

Qualifying capital investments at industrial facilities in Germany that reduce effluent discharges offset wastewater fees that would otherwise be required to be paid. For more information about our environmental capital expenditures, see Environmental. Total capital expenditures at the Celgar mill in 2008, 2007 and 2006 were A12.1 million, A7.9 million and A16.0 million, respectively. In 2008, capital expenditures related primarily to the Celgar Energy Project and upgrades to the mills woodroom. We commenced the Celgar Energy Project as part of our continued focus on energy production and sales and to increase the mills production of green energy and optimize its power generation capacity. The project is designed to be a high return capital project with an estimated cost of approximately A35.0 million. It includes the installation of a second turbo generator with a design capacity of 48 MW. The project is expected to bring the mills installed generating capacity up to 100 MW, and upgrade the mills bark boiler and steam facilities. In January 2009 the Celgar mill finalized an electricity purchase agreement under which it will sell electrical energy generated by the Celgar Energy Project to the principal provincial power authority. See Energy and Recent Energy Initiatives. In 2009, we intend to reduce discretionary capital expenditures at all of our mills to help conserve our cash resources in response to the current economic environment. Overall, capital expenditures in 2009 are expected to be approximately A42.0 million and primarily relate to the Celgar Energy Project. Environmental Our operations are subject to a wide range of environmental laws and regulations, dealing primarily with water, air and land pollution control. We devote significant management and financial resources to comply with all applicable environmental laws and regulations. Our total capital expenditures on environmental projects at our mills were approximately A4.9 million in 2008 (2007 A0.2 million). In 2009, we expect environmental project related capital expenditures to be approximately A8.8 million in 2009, primarily relating to a washer project at the Rosenthal mill. We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in substantial compliance with the requirements of all applicable environmental laws and regulations and our respective operating permits. 19

Under German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures against the wastewater fees that they would otherwise be required to pay. We estimate that the aggregate wastewater fees we saved in 2008 as a result of environmental capital expenditures and initiatives to reduce allowable emissions and discharges at our Stendal and Rosenthal mills were approximately A6.4 million. In 2007, we saved approximately A4.1 million and, in 2006, the Stendal and Rosenthal mills saved aggregate wastewater fees of approximately A7.7 million. We expect that capital investment programs and other environmental initiatives at our German mills will mostly offset the wastewater fees that may be payable for 2009 and 2010 and will ensure that our operations continue in substantial compliance with prescribed standards. Environmental compliance is a priority for our operations. To ensure compliance with environmental laws and regulations, we regularly monitor emissions at our mills and periodically perform environmental audits of operational sites and procedures both with our internal personnel and outside consultants. These audits identify opportunities for improvement and allow us to take proactive measures at the mills as considered appropriate. The Rosenthal mill has a relatively modern biological wastewater treatment and oxygen bleaching facility. We have significantly reduced our levels of adsorbable organic halogen discharge at the Rosenthal mill and we believe the Rosenthal mills adsorbable organic halogen and chemical oxygen demand discharges are in compliance with the standards currently mandated by the German government. The Stendal mill, which commenced operations in September 2004, has been in substantial compliance with applicable environmental laws, regulations and permits. Management believes that, as the Stendal mill is a state-of-the-art facility, it will operate in compliance with the applicable environmental requirements. The Celgar mill has been in substantial compliance with applicable environmental laws, regulations and permits. In 2008 dredging of the mills spill pond was completed to remove a stockpile of solids responsible for generating the odor which has at times caused compliance issues with the mills air permit. In November 2008, the Celgar mill suffered a spill of diluted weak black liquor into the nearby Columbia River. The spill was promptly reported by the mill to authorities and remediated. An environmental impact report prepared by independent consultants engaged by the mill concluded that the environmental impact of the spill was minimal. The spill was also investigated by federal and provincial environmental authorities and a report of the matter is expected some time in 2009. Although we cannot predict what action, if any, the authorities may take, we do not currently expect the spill to result in any material charges. The Celgar mill operates two landfills, a newly commissioned site and an older site. The Celgar mill intends to decommission the old landfill and is developing a closure plan and reviewing such plan with the Ministry of Environment, or MOE. However, the MOE, in conjunction with the provincial pulp and paper industry, is in the process of developing a standard for landfill closures. In addition, the portion of the landfill owned by an adjacent sawmill continues to be active. Accordingly, the mill has not been able to move forward with the closure. We currently believe we may receive regulatory approval for such closure plan in 2009 and commence closure activities thereafter. We currently estimate the cost of closing the landfill at approximately A1.6 million but since the closure program for the old landfill has not been finalized or approved, there can be no assurance that the decommissioning of the old landfill will not exceed such cost estimate. Future regulations or permits may place lower limits on allowable types of emissions, including air, water, waste and hazardous materials, and may increase the financial consequences of maintaining compliance with environmental laws and regulations or conducting remediation. Our ongoing monitoring and policies have enabled us to develop and implement effective measures to maintain emissions in substantial compliance with environmental laws and regulations to date in a cost-effective manner. However, there can be no assurances that this will be the case in the future. 20

Human Resources We currently employ approximately 1,515 people. We have approximately 1,094 employees working in our German operations, including our transportation subsidiaries. In addition, there are approximately 18 people working at the office we maintain in Vancouver, British Columbia, Canada. Celgar currently employs approximately 403 people in its operations, the vast majority of which are unionized. Rosenthal is bound by collective agreements negotiated with Industriegewerkschaft Bergbau Chemie, Energie, or IGBCE, a national union that represents pulp and paper workers. We are currently negotiating a new agreement with IGBCE to replace the labor contract which expired at the end of 2008. We expect that this agreement will be concluded on similar terms as the prior agreement and will provide for a wage increase in 2009. Although we consider our relationship with our Rosenthal employees to be good, we can provide no assurance that a new collective agreement will be settled for the Rosenthal mill without significant work stoppages or disruptions. Stendal and its subsidiaries employ approximately 632 people. Pursuant to the government grants and financing arranged in connection with the Stendal mill, we have agreed with German state authorities to maintain this number of jobs until September 2010. Stendal has not yet entered into any collective agreements with IGBCE, although it may do so in the future. We consider the relationships with our employees to be good. We have implemented profit sharing plans, training programs and early retirement schemes for the benefit of our German employees. Although no assurances can be provided, we have not had any significant work stoppages at any of our German operations and we would therefore expect to enter into labor agreements with our pulp workers in Germany without any significant work stoppages at our German mills. We have negotiated a new four-year collective agreement, effective May 1, 2008, with our hourly workers at the Celgar mill to replace the collective agreement which expired on April 30, 2008. The agreement provides for a retroactive wage increase of 2.0% for 2008, a wage increase of 2.5% in each of 2009 and 2010 and a wage increase of 3.0% in 2011. Description of Certain Indebtedness The following summaries of certain material provisions of: (i) our senior notes; (ii) our convertible notes; (iii) the Stendal Loan Facility, including the recent amendment thereto; (iv) the Rosenthal Loan Facility; and (v) the Celgar Working Capital Facility, (as such terms are referred to below), are not complete and these provisions, including definitions of certain terms, are qualified by reference to the applicable documents and the applicable amendments to such documents on file with the Securities and Exchange Commission, or SEC. Senior Notes In conjunction with the acquisition of the Celgar mill and the repayment of Rosenthals then project loan facility, in February 2005, we issued $310.0 million in principal amount of senior notes, referred to as the Senior Notes. The Senior Notes bear interest at the rate of 9.25% per annum, payable in arrears on February 15 and August 15 of each year the notes are outstanding. The Senior Notes mature on February 15, 2013. The Senior Notes are our senior unsecured obligations and, accordingly, will rank junior in right of payment to all existing and future secured indebtedness and all indebtedness and liabilities of our subsidiaries, equal in right of payment with all existing and future unsecured senior indebtedness and senior in right of payment to the 8.5% convertible senior subordinated notes due 2010 and any future subordinated indebtedness. We may redeem the Senior Notes on or after February 15, 2009, in whole or in part, at the applicable redemption prices plus accrued and unpaid interest, if any, to the redemption date. In certain circumstances, we may also redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 109.35% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date with the net cash proceeds of certain equity offerings. The notes were issued under an indenture which, among other things, restricts our ability and the ability of our restricted subsidiaries under the indenture to: (i) incur additional indebtedness or issue preferred stock; (ii) pay dividends or make other distributions to our stockholders; (iii) purchase or redeem capital stock or subordinated indebtedness (unless there is no default and such purchase or redemption involves our convertible notes and the daily closing sale price per share of our common 21

stock on the NASDAQ Global Market for a period of at least ten consecutive trading days exceeds 120% of the then applicable conversion price of such convertible notes); (iv) make investments; (v) create liens and enter into sale and lease back transactions; (vi) incur restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (vii) sell assets; (viii) consolidate or merge with or into other companies or transfer all or substantially all of our assets; and (ix) engage in transactions with affiliates. These limitations are subject to other important qualifications and exceptions. In order to take into account the nature of the non-recourse project financing of the loan facility for our Stendal mill and to enhance our financing flexibility, the indenture governing our senior notes provides for a restricted group and an unrestricted group. The terms of the indenture are applicable to the restricted group and are generally not applicable to the unrestricted group. Currently, the restricted group is comprised of Mercer Inc., the Rosenthal and Celgar mills and certain holding subsidiaries. The restricted group excludes our Stendal mill. The working capital facilities at our Rosenthal and Celgar mills and our Convertible Notes and Senior Notes are obligations of the restricted group. The Stendal Loan Facility is an obligation of our unrestricted group. Convertible Notes In October 2003, we issued $82.5 million in aggregate principal amount of 8.5% convertible senior subordinated notes due 2010, referred to as the Convertible Notes. In December 2006, we purchased and cancelled an aggregate of approximately $15.2 million principal amount of such notes in exchange for approximately 2.2 million shares of our common stock. We pay interest semi-annually on the Convertible Notes on April 15 and October 15 of each year, beginning on April 15, 2004. The Convertible Notes mature on October 15, 2010. The Convertible Notes are redeemable on and after October 15, 2008, at any time in whole or in part, at our option on not less than 20 and not more than 60 days prior notice at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the date of redemption, subject to the restrictions in the indenture governing the notes. The Convertible Notes are convertible, at the option of the holder, unless previously redeemed, at any time on or prior to maturity into our common shares at a conversion price of $7.75 per share, which is equal to a conversion rate of approximately 129 shares per $1,000 principal amount of Convertible Notes, subject to adjustment. Holders of the Convertible Notes have the right to require us to purchase all or any part of the Convertible Notes 30 business days after the occurrence of a change of control with respect to us at a purchase price equal to the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The Convertible Notes are unsecured obligations of Mercer Inc. and are subordinated in right of payment to existing and future senior indebtedness (including our Senior Notes described above) and are effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The indenture governing the Convertible Notes limits the incurrence by us, but not our subsidiaries, of senior indebtedness. Stendal Loan Facility In August 2002, Stendal entered into a senior A828.0 million project finance facility, referred to as the Stendal Loan Facility. The Stendal Loan Facility is divided into tranches which cover, among other things, project construction and development costs, financing and start-up costs and working capital, as well as the financing of a debt service reserve account, or DSRA, approved cost overruns and a revolving loan facility that covered time lags for receipt of grant funding and value-added tax refunds in the amount of A160.0 million, which has been repaid. The DSRA is an account maintained to hold and, if needed, pay up to one years principal and interest due under the facility as partial security for the lenders. Other than the revolving working capital tranche, no further advances are currently available under the Stendal Loan Facility. Pursuant to the Stendal Loan Facility, interest was to accrue at variable rates between Euribor plus 0.60% and Euribor plus 1.55% per year. The facility provides for Stendal to manage its risk exposure to interest rate risk, currency risk and pulp price risk by way of interest rate swaps, Euro and U.S. dollar swaps and pulp hedging transactions, subject to certain controls, including certain maximum notional and at-risk amounts. Pursuant to the terms of the facility, in 2002 Stendal entered into interest rate swap agreements in respect of borrowings to fix most 22

of the interest costs under the Stendal Loan Facility at a rate of 5.28% commencing May 2004, plus margin, until final payment in October 2017. For more information, see Item 7A Quantitative and Qualitative Disclosures about Market Risk. Pursuant to the terms of the Stendal Loan Facility, Stendal reduced the aggregate advances outstanding to A531.1 million at the end of 2008 from a maximum original amount of A638.0 million. The tranches are generally repayable in installments and mature between the fifth and 15th anniversary of the first advance under the Stendal Loan Facility for project construction. In February 2009, we completed an agreement with Stendals lending syndicate to amend the Stendal Loan Facility, referred to as the Amendment. The Amendment is subject to customary conditions precedent, which are expected to be completed on or before March 15, 2009. Pursuant to the Amendment, Stendals obligation to repay A164.0 million of scheduled principal payments, referred to as the Deferred Amount, is deferred until maturity of the facility in September 2017. Until the Deferred Amount is repaid in full, Stendal may not make distributions, in the form of interest and capital payments on shareholder debt or dividends on equity invested, to its shareholders, including us. The Amendment also provides for a 100% cash sweep, referred to as the Cash Sweep, of any excess cash of Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Project Finance Loan Agreement during the then following 12 months, or Fully Funded, and second to prepay the Deferred Amount. Not included in the Cash Sweep is an amount of A15.0 million which Stendal is permitted to retain for working capital purposes. The Amendment implements a permitted leverage ratio of total debt under the Stendal Loan Facility to EBITDA, or Senior Debt/EBITDA Cover Ratio, which is effective from December 31, 2009 and is set to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. The Amendment also revises the Stendal Loan Facilitys annual debt service cover ratio, or Annual Debt Ratio, requirement to be at least 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x from January 1, 2014 until Maturity. The Amendment includes the following as events of default: if scheduled debt service for two consecutive periods is partially or wholly financed by drawings from the DSRA and as a result the DSRA is less than 3313% Fully Funded; if the DSRA is fully drawn and Stendal exercises its current 6-month principal payment deferral right in respect of the next repayment date; and failure to meet the Senior Debt/EBITDA Cover Ratio or Annual Debt Ratio as set out above.

The Amendment provides that Stendal and its shareholders may, once per fiscal year, cure a deficiency in either the Annual Debt Ratio or the Senior Debt/EBITDA Cover Ratio by way of a capital contribution or fully subordinated shareholder loan to Stendal in the amount necessary to cure such deficiency and thereby prevent the occurrence of an event of default. Under the terms of the Amendment, if, from December 31, 2011 until the date when all of the loans pursuant to the Stendal Loan Facility are repaid in full, we raise aggregate actual net proceeds of A20.0 million or more from an equity financing and the DSRA is not Fully Funded, it will constitute an event of default if we do not contribute A10.0 million to the capital of Stendal. The tranches under the Stendal Loan Facility are severally guaranteed by German federal and state governments in respect of an aggregate of 80% of the principal amount of these tranches. Under the guarantees, the German federal and state governments that provide the guarantees are responsible for the performance of our payment obligations for the guaranteed amounts. Such governmental guarantees permit the Stendal Loan Facility to benefit from lower interest costs and other credit terms than would otherwise be available. The Stendal Loan Facility is secured by all of the assets of Stendal. In connection with the Stendal Loan Facility, we entered into a shareholders undertaking agreement, referred to as the Undertaking, dated August 26, 2002, as amended, with Stendals then minority shareholders and the lenders in order to finance the shareholders contribution to the Stendal mill. Under the terms of the Undertaking, 23

we have agreed, for as long as Stendal has any liability under the Stendal Loan Facility to HVB, to retain control over at least 51% of the voting shares of Stendal. Rosenthal Loan Facility In February 2005, Rosenthal established a revolving working capital facility, referred to as the Rosenthal Loan Facility, to replace its prior project financing facility. The A40.0 million revolving working capital facility for the Rosenthal mill consists of a revolving credit facility which may be utilized by way of cash advances or advances by way of letter of credit or bank guarantees. The facility matures in February 2010. The interest payable on cash advances is LIBOR or EURIBOR plus 1.55%, plus certain other costs incurred by the lenders in connection with the facility. Each cash advance is to be repaid on the last day of the respective interest period and in full on the termination date and each advance by way of a letter of credit or bank guarantee shall be repaid on the applicable expiry date of such letter of credit or bank guarantee. An interest period for cash advances shall be three, six or 12 months or any other period as Rosenthal and the lenders may determine. There is also a 0.35% per annum commitment fee on the unused and uncancelled amount of the revolving facility which is payable quarterly in arrears. This facility is secured by a first fixed charge on the inventories, receivables and accounts of Rosenthal. It also provides Rosenthal with a hedging facility relating to the hedging of the interest, currency and pulp prices as they affect Rosenthal pursuant to a strategy agreed to by Rosenthal and the lender from time to time. Celgar Working Capital Facility In May 2006, Celgar established a C$40.0 million revolving working capital credit facility, referred to as the Celgar Working Capital Facility, to replace an existing facility. In January 2009, we extended the maturity date of this facility from May 2009 to May 2010. Availability of drawdowns under the facility is subject to a borrowing base limit that is based upon the Celgar mills eligible accounts receivable and inventory levels from time to time. The revolving facility is available by way of: (i) Canadian and U.S. denominated advances which bear interest at a designated prime rate plus 0.50% for Canadian advances and at a designated base rate plus 0.50% per annum for U.S. advances; (ii) bankers acceptance equivalent loans which bear interest at the applicable Canadian dollar bankers acceptance rate plus 2.25% per annum; and/or (iii) LIBOR advances which bear interest at the applicable LIBOR plus 2.25% per annum. The facility incorporates two sub lines, a $2.0 million letter of credit sub line and a $3.0 million foreign exchange contract sub line. Under these sub lines the lender will provide letters of credit guarantees and foreign exchange contract guarantees up to a maximum of $2.0 million and $3.0 million, respectively, subject, in each case, to the facility limit and payment of applicable fees. Celgar is also required to pay a 0.25% per annum standby fee monthly in arrears on any unutilized portion of the revolving facility. The Celgar Working Capital Facility is secured by, among other things, a first fixed charge on the current assets of Celgar. Discontinued Operations In August 2006, we divested our equity interest in the Heidenau paper mill and Landqart AG for cash proceeds of A5.0 million and a secured note of A5.0 million. In November 2006, we sold substantially all of the assets comprising the Fahrbrucke paper mill. We recorded an aggregate net loss of A6.0 million on the disposal of these assets which included an accrual of A1.9 million for net costs expected in connection with funding and other commitments related to the Fahrbrucke sale. Additional Information We make available free of charge on or through our website at www.mercerint.com annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports, as soon as reasonably practicable after we file these materials with the SEC. The public may read and copy any material we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site at www.sec.gov that also contains our current and periodic reports, including our proxy and information statements. 24

ITEM 1A. RISK FACTORS The statements in this Risk Factors section describe material risks to our business and should be considered carefully. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995. Our disclosure and analysis in this annual report on Form 10-K and in our annual report to shareholders contain some forward-looking statements that set forth anticipated results based on managements current plans and assumptions. These include statements regarding: our markets; demand and prices for our products; raw material costs and supply; energy prices, sales and our initiatives to enhance sales of surplus energy; capital expenditures; the economy; foreign exchange rates particularly the U.S. dollar and Canadian dollar; our level of indebtedness; and derivatives.

From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Statements in the future tense, and all statements accompanied by terms such as may, will, believe, project, expect, estimate, assume, intend, anticipate, plan, and variations thereof and similar terms are intended to be forward-looking statements as defined by federal securities law. You can find examples of these statements throughout this annual report on Form 10-K, including in the description of business in Item 1. Business and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. While these forward-looking statements reflect our best estimates when made, the following risk factors could cause actual results to differ materially from estimates or projections. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. As noted above, these forwardlooking statements speak only as of the date when they are made. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements. Moreover, in the future, we may make forward-looking statements that involve the risk factors and other matters described in this document as well as other risk factors subsequently identified. Our business is highly cyclical in nature. The pulp business is highly cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. Pulp markets are highly competitive and are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro economic conditions and levels of industry capacity. 25

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production or permanently close machines or entire mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Demand for pulp has historically been determined by the level of economic growth and has been closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved. However, in the latter half of 2008, the current global economic crisis has resulted in a sharp decline of pulp prices from a high of A900 per ADMT to A635 per ADMT at the end of 2008. There may be further price deterioration in the future. We cannot predict the length or severity of the current economic downturn and its continuing impact on lower demand and prices for our product. Prices for pulp are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the price for pulp, such pulp may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations could be materially adversely affected. Our level of indebtedness could negatively impact our financial condition and results of operations. As of December 31, 2008, we had approximately A820.3 million of indebtedness outstanding, of which A531.1 million relates to the Stendal Loan Facility. We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following: our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all; a significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes; increasing our vulnerability to current and future adverse economic and industry conditions; a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations; our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general; causing us to offer debt or equity securities on terms that may not be favorable to us or our shareholders; limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness.

The indenture relating to our Senior Notes and our bank credit facilities contain restrictive covenants which impose operating and other restrictions on us and our subsidiaries. These restrictions will affect, and in many respects will limit or prohibit, our ability to, among other things, incur or guarantee additional indebtedness or enter into sale/leaseback transactions, pay dividends or make distributions on capital stock or redeem or repurchase capital stock, make investments or acquisitions, create liens and enter into mergers, consolidations or transactions with affiliates. The terms of our indebtedness also restrict our ability to sell certain assets, apply the proceeds of such sales and reinvest in our business. 26

Failure to comply with the covenants in the indenture relating to our Senior Notes or in our bank credit facilities could result in events of default and could have a material adverse effect on our liquidity, results of operations and financial condition. Our ability to repay or refinance our indebtedness will depend on our future financial and operating performance. Our performance, in turn, will be subject to prevailing economic and competitive conditions, as well as financial, business, legislative, regulatory, industry and other factors, many of which are beyond our control. Our ability to meet our future debt service and other obligations, in particular the Stendal project debt, may depend in significant part on the extent to which we can implement successfully our business strategy. We cannot assure you that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized. The global economic crisis could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources. As widely reported, financial markets in the United States, Europe and Asia experienced extreme and unprecedented disruption in the second half of 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Such crisis has now broadened and is impacting other sectors of the economy, resulting in an extremely difficult market environment for many businesses, including our own. As a result, we are subject to a number of risks associated with these adverse conditions. Principally, as pulp demand has historically been determined by the level of economic growth and business activity and the recent financial market disruptions have led to slowdowns in world economies, demand and prices for our product have decreased substantially and may continue to decrease further. Additionally, restricted credit availability restrains our customers ability or willingness to purchase our products resulting in lower revenues. Restricted credit availability also can restrict us in the way we operate our business, our level of inventories and the amount of capital expenditures we may undertake. Depending on their severity and duration, the effects and consequences of the financial market turmoil and wider global economic downturn could have a material adverse effect on our liquidity and capital resources, including our ability to raise capital, if needed, the ability of banks to honor draws on our credit facilities, or otherwise negatively impact our business and financial results. The timing and nature of any recovery in the financial markets or in the general global economic situation remains uncertain, and there can be no assurance that market conditions will improve in the near future. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions on world economies and pulp markets. Prolonged depressed pulp prices may cause us to take production downtime at our mills. If prolonged depressed pulp prices render operations at any one of our mills uneconomical we may be forced to take production downtime. During such temporary shutdowns we would be required to continue to expend capital to maintain the mill and equipment. In addition, we could incur significant labor costs if we are required to give employees notice prior to any layoff. If one of our mills is shut down, it may experience prolonged startup periods, ranging from several days to several weeks. The shutdown of any one of our mills for a substantial period of time could have a material adverse effect on our financial condition and results of operations. In the current economic conditions and 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. In light of the current state of the world economy and tight credit markets, challenging operating environment and current weakness in pulp demand and prices, there can be no assurance that we will be able to generate sufficient cash flows to service, repay or refinance our outstanding indebtedness when it matures. In particular, if we are forced to take production downtime at any of our mills as a result of the weak pulp pricing environment, this could have a material adverse effect on cash flows and impair our ability to service and repay debt. 27

Our shares may be delisted from the NASDAQ Global Market if the closing price for our shares is not maintained at $1.00 per share or higher. NASDAQ imposes, among other requirements, listing maintenance standards as well as minimum bid and public float requirements. The price of our shares must trade at or above $1.00 to comply with NASDAQs minimum bid requirement for continued listing on the NASDAQ Global Market. In recent months, our shares have traded at below $1.00 per share at closing for an extended period of time. In response to current market conditions, NASDAQ has suspended its enforcement of the rules regarding a minimum closing bid price until April 20, 2009. If the closing bid price of our shares continues to fail to meet NASDAQs minimum bid price requirement for 30 consecutive business days on or after April 20, 2009, or such later date to which NASDAQ may extend its suspension of this requirement, of if we otherwise fail to meet all other applicable requirements of the NASDAQ Global Market, NASDAQ may make a determination to delist our common shares. Any such delisting could adversely affect the market liquidity of our shares and the market price of our shares could decrease and could also adversely affect our ability to obtain financing or refinancing for the continuation of our operations and/or result in the loss of confidence by stakeholders. If our shares were threatened with delisting from The NASDAQ Global Market, we may, depending on the circumstances, seek to extend the period for regaining compliance with NASDAQ listing requirements by moving our shares to The NASDAQ Capital Market, or we may pursue other strategic alternatives to meet the continuing listing standards. In addition, we may maintain our listing on the Toronto Stock Exchange.

Cyclical fluctuations in the price and supply of our raw materials could adversely affect our business. Our main raw material is fiber in the form of wood chips and pulp logs. Such fiber is cyclical in terms of both price and supply. The cost of wood chips and pulp logs is primarily affected by the supply and demand for lumber. Demand for these raw materials is generally determined by the volume of pulp and paper products produced globally and regionally. Since 2006 high energy prices, a focus on, and governmental initiatives related to, green or renewable energy have led to an increase in renewable energy projects in Europe, including Germany. Demand for wood residuals from such energy producers has generally put upward pressure on prices for wood residuals such as wood chips in Germany and its neighboring countries. This has resulted in higher fiber costs for our German mills and such trend could continue to put further upward pressure on wood chip prices although declining energy prices and weakening economies in the latter part of 2008 have tempered such demand. Similarly, North American energy producers are exploring the viability of renewable energy initiatives and governmental initiatives in this field are increasing, all of which could lead to higher demand for sawmill residual fiber, including chips. The cyclical nature of pricing for these raw materials represents a potential risk to our profit margins if pulp producers are unable to pass along price increases to their customers. We do not own any timberlands or have any long-term governmental timber concessions nor do we have any long-term fiber contracts at our German operations. Raw materials are available from a number of suppliers and we have not historically experienced material supply interruptions or substantial sustained price increases, however our requirements have increased and may continue to increase as we increase capacity through capital projects or other efficiency measures at our mills. As a result, we may not be able to purchase sufficient quantities of these raw materials to meet our production requirements at prices acceptable to us during times of tight supply. In addition, the quality of fiber we receive could be reduced as a result of industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation, weather conditions, acts of god and other events beyond our control. An insufficient supply of fiber or reduction in the quality of fiber we receive would materially adversely affect our business, financial condition, results of operations and cash flow. In addition to the supply of wood fiber, we are dependent on the supply of certain chemicals and other inputs used in our production facilities. Any disruption in the supply of these chemicals or other inputs could affect our ability to meet customer demand in a timely manner and could harm our reputation. Any material increase in the cost of these chemicals or other inputs could have a material adverse effect on our business, results of operations, financial condition and cash flows. 28

We operate in highly competitive markets. We sell our pulp globally, with a large percentage sold in Europe, North America and Asia. The markets for pulp are highly competitive. A number of other global companies compete in each of these markets and no company holds a dominant position. Our pulp is considered a commodity because many companies produce similar and largely standardized products. As a result, the primary basis for competition in our markets has been price. Many of our competitors have greater resources and lower leverage than we do and may be able to adapt more quickly to industry or market changes or devote greater resources to the sale of products than we can. There can be no assurance that we will continue to be competitive in the future. The global pulp market has historically been characterized by considerable swings in prices which have and will result in variability in our earnings. Prices are typically denominated in U.S. dollars. We are exposed to currency exchange rate and interest rate fluctuations. In 2008, the majority of our sales were in products quoted in U.S. dollars while most of our operating costs and expenses, other than those of the Celgar mill, were incurred in Euros. In addition, all of the products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily incurred in Canadian dollars. Our results of operations and financial condition are reported in Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S. dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies relative to the Euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows. In 2002, Stendal entered into variable-to-fixed interest rate swaps to fix interest payments under the Stendal mill financing facility, which has kept Stendal from benefiting from the general decline in interest rates that ensued. These derivatives are marked to market at the end of each reporting period and all unrealized gains and losses are recognized in earnings for the relevant reporting periods. Increases in our capital expenditures or maintenance costs could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and comply with environmental laws. Our annual capital expenditures may vary due to fluctuations in requirements for maintenance, business capital, expansion and as a result of changes to environmental regulations that require capital expenditures to bring our operations into compliance with such regulations. In addition, our senior management and board of directors may approve projects in the future that will require significant capital expenditures. Increased capital expenditures could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. Further, while we regularly perform maintenance on our manufacturing equipment, key pieces of equipment in our various production processes may still need to be repaired or replaced. If we do not have sufficient funds or such repairs or replacements are delayed, the costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our business, financial condition, results of operations and cash flows. We use derivatives to manage certain risk which has caused significant fluctuations in our operating results. We use derivative instruments to limit our exposure to interest rate fluctuations. Concurrently with entering into the Stendal financing, Stendal entered into variable-to-fixed rate interest swaps for the full term of the Stendal Loan Facility to manage its interest rate risk exposure with respect to the full principal amount of this facility. We record unrealized gains or losses on our derivative instruments when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. These unrealized and realized gains and losses can materially impact our operating results for any reporting period. For example, our operating results for 2008 included unrealized net losses of A25.2 million on our interest rate derivative. For 2007, our operating results included realized and unrealized net gains of A20.4 million on our currency and interest rate 29

derivatives. Our operating results for 2006 included realized and unrealized net gains of A105.8 million on currency and interest rate derivatives. If any of the variety of instruments and strategies we utilize are not effective, we may incur losses which may have a materially adverse effect on our business, financial condition, results of operations and cash flow. Further, we may in the future use derivative instruments to manage pulp price risks. The purpose of our derivative activity may also be considered speculative in nature; we do not use these instruments with respect to any pre-set percentage of revenues or other formula, but either to augment our potential gains or reduce our potential losses depending on our perception of future economic events and developments. We are subject to extensive environmental regulation and we could have environmental liabilities at our facilities. Our operations are subject to numerous environmental laws as well as permits, guidelines and policies. These laws, permits, guidelines and policies govern, among other things: unlawful discharges to land, air, water and sewers; waste collection, storage, transportation and disposal; hazardous waste; dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances; the clean-up of unlawful discharges; land use planning; municipal zoning; and employee health and safety.

In addition, as a result of our operations, we may be subject to remediation, clean up or other administrative orders or amendments to our operating permits, and we may be involved from time to time in administrative and judicial proceedings or inquiries. Future orders, proceedings or inquiries could have a material adverse effect on our business, financial condition and results of operations. Environmental laws and land use laws and regulations are constantly changing. New regulations or the increased enforcement of existing laws could have a material adverse effect on our business and financial condition. In addition, compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be no assurance that we will be able to maintain our profitability by offsetting any increased costs of complying with future regulatory requirements. We are subject to liability for environmental damage at the facilities that we own or operate, including damage to neighboring landowners, residents or employees, particularly as a result of the contamination of soil, groundwater or surface water and especially drinking water. The costs of such liabilities can be substantial. Our potential liability may include damages resulting from conditions existing before we purchased or operated these facilities. We may also be subject to liability for any offsite environmental contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. In addition, we may be held legally responsible for liabilities as a successor owner of businesses that we acquire or have acquired. Except for Stendal, our facilities have been operating for decades and we have not done invasive testing to determine whether or to what extent environmental contamination exists. As a result, these businesses may have liabilities for conditions that we discover or that become apparent, including liabilities arising from non-compliance with environmental laws by prior owners. Because of the limited availability of insurance coverage for environmental liability, any substantial liability for environmental damage could materially adversely affect our results of operations and financial condition. 30

Enactment of new environmental laws or regulations or changes in existing laws or regulations might require significant capital expenditures. We may be unable to generate sufficient funds or access other sources of capital to fund unforeseen environmental liabilities or expenditures. We are subject to risks related to our employees. The majority of our employees are unionized. In the future we may enter into a collective agreement with our pulp workers at the Stendal mill. The collective agreements relating to hourly workers at both our Rosenthal and Celgar mills expired in 2008. We are currently negotiating a new agreement with our Rosenthal employees and have negotiated a new four-year collective agreement, effective May 1, 2008, with the hourly workers at our Celgar mill. Although we have not experienced any work stoppages in the past, there can be no assurance that we will be able to negotiate acceptable collective agreements or other satisfactory arrangements with our employees upon the expiration of our collective agreements or in conjunction with the establishment of a new agreement or arrangement with our pulp workers at the Stendal mill. This could result in a strike or work stoppage by the affected workers. The registration or renewal of the collective agreements or the outcome of our wage negotiations could result in higher wages or benefits paid to union members. Accordingly, we could experience a significant disruption of our operations or higher on-going labor costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flow. The Celgar Energy Project may not generate the results or benefits we expect. The Celgar Energy Project is subject to customary risks and uncertainties inherent for large capital projects which could result in the project not completing on schedule or as budgeted. Delays to Celgar receiving any operating permits or any required amendments to such permits could result in construction delays, operational deficiencies or funding shortfalls. Furthermore, the Celgar mill could experience operating difficulties or delays during the start-up period when production of green energy is being ramped up. The Celgar Energy Project may not achieve our planned power generation or the level required under the electricity purchase agreement concluded with British Columbias principal power authority. We rely on German federal and state government grants and guarantees. We currently benefit from a subsidized capital expenditure program and lower cost of financing as a result of German federal and state government grants and guarantees at our Stendal mill. Should either the German federal or state governments be prohibited from honoring legislative grants and guarantees at Stendal, or should we be required to repay any such legislative grants, this may have a material adverse effect on our business, financial condition, results of operations and cash flow. The EU ETS and Germanys Renewable Energy Act. Since 2005, our German mills have benefitted from sales of emission allowances under the EU ETS. As a result of our Rosenthal and Stendal mills recently commenced participation in the Renewable Energy Act, the amount of emissions allowances granted to our German mills under the EU ETS may be reduced or our German mills may cease to be eligible at all for participation under the EU ETS. Additionally, the Renewable Energy Act is subject to governmental amendments which could adversely affect the eligibility of our Rosenthal and Stendal mills to participate in this statutory program and/or the tariffs paid thereunder. As a result we cannot predict with any certainty the amount of future sales of surplus energy we may be able to generate. We are dependent on key personnel. Our future success depends, to a large extent, on the efforts and abilities of our executive and senior mill operating officers. Such officers are industry professionals many of whom have operated through multiple business cycles. Our officers play an integral role in, among other things: sales and marketing; 31

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

The loss of one or more of our officers could make us less competitive in these areas which could materially adversely affect our business, financial condition, results of operations and cash flows. We do not maintain any key person life insurance for any of our executive or senior mill operating officers. We may experience material disruptions to our production. A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our results of operations. Any of our mills could cease operations unexpectedly due to a number of events, including: unscheduled maintenance outages; prolonged power failures; equipment failure; design error or operator error; chemical spill or release; explosion of a boiler; disruptions in the transportation infrastructure, including roads, bridges, railway tracks and tunnels; fires, floods, earthquakes or other natural catastrophes; labor difficulties; and other operational problems.

Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If any of our facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired and could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters. The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks or natural disasters, could create economic and financial disruptions, could lead to operational difficulties (including travel limitations) that could impair our ability to manage or operate our business and adversely affect our results of operations. Our insurance coverage may not be adequate. We have obtained insurance coverage that we believe would ordinarily be maintained by an operator of facilities similar to our mills. Our insurance is subject to various limits and exclusions. Damage or destruction to our facilities could result in claims that are excluded by, or exceed the limits of, our insurance coverage. Additionally, the current financial crisis is affecting the availability of insurance coverage and, in particular, the availability and extent of credit insurance, and there can be no assurance that we will be able to maintain credit insurance for our planned operations on commercially acceptable terms or at all. 32

We rely on third parties for transportation services. Our business primarily relies upon third parties for the transportation of pulp to our customers, as well as for the delivery of our raw materials to our mills. Our pulp and raw materials are principally transported by truck, barge, rail and sea-going vessels, all of which are highly regulated. Increases in transportation rates can also materially adversely affect our results of operations. Further, if our transportation providers fail to deliver our pulp in a timely manner, it could negatively impact our customer relationships and we may be unable to sell it at full value. If our transportation providers fail to deliver our raw materials in a timely fashion, we may be unable to manufacture pulp in response to customer orders. Also, if any of our transportation providers were to cease operations, we may be unable to replace them at a reasonable cost. The occurrence of any of the foregoing events could materially adversely affect our results of operations. Washington State law and our Articles of Incorporation may have anti-takeover effects which will make an acquisition of our Company by another company more difficult. We are subject to the provisions of the Revised Code of Washington, Chapter 23B.19, which prohibits a Washington corporation, including our Company, from engaging in any business combination with an acquiring person for a period of five years after the date of the transaction in which the person became an acquiring person, unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales as well as certain transactions resulting in a financial benefit to the acquiring person. Subject to certain exceptions, an acquiring person is a person who, together with affiliates and associates, owns, or within five years did own, 10% or more of the corporations voting stock. We may in the future adopt certain measures that may have the effect of delaying, deferring or preventing a change in control of our Company. Under Washington State law, we have the ability to adopt certain of these measures, including, without limitation, a shareholder rights plan, without any further vote or action by the holders of our shares. These measures may have anti-takeover effects, which may delay, defer or prevent a takeover attempt that a holder of our shares might consider in its best interest. ITEM 1B. None. ITEM 2. PROPERTIES UNRESOLVED STAFF COMMENTS.

We lease offices in Vancouver, British Columbia, Seattle, Washington, and in Berlin, Germany. We own the Rosenthal and Celgar mills and the underlying property. The Stendal mill is situated on property owned by Stendal, our 70.6% owned subsidiary. The Rosenthal mill is situated on a 220 acre site near the town of Blankenstein in the state of Thuringia, approximately 300 kilometers south of the Stendal mill. The Saale river flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with a current annual production capacity of approximately 325,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the mill include: an approximately 315,000 square feet fiber storage area; barking and chipping facilities for pulp logs; an approximately 300,000 square feet roundwood yard; a fiber line, which includes a Kamyr continuous digester and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a bailing line; an approximately 63,000 square feet finished goods storage area; a chemical recovery system, which includes a recovery boiler, evaporation plant and recausticizing plant; a fresh water plant; 33

a wastewater treatment plant; and a power station with a turbine capable of producing 45 MW of electric power from steam produced by the recovery boiler.

The Stendal mill is situated on a 200 acre site owned by Stendal that is part of a larger 1,250 acre industrial park near the town of Stendal in the state of Saxony-Anhalt, approximately 300 kilometers north of the Rosenthal mill and 130 kilometers from the city of Berlin. The mill is adjacent to the Elbe river and has access to harbor facilities for water transportation. The mill is a single line mill with a current annual design production capacity of approximately 635,000 ADMTs of kraft pulp. The Stendal mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly being generated is sold to the regional power grid. The facilities at the mill include: an approximately 920,000 square feet fiber storage area; barking and chipping facilities for pulp logs; a fiber line, which includes ten Superbatch digester and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a bailing line; an approximately 108,000 square feet finished goods storage area; a recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a fresh water plant; a wastewater treatment plant; and a power station with a turbine capable of producing approximately 100 MW of electric power from steam produced by the recovery boiler and a power boiler.

The Celgar mill is situated on a 400 acre site near the city of Castlegar, British Columbia. The mill is located on the south bank of the Columbia River, approximately 600 kilometers east of the port city of Vancouver, British Columbia, and approximately 32 kilometers north of the Canada-U.S. border. The city of Seattle, Washington is approximately 650 kilometers southwest of Castlegar. It is a single line mill with a current annual production capacity of approximately 495,000 ADMTs of kraft pulp. Internal power generating capacity could, with certain capital improvements, enable the Celgar mill to be self-sufficient in electrical power and at times to sell surplus electricity. The facilities at the Celgar mill include: chip storage facilities consisting of four vertical silos and an asphalt surfaced yard with a capacity of 200,000 cubic meters of chips; a woodroom containing debarking and chipping equipment for pulp logs; a fiber line, which includes a dual vessel hydraulic digester, pressure knotting and screening, single stage oxygen delignification and a four stage bleach plant; two pulp machines, which each include a dryer, a cutter and a bailing line; a chemical recovery system, which includes a recovery boiler, evaporation plant, recausticizing area and effluent treatment system; and a turbine and generator capable of producing approximately 52 MW of electric power from steam produced by a recovery boiler and power boiler fueled by natural gas.

At the end of 2008, substantially all of the assets relating to the Stendal mill were pledged to secure the Stendal Loan Facility. The working capital loan facilities established for the Rosenthal and Celgar mills are secured by first charges against the inventories and receivables at the respective mills. 34

The following table sets out our pulp production capacity and actual production sales volumes and revenues by mill for the periods indicated:
Annual Production Capacity(1) Years Ended December 31, 2008 2007 (ADMTs) 2006

Pulp Production by Mill: Rosenthal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Celgar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stendal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

325,000 495,000 635,000

328,693 485,893 610,401 1,424,987

326,838 476,243 601,592 1,404,673

306,188 438,855 557,217 1,302,260

Total pulp production . . . . . . . . . . . . . . . . . . . . . . . . 1,455,000

(1) Capacity is the rated capacity of the plants for the year ended December 31, 2008, which is based upon production for 365 days a year. Targeted production is generally based upon 355 days per year.

ITEM 3.

LEGAL PROCEEDINGS

In October 2005, our wholly owned subsidiary, Zellstoff Celgar Limited, received a re-assessment for real property transfer tax payable in British Columbia, Canada, in the amount of approximately A2.6 million (C$4.5 million) in connection with the acquisition of the Celgar mill. We are currently contesting the re-assessment and, as part of this process, a statutory lien was registered against the assets of the Celgar mill by British Columbias revenue authority in 2008. We currently expect a hearing in this matter to occur sometime in 2009. The amount, if any, that may be payable in connection with this matter remains uncertain. In December 2008, the Court of First Instance of the European Communities dismissed the appeal brought by Kronoply GmbH and Kronotex GmbH & Co., two related board manufacturers against the decision of the Commission of the European Communities not to raise objection against the approximately A275 million of government grants received by our Stendal mill. We are subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

35

PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information. Our shares are quoted for trading on the NASDAQ Global Market under the symbol MERC and listed in U.S. dollars on the Toronto Stock Exchange under the symbol MRI.U. The following table sets forth the high and low sale prices of our shares on the NASDAQ Global Market for each quarter in the two year period ended December 31, 2008:
Fiscal Quarter Ended High Low

2007 March 31 . . . . . . . . . . . . . . . . June 30. . . . . . . . . . . . . . . . . . September 30 . . . . . . . . . . . . . December 31 . . . . . . . . . . . . . 2008 March 31 . . . . . . . . . . . . . . . . June 30. . . . . . . . . . . . . . . . . . September 30 . . . . . . . . . . . . . December 31 . . . . . . . . . . . . .

............................................. ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. .............................................

$13.74 13.39 10.94 10.10 $ 9.02 8.48 7.72 3.66

$11.19 9.51 7.56 6.99 $ 6.70 6.31 3.17 0.95

(b) Shareholder Information. As at February 27, 2009, there were approximately 453 holders of record of our shares and a total of 36,422,487 shares were outstanding. (c) Dividend Information. The declaration and payment of dividends is at the discretion of our board of directors. Our board of directors has not declared or paid any dividends on our shares in the past two years and does not anticipate declaring or paying dividends in the foreseeable future. (d) Equity Compensation Plans. The following table sets forth information as at December 31, 2008 regarding our equity compensation plans approved by our shareholders. 1,000,000 of our shares may be issued pursuant to options, stock appreciation rights and restricted shares under our 2004 Stock Incentive Plan. Our Amended and Restated 1992 Non-Qualified Stock Option Plan expired in 2008.
Number of Shares to be Issued Upon Exercise of Outstanding Options Weighted-average Exercise Price of Outstanding Options Number of Shares Available for Future Issuance Under Plan

2004 Stock Incentive Plan . . . . . . . . . . . . . . . Amended and Restated 1992 Non-Qualified Stock Option Plan . . . . . . . . . . . . . . . . . . .

30,000 898,334

$7.30 $6.41

166,700(1) (2)

(1) An aggregate of 232,685 restricted shares have been issued under the plan. Grants for up to 570,614 shares have been made pursuant to the Performance Supplement under the plan (as described below). (2) The plan has expired.

The terms of the 2004 Plan permit us to grant awards under other plans, programs or agreements which may be settled in shares under the 2004 Plan. Pursuant to such terms we initiated a long-term performance incentive supplement, or Performance Supplement, in February 2008. The function of the Performance Supplement, in accordance with the purposes of the 2004 Plan, is to promote the long-term success of the Company and the creation of shareholder value by aligning the interests of our employees, including senior management, with those of our shareholders. Any grants made under the Performance Supplement are settled in the form of shares issued under the 2004 Plan and any shares issued pursuant to the Performance Supplement reduce the number of shares available under the 2004 Plan. The Performance Supplement provides for the grant of restricted stock, restricted stock units and performance awards comprised of performance shares and performance units to salaried employees of the Company and its 36

affiliates. The total number of shares reserved and available for delivery for awards granted under the Performance Supplement is 570,614 shares and represents a portion of the shares which can be issued under the 2004 Plan. We do not have any equity compensation plans that have not been approved by shareholders. (e) Private Placements. In December 2006, we purchased and cancelled an aggregate of $15,245,000 principal amount of our convertible notes in exchange for 2,201,035 shares of our common stock. The shares were issued pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. (f) Performance Graph. The following graph shows a five-year comparison of cumulative total shareholder return, calculated on an assumed dividend reinvested basis, for our common stock, the NASDAQ Stock Market Index (the NASDAQ Index) and Standard Industrial Classification, or SIC, Code Index (SIC Code 2611 pulp mills) (the Industry Index). The graph assumes $100 was invested in each of our common stock, the NASDAQ Index and the Industry Index on December 31, 2003. Data points on the graph are annual. 5-YEAR CUMULATIVE TOTAL RETURN ASSUMES $100 INVESTED ON DEC. 31, 2003 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING DEC 31, 2008
250 225 200 175 150 125 100 75 50 25 0 2003

DOLLARS

2004

2005

2006

2007

2008

MERCER INTERNATIONAL, INC. NASDAQ MARKET INDEX

SIC CODE INDEX

Company

2003

2004

2005

2006

2007

2008

Mercer International Inc. . . . . . . . . . . . . . . . . . . . 100.00 SIC Code Index . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 NASDAQ Stock Market Index . . . . . . . . . . . . . . . . 100.00

167.72 116.55 108.41

123.78 119.98 110.79

186.93 186.38 122.16

123.31 228.45 134.29

30.24 37.76 79.25

37

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected historical financial and operating data as at and for the periods indicated. The following selected financial data is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements and related notes contained in this annual report and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. The following selected financial data: includes the operating results of the Stendal mill from its start up in September 2004 and the results of operations and financial condition of the Celgar mill from the time of its acquisition in February 2005; and excludes the results of operations of our paper operations which were sold in 2006 and are accounted for as discontinued operations. Previously reported data and the financial statements and related notes included herein have been reclassified to conform to the current presentation.
2008 Statement of Operations Data Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Operating income (loss) from continuing operations . . . . . . . A Unrealized gains (losses) on derivative financial instruments . . A Realized gains (losses) on derivative financial instruments . . . A Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Net income (loss) from continuing operations . . . . . . . . . . . A Net income (loss) (including discontinued operations) . . . . . . A Net income (loss) per share from continuing operations, Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Net income (loss) per share (including discontinued operations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Weighted average shares outstanding (in thousands), Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Sheet Data Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Shareholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Other Pulp Data(4) Sales volume (ADMTs) . . . . . . . . . . . . . . . . . . . . . . . . Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average price realized (per ADMT) . . . . . . . . . . . . . . . . A 1,423,300 1,424,987 478 A 1,352,590 1,404,673 516 A 1,326,355 1,302,260 465 A 1,101,304 1,184,619 407 A 421,716 446,710 423 258,901 104,527 154,374 909,478 166,225 A A A A A 290,259 121,516 168,743 885,339 276,662 A A 221,800 120,002 A A 251,522 140,327 A A A A A 207,409 229,068 (21,659)(2) 863,840 162,741 36,285 36,287 36,081 45,303 33,336 43,084 31,218 31,218 17,426 28,525 720,291 706,962 13,329 (25,228) 65,756 (1,174) (72,465) (72,465) (2.00) (2.00) (2.00) A A A A A A A A A A A A 727,295 657,709 69,586 13,537 6,820 71,400 4,453 22,389 22,179 0.62 0.58 0.61 A A A A A A A A A A A A 644,899 552,395 92,504 109,358 (3,510) 91,931 6,090 69,242 63,210 2.08 1.72 1.90 A A A A A A A 469,178 450,528 18,650 (69,308) (2,455) 86,326 2,422 A A A A A A A A A A A A 197,693 205,894 (8,201) (32,331) 44,467 23,185 2,772 30,139 19,980 1.73 1.25 1.15 Years Ended December 31, 2007 2006 2005 2004

(Euro in thousands, other than per share and per ADMT amounts)

A (112,058) A (117,146) A A A (3.59) (3.59) (3.75)

A 101,798(2) A 1,302,594 A A 963,791 218,801

A 111,195(2) A 1,393,816 A 1,104,746 A 148,743

Total assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 1,180,230

A 1,283,517

A 1,255,649

(1) We capitalized most of the interest related to the Stendal mill prior to September 18, 2004. (2) We have applied for investment grants from the federal and state governments of Germany and had claims of approximately A0.3 million outstanding at December 31, 2007, all of which was received in 2008, A1.6 million outstanding at December 31, 2006, all of which was received in 2007 and approximately A7.0 million outstanding at December 31, 2005, all of which was received in 2006. However, in accordance with our accounting policies, we do not record these grants until they are received. (3) We do not report the effect of government grants relating to our assets in our income. These grants reduce the cost basis of the assets purchased when the grants are received. See Item 1 Business Capital Expenditures. (4) Excluding intercompany sales.

38

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of our continuing operations as at and for the three years ended December 31, 2008 is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. The following Managements Discussion and Analysis of Financial Condition and Results of Operations reflects the disposition of our paper operations in 2006, the results of which have been classified as discontinued operations and their financial results are reported separately as discontinued operations Results of Operations General We operate in the pulp business and our operations are located in Germany and Western Canada. Our mills have a combined annual production capacity of approximately 1,455,000 ADMTs. We operate in markets that are global, cyclical and commodity based. Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results are influenced largely by the market price for our products and raw materials, the mix of products produced and foreign currency exchange rates. Kraft pulp markets are highly cyclical, with prices determined by supply and demand. Demand for kraft pulp is influenced to a significant degree by global levels of economic activity and supply is driven by industry capacity and utilization rates. Our product mix is important because premium grades of NBSK pulp generally achieve higher prices and profit margins. Global economic conditions, changes in production capacity and inventory levels are the primary factors affecting kraft pulp prices. Historically, kraft pulp prices have been cyclical in nature. The average European list prices for NBSK pulp between 2000 and 2008 ranged from a low of $447 per ADMT in 2002 to a high of $900 per ADMT in mid-2008. In the latter part of 2008, we experienced extremely difficult market conditions characterized by poor demand and rapidly declining prices for our product. At the end of 2008, NBSK list prices in Europe had declined to $635 per ADMT. Our sales realizations are affected by customer discounts, commissions and other items, as well as fluctuations in NBSK pulp prices. Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips and pulp logs. Wood chip and pulp log costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average cost by spreading fixed costs over more units. Our financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro and Canadian dollar exchange rate and in interest rates. Changes in currency rates affect our operating results because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is quoted in U.S. dollars, even though a significant portion of the sales from our German mills is invoiced in Euros. Therefore, a weakening of the U.S. dollar against the Euro and the Canadian dollar will generally reduce the amount of our pulp operations revenues. Most of our operating costs at our German mills, including our debt obligations under the Stendal Loan Facility and Rosenthal Loan Facility, are incurred in Euros. Most of our operating costs at the Celgar mill, including its working capital facility, are in Canadian dollars. These costs do not fluctuate with the U.S. dollar to Euro or Canadian dollar exchange rates. Thus, a weakening of the U.S. dollar against the Euro and the Canadian dollar tends to reduce our sales revenue, gross profit and income from operations. Conversely, an increase in the U.S. dollar versus the Euro and the Canadian dollar positively impacts our revenues by increasing our operating margins and cash flow. Changes in interest rates can impact our operating results because the credit facilities established for our mills use floating rates of interest. 39

From time to time, we also enter into interest rate and foreign currency derivative contracts to partially protect against the effect of such changes. Gains or losses on such derivatives are included in our earnings, either as they are settled or as they are marked to market for each reporting period. See Item 7A Quantitative and Qualitative Disclosures about Market Risk. Stendal, as required under the Stendal Loan Facility, entered into variable-to-fixed rate interest swaps, referred to as the Stendal Interest Rate Contracts, in August 2002 to fix the interest rate on approximately A612.6 million of indebtedness for the full term of the Stendal Loan Facility. In 2008 and 2007, we recorded a net unrealized noncash holding loss of A25.2 million and gain of A19.5 million, respectively, before minority interests on the mark to market valuation of the Stendal Interest Rate Contracts. The 2008 loss was primarily due to the decrease in longterm European interest rates, whereas the 2007 gain resulted primarily from improving world economies and increases in long-term European interest rates. In 2006, we recorded a net unrealized non-cash holding gain of A37.3 million before minority interests on the Stendal Interest Rate Contracts. Slowing world economies and further reductions in interest rates could result in our recording of further non-cash holding losses on the Stendal Interest Rate Contracts in future periods when they are marked to market. 2008 Significant Actions In 2008 we took the following significant actions: Commenced the Celgar Energy Project at our Celgar mill to advance our objective of increasing production of and revenues from green energy; Submitted a proposal under the bioenergy call for green power issued by British Columbias primary public utility provider which was selected and has resulted in the finalization of an electricity purchase agreement with, the utility for the supply of electrical energy generated from the Celgar Energy Project; Worked with our lenders to restructure the Stendal Loan Facility which resulted in the completion of an amending agreement in February 2009; Modernized the Celgar mills woodroom, established log purchasing programs and implemented logistical changes to improve Celgars fiber costs; Continued to focus on cost reductions and working capital management; and Developed various initiatives to enhance short-term liquidity.

Current Market Environment In 2008 global economies experienced unprecedented volatility and disruption and we are currently operating in a difficult worldwide economic environment. During the fourth quarter of 2008, we experienced significant declines in demand and selling prices for our product. As we enter 2009, pulp industry conditions remain challenging. These conditions are beyond our ability to control and may have a significant impact on our business, results of operations, cash flows, ability to meet our debt service obligations and financial position.

40

Three-Year Snapshot Selected production, sales and exchange rate data for each of our last three years is as follows:
Years Ended December 31, 2008 2007 2006

Pulp Production (000 ADMTs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scheduled Production Downtime (000 ADMTs) . . . . . . . . . . . . . . . . . . .

1,425.0 47.0

1,404.7 46.0 1,352.6 A 704.4 $ 800 A 584 A 516 1,401.9 430.4 22.9 53 0.7294 1.0740 1.4690

1,302.3 60.0 1,326.4 A 624.0 $ A A 680 542 465 1,297.4 414.4 20.9 50 0.7962 1.1344 1.4244

Pulp Sales (000 ADMTs)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,423.3 Pulp Revenues (in millions)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 689.3 NBSK pulp list prices in Europe ($/ADMT) . . . . . . . . . . NBSK pulp list prices (A/ADMT). . . . . . . . . . . . . . . . . . Average pulp sales realizations (A/ADMT)(2) . . . . . . . . . Energy Production (000 MWh) . . . . . . . . . . . . . . . . . . . Energy Sales (000 MWh) . . . . . . . . . . . . . . . . . . . . . . . Energy Revenue (in millions). . . . . . . . . . . . . . . . . . . . . Average energy sales realizations (A/MWh) . . . . . . . . . . Average Spot Currency Exchange Rates A / $(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C$ / $(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C$ / A(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. $ 839 .............. A 571 .............. A 478 . . . . . . . . . . . . . . 1,456.6 .............. 456.1 .............. 31.0 .............. 68 .............. .............. .............. 0.6800 1.0669 1.5603

(1) Excluding intercompany sales volumes of nil, nil and 13,234 ADMTs of pulp and intercompany net sales revenues of Anil, Anil and A6.4 million in 2008, 2007 and 2006, respectively. (2) List price less discounts and commissions. (3) Average Federal Reserve Bank of New York noon spot rate over the reporting period. (4) Average Bank of Canada noon spot rate over the reporting period.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 In the year ended December 31, 2008, pulp revenues decreased by approximately 2.1% to A689.3 million from A704.4 million in 2007, primarily due to the challenging market conditions in the second half of the year and the weakness of the U.S. dollar in much of the first three quarters of 2008. In 2008, revenues from the sale of excess energy increased to A31.0 million from A22.9 million in 2007. The increase in energy revenues in 2008 includes the settlement of certain energy forward contracts totaling approximately A4.5 million. Pulp prices increased in the first half of 2008, primarily as a result of stronger demand and the weakening of the U.S. dollar but decreased in the second half due to deteriorating global economic conditions. List prices for NBSK pulp in Europe were approximately $839 (A571) per ADMT in 2008, compared to approximately $800 (A584) per ADMT in 2007. At the end of 2008, list prices decreased to approximately $635 (A456) per ADMT in Europe and $530 (A381) per ADMT in Asia, depending upon the country of delivery. At December 31, 2008, Norscan producers inventories for softwood kraft rose to 40 days supply, compared to 27 days at the end of 2007 as a result of weak demand and consumer de-stocking. Pulp sales volume increased to 1,423,300 ADMTs in 2008 from 1,352,590 ADMTs in 2007. Average pulp sales realizations decreased by approximately 7.4% to A478 per ADMT in 2008 from A516 per ADMT in 2007 because of weakening conditions in the second half of 2008. The negative market conditions, however, were partially offset by the strengthening of the U.S. dollar late in the year. Pulp production increased to 1,424,987 ADMTs in 2008 from 1,404,673 ADMTs in 2007, as all of our mills generally performed well and our Stendal and Rosenthal mills marked a record production year. In each of 2008 and 2007, we took a total of 33 days scheduled maintenance downtime at our mills and expect to take approximately 27 days in 2009. Costs and expenses increased to A707.0 million in the year ended December 31, 2008 from A657.7 million in 2007. 41

On average, and excluding the effect of the non-cash inventory provisions on our fiber inventories in the fourth quarter of 2008, our fiber costs in 2008 were generally flat from 2007. In Germany, fiber costs decreased slightly as sustained production curtailments by large parts of the European board industry lowered demand for fiber throughout 2008 and decreased prices for roundwood which offset price increases in wood chips caused by decreased sawmilling activity. Fiber costs at our Celgar mill increased in 2008 from the prior year, primarily as a result of increased whole log chipping and higher freight costs incurred in the delivery of wood chips to the mill. Overall, in the short-term, we currently expect fiber prices in Germany to remain generally level with 2008 fourth quarter prices. However, possible reductions in harvesting rates by German forest owners in response to market conditions could lead to an undersupply of roundwood and upward pressure on fiber prices later in the year. Fiber costs at our Celgar mill are expected to decrease as we move further into 2009 as a result of lower wood chip prices and the expected ramp up of the mills recently upgraded woodroom. In the fourth quarter of 2008, we were required to record non-cash provisions of A4.2 million and A7.1 million against our finished goods and fiber inventories, respectively, as a result of weakening NBSK markets. In 2008, contribution to income from the sale of emission allowances increased to A5.6 million, compared to A4.6 million in 2007. Operating depreciation and amortization decreased marginally to A55.5 million in 2008 from A56.4 million in 2007. For the year ended December 31, 2008, operating income decreased to A13.3 million from A69.6 million in 2007, primarily due to lower sales realizations resulting from deteriorating market conditions and non-cash inventory provisions totaling A11.3 million. Interest expense in 2008 decreased to A65.8 million from A71.4 million in 2007 primarily due to lower levels of borrowing. In 2008, primarily due to the significant decrease in long-term European interest rates, we recorded an unrealized loss of A25.2 million on the Stendal Interest Rate Contracts, compared to a net gain on derivatives of A20.4 million in 2007 which was primarily the result of higher long-term European interest rates. A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2008, we recorded an unrealized foreign exchange loss on our debt of A4.2 million as a result of the strengthening of the U.S. dollar in the latter part of the year, compared to a gain of A11.0 million in 2007. In 2008, the minority shareholders proportionate interest in the Stendal mills loss was A13.1 million, compared to A1.3 million of income in 2007. In 2008, we reported a net loss from continuing operations of A72.5 million, or A2.00 per basic and diluted share which included an unrealized loss of A29.5 million on our Stendal Interest Rate Contracts and a foreign exchange loss on our long-term debt and non-cash inventory provisions totaling A11.3 million. In 2007, we reported net income from continuing operations of A22.4 million, or A0.62 per basic and A0.58 per diluted share, which included an aggregate net gain of A31.3 million on our outstanding derivatives and a foreign exchange gain on our long-term debt, compared to a loss of A29.5 million in 2008. In 2008, Operating EBITDA was A69.1 million, compared to A126.2 million in 2007. Operating EBITDA in 2008 includes non-cash inventory provisions totaling A11.3 million. Operating EBITDA is defined as operating income (loss) from continuing operations plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) 42

from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) minority interests on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) Operating EBITDA does not reflect the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and relying primarily on our GAAP financial statements. The following table provides a reconciliation of net income from continuing operations to operating income from continuing operations and Operating EBITDA for the periods indicated:
Years Ended December 31, 2008 2007 (in thousands)

Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes (benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment (income) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange (gain) loss on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A (72,465) (13,075) 2,477 65,756 1,174 25,228 4,234 13,329 55,762 A 69,091

A 22,389 1,251 10,314 71,400 (4,453) (20,357) (10,958) 69,586 56,658 A 126,244

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 In the year ended December 31, 2007, pulp revenues increased by approximately 12.9% to A704.4 million from A624.0 million in 2006, primarily due to higher prices which were partially offset by an 8% and 5% weakening of the U.S. dollar versus the Euro and the Canadian dollar, respectively. In 2007, revenues from the sale of excess energy were A22.9 million compared to A20.9 million in 2006. Pulp prices increased steadily in 2007 primarily as a result of stronger demand and the weakening of the U.S. dollar. List prices for NBSK pulp in Europe were approximately $800 (A584) per ADMT in 2007, compared to approximately $680 (A542) per ADMT in 2006. At the end of 2007, list prices increased to approximately $870 (A596) per ADMT in Europe and $760 (A520) per ADMT in Asia, depending upon the country of delivery. At December 31, 2007, Norscan producers inventories for softwood kraft declined to 27 days supply, compared to 25 days at the end of 2006. Average pulp sales realizations increased to A516 per ADMT in 2007 from A465 per ADMT in 2006. Costs and expenses increased to A657.7 million in the year ended December 31, 2007 from A552.4 million in 2006, primarily as a result of increased fiber costs and higher sales volume. In 2006, we benefited from, and costs were reduced by, a reversal of an accrual for wastewater fees of A13.0 million. 43

Weak markets for emission allowances in 2007 resulted in the contribution to income from such sales decreasing to A4.6 million, compared to A15.6 million in 2006. Partially offsetting this was a 9% increase in sales of surplus energy in 2007 compared to 2006. Overall, in 2007, fiber costs increased by approximately 29% compared to 2006 as a result of both a supply imbalance and increased demand. In Germany, the supply imbalance resulted from low harvesting levels in late 2005 and 2006 which were not made up during the course of the year. Increased demand in Germany resulted from higher consumption of wood residuals by renewable energy suppliers. A strong European lumber market at the beginning of 2007 provided some marginal price relief in the middle of the year. Fiber costs at our Celgar mill were also higher in the current period compared to the comparative period of 2006 due to reduced North American sawmill activity as a result of weakness in U.S. housing construction. Fiber costs at our Celgar mill were relatively stable over the last half of 2007, due to supply optimization and the currency impact on the mills U.S. sourced fiber. Overall, continued weakness in lumber markets may put upward pressure on prices in the first half of 2008. Operating depreciation and amortization increased marginally to A56.4 million in 2007 from A55.8 million in 2006. For the year ended December 31, 2007, operating income decreased to A69.6 million from A92.5 million in the prior year as higher pulp prices, productivity and energy sales were more than offset by higher fiber costs, the weakening of the U.S. dollar and the reduction in sales of emission allowances. Interest expense in 2007 decreased by 22% to A71.4 million from A91.9 million in 2006 primarily due to a lower level of borrowing by Stendal as it repaid A33.9 million in principal, the settlement of the cross-currency swaps in the first quarter of 2007 and the inclusion in 2006 of A2.1 million of interest expense related to our repurchase of convertible notes. Stendal previously entered into the Stendal Interest Rate Contracts to fix the interest rate on its outstanding bank indebtedness. Due to the increase in long-term European interest rates, we recorded realized and unrealized net gains of A20.4 million before minority interests on our outstanding derivatives in 2007, compared to an unrealized net gain of A105.8 million on our outstanding derivatives in 2006 which included a realized loss of A3.5 million from the settlement of currency forwards. A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2007, we recorded an unrealized gain of A11.0 million on our foreign currency denominated debt as a result of the weakening of the U.S. dollar during the period, compared to an unrealized gain of A15.2 million thereon in 2006. In 2007 we decreased our provision for deferred income tax by approximately A48.7 million, primarily due to lower unrealized gains on our derivative instruments. In 2007, minority interest, representing the minority shareholders proportionate interest in the Stendal mill, was A1.3 million, compared to A1.1 million in 2006. We reported net income from continuing operations for 2007 of A22.4 million, or A0.62 per basic and A0.58 per diluted share, which included an aggregate net gain of A31.3 million on our outstanding derivatives and a foreign exchange gain on our long-term debt. In 2006, we reported net income from continuing operations of A69.2 million, or A2.08 per basic and A1.72 per diluted share, which reflected a net unrealized gain of A121.1 million on our outstanding derivatives and a foreign exchange gain on our debt. In 2007, net income including discontinued operations was A22.2 million, or A0.61 per basic and A0.58 per diluted share. In 2006, net income including discontinued operations was A63.2 million, or A1.90 per basic and A1.58 per diluted share. In 2007, Operating EBITDA decreased to A126.2 million from A148.3 million in 2006. Operating EBITDA is defined as operating income (loss) from continuing operations plus depreciation and amortization and nonrecurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely 44

from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) minority interests on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) Operating EBITDA does not reflect the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and relying primarily on our GAAP financial statements. The following table provides a reconciliation of net income from continuing operations to operating income from continuing operations and Operating EBITDA for the periods indicated:
Years Ended December 31, 2007 2006 (in thousands)

Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes (benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment (income) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange (gain) loss on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . Add: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 22,389 1,251 10,314 71,400 (4,453) (20,357) (10,958) 69,586 56,658 A 126,244

A 69,242 1,071 57,443 91,931 (6,090) (105,848) (15,245) 92,504 55,834 A 148,338

Sensitivities Our earnings are sensitive to, among other things, fluctuations in: NBSK Pulp Price. NBSK pulp is a global commodity that is priced in U.S. dollars, whose markets are highly competitive and cyclical in nature. As a result, our earnings are sensitive to NBSK pulp price changes. Based upon our 2008 sales volume (and assuming all other factors remained constant), each $10.00 per tonne change in NBSK pulp prices yields a change in Operating EBITDA of approximately A9.7 million. Foreign Exchange. As NBSK pulp is principally quoted in U.S. dollars, the amount of revenues we generate fluctuates with changes in the value of the U.S. dollar to the Euro. Based upon our 2008 revenues, each A0.01 change in the value of the U.S. dollar yields a change in annual gross sales revenue of approximately A10.1 million. 45

Liquidity and Capital Resources The following table is a summary of selected financial information for the periods indicated:
Years Ended December 31, 2008 2007 (in thousands)

Financial Position Cash and cash equivalents . . . . . . . . . . . . . . . . . Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . Shareholders equity . . . . . . . . . . . . . . . . . . . . . . Sources and Uses of Funds

. . . . . . . . . . . . . . . . . . . . . . . . . A 42,452 ......................... 13,000 ......................... 154,374 ......................... 881,704 ......................... 1,180,230 ......................... 909,478 ......................... 166,225

84,848 33,000 168,743 933,258 1,283,517 885,339 276,662

Our principal sources of funds are cash flows from operations, cash on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds consist of operating expenditures, payments of principal and interest on the Stendal Loan Facility, capital expenditures and interest payments on our outstanding senior notes and convertible notes. As at December 31, 2008, our cash and cash equivalents were A42.5 million, compared to A84.8 million at the end of 2007. We also had A13.0 million of cash restricted in the DSRA under the Stendal Loan Facility. In February 2009, to increase its liquidity and financial flexibility in the current difficult market environment, Stendal entered into the Amendment for its Stendal Loan Facility. The Stendal Loan Facility is our only credit facility which currently has scheduled principal payments. The Amendment revises the repayment schedule of principal payments due by deferring approximately A164.0 million of principal payments until maturity on September 30, 2017. The Deferred Amount includes approximately A20.0 million, A26.0 million and A21.0 million of scheduled principal payments in 2009, 2010 and 2011, respectively. Under the revised repayment schedule, we will be required to make principal payments totaling A16.5 million during the next twelve months. The Amendment also provides for a cash sweep of any excess cash of Stendal which will be used first to prepay the Deferred Amount and second to fund the DSRA. Not included in the cash sweep is A15.0 million which Stendal is permitted to retain for working capital purposes. As part of the Amendment, we are required to make a capital contribution of A10.0 million to Stendal. For a description of the Stendal Loan Facility see Item 1 Business Description of Certain Indebtedness. In January 2009 we extended the maturity of the Celgar Working Capital Facility from May 2009 to May 2010. The Stendal Loan Facility is provided by a syndicate of eleven financial institutions and both our Celgar Working Capital Facility and our Rosenthal Loan Facility are each provided by one financial institution. To date we have not experienced any reductions in credit availability with respect to these credit facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected. For a description of the Celgar Working Capital Facility and the Rosenthal Loan Facility, see Item 1 Business Description of Certain Indebtedness. In 2008, capital expenditures related to the Celgar Energy Project totaled approximately A4.6 million and we expect costs for the project to be approximately A26.0 million in 2009. Although there can be no assurance, we currently intend to finance the balance of the costs of the Celgar Energy Project with additional term indebtedness and have commenced preliminary discussions with a number of potential lenders. Debt As at December 31, 2008, the amount outstanding under Stendal Loan Facility was A531.1 million. We also had approximately C$31.0 million outstanding under the Celgar facility. 46

Additionally, we have $310.0 million (A222.7 million) in principal amount of our Senior Notes outstanding which mature in February 2013 and for which we pay interest at the rate of 9.25% on February 15 and August 15 of each year. There are no scheduled principal payments until maturity. The indenture governing the Senior Notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity. We also have $67.3 million (A48.3 million) in principal amount of our Convertible Notes which mature in October 2010. We pay interest on the Convertible Notes semi-annually on April 15 and October 15 of each year at the rate of 8.5%. The Convertible Notes are also not subject to any financial maintenance covenants. For a description of the Senior Notes and the Convertible Notes, see Item 1 Business Description of Certain Indebtedness. Debt Covenants Our long-term obligations contain various financial tests and covenants customary to these types of arrangements. The Stendal Loan Facility contains an annual debt service cover ratio which, pursuant to the terms of the Amendment, must not fall below 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x for the period after January 1, 2014 until maturity on September 30, 2017. The Amendment also implements a permitted leverage ratio of total debt to EBITDA which is effective from December 31, 2009. This ratio is set to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. Failure to comply with either ratio constitutes an event of default, but may be cured by the shareholders of Stendal with a once-per-fiscal-year ratio deficiency cure through a capital contribution or subordinated loan in the amount necessary to cure such deficiency. Under the Rosenthal Loan Facility, our Rosenthal mill must not exceed a ratio of net debt to EBITDA of 3:1 in any 12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.4:1 for each six month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1. The Celgar Working Capital Facility includes a covenant that, for so long as the excess amount under the facility is less than C$8.0 million, then until it becomes equal to or greater than such amount, the Celgar mill must maintain a fixed charge coverage ratio of not less than 1.1:1.0 for each 12-month period. As at December 31, 2008, we were in full compliance with all of the covenants of our indebtedness. Cash Flow Analysis Cash Flows from Operating Activities. We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals and debt service. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses. Generally, finished goods inventories are increased prior to scheduled maintenance downtime to maintain sales volume while production is stopped. Our fiber inventories exhibit seasonal swings as we increase pulp log and wood chip inventories to ensure adequate supply of fiber to our mills during the winter months. Changes in sales volume can affect the level of receivables and influence overall working capital levels. We believe our management practices with respect to working capital conform to common business practices. Operating activities in 2008 used cash of A11.9 million, compared to providing cash of A19.1 million in 2007. An increase in receivables due primarily to higher pulp sales used cash of A14.8 million in 2008, compared to A11.9 million in 2007. An increase in inventories before non-cash provisions used cash of A13.3 million in 2008, compared to an increase in inventories using cash of A38.7 million in 2007. An increase in accounts payable and accrued expenses provided cash of A1.2 million in 2008, compared to an increase in accounts payable and accrued expenses providing cash of A3.3 million in 2007. As a result of very weak NBSK markets, we were required to record non-cash inventory provisions totaling A11.3 million against our finished goods and fiber inventories in the fourth quarter of 2008. 47

Declines in working capital also provide cash for operations, including declines in receivables from sales, reductions in inventory levels and increases in accounts payable. Cash Flows from Investing Activities. Investing activities in 2008 provided cash of A2.0 million, primarily due to the drawdown of A20.0 million from the Stendal Loan Facilitys DSRA. Investing activities in 2007 provided cash of A25.0 million, primarily due to a drawdown of A24.0 million from the DSRA under the Stendal Loan Facility to repay principal. The repayment of notes receivable provided cash of A5.7 million in 2008 and A5.0 million in 2007. In 2008, capital expenditures, including expenditures primarily related to the Celgar Energy Project and the renewal of a bleaching line at our Rosenthal mill, used cash of A25.7 million. In the same period last year, capital expenditures used A4.9 million which included approximately A9.1 million received in the third quarter of 2007 in connection with the settlement of the Stendal engineering, procurement and construction contract, which was recorded as a reduction of property, plant, and equipment. We expect capital expenditures in 2009 to total approximately A42.0 million and primarily relate to the Celgar Energy Project. In response to the current economic environment, we intend to reduce discretionary capital expenditures at all of our mills in 2009. Cash Flows from Financing Activities. In 2008, financing activities used cash of A31.2 million primarily due to principal repayments under the Stendal Loan Facility of A34.0 million, of which A20.0 million was funded from the DSRA under the facility, and the repayment of capital lease obligations of A3.3 million. Financing activities used cash of A30.7 million in 2007 primarily due to the principal repayments of the Stendal Loan Facility of A33.9 million, of which A24.0 million was funded from the DSRA, and the repayment of capital lease obligations of A5.6 million. Capital Resources Other than commitments totaling approximately A6.8 million relating to the Celgar Energy Project, we have no material commitments to acquire assets or operating businesses. Although there can be no assurance, we intend to finance the balance of costs of the Celgar Energy Project with term indebtedness and have commenced preliminary discussions with a number of potential lenders. With the recent global financial crisis and broader global economic downturn, our short-term focus is on maintaining the sustainability of our business. In order to meet this objective, we are working to reduce costs, cut discretionary spending, including capital expenditures and are seeking to enhance our liquidity. Future Liquidity Our ability to make scheduled payments of principal, or to pay interest on or to refinance our indebtedness, or to fund planned expenditures will depend on our future performance, which is subject to general economic, financial and other factors that are beyond our control. A continued and deteriorating weak economic environment and poor pulp market conditions could have a significant negative effect on our ability to generate cash flows, maintain compliance with our debt covenants and meet our debt service obligations. Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our Celgar Working Capital Facility and Rosenthal Loan Facility, will be adequate to meet the future liquidity needs during the next 12 months. Off-Balance-Sheet Activities At December 31, 2008 and 2007, we had no off-balance-sheet arrangements. 48

Discontinued Operations Our discontinued operations consist of two paper mills in Germany that had an aggregate annual production capacity of approximately 70,000 ADMTs. Since we viewed these paper mills as non-core operations, we successfully divested them in 2006 and now account for them as discontinued operations. The following represents the results of our discontinued operations for the periods indicated:
Years Ended December 31, 2008 2007 2006 (in thousands)

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . Net loss on disposal of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 128 (210) (210)

A 46,351 394 (5,957) (6,032)

The following represents the statement of cash flows of our discontinued operations for the periods indicated:
Years Ended December 31, 2008 2007 (in thousands)

Cash flows used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A (1,519) 1,260

See Note 17, Discontinued Operations, of the consolidated financial statements and related notes contained in this annual report on Form 10-K for additional information relating to the discontinued operations. Contractual Obligations and Commitments The following table sets out our contractual obligations and commitments as at December 31, 2008 in connection with our long-term liabilities.
Payments Due By Period Contractual Obligations(7) 2009 2010-2011 2012-2013 (in thousands) Beyond 2013 Total

Long-term debt(1) . . . . . . . . . . . . . . . . . . . . Debt, Stendal(2) . . . . . . . . . . . . . . . . . . . . . Capital lease obligations(3) . . . . . . . . . . . . . Operating lease obligations(4) . . . . . . . . . . . Purchase obligations(5) . . . . . . . . . . . . . . . . Contractual commitments for capital expenditures(6) . . . . . . . . . . . . . . . . . . . . Other long-term liabilities(7) . . . . . . . . . . . . Total(8). . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,500 3,419 2,276 2,788 9,420 1,236

A 66,505 37,083 5,734 3,403 2,349 420 927 A 116,421

A 222,718 64,583 1,547 958 2,102 1,121 A 293,029

412,907 1,537 5,841 3,679

A 289,223 531,073 12,237 6,637 13,080 9,840 6,963 A 869,053

A 35,639

A 423,964

(1) This reflects principal only relating primarily to indebtedness under credit facilities relating to the pulp mills, but does not reflect indebtedness relating to the Stendal mill. See Item 1 Business Description of Certain Indebtedness, footnote 2 below and Note 7 to our annual financial statements included herein for a description of such indebtedness. See Item 7A Quantitative and Qualitative Disclosure about Market Risk for information about our derivatives. (2) This reflects principal only in connection with indebtedness relating to the Stendal mill, including under the Stendal Loan Facility and convertible notes. See Item 1 Business - Description of Certain Indebtedness and Note 7 to our annual financial statements included herein for a description of such indebtedness. Principal payments totaling A101.4 million that were originally scheduled for 2009 to 2013 have been deferred to 2017 pursuant to the Amendment to the Stendal Loan Facility as noted in Note 19 to our annual financial statements. This does not include amounts associated with derivatives entered into in connection with the Stendal Loan Facility. See Item 7A Quantitative and Qualitative Disclosure about Market Risk for information about our derivatives. (3) Capital lease obligations relate to transportation vehicles and production equipment. These amounts reflect principal and interest. (4) Operating lease obligations relate to transportation vehicles and other production and office equipment.

49

(5) Purchase obligations relate primarily to take-or-pay contracts, including for purchases of raw materials, made in the ordinary course of business. (6) Contractual commitments for capital expenditures relate primarily to non-cancellable commitments related to the Celgar Energy Project and the Rosenthal bleaching line renewal project. (7) Other long-term liabilities relate primarily to future payments that will be made for post-employment benefits other than pensions. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations. Additionally, the balance also includes pension funding which is calculated on an annual basis. Consequently, the 2009 amount includes A0.8 million related to pension funding. (8) We have identified approximately A0.8 million of potential tax liabilities that are more likely than not to be paid. However, due to the uncertain timing related to the potential liabilities, we are unable to allocate the payments in the contractual obligations table.

Foreign Currency Our reporting currency is the Euro as the majority of our business transactions are denominated in Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations. We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Unrealized gains or losses from these translations are recorded in our consolidated statement of comprehensive income and impact on shareholders equity on the balance sheet but do not affect our net earnings. In the year ended December 31, 2008, we reported a net A41.9 million foreign currency translation loss and, as a result, the cumulative foreign exchange translation loss reported within comprehensive income (loss) decreased to A0.8 million at December 31, 2008. In the year ended December 31, 2007, we reported a cumulative foreign currency translation gain of A29.2 million. Based upon the exchange rate at December 31, 2008, the U.S. dollar has increased by approximately 4.7% in value against the Euro since December 31, 2007. See Item 7A Quantitative and Qualitative Disclosures about Market Risk. Results of Operations of the Restricted Group Under Our Senior Note Indenture The indenture governing our Senior Notes requires that we also provide a discussion in annual and quarterly reports we file with the SEC under Managements Discussion and Analysis of Financial Condition and Results of Operations of the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, referred to as the Restricted Group. The Restricted Group is comprised of Mercer Inc., our Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill and, up to December 31, 2006, our discontinued operations. The following is a discussion of the results of operations and financial condition of the Restricted Group. For further information regarding the Restricted Group including, without limitation, a reconciliation to our consolidated results of operations, see Note 20 of the consolidated financial statements included in this annual report on Form 10-K. Restricted Group Results Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 Pulp revenues for the Restricted Group in 2008 decreased to A401.0 million from A401.3 million in 2007, primarily due to lower sales realizations. Revenues from the sale of excess energy were A12.1 million in 2008 compared to A9.1 million in 2007. The increase in energy revenues in 2008 includes the settlement of certain energy forward contracts totaling approximately A1.5 million. Pulp prices increased in the first half of 2008, primarily as a result of stronger demand and the weakening of the U.S. dollar but decreased in the second half due to deteriorating global economic conditions. List prices for NBSK pulp in Europe were approximately $839 (A571) per ADMT in 2008, compared to approximately $800 (A584) in 2007. Pulp sales volume of the Restricted Group increased to 833,177 ADMTs in 2008 from 764,531 ADMTs in 2007. Average pulp sales realizations for the Restricted Group decreased by approximately 8.4% to A480 per 50

ADMT in the year ended December 31, 2008 from A524 per ADMT in 2007 because of weakening conditions in the second half of 2008 which was partially offset by the strengthening of the U.S. dollar late in the quarter. Pulp production for the Restricted Group increased slightly to 814,586 ADMTs in 2008 from 803,081 ADMTs in 2007 as our Celgar and Rosenthal mills performed generally well and our Rosenthal mill marked a record production year. We took an aggregate of 22 days scheduled annual maintenance downtime at our Rosenthal and Celgar mills in 2008 and 21 days scheduled annual maintenance downtime in 2007. We expect to take approximately 27 days in 2009. Pulp inventories for the Restricted Group were lower in 2008, compared to the same time last year. Cost and expenses for the Restricted Group in 2008 increased to A415.5 million from A373.7 million in the comparative period of 2007. Operating depreciation and amortization for the Restricted Group decreased slightly to A28.6 million in 2008 from A28.7 million in 2007. Overall, excluding the effect of the non-cash inventory provisions on our fiber inventories, fiber costs of the Restricted Group increased by approximately 2.9% in 2008 versus the same period of 2007. Fiber costs for our Rosenthal mill decreased slightly as sustained production curtailments by large parts of the European board industry lowered demand for fiber throughout 2008 and decreased prices for roundwood offset price increases in wood chips caused by decreased sawmilling activity. At our Celgar mill fiber costs increased in 2008 from the prior year, primarily as a result of increased whole log chipping and higher freight costs incurred in the delivery of wood chips to the mill. Overall, in the short-term, we currently expect fiber prices in Germany to remain generally level with 2008 fourth quarter prices. However, possible reductions in harvesting rates by German forest owners in response to market conditions could lead to an undersupply of roundwood and upward pressure on fiber prices later in the year. Fiber costs at our Celgar mill are expected to decrease as we move further into 2009 as a result of lower wood chip prices and the expected ramp up of the mills recently upgraded woodroom. The markets and prices for emission allowances continue to be weak, and as a result our contribution to income from the sale of such emission allowances by our Rosenthal mill in 2008 was A0.4 million, compared to A1.6 million in 2007. In 2008, operating income of the Restricted Group decreased to A2.4 million from A36.7 million last year, primarily due to lower sales realizations resulting from deteriorating market conditions in the second half of 2008 and non-cash provisions totaling A8.6 million recorded against the fiber and finished goods inventories at our Celgar and Rosenthal mills. Interest expense for the Restricted Group in 2008 decreased slightly to A27.0 million from A28.5 million a year ago, primarily due to lower levels of borrowing. In 2008, the Restricted Group recorded an unrealized loss on foreign currency denominated debt of A4.1 million, compared to a gain of A10.6 million in 2007. The Restricted Group recorded a net loss of A30.4 million for the year ended December 31, 2008, compared to net income of A17.5 million for the year ended December 31, 2007. The Restricted Group generated Operating EBITDA of A26.5 million and A65.6 million in the years ended December 31, 2008 and 2007, respectively. Operating EBITDA is defined as operating income (loss) from continuing operations plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 2008 for additional information relating to such limitations and Operating EBITDA. 51

The following table provides a reconciliation of net income from continuing operations to operating income from continuing operations and Operating EBITDA for the Restricted Group for the periods indicated:
Years Ended December 31, 2008 2007 (in thousands)

Restricted Group(1) Net income (loss) from continuing operations(2) . . . . . . Income taxes (benefits) . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment (income) loss . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange (gain) loss on debt . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . A (30,432) ....................... 3,728 ....................... 27,027 ....................... (6,834) ....................... 4,114

A 17,702 6,428 28,472 (5,303) (10,629) 36,670 28,919 A 65,589

Operating income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . (2,397) Add: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,867 Operating EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 26,470

(1) See Note 20 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. (2) For the Restricted Group net income from continuing operations and net income are the same for 2008, but different for 2007.

Restricted Group Results Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 Pulp revenues for the Restricted Group in 2007 increased to A401.3 million from A361.0 million in 2006, primarily because of higher prices and sales volumes. Revenues from the sale of excess energy were A9.1 million in 2007, compared to A7.0 million in 2006. The increase in pulp prices was partially offset by the weakening of the U.S. dollar which decreased in value by approximately 8% and 5% against the Euro and the Canadian dollar, respectively, during the period. Average pulp sales realizations for the Restricted Group increased to A524 per ADMT on average in the year ended December 31, 2007 from A472 per ADMT in 2006. Costs and expenses for the Restricted Group in 2007 increased to A373.7 million from A333.6 million in the comparative period of 2006, primarily as a result of increased fiber costs and higher sales volume. Operating depreciation and amortization for the Restricted Group in 2007 increased marginally to A28.7 million from A27.8 million in 2006. During 2007, we took an aggregate of 21 days scheduled annual maintenance downtime at our Rosenthal and Celgar mills. During 2006, our Rosenthal and Celgar mills took approximately 34 days of scheduled maintenance and strategic capital expenditure downtime, during which Rosenthal completed the installation of a new brownstock washer. During the scheduled maintenance downtime at Celgar, we implemented the final phase of our Blue Goose capital project consisting of the dryer capacity expansion. These changes have shown improvements in production capacity and operational efficiencies, as evidenced by Celgar achieving daily, monthly and quarterly production records during the year. The markets and prices for emission allowances continue to be weak, and as a result our contribution to income from the sale of such emission allowances by our Rosenthal pulp mill in 2007 was A1.6 million, compared to A4.9 million in 2006. Overall, fiber costs of the Restricted Group increased by approximately 33% in 2007 versus the same period of 2006 as a result of both a supply imbalance and increased demand. In Germany, the supply imbalance resulted from low harvesting levels in late 2005 and 2006 which were not made up during the course of the year. Increased demand in Germany resulted from higher consumption of wood residuals by renewable energy suppliers. A strong European lumber market at the beginning of 2007 provided some price relief in the middle of the year. Overall, we currently 52

expect fiber prices to be generally level for the balance of the year but continued weakness in lumber markets may put upward pressure on prices in early 2008. In 2007, income from operations of the Restricted Group increased to A36.7 million from A34.4 million last year, primarily as a result of higher pulp prices, partially offset by higher fiber prices and a weakening U.S. dollar. Interest expense for the Restricted Group in 2007 decreased to A28.5 million from A34.4 million a year ago as a result of lower borrowings and the inclusion in 2006 of A2.1 million of interest expense recorded on the repurchase of convertible notes. The Restricted Group did not have any currency derivatives outstanding during 2006 that materially affected its results. In 2007, the Restricted Group recorded an unrealized gain on its foreign currency denominated debt and distributions of A10.6 million, compared to A15.2 million in 2006. The net income for the Restricted Group for the year ended December 31, 2007 was A17.5 million, which reflected improved markets and an unrealized gain on foreign currency denominated debt of A10.6 million. In 2006, the Restricted Group reported net income of A9.4 million, which reflected improved markets and an unrealized gain on foreign currency denominated debt of A15.2 million. The Restricted Group generated Operating EBITDA of A65.6 million and A62.2 million in the years ended December 31, 2007 and 2006, respectively. Operating EBITDA is defined as operating income (loss) from continuing operations plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA for the Restricted Group is calculated by adding depreciation and amortization and nonrecurring capital asset impairment charges of A28.9 million and A27.8 million to the income from operations of A36.7 million and A34.4 million for the years ended December 31, 2007 and 2006, respectively. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 2007 for additional information relating to such limitations and Operating EBITDA. The following table provides a reconciliation of net income from continuing operations to operating income from continuing operations and Operating EBITDA for the Restricted Group for the periods indicated:
Years Ended December 31, 2007 2006 (in thousands)

Restricted Group(1) Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes (benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment (income) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange (gain) loss on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 17,702 6,428 28,472 (5,303) (10,629) 36,670 28,919 A 65,589

A 9,351 11,258 34,354 (5,316) (15,245) 34,402 27,819 A 62,221

(1) See Note 20 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results.

53

Liquidity and Capital Resources of the Restricted Group The following table is a summary of selected financial information for the Restricted Group for the periods indicated:
Years Ended December 31, 2008 (in thousands) 2007

Restricted Group Financial Position(1) Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 26,176 101,490 351,009 579,777 324,638 210,179

A 59,371 120,486 385,569 627,854 305,158 278,582

(1) See Note 20 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results.

At December 31, 2008, the Restricted Group had cash and cash equivalents of A26.2 million, compared to A59.4 million at the end of 2007. At December 31, 2008, the Restricted Group had working capital of A101.5 million. As at December 31, 2008, we had drawn none of the A40.0 million Rosenthal Loan Facility and C$31.0 million under the C$40.0 million Celgar Working Capital Facility. Standard & Poors Ratings Services bases its assessment of our credit risk on the business and financial profile of the Restricted Group only. On February 13, 2009, Standard & Poors lowered the Restricted Groups credit rating to B- and placed all ratings on credit watch with negative implications, citing the pulp market environment and potential liquidity issues. Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets. We expect the Restricted Group to meet its interest and debt service obligations and meet the working and maintenance capital requirements for its current operations from cash flow from operations, cash on hand and the Rosenthal Loan Facility and the Celgar Working Capital Facility. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of recording of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Our significant accounting policies are disclosed in Note 1 to our audited annual consolidated financial statements included in Part IVof this annual report. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for pensions and post-retirement benefits, provisions for bad debt and doubtful accounts, derivative instruments, impairment of long-lived assets, deferred taxes, inventory provisions and environmental conservation and legal liabilities. Actual estimates could differ from these estimates. The following accounting policies require managements most difficult, subjective and complex judgments, and are subject to a fair degree of measurement uncertainty. 54

Derivative Instruments. We adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. Derivative instruments are measured at fair value and reported in the balance sheet as assets or liabilities. Accounting for gains or losses depends on the intended use of the derivative instruments. Gains or losses on derivative instruments which are not designated hedges for accounting purposes are recognized in earnings in the period of the change in fair value. Gains or losses on derivative instruments formally designated as hedges are recognized in either earnings or other comprehensive income. In 2008, we reported a net unrealized non-cash holding loss of A25.2 million before minority interests in respect of the Stendal Interest Rate Contracts. Impairment of Long-Lived Assets. We evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, actual impairment losses could vary materially, either positively or negatively, from estimated impairment losses. As a result of current market conditions, we undertook a long-lived asset impairment review and concluded that no impairment losses were incurred in 2008. Deferred Taxes. We currently have deferred tax assets which are comprised primarily of tax loss carryforwards and deductible temporary differences, both of which will reduce taxable income in the future. The amounts recorded for deferred tax are based upon various judgments, assumptions and estimates. We assess the realization of these deferred tax assets on a periodic basis to determine whether a valuation allowance is required. We determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized, based on currently available information, including, but not limited to, the following: the history of the tax loss carryforwards and their expiry dates; future reversals of temporary differences; our projected earnings; and tax planning opportunities.

If we believe that it is more likely than not that some of these deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against these deferred tax assets. As at December 31, 2008, we had A31.7 million in deferred tax assets and A34.5 million in deferred tax liabilities, resulting in a net deferred tax liability of A2.8 million. Our tax assets are net of a A78.7 million valuation allowance. For the year ended December 31, 2008, our review concluded that it was appropriate to increase the valuation allowance against loss carryforwards by approximately A5.5 million, after considering expected future earnings and reversals of temporary differences. If market conditions improve or tax planning opportunities arise in the future, we will reduce our valuation allowances, resulting in future tax benefits. If market conditions deteriorate in the future, we will increase our valuation allowances, resulting in future tax expenses. Any change in tax laws, particularly in Germany, will change the valuation allowances in future periods. Inventory Provisions. Inventories of NBSK pulp and logs and wood chips are valued at the lower of cost, using the weighted-average cost method, or net realizable value. We estimate the net realizable value based on future cash flows expected to result from the sale of our product (NBSK pulp). The cash flows are estimated based on the expected time it will take to exhaust the respective inventory, including estimates of additional costs that will need to be incurred to bring that inventory to a salable state. The future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective judgments. Depending on the 55

assumptions and estimates used, the estimated future cash flows can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows, actual inventory provisions could vary materially, either positively or negatively, from estimated inventory provisions. In 2008, inventory provisions taken against finished goods inventory and logs and wood chip inventory were A4.2 million and A7.1 million, respectively. New Accounting Standards See Note 1 to our consolidated financial statements included in Item 15 of this annual report on Form 10-K. Cautionary Statement Regarding Forward-Looking Information The statements in this annual report on Form 10-K that are not reported financial results or other historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of different places in this report and can be identified by words such as estimates, projects, expects, intends, believes, plans, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks and assumptions include those set forth in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2008. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC. Factors that could cause actual results to differ materially include, but are not limited to those set forth under Item 1A Risk Factors in this annual report on Form 10-K. Inflation We do not believe that inflation has had a material impact on revenues or income during 2008.

56

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the Euro and the U.S. dollar and the Canadian dollar versus the U.S. dollar and the Euro. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the future use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We also use derivatives to reduce our potential losses or to augment our potential gains, depending on our managements perception of future economic events and developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in proportion to notional amounts. Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our managements expectations of future events. However, these strategies may not be effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize is not effective, we may incur significant losses. Derivatives Derivatives are contracts between two parties where payments between the parties are dependent upon movements in the price of an underlying asset, index or financial rate. Examples of derivatives include swaps, options and forward rate agreements. The notional amount of the derivatives is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties and the notional amount itself is not generally exchanged by the parties. The principal derivatives we use are foreign exchange derivatives and interest rate derivatives. In 2008, we also used energy derivatives in connection with the sale of surplus electricity generated at our Stendal and Rosenthal mills. Foreign exchange derivatives include currency swaps which involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Such cross currency swaps involve the exchange of both interest and principal amounts in two different currencies. They also include foreign exchange forwards which are contractual obligations in which two counterparties agree to exchange one currency for another at a specified price for settlement at a pre-determined future date. Forward contracts are effectively tailor-made agreements that are transacted between counterparties in the over-the-counter market. Interest rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive financial instrument on a future date at a specified price. They also include interest rate swaps which are over-the-counter contracts in which two counterparties exchange interest payments based upon rates applied to a notional amount. Energy derivatives include fixed electricity forward sales and purchase contracts which are contractual obligations to buy or sell electricity at a future specified date. Our mills produce surplus electricity that we sell to third parties. As a result, we monitor the electricity market closely. Where possible and to the extent we think it is advantageous, we may sell into the forward market through forward contracts. We use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euros to U.S. dollars as our principal product is priced in U.S. dollars. We have also converted some of our costs to U.S. dollars by issuing long-term U.S. dollar denominated debt in the form of our 8.5% convertible subordinated notes and $310.0 million 9.25% senior notes. The proceeds of the 9.25% senior notes were used in part to repay a project loan facility for our Rosenthal mill, referred to as the Project Facility. We use interest rate derivatives to fix the rate of interest on indebtedness, including under the Stendal Loan Facility. In 2008 we used energy derivatives to sell electricity forward at opportunistic rates. 57

The interest rate derivatives we entered into were pursuant to the Stendal Loan Facility which provides facilities for foreign exchange derivatives, interest rate derivatives and commodities derivatives, subject to prescribed controls, including maximum notional and at-risk amounts. The Stendal Loan Facility is secured by substantially all of the assets of the Stendal mill and has the benefit of certain German governmental guarantees. This credit facility does not have a separate margin requirement when derivatives are entered into and is subsequently marked to market each period. The revolving working capital credit facility we established in February 2005 for the Rosenthal mill allows us to enter into derivative instruments to manage risks relating to its operations. We record unrealized gains and losses on our outstanding derivatives when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. We determine market valuations based primarily upon valuations provided by our counterparties. In August 2002, Stendal entered into the Stendal Interest Rate Contracts in connection with its long-term indebtedness relating to the Stendal mill to fix the interest rate under the Stendal Loan Facility at the then low level, relative to its historical trend and projected variable interest rate. These contracts were entered into under a specific credit line under the Stendal Loan Facility and are subject to prescribed controls, including certain maximum amounts for notional and at-risk amounts. Under the Stendal Interest Rate Contracts, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rates payable under the Stendal Loan Facility were swapped into fixed rates based on the Eur-Euribor rate for the repayment periods of the tranches under the Stendal Loan Facility. Stendal effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty. We are exposed to very modest credit related risks in the event of non-performance by counterparties to derivative contracts. However, we do not expect that the counterparties, which are major financial institutions and large utilities, will fail to meet their obligations. The following table and the notes thereto sets forth the maturity date, the notional amount, the recognized gain or loss and the strike and swap rates for derivatives that were in effect during 2007 and 2008:
Recognized Gain (Loss) Year Ended December 31, 2008 (in thousands) Recognized Gain (Loss) Year Ended December 31, 2007 (in thousands)

Derivative Instrument

Maturity Date

Notional Amount (in millions of Euros or MWh)

Notional Amount (in millions)

Interest Rate Derivatives Stendal Interest Rate Contracts(1) . . . . Foreign Exchange Rate Derivatives Stendal Currency Swap(2) . . . . . . . . . . Stendal Currency Swap(3) . . . . . . . . . . Energy Derivative(4) Electricity forward sale . . . . . . . . . . . . Electricity forward purchase . . . . . . . .

October 2017 Settled Settled

A A A

523.1

A (25,228) A A

A 556.6 A A

A 19,470 A A (181) 1,067 886

2009 2009

MWh 104,000 MWh 104,000

A 9,172 A (5,901) A 3,271

A A

(1) In connection with the Stendal Loan Facility, in the third quarter of 2002 Stendal entered into the Stendal Interest Rate Contracts, which are variable-to-fixed interest rate swaps, for the term of the Stendal Loan Facility, with respect to an aggregate maximum amount of approximately A612.6 million of the principal amount of the long-term indebtedness under the Stendal Loan Facility. The swaps took effect on October 1, 2002 and are comprised of three contracts. The first contract commenced in October 2002 for a notional amount of A4.1 million, gradually increasing to A464.9 million, with an interest rate of 3.795%, and matured in May 2004. The second contract commenced in May 2004 for a notional amount of A464.9 million, gradually increasing to A612.6 million, with an interest rate of 5.28%, and matured in April 2005. The third contract commenced in April 2005 for a notional amount of A612.6 million, with an interest rate of 5.28%, and the notional amount gradually decreases and the contract terminates upon the maturity of the Stendal Loan Facility in October 2017.

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(2) For A306.3 million of the outstanding principal amount under the Stendal Loan Facility, all repayment installments from February 7, 2005 until October 2, 2017 were swapped into U.S. dollar amounts at a rate of $1.2960. The interest rate was swapped into the following payments: pay six-month U.S. dollar to LIBOR plus 12 basis points and receive the six-month Euribor. The swap was settled in March 2007. (3) For A153.2 million of the outstanding principal amount under the Stendal Loan Facility, all repayment installments from April 18, 2005 until October 2, 2017 were swapped into U.S. dollar amounts at a rate of $1.2799. The interest rate was swapped into the following payments: pay six-month U.S. dollar to LIBOR plus 13 basis points and receive the six-month Euribor. The swap was settled in March 2007. (4) During the year, 104,000 MWh of electricity contracts were sold forward by Rosenthal and Stendal. Subsequently 104,000 MWh were purchased forward, effectively settling the forward sales. These contracts are expected to settle in the first quarter of 2009. In addition, 66,000 MWh of electricity contracts were settled in 2008 for a net gain of approximately A1.2 million.

Interest Rate Risk Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We seek to manage our interest rate risks through the use of interest rate derivatives. For a discussion of our interest rate derivatives including maturities, notional amounts, gains or losses and swap rates, see Derivatives in this Item 7A. The following tables provide information about our exposure to interest rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 2008 and expected cash flows from these instruments:
As at December 31, 2008 Carrying Value Fair Value Expected maturity date 2009 2010 2011 2012 2013 Thereafter

(in thousands)

Assets Cash, restricted (A)(1). . Liabilities Long-term debt: Fixed rate ($)(2) . . . . . Average interest rate . Fixed rate ($)(3) . . . . . Average interest rate . Variable rate (A)(4) . . . Average interest rate . Variable rate (C$)(5) . . Average interest rate .

. . . . . . . . A 13,000 A 222,718 9.25% A 48,319 8.5% A 531,073 6.3% A 18,186 3.9%

A 13,000 A 116,927 9.25% A 31,891 8.5% A 531,073 6.3% A 18,186 3.9%

A A A

130

A A

130

A A

130

A A

130

130

A 13,650

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

A 48,391 A A 8.5% A 16,500 A 13,916 A 23,167 A 24,583 A 40,000 A 412,907 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% A A A A 18,186 A A 3.9%
As at December 31, 2008

A 222,718 A 9.25% A A

Nominal Amount

Fair Value

Expected maturity date 2009 2010 2011 2012 2013 Thereafter

(in thousands)

Interest Rate Derivatives Interest rate swaps: Variable to fixed (A)(6) . . . . . . . . . Average pay rate. . . . . . . . . . . . Average receive rate . . . . . . . . .

A 523,062 A (47,112) A 36,018 A 39,280 A 43,315 A 46,873 A 50,794 A 306,782 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%

(1) We are required to maintain a restricted cash account pursuant to the Stendal Loan Facility. The interest income on the restricted cash balance is estimated to be 1.0% per annum. (2) Senior Notes due February 2013, bearing interest at 9.25%, principal amount $310.0 million. (3) Subordinated convertible notes due October 2010, bearing interest at 8.5%, principal amount $67.3 million. (4) Stendal Loan Facility bears interest at varying rates of between Euribor plus 0.90% to Euribor plus 1.85%. (5) Celgar Working Capital Facility bears interest at bankers acceptance plus 2.25% or Canadian prime plus 0.50% on Canadian dollar denominated amounts and bears interest at LIBOR plus 2.25% or U.S. base plus 0.50% on U.S. dollar denominated amounts. As at December 31, 2008, the principal amount owing was C$31.0 million. (6) Interest rate swaps put in place on the Stendal Loan Facility, effectively converting it from a variable interest rate to a fixed interest rate loan.

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Foreign Currency Exchange Rate Risk Our reporting currency is the Euro. However, we hold financial instruments denominated in U.S. dollars and Canadian dollars which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the Euro will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the Euro will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the Euro will increase the fair value of such financial instrument assets and a depreciation of these currencies against the Euro will decrease the fair value of financial instrument liabilities, thereby increasing our fair value. We seek to manage our foreign currency risks by utilizing foreign exchange rate derivatives. For a discussion of such derivatives including maturities, notional amounts, gains or losses and strike rates, see Derivatives in this Item 7A. The following table provides information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 2008 and expected cash flows from these instruments:
As at December 31, 2008 Carrying Value Fair Value Expected maturity date 2009 2010 2011 2012 2013 Thereafter

(in thousands)

On-Balance Sheet Financial Instruments Euro functional currency Liabilities: Fixed rate ($)(1) . . . . . . . . . . . . . A 222,718 A 116,927 Average interest rate . . . . . . . . . 9.25% 9.25% Fixed rate ($)(2) . . . . . . . . . . . . . A 48,319 A 31,891 Average interest rate . . . . . . . . . 8.5% 8.5% Variable rate (C$)(3) . . . . . . . . . . A 18,186 A 18,186 Average interest rate . . . . . . . . . 3.9% 3.9%

A A A

A A A

A A A

A 48,319 8.5% A 18,186 3.9%

A 222,718 9.25% A A

A A A

(1) Senior Notes due February 2013, bearing interest at 9.25%, principal amount $310.0 million. (2) Subordinated convertible notes due October 2010, principal amount $67.3 million. (3) Celgar Working Capital Facility bears interest at bankers acceptance plus 2.25% or Canadian prime plus 0.50% on Canadian dollar denominated amounts and bears interest at LIBOR plus 2.25% or U.S. base plus 0.50% on U.S. dollar denominated amounts. As at December 31, 2008, the principal amount owning was C$31.0 million.

Energy Price Risk We are subject to some electricity price risk, primarily for the electricity that our operations purchase. During the year, our Rosenthal and Stendal mills sold forward approximately 170,000 MWh and subsequently effectively settled those forward sales by purchasing forward approximately 170,000 MWh. As a result of these transactions, the mills recorded net gains totaling approximately A4.5 million. As at December 31, 2008, approximately 104,000 MWh of net contracts were outstanding to be delivered upon. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data required with respect to this Item 8, and as listed in Item 15 of this annual report on Form 10-K, are included in this annual report on Form 10-K commencing on page 65. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 60

15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report on Form 10-K. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Mercer Inc.s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Mercer Inc.s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth in Internal ControlIntegrated Framework, as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management believes that Mercer Inc. maintained effective internal control over financial reporting as of December 31, 2008. Mercer Inc.s independent registered chartered accountants have audited and issued their report on managements assessment of Mercer Inc.s internal control over financial reporting, which appears below. Changes in Internal Controls There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION

Not applicable. 61

PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Subsequent to our Conversion to a corporate form, we are governed by a board of directors, referred to as the Board, each member of which is elected annually, beginning with our annual meeting held in 2007. Prior to the conversion, as a business trust, we were managed by trustees, who have comparable duties and responsibilities as directors of corporations. Each of our issued and outstanding shares of common stock is entitled to one vote at such meetings. The following sets forth information relating to our directors and executive officers. Jimmy S.H. Lee, age 51, has been a director since May 1985 and President and Chief Executive Officer since 1992. Previously, during the period that MFC Bancorp Ltd. was our affiliate, he served as a director from 1986 and President from 1988 to December 1996 when it was spun out. During Mr. Lees tenure with Mercer, we acquired the Rosenthal mill and converted it to the production of kraft pulp, constructed and commenced operations at the Stendal mill and acquired the Celgar mill. Kenneth A. Shields, age 60, has been a director since August 2003. Mr. Shields is the Chairman and Chief Executive Officer of Conifex Inc., a private Canadian company pursuing acquisition opportunities in the forestry and sawmilling sector. Mr. Shields currently serves as a member of the board of directors of Raymond James Financial, Inc. and serves as the Chairman and a member of the board of directors of its Canadian subsidiary, Raymond James Ltd., since his retirement as Chief Executive Officer of Raymond James Ltd. in February 2006. Mr. Shields has served as past Chairman of the Investment Dealers Association of Canada and Pacifica Papers Inc., and is a former director of each of Slocan Forest Products Ltd., TimberWest Forest Corp. and the Investment Dealers Association of Canada. William D. McCartney, age 53, has been a director since January 2003. Mr. McCartney has been President and Chief Executive Officer of Pemcorp Management Inc., a management services company, since 1990. Mr. McCartney has also served as a director of Exeter Resource Corporation since September 2005. Mr. McCartney is also a member of the Institute of Chartered Accountants in Canada. Guy W. Adams, age 57, has been a director since August 2003. Mr. Adams is the managing member of GWA Advisors, LLC, GWA Investments, LLC and GWA Capital Partners, LLC, where he has served since 2002. GWA Investments is an investment fund investing in publicly traded securities managed by GWA Capital Partners, LLC, a registered investment advisor. Prior to 2002, Mr. Adams was the President of GWA Capital, which he founded in 1996 to invest his own capital in public and private equity transactions, and a business consultant to entities seeking refinancing or recapitalization. Mr. Adams has been a director of Vitesse Semiconductor Corp. since October 2007. Eric Lauritzen, age 70, has been a director since June 2004. Mr. Lauritzen was President and Chief Executive Officer of Harmac Pacific, Inc., a North American producer of softwood kraft pulp previously listed on the Toronto Stock Exchange and acquired by Pope & Talbot Inc. in 1998, from May 1994 to July 1998, when he retired. Mr. Lauritzen was Vice President, Pulp and Paper Marketing of MacMillan Bloedel Limited, a North American pulp and paper company previously listed on the Toronto Stock Exchange and acquired by Weyerhaeuser Company Limited in 1999, from July 1981 to April 1994. Graeme A. Witts, age 70, has been a director since January 2003. Mr. Witts organized Sanne Trust Company Limited, a trust company located in the Channel Islands, in 1988 and was managing director from 1988 to 2000, when he retired. He is now managing director of Azure Property Group, SA, a European hotel group. Mr. Witts is also a fellow of the Institute of Chartered Accountants of England and Wales and has previous executive experience with the Proctor & Gamble Company and Clarks Shoes, as well as government auditing. George Malpass, age 69, has been a director since November 2006. Mr. Malpass was formerly the Chief Executive Officer and a director of Primex Forest Products Ltd. and is also a former director of both International Forest Products Ltd. and Riverside Forest Products Ltd. David M. Gandossi, age 51, has been Secretary, Executive Vice-President and Chief Financial Officer since August 15, 2003. Mr. Gandossi was formerly the Chief Financial Officer and Executive Vice-President of Formation Forest Products (a closely held corporation) from June 2002 to August 2003. Mr. Gandossi previously 62

served as Chief Financial Officer, Vice-President, Finance and Secretary of Pacifica Papers Inc., a North American specialty pulp and paper manufacturing company previously listed on the Toronto Stock Exchange, from December 1999 to August 2001 and Controller and Treasurer from June 1998 to December 1999. From June 1998 to August 31, 1998, he also served as Secretary to Pacifica Papers Inc. From March 1998 to June 1998, Mr. Gandossi served as Controller, Treasurer and Secretary of MB Paper Ltd. From April 1994 to March 1998, Mr. Gandossi held the position of Controller and Treasurer with Harmac Pacific Inc., a Canadian pulp manufacturing company previously listed on the Toronto Stock Exchange. Mr. Gandossi is a member of the British Columbia governments Working Roundtable on Forestry. From February 2007 to present, he has chaired the B.C. Pulp and Paper Task Force, a government industry and labor effort that is mandated to identify measures to improve the competitiveness of the British Columbia pulp and paper industry. Mr. Gandossi is a member of the Institute of Chartered Accountants in Canada. Claes-Inge Isacson, age 63, has been our Chief Operating Officer since November 2006 and is based in our Berlin office. Mr. Isacson brings over 24 years of senior level pulp and paper management to our senior management team, with a focus on kraft pulp. Mr. Isacson held the positions of President Norske Skog Europe, and then Senior Vice President Production for Norske Skogindustrier ASA between 1989 and 2004. His most recent position was President, AF Process, a consulting and engineering company working worldwide. He holds a Masters of Science, Mechanical Engineering. David K. Ure, age 41, has been our Vice President, Controller, since October 16, 2006. Mr. Ure was formerly the Controller of Catalyst Paper Corporation from 2001 to 2006 and Controller of Pacifica Papers Inc. from 2000 to 2001. He also served as U.S. Controller of Crown Packaging Ltd. in 1999 and the Chief Financial Officer and Secretary of Finlay Forest Industries Inc. from 1997 to 1998. He is on the Board of Trustees of the Pulp and Paper Industry Pension Plan and has over fifteen years experience in the forest products industry. Mr. Ure is a member of the Certified General Accountants Association of Canada. Leonhard Nossol, age 51, has been our Group Controller for Europe since August 2005. He has also been a managing director of Rosenthal since 1997 and the sole managing director of Rosenthal since September 2005. Mr. Nossol had a significant involvement in the conversion of the Rosenthal mill to the production of kraft pulp in 1999 and increases in the mills annual production capacity to 325,000 ADMTs, as well as the reduction in production costs at the mill. David M. Cooper, age 55, has been Vice President of Sales and Marketing for Europe since June 2005. Mr. Cooper previously held a variety of senior positions around the world in Sappi Ltd., a large global forest products group, from 1982 to 2005, including the sales and marketing of various pulp and paper grades and the management of a manufacturing facility. He has more than 25 years of diversified experience in the international pulp and paper industry. Eric X. Heine, age 45, has been Vice President of Sales and Marketing for North America and Asia since June 2005. Mr. Heine was previously Vice President Pulp and International Paper Sales and Marketing for Domtar Inc., a global pulp and paper corporation, from 1999 to 2005. He has over 18 years of experience in the pulp and paper industry, including developing strategic sales channels and market partners to build corporate brands. Wolfram Ridder, age 47, was appointed Vice President of Business Development in August 2005, prior to which he was a managing director of Stendal. Mr. Ridder was the principal assistant to our Chief Executive Officer from November 1995 until September 2002. Genevieve Stannus, age 38, has been our Treasurer since July 2005, prior to which she was a Senior Financial Analyst with Mercer from August 2003. Prior to joining Mercer, Ms. Stannus held Senior Treasury Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. She has over ten years experience in the forest products industry. Ms. Stannus is a member of the Certified General Accountants Association of Canada. Niklaus Gruenenfelder, age 51, became the Managing Director of Stendal in January 2009. Previously, from 1989 until 2006, Mr. Gruenenfelder held a variety of positions with Swiss chemicals manufacturer Ciba Specialty Chemicals Holding Inc. (formerly Ciba-Geigy AG). In 2006, Huntsman Corporation, a global chemical and chemical products company, acquired the textile effects business from Ciba and Mr. Gruenenfelder was the 63

Managing Director and Head of Technical Operations at Huntsmans Langweid am Leich plant in Germany from 2006 until he joined Mercer earlier this year. Mr. Gruenenfelder holds a Ph.D. in Technical Science. The Board met 11 times during 2008 and each current member of the Board attended 75% or more of the total number of such meetings and meetings of the committees of the Board on which they serve during their term. In addition, our independent directors regularly meet in separate executive sessions without any member of our management present. The Lead Director presides over these meetings. Although we do not have a formal policy with respect to attendance of directors at our annual meetings, all directors are encouraged and expected to attend such meetings if possible. All of our directors attended our 2008 annual meeting. The Board has developed corporate governance guidelines in respect of: (i) the duties and responsibilities of the Board, its committees and officers; and (ii) practices with respect to the holding of regular quarterly and strategic meetings of the Board including separate meetings of non-management directors. The Board has established four standing committees, the Audit Committee, the Compensation and Human Resource Committee, the Governance and Nominating Committee and the Environmental, Health and Safety Committee. Audit Committee The Audit Committee functions pursuant to a charter adopted by the directors. A copy of the current charter is incorporated by reference in the exhibits to this Form 10-K and is available on our website at www.mercerint.com under the Governance link. The function of the Audit Committee generally is to meet with and review the results of the audit of our financial statements performed by the independent public accountants and to recommend the selection of independent public accountants. The members of the Audit Committee are Mr. McCartney, Mr. Witts and Mr. Lauritzen, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. Both Mr. McCartney and Mr. Witts are Chartered Accountants and Mr. McCartney is a financial expert within the meaning of such term under the Sarbanes-Oxley Act of 2002. The Audit Committee met 5 times during 2008. The Audit Committee has established procedures for: (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; and (ii) the confidential and anonymous submission by our employees and others of concerns regarding questionable accounting or auditing matters. A person wishing to notify us of such a complaint or concern should send a written notice thereof, marked Private & Confidential, to the Chairman of the Audit Committee, Mercer International Inc., c/o Suite 2840, P.O. Box 11576, 650 West Georgia Street, Vancouver, B.C.,V6B 4N8 Canada. Compensation and Human Resource Committee The Board has established a Compensation and Human Resource Committee. The Compensation and Human Resource Committee is responsible for reviewing and approving the strategy and design of our compensation, equity-based and benefits programs. The Compensation and Human Resource Committee functions pursuant to a charter adopted by the directors, a copy of which is incorporated by reference in the exhibits to this Form 10-K and is available on our website at www.mercerint.com in the Corporate Governance Guidelines under the Governance link. The Compensation and Human Resource Committee is also responsible for approving all compensation actions relating to executive officers. The members of the Compensation and Human Resource Committee are Mr. Malpass, Mr. Lauritzen and Mr. Adams, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Compensation and Human Resource Committee met 4 times during 2008. Governance and Nominating Committee The Board has established a Governance and Nominating Committee comprised of Mr. Shields, Mr. McCartney and Mr. Witts, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Governance and Nominating Committee functions pursuant to a charter adopted by the directors, a copy of which is incorporated by reference in the exhibits to this Form 10-K and is available on our website at www.mercerint.com in the Corporate Governance Guidelines under the Governance link. The purpose of the committee is to: (i) manage the corporate governance system of the Board; (ii) assist the 64

Board in fulfilling its duties to meet applicable legal and regulatory and self-regulatory business principles and codes of best practice; (iii) assist in the creation of a corporate culture and environment of integrity and accountability; (iv) in conjunction with the Lead Director, monitor the quality of the relationship between the Board and management; (v) review management succession plans; (vi) recommend to the Board nominees for appointment to the Board; (vii) lead the Boards annual review of the Chief Executive Officers performance; and (viii) set the Boards forward meeting agenda. The Governance and Nominating Committee met 4 times in 2008. Environmental, Health and Safety Committee The Board established an Environmental, Health and Safety Committee in 2006, currently comprised of Mr. Lauritzen, Mr. Malpass and Mr. Lee, to review on behalf of the Board the policies and processes implemented by management, and the resulting impact and assessments of all our environmental, health and safety related activities. The Environmental, Health and Safety Committee functions pursuant to a charter adopted by the directors, a copy of which is incorporated by reference in the exhibits to this Form 10-K and is available on our website at www.mercerint.com in the Corporate Governance Guidelines under the Governance link. More specifically, the Environmental, Health and Safety Committee is to: (i) review and approve, and if necessary revise, our environmental, health and safety policies and environmental compliance programs; (ii) monitor our environmental, health and safety management systems including internal and external audit results and reporting; and (iii) provide direction to management on the frequency and focus of external independent environmental, health and safety audits. The Environmental, Health and Safety Committee met 4 times in 2008. Lead Director/Deputy Chairman The Board appointed Mr. Shields as its Lead Director in September 2003 and in 2006 as Deputy Chairman of the Board. The role of the Lead Director is to provide leadership to the non-management directors on the Board and to ensure that the Board can operate independently of management and that directors have an independent leadership contact. The duties of the Lead Director include, among other things: (i) ensuring that the Board has adequate resources to support its decision-making process and ensuring that the Board is appropriately approving strategy and supervising managements progress against that strategy; (ii) ensuring that the independent directors have adequate opportunity to meet to discuss issues without management being present; (iii) chairing meetings of directors in the absence of the Chairman and Chief Executive Officer; (iv) ensuring that delegated committee functions are carried out and reported to the Board; and (v) communicating to management, as appropriate, the results of private discussions among outside directors and acting as a liaison between the Board and the Chief Executive Officer. Code of Business Conduct and Ethics The Board has adopted a Code of Business Conduct and Ethics that applies to our directors, employees and executive officers. The code is incorporated by reference in the exhibits to this Form 10-K and is available on our website at www.mercerint.com under the Governance link. A copy of the code may also be obtained without charge upon request to Investor Relations, Mercer International Inc., Suite 2840, P.O. Box 11576, 650 West Georgia Street, Vancouver, British Columbia, Canada V6B 4N8 (Telephone: (604) 684-1099) or Investor Relations, Mercer International Inc., 14900 Interurban Avenue South, Suite 282, Seattle WA, U.S.A. 98168 (Telephone: (206) 674-4639). Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires that our officers and directors and persons who own more than 10% of our shares file reports of ownership and changes in ownership with the SEC and furnish us with copies of all such reports that they file. Based solely upon a review of the copies of these reports received by us, and upon written representations by our directors and officers regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that all of our directors and officers filed all required reports under Section 16(a) in a timely manner for the year ended December 31, 2008. 65

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2009, which will be filed with the SEC within 120 days of our most recently completed fiscal year.

ITEM 12.

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

The information required by this Item 12 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2009, which will be filed with the SEC within 120 days of our most recently completed fiscal year.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Review, Approval or Ratification of Transactions with Related Persons Pursuant to the terms of the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving the terms and conditions of all proposed transactions between us, any of our officers or directors, or relatives or affiliates of any such officers or directors, to ensure that such related party transactions are fair and are in our overall best interest and that of our shareholders. In the case of transactions with employees, a portion of the review authority is delegated to supervising employees pursuant to the terms of our written Code of Business Conduct and Ethics. The Audit Committee has not adopted any specific procedures for conduct of reviews and considers each transaction in light of the facts and circumstances. In the course of its review and approval of a transaction, the Audit Committee considers, among other factors it deems appropriate: Whether the transaction is fair and reasonable to us; The business reasons for the transaction; Whether the transaction would impair the independence of one of our non-employee directors; and Whether the transaction is material, taking into account the significance of the transaction.

Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction. The information called for by Item 407(a) of Regulation S-K required to be included under this Item 13 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2009, which will be filed with the SEC within 120 days of our most recently completed fiscal year.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2009, which will be filed with the SEC within 120 days of our most recently completed fiscal year. 66

PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements

Page

Report of Independent Registered Chartered Accountants PricewaterhouseCoopers LLP . . . Report of Independent Registered Chartered Accountants Deloitte & Touche LLP . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Shareholders Equity . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1.1 List of Exhibits

70 72 73 74 75 76 77 78

1.2

2.1

3.1 3.2 4.1* 4.2 4.3

Underwriting Agreement dated February 8, 2005 between Mercer International Inc. and RBC Capital Markets Corporation, on behalf of itself and CIBC World Markets Corp., Raymond James & Associates, Inc. and D.A. Davidson & Co. Incorporated by reference from Form 8-K dated February 10, 2005. Underwriting Agreement dated February 8, 2005 among Mercer International Inc. and RBC Capital Markets Corporation and Credit Suisse First Boston LLC, on behalf of themselves and CIBC World Markets Corp. Incorporated by reference from Form 8-K dated February 10, 2005. Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006. Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006. First Supplemental Indenture dated March 1, 2006 to Indenture dated as of October 10, 2003 between Mercer International Inc. and Wells Fargo Bank, N.A. Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference from Form S-3 filed December 10, 2004. First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference from Form 8-K dated February 17, 2005. Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated February 3, 2009. Shareholders Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Losungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated September 10, 2002. Shareholders Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Losungen GmbH and FAHR Beteiligungen AG.

10.1

10.2

10.3*

67

10.4*

Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Losungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.16 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. Form of Trustees Indemnity Agreement between Mercer International Inc. and its Trustees. Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003. Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004. 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004. Asset Purchase Agreement by and among Mercer International Inc., 0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the assets and undertakings of Stone Venepal (Celgar) Pulp Inc. dated November 22, 2004. Incorporated by reference from Form 8-K dated November 23, 2004. Revolving Credit Facility Agreement dated February 9, 2005 among D&Z Holding GmbH, Zellstoffund Papierfabrik Rosenthal GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated February 17, 2005. Shareholders Undertaking Agreement dated February 9, 2005 relating to Revolving Credit Facility Agreement. Incorporated by reference from Form 8-K dated February 17, 2005. Revolving Term Credit Facility dated for reference May 19, 2006 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated May 30, 2006. Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006. Employment Agreement effective October 16, 2006 between Mercer International Inc. and David Ure dated September 22, 2006. Incorporated by reference from Form 8-K dated October 13, 2006. Employment Agreement effective September 25, 2006 between Mercer International Inc. and ClaesInge Isacson dated December 5, 2008. Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008. Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. Exchange Agreement dated December 4, 2006 between Mercer International Inc. and Nisswa Master Fund Ltd. Incorporated by reference from Form 8-K dated December 5, 2006. Exchange Agreement dated December 4, 2006 between Mercer International Inc. and CC Arbitrage Ltd. Incorporated by reference from Form 8-K dated December 5, 2006. Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. List of Subsidiaries of Registrant. Consent of Independent Registered Chartered Accountants PricewaterhouseCoopers LLP. Consent of Independent Registered Chartered Accountants Deloitte & Touche LLP. Section 302 Certificate of Chief Executive Officer. Section 302 Certificate of Chief Financial Officer. 68

10.5* 10.6 10.7 10.8 10.9

10.10

10.11 10.12

10.13 10.14 10.15 10.16 10.17*** 14 99.1 99.2 99.3 99.4 21 23.1 23.2 31.1 31.2

32.1** 32.2**

Section 906 Certificate of Chief Executive Officer. Section 906 Certificate of Chief Financial Officer.

* Filed in Form 10-K for prior years. ** 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, or the Exchange Act; and (ii) are not to be subject to automatic incorporation by reference into any of our Companys registration statements filed under the Securities Act, as amended for the purposes of liability thereunder or any offering memorandum, unless our Company specifically incorporates them by reference therein. *** Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and filed separately with the Commission pursuant to a confidential treatment application filed with the Commission.

69

INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of Mercer International Inc. We have completed integrated audits of Mercer International Inc.s 2008 and 2007 consolidated financial statements and of its internal control over financial reporting as at December 31, 2008. Our opinions, based on our audits, are presented below. Consolidated financial statements We have audited the accompanying consolidated balance sheets of Mercer International Inc. as at December 31, 2008 and December 31, 2007, and the related consolidated statement of operations, comprehensive income (loss), changes in shareholders equity and cash flows for each of the years in the two year period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of the Companys financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the years then ended in accordance with accounting principles generally accepted in the United States. The financial statements of the Company as at December 31, 2006 and for the year then ended were audited by other auditors whose report dated February 28, 2007 expressed an unqualified opinion on those financial statements. Internal control over financial reporting We have also audited Mercer International Inc.s internal control over financial reporting as at December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, 70

accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2008 based on criteria established in Internal Control Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP Chartered Accountants March 2, 2009 Vancouver, Canada

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS To the Board of Directors and Shareholders of Mercer International Inc. We have audited the accompanying consolidated statements of operations, comprehensive income (loss), changes in shareholders equity, and cash flows of Mercer International Inc. and subsidiaries (the Company) for the year ended December 31, 2006. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Mercer International Inc. and subsidiaries for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, effective January 1, 2006. In addition, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an Amendment of FASB Statements No. 87, 88, 106 and 132(R), effective December 31, 2006.

/s/ Deloitte & Touche LLP Independent Registered Chartered Accountants Vancouver, Canada February 28, 2007

72

MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (In thousands of Euros, except per share data)
December 31, 2008 2007

ASSETS Current assets Cash and cash equivalents (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, restricted (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note receivable, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term assets Cash, restricted (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred note issuance and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note receivable, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES Current liabilities Accounts payable and accrued expenses (Note 6) . . . . . . . . . . . . . . . . . . . . . . Pension and other post-retirement benefit obligations, current portion (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt, current portion (Note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities Debt, less current portion (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized interest rate derivative losses (Note 14) . . . . . . . . . . . . . . . . . . . . . Pension and other post-retirement benefit obligations (Note 8) . . . . . . . . . . . . . Capital leases and other (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SHAREHOLDERS EQUITY Share capital (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies (Note 16) Subsequent events (Note 19)

42,452 13,000 100,158 642 98,457 4,192 258,901

84,848 89,890 5,896 103,610 6,015 290,259

881,704 419 4,011 31,666 3,529 921,329 A 1,180,230

33,000 933,258 96 5,303 17,624 3,977 993,258 A 1,283,517

87,517 510 16,500 104,527 803,796 47,112 12,846 11,267 34,457 909,478 1,014,005

87,000 493 34,023 121,516 815,832 21,885 19,983 8,999 18,640 885,339 1,006,855

202,844 299 (35,046) (1,872) 166,225 A 1,180,230

202,844 134 37,419 36,265 276,662 A 1,283,517

The accompanying notes are an integral part of these financial statements. 73

MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of Euros, except per share data)
For the Years Ended December 31, 2008 2007 2006

Revenues: Pulp revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs and expenses: Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . (Sale) purchase of emission allowances . . . . . . . . . . . . . . . . . . . . . . Operating income from continuing operations . . . . . . . . . . . . . . . . . . . Other income (expense) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gain (loss) on debt . . . . . . . . . . . . . . . . . . . . . . . . Realized gain (loss) on derivative instruments (Note 14) . . . . . . . . . . Unrealized gain (loss) on derivative instruments (Note 14) . . . . . . . . Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes and minority interest from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (provision) (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before minority interest from continuing operations. . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share from continuing operations (Note 12) Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share (Note 12) Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 689,320 30,971 720,291 626,933 55,484 37,874 30,158 (5,613) 13,329 (65,756) (1,174) (4,234) (25,228) (96,392) (83,063) (501) (1,976) (85,540) 13,075 (72,465) A (72,465) A A A A (2.00) (2.00) (2.00) (2.00)

A 704,391 22,904 727,295 575,238 56,400 95,657 30,714 (4,643) 69,586 (71,400) 4,453 10,958 6,820 13,537 (35,632) 33,954 (2,170) (8,144) 23,640 (1,251) 22,389 (210) A 22,179 A A A A 0.62 0.58 0.61 0.58

A 623,977 20,922 644,899 477,526 55,834 111,539 34,644 (15,609) 92,504 (91,931) 6,090 15,245 (3,510) 109,358 35,252 127,756 (584) (56,859) 70,313 (1,071) 69,242 (6,032) A 63,210 A A A A 2.08 1.72 1.90 1.58

The accompanying notes are an integral part of these financial statements. 74

MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands of Euros)
For the Years Ended December 31, 2008 2007 2006

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (72,465) Other comprehensive income (loss) Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . FASB 158 pension income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains (losses) on securities arising during the year . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,876) 4,079 (340) (38,137)

A 22,179 29,214 (809) 95 28,500 A 50,679

A 63,210 (3,730) 171 (3,559) A 59,651

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (110,602)

The accompanying notes are an integral part of these financial statements. 75

MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (In thousands of Euros)
Common Shares Amount Paid in Excess of Par Value A156,138 251 297 (57) 12,052 A168,681 261 145 6,181 A175,268 A175,268 Retained Earnings (Deficit) A (47,970) 63,210 A 15,240 22,179 A 37,419 (72,465) A (35,046) Foreign Currency Translation Adjustments A 15,615 (3,730) A 11,885 29,214 A 41,099 (41,876) A (777) Accumulated Other Comprehensive Income (Loss) Defined Benefit Pension Plans A (331) (3,789) A (4,120) (809) A (4,929) 4,079 A (850) A Unrealized Gains (Losses) on Securities A (171) 171 95

Number of Shares Balance at December 31, 2005 . . . . . . . . Shares issued on exercise of stock options . . Shares issued on grants of restricted stock . . Shares of restricted stock cancelled . . . . . . Shares issued on repurchase of notes . . . . . Stock compensation expense . . . . . . . . . . Adjustment to initially apply FASB Statement No. 158, net of tax . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . Balance at December 31, 2006 . . . . . . Shares issued on exercise of stock options Shares issued on grants of restricted stock Shares issued on repurchase of notes . . . Stock compensation expense . . . . . . . . Net income . . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,169,140 . 60,000 . 45,000 . (9,999) . 2,201,035 .

Par Value A 25,448 41 32 (7) 1,447 A 26,961 43 15 557 A 27,576 A 27,576

Paid-in Capital A 14 140 A 154 (20) A 134 61 29 75 A 299

Total A 15,113 (3,789) (3,559) A 7,765 28,500 A 36,265 (38,137) A (1,872)

Shareholders Equity A 148,743 292 329 (64) 13,499 140 (3,789) 63,210 (3,559) A 218,801 304 160 6,738 (20) 22,179 28,500 A 276,662 61 29 75 (72,465) (38,137) A 166,225

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. 35,465,176 . 56,666 . 21,000 . 742,185 . . . . 36,285,027 . 21,000 . 116,460 . . .

Balance at December 31, 2007 . . . . . . . . Shares issued on grants of restricted stock . . Shares issued on grants of performance stock Stock compensation expense . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . .

A 95 (340) A (245)

Balance at December 31, 2008 . . . . . . . . . . . . . 36,422,487

The accompanying notes are an integral part of these financial statements. 76

MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of Euros)
For the Years Ended December 31, 2008 2007 2006

Cash flows from (used in) operating activities Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income (loss) to cash flows from operating activities Unrealized (gain) loss on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange (gain) loss on debt . . . . . . . . . . . . . . . . . . . . . . . Operating depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from equity investee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and other post-retirement expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and other post-retirement benefit funding . . . . . . . . . . . . . . . . . . . . . . Inventory provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in current assets and liabilities Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . Cash flows from (used in) investing activities Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of property, plant and equipment(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds on sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . Note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . Cash flows from (used in) financing activities Repayment of notes payable and debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from investment grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from borrowings of notes payable and debt . . . . . . . . . . . . . . . . . . . . . Proceeds from minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in construction costs payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of year (1) . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of year (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental disclosure of cash flow information: Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental schedule of non-cash investing and financing activities: Acquisition of production and other equipment under capital lease obligations Property, plant and equipment on acquisition of 7% interest in Stendal . . . . . Acquisition of notes receivable on sale of paper assets . . . . . . . . . . . . . . . . . Increase (decrease) in accounts payable relating to investing activities . . . . . .

A (72,465) 25,228 4,234 55,484 278 (765) (13,075) 1,976 264 1,981 (2,739) 11,272 (123) (14,811) (13,331) 1,240 3,486 (11,866) 20,000 (25,704) 2,000 5,708 2,004 (34,023) (3,312) 266 5,837 (31,232) (1,302) (42,396) 84,848 A 42,452 A 60,652 1,100 A 5,318 2,627

A 22,179 (13,537) (10,958) 56,400 258 179 1,251 8,144 243 1,806 (2,021) 2,048 (11,890) (38,703) 3,303 447 19,149 24,000 (4,864) 881 4,954 24,971 (26,719) (5,562) 1,236 305 (30,740) 1,664 15,044 69,804 A 84,848 A 73,318 452 A 2,110

A 63,210 (109,358) (15,245) 56,085 269 5,957 1,071 (1,206) 56,859 541 1,638 (1,941) 1,438 (7,381) 7,364 (9,305) (773) 49,223 (25,388) (32,937) 1,765 (6,870) 1,184 (62,246) (87,911) (4,091) 9,101 556 78,100 5,463 (240) 978 (1,698) (13,743) 83,547 A 69,804 A 84,382 1,304 A 3,301 8,067 11,321

.. .. . . . . . . . .

(1) Includes amounts related to discontinued operations of: 2008 Anil, 2007 A437, 2006 A772 (2) Includes amounts related to discontinued operations of: 2008 Anil, 2007 Anil, 2006 A437 (3) During 2007, purchases of property, plant, and equipment include amounts received and recorded as a reduction of property, plant and equipment (approximately A9,100) upon the settlement of the Stendal engineering, procurement and construction (EPC) contract.

The accompanying notes are an integral part of these financial statements. 77

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies Background Mercer International Inc. (Mercer Inc. or the Company) is a Washington corporation and the Companys shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange, respectively. The Company converted its corporate form from a Washington business trust to a corporation effective March 1, 2006 without effecting any changes to its business, management, accounting practices, assets or liabilities. Mercer Inc. operates three pulp manufacturing facilities in Canada and Germany, and is the second largest producer of market northern bleached softwood kraft, or NBSK, pulp in the world. In these consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (A). The term U.S. dollars and the symbol $ refer to United States dollars. The symbol C$ refers to Canadian dollars. Basis of Presentation These consolidated financial statements contained herein include the accounts of the Company and its whollyowned and majority-owned subsidiaries (collectively, the Company). All significant inter-company balances and transactions have been eliminated upon consolidation. Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgement is required in determining the accounting for, among other things, the accounting for doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ from these estimates, and changes in these estimates are recorded when known. Cash and Cash Equivalents Cash and cash equivalents include cash held in bank accounts and highly liquid money market investments with original maturities of three months or less. Investments Trading securities, consisting of marketable securities, are classified as current investments and are reported at fair values with realized gains or losses and unrealized holding gains or losses included in the results of operations. Investments in entities where the Company has equity investments in publicly traded companies in which it has less than 20% of the voting interest and in which it does not exercise significant influence are classified as available-for-sale securities. These securities are reported as long-term investments at fair values; based upon quoted market prices, with the unrealized gains or losses included in accumulated other comprehensive income as a separate component of shareholders equity, until realized. If a loss in value in available-for-sale securities is considered to be other than temporary, the loss is recognized in the determination of net income. The cost of all securities sold is based on the specific identification method to determine realized gains or losses. 78

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) Inventories Inventories of pulp and logs and wood chips are valued at the lower of cost, using the weighted-average cost method, or net realizable value. Other materials and supplies are valued at the lower of cost and replacement cost. Cost includes labor, materials and production overhead and is determined by using the average cost method. Inventories include both roundwood (logs) and wood chips. These inventories are located both at the pulp mill and at various locations. In accordance with industry practice, physical inventory counts utilize standardized techniques to estimate quantities of roundwood and wood chip inventory volumes. These techniques historically have provided reasonable estimates of such inventories. Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production and other equipment primarily over 25 years. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset. As a result of current market conditions, the Company undertook a long-lived asset impairment review and concluded that no impairment losses were incurred in 2008. The costs of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized, as well as interest costs associated with major capital projects until ready for their intended use. The cost of repairs and maintenance performed on manufacturing facilities, composed of labor, materials and other incremental costs, is charged to operations as incurred. Leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term. Operating lease payments are recognized as an expense in the Consolidated Statement of Operations on a straight line basis over the lease term. The Company provides for asset retirement obligations when there are legislated or contractual bases for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increase to property, plant, and equipment, and are amortized over the remaining useful life of the related assets. The liability is accreted using a risk free interest rate. As at December 31, 2008, the Company recorded A2,182 of asset retirement obligations. The Companys obligations for the proper removal and disposal of asbestos products from the Companys mills meets the definition of a conditional asset retirement obligation as found in the Financial Accounting Standards Board Statement Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout its older facilities. As a result of the longevity of the Companys mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to estimate the fair value of its asbestos removal and disposal obligation. Government Grants The Company records investment grants from federal and state governments when they are received. Grants related to assets are government grants whose primary condition is that the company qualifying for them should 79

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) purchase, construct or otherwise acquire long-term assets. Secondary conditions may also be attached restricting the type or location of the assets and/or other conditions must be met. Grants related to assets, when received, are deducted from the asset costs. Grants related to income are government grants which are either unconditional or related to the Companys normal business operations, and are reported as a reduction of related expenses when received. Deferred Note Issuance Costs Note issuance costs are deferred and amortized as a component of expenses over the term of the related debt instrument. Pensions The Company maintains a defined benefit pension plan for its salaried employees at its Celgar mill which is funded and non-contributory. The cost of the benefits earned by the salaried employees is determined using the projected benefit method pro rated on services. The pension expense reflects the current service cost, the interest on the unfunded liability and the amortization over the estimated average remaining service life of the employees of (i) the unfunded liability and (ii) experience gains or losses. In accordance with the provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statement No. 87, 88, 106 and 132R (FAS 158), the Company recognizes the net funded status of the plan. Effective December 31, 2008, the defined benefit pension plan will be closed to new members and the defined benefit service accrual will cease. Members will begin to accrue benefits under a new defined contribution plan effective January 1, 2009. The contributions to the new plan will be charged against earnings, in the Consolidated Statement of Operations. In addition, hourly-paid employees at the Celgar mill are covered by a multi-employer defined contribution pension plan for which contributions are charged against earnings in the Consolidated Statement of Operations. Foreign Operations and Currency Translation The Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in Euros, at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Transaction gains and losses related to net assets primarily located in Canada are recognized as unrealized foreign currency translation adjustments within comprehensive income (loss) in shareholders equity, until all of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entitys functional currency) are included in Costs and expenses in the Consolidated Statement of Operations, which amounted to A4,597, A(7,452) and A(1,059) for the years ended December 31, 2008, 2007 and 2006, respectively. Revenue and Related Cost Recognition The Company recognizes revenue from product sales, transportation and other when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, title of ownership and risk of loss have passed to the customer and collectability is reasonably assured. Sales are reported net of discounts and allowances. 80

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) Amounts charged to customers for shipping and handling are recognized as revenue. Shipping and handling costs incurred by the Company are included in Operating costs. During 2008, the Company has increased its focus on the production and sale of surplus electricity. Accordingly, management no longer considers this activity to be a by-product and, commencing in 2008, the Company began reporting revenue from sales of surplus electricity as Energy revenue in the Consolidated Statement of Operations. In previous years, these revenues were being reported within Operating costs. Consequently, the presentation in the Consolidated Statement of Operations has been revised for the Companys energy sales. Energy revenues are recognized as customers are invoiced at agreed upon rates and when collection is reasonably assured. These revenues include an estimate of the value of electricity consumed by customers in the year but billed subsequent to year end. Customer bills are based on meter readings that indicate electricity consumption. This activity does not meet the tests to be considered an operating segment, as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131). Environmental Conservation Liabilities for environmental conservation are recorded when it is probable that obligations have been incurred and their fair value can be reasonably estimated. Any potential recoveries of such liabilities are recorded when there is an agreement with the reimbursing entity and recovery is assessed as likely to occur. Stock-Based Compensation The Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (FAS 123(R)) on January 1, 2006. This statement requires the Company to recognize the cost of employee services received in exchange for the Companys equity instruments. Under FAS 123(R), the Company is required to record compensation expense over an awards vesting period based on the awards fair value. The Company elected to adopt FAS 123(R) on a modified prospective basis; accordingly, the financial statements for periods prior to January 1, 2006 do not include compensation cost calculated under the fair value method. Stock based compensation expense has been recorded in Selling, general, and administrative expenses on the Consolidated Statement of Operations. The fair value of performance stock awards is re-measured at each balance sheet date. The cumulative effect of the change in fair value is recognized in the period of the change as an adjustment to compensation cost. The Company estimates forfeitures of performance stock awards based on managements expectations and recognizes compensation cost only for those awards expected to vest. Estimated forfeitures are adjusted to actual experience as needed. The fair value of restricted stock awards are determined by multiplying the market price of a share of Mercer common shares on the grant date by the number of units. Taxes on Income Income taxes are reported under FAS No. 109, Accounting for Income Taxes (FAS 109), and accordingly, deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided if, after considering available evidence, both positive and negative, it is more likely than not that some or all of the deferred tax assets will not be realized. 81

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) Derivative Financial Instruments The Company enters into derivative financial instruments, including foreign currency forward contracts and swaps, electricity forward contracts, and interest rate swaps, caps and forward rate agreements, to limit exposures to changes in foreign currency exchange rates, energy prices, and interest rates. These derivative instruments are not designated as hedging instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) and, accordingly, any change in the marked-to-market fair value is recognized as either a gain or loss on derivative financial instruments in the Consolidated Statement of Operations. Net Income (Loss) Per Share Basic net income (loss) per share (EPS) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted income (loss) per share is calculated to give effect to all potentially dilutive common shares outstanding (computed under basic EPS) applying the Treasury Stock method. Outstanding stock options, restricted stock, awards such as restricted stock awards with performance conditions (known as performance stock), and convertible notes represent the only potentially dilutive effects on the Companys weighted average shares. See Note 12-Net Income (Loss) Per Share. Reclassifications Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. Recently Implemented Accounting Standards Fair Value Measurements On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over company-specific inputs, and expands disclosures regarding fair value measurements. It is applicable whenever another standard requires or permits assets or liabilities to be measured at fair value, but it does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial assets and financial liabilities and for non-financial assets and nonfinancial liabilities that are remeasured at least annually for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The effect of the adoption of FAS 157 on January 1, 2008 was not material and no adjustment to accumulated deficit was required. Refer to Note 14 for more information. On February 12, 2008, the Financial Accounting Standards Board (FASB) Staff issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which defers the effective date of FAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008, for items within the scope of FSP 157-2. The provisions of FAS 157 have not been applied to non-financial assets and liabilities, such as asset retirement obligations. Determining the Fair Value of a Financial Asset when the market for that Asset is not active In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3), which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset 82

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) when the market for that financial asset is not active. FSP 157-3 was effective immediately upon issuance, including prior periods for which financial statements have not been issued. The application of FSP 157-3 had no impact on the Companys financial statements or disclosures. The Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 effective January 1, 2008, the impact of which was not material. Accounting for Uncertainty in Income Taxes On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FAS 109, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 9-Income Taxes. New Accounting Standards In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160). FAS 160 establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Specifically, FAS 160 states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of FAS 160 are effective for the Companys year beginning on or after December 15, 2008, early adoption is prohibited. The Company is currently evaluating the impact that the adoption of this statement will have on the Companys consolidated financial position, results of operations and disclosures. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (FAS 141(R)). FAS 141(R) establishes how an entity accounts for identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and determines what disclosures are required as part of a business combination. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, early adoption is prohibited. The Company is currently evaluating FAS 141(R) to determine the impact it will have, if any, on any future acquisitions. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a companys financial position, financial performance and 83

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 1. The Company and Summary of Significant Accounting Policies (Continued) cash flows. The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Consequently, FAS 161 will be effective for the Companys quarter ended March 31, 2009. The Company is in the process of determining the impact, if any, the adoption of FAS 161 will have on its financial statement disclosures. In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (FAS 142). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is reviewing FSP 142-3 and is unable to estimate the impact on its financial position, results of operations or cash flows. In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). FAS 162 defines the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The provisions of FAS 162 are effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is in the process of determining the impact, if any, the adoption of FAS 162 will have on its financial statements and disclosures. In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Settlement) (FSP 14-1). FSP 14-1 states that convertible debt instruments that are within its scope are required to be separated into both a debt component and an equity component. In addition, any debt discount is to be accreted to interest expense over the expected life of the debt. The provisions of FSP 14-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and implementation is generally required to be retrospective. Early adoption is not permitted. The Company is in the process of determining the impact, if any, the adoption of FSP 14-1 will have on its financial statements and disclosures. Note 2. Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash includes restricted cash for debt service reserves as required under debt agreements (Note 7(a)). The Company maintains cash balances in foreign financial institutions in excess of insured limits.
December 31, 2008 2007

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 42,452 A 13,000

A 84,848 A 33,000

84

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 3. Receivables
December 31, 2008 2007

Sale of pulp (net of allowance of A614 and A626, respectively) . . . . . . . . . . . . . . . . . . A 85,120 Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,433 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,605 A 100,158

A 81,913 2,673 5,304 A 89,890

The Company reviews the collectability of receivables on a periodic basis. The Company maintains an allowance for doubtful accounts at an amount estimated to cover the potential losses on any uninsured receivables. Any amounts that are determined to be uncollectible and uninsured are offset against the allowance. The allowance is based on the Companys evaluation of numerous factors, including the payment history and financial position of the debtors. The Company does not generally require collateral for any of its receivables. Other relates to non-trade receivables that are individually not material. Note 4. Inventories
December 31, 2008 2007

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 38,225 Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,881 Work in process and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,351 A 98,457

A 38,045 43,127 22,438 A 103,610

As at December 31, 2008, the Company recorded provisions totaling approximately A4,200 (2006 and 2007 nil) against finished goods inventories. In addition, the Company recorded provisions totaling approximately A7,100 (2007 and 2006 nil) against raw material inventories. The provisions were primarily the result of the decline in the US dollar price of NBSK pulp. The provisions against finished goods and raw material inventories are included in Operating costs. Note 5. Property, Plant and Equipment
December 31, 2008 2007

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 24,661 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,046 Production equipment and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,991 Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211,698 (329,994) A 881,704

24,538 125,369 1,070,202 1,220,109 (286,851)

A 933,258

Included in production equipment and other is equipment under capital leases which had gross amounts of A17,682 and A17,765, and accumulated depreciation of A6,837 and A9,005, respectively, as at December 31, 2008 and 2007. During the years 2008, 2007 and 2006, production equipment and other totaling A5,318, A3,286 and A3,301, respectively, was acquired under capital lease obligations. 85

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 5. Property, Plant and Equipment (Continued) Certain of the assets at the Celgar mill are subject to a lien registered for the benefit of a government revenue agency. The lien was registered pursuant to a property transfer tax dispute that is currently before the courts. See Note 16-Commitments and Contingencies. Note 6. Accounts Payable and Accrued Expenses
December 31, 2008 2007

Trade payables . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and other . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . Capital leases, current portion . . . . . . . . . . . . .

.............................. .............................. .............................. .............................. ..............................

A 31,140 4,559 31,181 17,202 3,435 A 87,517

A 37,245 3,097 25,752 17,437 3,469 A 87,000

Note 7. Debt Certain of the Companys debt agreements were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to other important qualifications and exceptions. As at December 31, 2008, the Company was in compliance with the terms of the indenture. Debt consists of the following:
December 31, 2008 2007

Note payable to bank, included in a total credit facility of A827,950 to finance the construction related to the Stendal pulp mill (a) . . . . . . . . . . . . . . . . . . . . . . . . . . A 531,073 Senior notes due February 2013, interest at 9.25% accrued and payable semiannually, unsecured (b) (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222,718 Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (c) (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,319 Credit agreement with a syndicate of banks with respect to a revolving credit facility of C$40 million (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,186 Loans payable to minority shareholders of Stendal pulp mill (e) . . . . . . . . . . . . . . . . Credit agreement with bank with respect to a revolving credit facility of A40 million (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820,296 Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,500) Debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 803,796

A 565,096 212,285 46,056 15,248 11,170 849,855 (34,023) A 815,832

86

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 7. Debt (Continued) The Company made scheduled principal repayments under these facilities of A34,023 in 2008, and expects the principle repayments to be A16,500 in 2009 pursuant to an amendment to the Stendal credit facility as noted in Note 19 - Subsequent Events. As of December 31, 2008, the principal maturities of debt are as follows:
Matures Amount

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . .

...................................... ...................................... ...................................... ...................................... ...................................... ......................................

A 16,500 80,421 23,167 24,583 262,718 412,907 A 820,296

(a) Note payable to bank, included in a total credit facility of A827,950 to finance the construction related to the Stendal pulp mill, interest at rates varying from Euribor plus 0.90% to Euribor plus 1.85% (rates on amounts of borrowing at December 31, 2008 range from 6.19% to 6.42%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the assets of the Stendal pulp mill, and at December 31, 2008, restricted cash amounting to A13,000, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to A516,073 of outstanding principal balance, subject to a debt service reserve account required to pay amounts due in the following twelve months under the terms of credit facility; payment of dividends is only permitted if certain cash flow requirements are met. See Note 19 Subsequent Events. (b) In February 2005, the Company issued $310 million of senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured. On or after February 15, 2009, the Company may redeem all or a part of the notes at redemption prices (expressed as a percentage of principal amount) equal to 104.63% for the twelve month period beginning on February 15, 2009, 102.31% for the twelve month period beginning on February 15, 2010, and 100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid interest. (c) As at December 31, 2008, the subordinated convertible notes had approximately $67.3 million of principal outstanding. The subordinated convertible notes are due October 2010, bear interest at 8.5% accrued and payable semi-annually, are convertible at any time by the holder into common shares of the Company at $7.75 per share and are unsecured. The Company may redeem for cash all or a portion of these notes at any time on or after October 15, 2008 at 100% of the principal amount of the notes plus accrued and unpaid interest up to the redemption date. The holders of the convertible notes will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal. (d) Credit agreement with respect to a revolving credit facility of C$40 million, on a three year term. Borrowings under the credit agreement are secured by pulp mill inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 2.25% or Canadian prime plus 0.50%. U.S. dollar denominated amounts bear interest at LIBOR plus 2.25% or U.S. base plus 0.50%. As at December 31, 2008, this facility was drawn by C$31 million and was accruing interest at a rate of approximately 3.90%. The credit agreement matures May 19, 2009, but is subject to a one-year extension at the Companys request. On January 23, 2009, the Company was granted a one-year extension pursuant to the terms of the credit agreement. The extension carries the same general terms and matures May 19, 2010. 87

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 7. Debt (Continued) (e) Loans payable to the minority shareholder of Stendal pulp mill bear interest at 7%, payable in September 2006 then payable semi-annually beginning March 2007, unsecured, subordinated to all liabilities of the Stendal pulp mill, due in 2017. The amounts outstanding on these loans were A34,122 and A32,216 as at December 31, 2008 and 2007, respectively. Cumulative net losses of Stendal in the amounts of A34,122 and A21,305 were applied to these loans in 2008 and 2007, respectively. The net obligation of Anil and A11,170 is reflected for 2008 and 2007, respectively. (f) Credit agreement with respect to a revolving credit facility of A40,000. Borrowings under the credit agreement are secured by pulp mill inventory and receivables. Borrowings under the credit agreement bear interest at Euribor plus 1.55%. As at December 31, 2008, this facility was undrawn.

Note 8. Pension and Other Post-Retirement Benefit Obligations Included in pension and other post-retirement benefit obligations are amounts related to the Companys Celgar and German pulp mills. The largest component of this obligation is with respect to the Celgar mill which maintains defined benefit pension plans and post-retirement benefits plans for certain employees (Celgar Plans). Pension benefits are based on employees earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Effective December 31, 2008, the defined benefit plan will be closed to new members. In addition, the defined benefit service accrual will cease on December 31, 2008, and members will begin to accrue benefits under a new defined contribution plan effective January 1, 2009. Information about the Celgar Plans, in aggregate for the year ended December 31, 2008 is as follows:
2008 Other Post-Retirement Benefit Obligations

Pension

Total

Change in benefit obligation Benefit obligation, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . Benefit obligation, December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of fair value of plan assets Fair value of plan assets, December 31, 2007 . . . . . . . . . . . . . . . . Actual returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . Fair value of plan assets, December 31, 2008 . . . . . . . . . . . . . . . . . . Funded status, December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .

A 27,832 789 1,356 (1,417) 973 (5,557) (3,948) 20,028 23,903 (4,084) 2,077 (1,417) (3,381) 17,098 A (2,930)

A 16,137 501 800 (381) (1,152) (3,442) (2,166) 10,297 381 (381) A (10,297)

A 43,969 1,290 2,156 (1,798) (179) (8,999) (6,114) 30,325 23,903 (4,084) 2,458 (1,798) (3,381) 17,098 A (13,227)(1)

88

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 8. Pension and Other Post-Retirement Benefit Obligations (Continued)
2008 Other Post-Retirement Benefit Obligations

Pension

Total

Components of the net benefit cost recognized Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of recognized items . . . . . . . . . . . . . . . . . . . . . . . . . Net benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

789 1,356 (1,542) (6) 597

501 800 83 1,384

1,290 2,156 (1,542) 77 1,981

(1) The total of A13,356 on the consolidated balance sheets also includes the pension liabilities of A129 relating to employees at the Companys German operations.

Information about the Celgar Plans, in aggregate for the year ended December 31, 2007 is as follows:
2007 Other Post-Retirement Benefit Obligations

Pension

Total

Change in benefit obligation Benefit obligation, December 31, 2006 . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . Benefit obligation, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of fair value of plan assets Fair value of plan assets, December 31, 2006 . . . . . . . . . . . . . . . . Actual returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . Fair value of plan assets, December 31, 2007 . . . . . . . . . . . . . . . . . . Funded status, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . Components of the net benefit cost recognized Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of recognized items . . . . . . . . . . . . . . . . . . . . . . . . . Net benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 25,990 840 1,363 (1,593) (481) 1,713 27,832 21,993 351 1,698 (1,593) 1,454 23,903 A (3,929) 840 1,363 (1,673) A 530 A

A 13,867 473 741 (323) 442 937 16,137 323 (323) A (16,137) A 473 741 62 1,276

A 39,857 1,313 2,104 (1,916) (39) 2,650 43,969 21,993 351 2,021 (1,916) 1,454 23,903 A (20,066)(1) 1,313 2,104 (1,673) 62 A 1,806 A

(1) The total of A20,476 on the consolidated balance sheets also includes the pension liabilities of A410 relating to employees at the Companys German operations.

89

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 8. Pension and Other Post-Retirement Benefit Obligations (Continued) The Company anticipates that it will make contributions to the pension plan of approximately A841 in 2009. Estimated future benefit payments under the Celgar Plans are as follows:
Amount

2009 2010 2011 2012 2013 2014

................................. ................................. ................................. ................................. ................................. 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .

............................... ............................... ............................... ............................... ............................... ...............................

A 1,765 1,871 1,963 2,073 2,197 13,108

During the year ended December 31, 2008, the Company recognized A4,079 in other comprehensive income (2007 loss of A809, 2006 loss of A3,789). As at December 31, 2008, the pension related accumulated other comprehensive income balance of A850 (2007 A4,929) is a result of net actuarial losses. The Celgar Plans do not have any net transition asset or obligation recognized as a reclassification adjustment of other comprehensive income. The amount included in other comprehensive income which is expected to be recognized in 2009 is approximately A89 of net actuarial gains. There are no plan assets that are expected to be returned to the Company in 2008. Investment Objective: The investment objective for the Celgar Plans is to sufficiently diversify invested plan assets to maintain a reasonable level of risk without imprudently sacrificing the return on the invested funds. To achieve this objective, asset allocation targets have been established by asset class as summarized below. Reviews of the investment objectives, key assumptions and the independent investment management are performed periodically. Summary of key assumptions:
December 31, 2008 2007

Benefit obligations Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . Net benefit cost for year ended Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . Expected rate of return on plan assets . . . . . . . . Assumed health care cost trend rate at Initial health care cost trend rate . . . . . . . . . . . . Annual rate of decline in trend rate . . . . . . . . . . Ultimate health care cost trend rate . . . . . . . . . . Medical services plan premiums trend rate . . . .

......................... ......................... ......................... ......................... ......................... ......................... ......................... ......................... .........................

7.25% 2.75% 5.25% 3.00% 7.00%

5.25% 3.00% 5.00% 3.00% 7.25%

12.00% 12.00% 1.00% 1.00% 4.50% 5.00% 2.50% 2.50%

The expected rate of return on plan assets is a management estimate based on, among other factors, historical long-term returns, expected asset mix and active management premium.

90

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 8. Pension and Other Post-Retirement Benefit Obligations (Continued) A one-percentage point change in assumed health care cost trend rate would have the following effect on the post-retirement benefit obligations:
December 31, 2008 1% increase 1% decrease December 31, 2007 1% increase 1% decrease

Effect on total service and interest rate components. . . . . . . . . . . . . . . . . . . . . . . . Effect on post-retirement benefit obligation . . Asset allocation of funded plans:

A 235 A 1,598

A (178) A (1,251)

A 212 A 2,252

A (160) A (1,762)

Target

2008

2007

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50-70% 30-45% 0-10%

61% 36% 3%

59% 34% 7%

100% 100%

Note 9. Income Taxes The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no adjustment in the liability for unrecognized tax benefits. As at the adoption date of January 1, 2007, the Company had approximately A18,600 of total gross unrecognized tax benefits, at December 31, 2008, that balance is A3,400, substantially all of which would affect the Companys effective tax rate if recognized. Currently, the Company does not believe that any of its unrecognized tax benefits will change significantly in the next fiscal year. However, this belief could change as tax years are examined by taxing authorities, the timing of those examinations, if any, are uncertain at this time. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2008 2007

Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 4,000 (3,200) A 800

A 4,400 200 (300) (300) A 4,000

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2008, the Company recognized approximately A200 in penalties and interest. The Company had A200 for the payment of interest and penalties accrued at December 31, 2008. The Company and/or one or more of its subsidiaries files income tax returns in the United States, Germany and Canada. The Company is generally not subject to U.S., German or Canadian income tax examinations for tax years before 2004, 2005 and 2004, respectively. The provision for current income taxes consists entirely of non-U.S. taxes for the years ended December 31, 2008, 2007 and 2006, respectively. 91

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 9. Income Taxes (Continued) Differences between the U.S. Federal Statutory and the Companys effective rates are as follows:
Year Ended December 31, 2008 2007 2006

U.S. Federal statutory rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34% 34% 34% U.S. Federal statutory rates on (income) loss from continuing operations before income tax and minority interest . . . . . . . . . . . . . . . . . . . . . . . . A 28,241 A (11,544) A (43,437) Tax differential on foreign income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . (2,966) 2,902 (4,070) Effect of foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,800) Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,530) 15,021 (16,145) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,422) (16,693) 6,209 A (2,477) A (10,314) A (57,443) Comprised of: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (501) Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,976) A (2,477) Deferred income tax assets and liabilities are composed of the following:
December 31, 2008 2007

A (2,170) (8,144) A (10,314)

(584) (56,859)

A (57,443)

German tax loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. tax loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canadian tax loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis difference between income tax and financial reporting with respect to operating pulp mills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payables and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for deferred pension liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax (liability) asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprised of: Deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 67,930 5,909 4,924 (17,118) 13,227 (1,726) (780) 2,079 531 956 75,932 (78,723) A (2,791) A 31,666 (34,457) A (2,791)

A 50,725 19,934 2,497 (6,354) 6,144 (2,736) 148 18 652 1,149 72,177 (73,193) A (1,016) A 17,624 (18,640) A (1,016)

The Company is subject to income tax audits on a continuing basis which may result in changes to the amounts in the above table. Due to this and other uncertainties regarding future amounts of taxable income in Germany, Canada and the United States, the Company has provided a valuation allowance for the majority of its deferred tax assets relating to tax losses carried forward for income tax purposes. 92

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 9. Income Taxes (Continued) The Companys German tax loss carryforward amount includes corporate and trade tax losses totaling approximately A405,900 at December 31, 2008. The Companys U.S. loss carryforwards amount is approximately A52,800 at December 31, 2008, which will expire in the tax years ending 2011 through 2028, if not used. The Companys Canadian tax loss carryforward amount is approximately A16,400 at December 31, 2008 which will begin to expire in the tax year ending 2026, if not used. Management is generally unable to conclude that these losses are more likely than not to be utilized, under current circumstances, and accordingly has fully reserved any resulting potential tax benefit that is not expected to be realized in 2009 or 2010. Income (loss) from foreign source continuing operations amounted to A(42,788), A(4,030) and A115,305 for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are intended to be indefinitely reinvested in operations. Note 10. Shareholders Equity

In December 2006, the Company purchased and cancelled an aggregate of approximately $15.25 million principal amount of the Companys subordinated convertible notes in exchange for 2,201,035 common shares of the Company. In March 2007, the Company converted a note payable to a third party to 742,185 common shares. The conversion was based on the 20-trading day average closing price of the Companys common shares at March 30, 2007. Common shares The Company has authorized 200,000,000 common shares (2007 200,000,000) with a par value of $1 per share. As at December 31, 2008, the Company had 36,422,487 (2007 36,285,027) common shares issued and outstanding. Preferred shares The Company has authorized 50,000,000 preferred shares (2007 50,000,000) with U.S. $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Companys articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at December 31, 2008, no preferred shares had been issued by the Company. Note 11. Stock-Based Compensation

The Company had a non-qualified stock option plan which provided for options to be granted to officers and employees to acquire a maximum of 3,600,000 common shares including options for 130,000 shares to directors who are not officers or employees. This plan expired in 2008 but unexercised options that were previously granted under this plan remain outstanding. The Company also has a stock incentive plan which provides for options, stock appreciation rights and restricted stock to be awarded to employees and outside directors to a maximum of 1,000,000 common shares. During 2008, the Company implemented a new form of stock-based compensation called performance stock under its existing stock incentive plan. 93

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

Performance Stock Grants of performance stock comprise rights to receive stock at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the year ended December 31, 2008, potential stock based performance awards totaled 570,614 shares, which cliff vest on December 31, 2010. Expense recognized for the year was A96 (2007 nil). The fair value of performance stock is determined based upon the number of shares granted and the quoted price of the Companys stock. Performance stock generally cliff vest three years from the grant date. As at December 31, 2008, no performance stock had vested. There were no performance stock awards cancelled during the year. As at December 31, 2008, the total remaining unrecognized compensation cost associated with the performance stock totaled approximately A340 which will be amortized over their remaining vesting period. Restricted Stock The fair value of restricted stock is determined based upon the number of shares granted and the quoted price of the Companys stock on the date of grant. Restricted stock generally vests over two years. Expense is recognized on a straight-line basis over the vesting period. Expense recognized for the years ended December 31, 2008, 2007 and 2006 was A168, A312 and A401, respectively. As at December 31, 2008, the total remaining unrecognized compensation cost related to restricted stock amounted to A45, which will be amortized over their remaining vesting period. During the year ended December 31, 2008, there were restricted stock awards of 21,000 shares (2007 21,000; 2006 45,000) granted to independent directors and officers of the Company and no restricted stock was cancelled during the year (2007 nil; 2006 9,999). As at December 31, 2008, the total number of restricted stock outstanding was 232,685 (2007 211,685; 2006 190,686), of which 21,000 had not vested. Stock Options The following table summarizes the status of the Companys stock options during 2008, 2007 and 2006:
Number of Options Weighted Average Exercise Price (In U.S. Dollars)

Outstanding at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185,000 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,000) Outstanding at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125,000 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 94 (56,666) (5,000) (135,000) 928,334

$6.71 6.38 6.69 7.10 7.92 8.50 $6.44

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

Following is a summary of the status of options outstanding at December 31, 2008:

Outstanding Options Weighted Average Remaining Number Contractual Life (Years) Exercisable Options Weighted Average Exercise Price Weighted Average Exercise Price (In U.S. Dollars)

Exercise Price Range (In U.S. Dollars)

Number

$5.65 - $6.375 7.30 7.92

830,000 30,000 68,334

1.50 6.50 6.75

$6.29 7.30 7.92

830,000 30,000 68,334

$6.29 7.30 7.92

During the year ended December 31, 2008, no options were granted, exercised, cancelled, or expired. The aggregate intrinsic value of options outstanding and currently exercisable as at December 31, 2008 is $nil per option. During the year ended December 31, 2007, 30,000 options were exercised at an exercise price of $6.375 and 26,666 options were exercised at an exercise price of $7.92 for cash proceeds of $402,445. 5,000 options were cancelled during the period, and 135,000 options expired during the period. The average intrinsic value of the options exercised was $4.58 per option. The aggregate intrinsic value of options outstanding and exercisable as at December 31, 2007 was $1.39 per option. The fair value of each option granted is estimated on the grant date using the Black-Scholes Model. There were no options granted in either 2008 or 2007. The assumptions used in calculating fair value as at December 31, 2006 were as follows:
2006

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life of the options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average fair value per option granted (in U.S. dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) The expected volatility was based on the Companys three year historical stock prices.

4.1% 0.5 years 34.1% 0.0% $2.94

Stock compensation expense recognized for the year ended December 31, 2008 was Anil (2007 - A65). As at December 31, 2008, all stock options had fully vested.

95

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 12. Net Income (Loss) Per Share
Year Ended December 31, 2008 2007 2006

Net income (loss) from continuing operations basic . . . . . . . . A Interest on convertible notes, net of tax . . . . . . . . . . . . . . . . . . . Net income (loss) from continuing operations diluted . . . . . . A Net income (loss) from continuing operations per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Net income (loss) from continuing operations . . . . . . . . . . . . . . A Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . Net income (loss) basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on convertible notes, net of tax . . . . . . . . . . . . . . . . . . . Net income (loss) diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . A Net income (loss) per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Weighted average number of common shares outstanding: Basic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of dilutive shares: Stock options and awards . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(72,465) (72,465) (2.00) (2.00) (72,465) (72,465) (72,465) (2.00) (2.00) 36,285,027 2,394 36,287,421

A A A A A

22,389 3,930 26,319 0.62 0.58 22,389 (210) 22,179 3,930 26,109 0.61 0.58

A A A A A

69,242 4,912 74,154 2.08 1.72 69,242 (6,032) 63,210 4,912 68,122 1.90 1.58

A A A

A A A

36,080,931 362,774 8,859,036 45,302,741

33,336,348 319,793 9,428,022 43,084,163

(1) The basic weighted average number of shares excludes performance and restricted stock which have been issued, but have not vested as at December 31, 2008.

The calculation of diluted income (loss) per share does not assume the exercise of stock options and awards or the conversion of convertible notes that would have an anti-dilutive effect on earnings per share. Stock options and awards excluded from the calculation of diluted income (loss) per share because they are anti-dilutive represented 928,334, nil and nil for the years ended December 31, 2008, 2007 and 2006, respectively. Convertible notes excluded from the calculation of diluted income (loss) per share because they are anti-dilutive represented 8,678,065, nil and nil for the years ended December 31, 2008, 2007 and 2006, respectively. Performance and restricted stock excluded from the calculation of diluted income per share because they are anti-dilutive represented 393,642 shares (2007 nil).

Note 13.

Business Segment Information

The Company has three operating segments, the individual pulp mills, that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are those of the one reportable business segment. The pulp business is cyclical in nature and its market is affected by fluctuations in supply and demand in each cycle. These fluctuations have significant effect on the cost of materials and the eventual sales prices of products. 96

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 13. Business Segment Information (Continued)

The following table presents net sales from continuing operations to external customers by geographic area based on location of the customer.
2008 2007 2006

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other European Union countries(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third party transportation revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 198,340 131,412 56,487 133,621 65,192 78,718 17,146 680,916 30,971 8,404 A 720,291

A 198,575 159,553 50,177 136,434 58,242 66,229 26,639 695,849 22,904 8,542 A 727,295

A 154,388 141,296 60,057 117,016 75,522 39,761 28,586 616,626 20,922 7,351 A 644,899

(1) Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission.

The following table presents total long-lived assets from continuing operations by geographic area based on location of the asset.
2008 2007

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 732,766 Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,850 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,036 A 898,652

A 776,839 189,277 4,215 A 970,331

In 2008, pulp sales to the Companys largest customer amounted to 9% (2007 7%; 2006 9%) of total pulp sales.

Note 14.

Financial Instruments

The fair value of financial instruments at December 31 is summarized as follows:

2008 Carrying Amount Fair Value Carrying Amount 2007 Fair Value

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate derivative contracts liability . . . . . . . . . . . . . 97

A 42,452 13,000 100,158 4,171 87,517 820,296 47,112

A 42,452 13,000 100,158 4,171 87,517 704,901 47,112

A 84,848 33,000 89,890 9,873 87,000 849,855 21,885

A 84,848 33,000 89,890 9,873 87,000 845,026 21,885

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 14. Financial Instruments (Continued)

Cash and Debt Instruments Many of the Companys transactions are denominated in foreign currencies, primarily the U.S. dollar. As a result of these transactions the Company and its subsidiaries has financial risk that the value of the Companys financial instruments will vary due to fluctuations in foreign exchange rates. The carrying value of cash and cash equivalents and accounts payable and accrued expenses approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. The fair value of notes receivable was estimated using discounted cash flows at prevailing market rates. The fair value of debt reflects recent market transactions. The fair value of the interest rate derivatives is obtained from dealer quotes, based on current interest rates. These values represent the estimated amount the Company would receive or pay to terminate agreements taking into consideration current interest rates and the creditworthiness of the counterparties. The Company uses interest rate derivatives to fix the rate of interest on indebtedness under the Stendal loan facilities and sometimes uses foreign exchange derivatives to convert some costs (including currency swaps relating to long-term indebtedness) from Euros to U.S. dollars. As at December 31, 2008, there were only interest rate derivative instruments in place and there were no foreign exchange derivatives outstanding. The interest rate derivative contracts are with the same banks which hold the debt and the Company does not anticipate nonperformance by the banks.
2008 2007 2006

Realized net gain on foreign exchange derivatives . . . . . . . . . . . . . . . . . A

A 6,820 A 19,470 (5,933) A 13,537

A (3,510) A 37,292 72,066 A 109,358

Unrealized net gain (loss) on interest rate derivatives . . . . . . . . . . . . . . . A (25,228) Unrealized net gain (loss) on foreign exchange derivatives . . . . . . . . . . . Unrealized net gain (loss) on derivative financial instruments . . . . . . . . . A (25,228) Energy Derivatives

The Company is also subject to price risk for electricity used in its manufacturing operations. During the year, the Company entered into fixed electricity forward sales contracts in connection with the Stendal and Rosenthal mills electricity generation. The Company realized gains of approximately A4,500 (2007 nil). The Company entered into the electricity forward sales contracts because it saw an opportunity to sell forward at opportunistic rates. Although the Company does not currently have plans to enter into similar transactions, should similar situations present themselves, the Company may enter into similar electricity derivative contracts. As at December 31, 2008, the Company had no outstanding electricity derivative contracts. Gains from energy derivatives are included within Operating costs in the Consolidated Statement of Operations. Interest Rate Derivatives During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately A612,600 of the principal amount of the indebtedness under the Stendal loan facility. Currently, the aggregate notional amount of these contracts is A523,100 at a fixed interest rate of 5.28% and they mature October 2017 (matching the maturity of the Stendal loan facility). The Company recognized an unrealized loss of A25,228, an unrealized gain of A19,470 and an unrealized gain of A37,292 with respect to these interest rate swaps for the years ended December 31, 2008, 2007 and 2006, respectively. 98

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 14. Financial Instruments (Continued)

Foreign Exchange Derivatives The Company did not enter into foreign exchange derivatives in 2008. During 2007, the Company had entered into certain currency swaps with an initial aggregate notional amount of A556,600 and recognized a gain of A6,820. During 2006, the Company entered into and subsequently settled certain currency forward contracts with an initial aggregate notional amount of Anil and recognized a loss of A3,510. Credit Risk Concentrations of credit risk on the sale of pulp products are with customers and agents based in Germany, China, Italy and the United States. FAS 157 Fair Value Measurements The Company adopted FAS 157 effective January 1, 2008. The adoption of FAS 157 resulted in no impact on the Companys consolidated financial position or results from operations. The fair value methodologies and, as a result, the fair value of the Companys investments and derivative instruments are determined based on the fair value hierarchy provided in FAS 157. The fair value hierarchy per FAS 157 is as follows: Level 1 Valuations based on quoted prices in active markets for identical assets and liabilities. Level 2 Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates. Level 3 Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts. The Company classified its investments within Level 1 of the valuation hierarchy where quoted prices are available in an active market. The Company also holds highly liquid investments within restricted cash, which are marked to market at the end of each period. Level 1 investments include exchange-traded equities. The Companys derivatives are classified within Level 2 of the valuation hierarchy, as they are traded on the over-the-counter market and are valued using internal models that use, as their basis, readily observable market inputs, such as forward interest rates. The valuation techniques used by Mercer are based upon observable inputs. Observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Companys own credit risk, in determining the fair value of the derivative instruments. The counterparty to the Stendal interest rate swap derivative is a multi-national financial institution. The fair value of the interest rate swaps represents the Companys exposure on the derivative contracts.

99

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 14. Financial Instruments (Continued)

The following table presents a summary of the Companys outstanding financial instruments and their estimated fair values under the hierarchy defined in FAS 157: Fair value measurements at December 31, 2008 using:
Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3)

Description

Total

Assets Investments held in restricted cash(a) . . . . . . . . . . . . Investments(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Derivatives(b) Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A 6,622 419 A 7,041

A A

A A

A 6,622 419 A 7,041

47,112 A 47,112

47,112 A 47,112

(a) Based on observable market data. (b) Based on observable inputs for the liability (interest rates and yield curves observable at specific intervals).

Note 15.

Lease Commitments

Minimum lease payments, primarily for various vehicles, and plant and equipment under capital and noncancellable operating leases and the present value of net minimum payments at December 31, 2008 were as follows:
Capital Leases Operating Leases

2009 . . . . . . . . . . . 2010 . . . . . . . . . . . 2011 . . . . . . . . . . . 2012 . . . . . . . . . . . 2013 . . . . . . . . . . . Thereafter . . . . . . .

.................................................. .................................................. .................................................. .................................................. .................................................. ..................................................

. A 3,419 . 2,740 . 2,994 . 1,356 . 191 . 1,537 (1,642) 10,595 (3,435)

A 2,276 2,005 1,398 953 5 A 6,637

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 12,237 Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total present value of minimum capitalized payments . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 7,160 Rent expense under operating leases was A2,137, A1,908 and A1,453 for 2008, 2007 and 2006, respectively. The current portion of the capital lease obligations is included in accounts payable and accrued expenses and the long-term portion is included in capital leases and other in the Consolidated Balance Sheets. 100

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 16. Commitments and Contingencies

At December 31, 2008, the Company recorded a liability for environmental conservation expenditures of approximately A2,739. Management believes the liability amount recorded is sufficient. The Company is required to pay certain fees based on water consumption levels at its German mills. Unpaid fees can be reduced by the mills demonstration of reduced environmental emissions. To the extent that the Company has not agreed with regulatory authorities for fee reductions, a liability for these water charges has been recognized. The Company maintains industrial land fills on its premises for the disposal of waste, primarily from the mills pulp processing activities. The mills have obligations under their land fill permits to decommission these disposal facilities pursuant to the requirements of its local regulations. The balance of the aggregate carrying amount of the asset retirement obligation amounted to approximately A2,182 at December 31, 2008. During the year, as part of the new Green Energy project for the Celgar mill, the Company entered into a number of contracts for the purchase of a new 48 megawatt condensing turbine-generator set, as well as other related equipment and service commitments. As at December 31, 2008, the value of the contracts committed was approximately A6,800 (C$11.6 million), a majority of which is due to be paid within the next year. In July 2008, as part of a bleaching project line renewal at the Rosenthal mill, the Company entered into contracts for the purchase of equipment and related services. As at December 31, 2008, the value of the contracts committed was approximately A2,940, of which A2,520 is expected to be paid in 2009, and the remainder in 2010. The Company had also entered into certain other capital commitments at the Rosenthal mill, none of which are individually material. Commitments under these contracts were approximately A400 at December 31, 2008. The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. The Company entered into certain minimum or fixed purchase commitments primarily related to the purchase of raw materials, none of which are individually material, that extend beyond 2009. Commitments under these contracts are approximately A2,800 in 2009. Between 2010 and 2011, commitments total approximately A2,300 and between 2012 and 2013 commitments total approximately A2,100. Total commitments beyond 2013 are approximately A5,800. Note 17. Discontinued Operations

In August 2006, the Company reorganized and divested its equity interests in certain paper production assets for aggregate consideration of approximately A5,000 of indebtedness, in the form of a secured note, and A5,000 in cash. Only the cash portion of the consideration appears on the consolidated condensed statements of cash flows. On November 16, 2006, the Company divested its last remaining paper production assets to focus exclusively on the manufacture and sale of pulp. Accordingly, the information related to the paper production assets is presented as discontinued operations in the Companys consolidated financial statements. 101

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 17. Discontinued Operations (Continued)

Condensed earnings from discontinued operations for the year ended December 31 are as follows:
2008 2007 2006

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating (loss) income from discontinued operations . . . . . . . . . . . . . . . . . Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss per common share from discontinued operations basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A A A A A
2008

A 128 A (142) (68) A (210) A (0.01) A (0.01)

2007

A 46,351 A 394 (469) (5,957) A (6,032) A (0.18) A (0.18)

2006

Condensed cash flows from discontinued operations for the year ended December 31 are as follows: Cash Cash Cash Cash flows flows flows flows used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . from (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . used in discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . Minority Share Purchase A A A (1,519) 1,260 A (259) A (2,121) 5,944 (4,158) A (335)

Note 18.

In October 2006, the Company increased its interest in the Stendal mill to 70.6% by acquiring a 7% minority interest therein for approximately A8,100, of which approximately A6,700 was paid by a note. The purchase price of approximately A8,100 was allocated to property, plant and equipment. Note 19. Subsequent Events

On January 23, 2009, the Company was granted a one-year extension pursuant to the terms of the credit agreement with respect to the revolving credit facility at the Celgar mill. The extension carries the same general terms and matures May 10, 2009. On February 4, 2009, the Company announced that it had reached an agreement with certain lenders to amend its Stendal credit facility (Note 7(a)). The amendment defers approximately A164,000 of scheduled principal payments until the maturity date, September 30, 2017, including approximately A20,000, A26,000 and A21,000 of scheduled principal payments in 2009, 2010 and 2011, respectively. Additionally, the Company is required to make a A10,000 capital contribution to Stendal, and pay amendment fees totaling approximately A3,600. The amendment is subject to customary conditions precedent which are expected to be completed on or before March 15, 2009. On January 30, 2009, the Celgar mill finalized an electricity purchase agreement with BC Hydro and Power Authority, or BC Hydro, British Columbias primary public utilities provider, for the sale of electricity from the Celgar Energy Project. Under the agreement, the Celgar mill will supply a minimum of approximately 238,000 Megawatt hours of electrical energy annually to BC Hydro over a 10 year term with deliveries estimated to commence in the first quarter of 2010. Note 20. Restricted Group Supplemental Disclosure

The terms of the indenture governing our 9.25% senior unsecured notes requires that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, 102

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 20. Restricted Group Supplemental Disclosure (Continued)

collectively referred to as the Restricted Group. As at and during the years ended December 31, 2008 and 2007, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill and, up to December 31, 2006, the discontinued paper business. Combined Condensed Balance Sheet December 31, 2008
Restricted Group Unrestricted Subsidiaries Eliminations Consolidated Group

ASSETS Current Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note receivable, current portion . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . Due from unrestricted group . . . . . . . . . . . . . . . . . . . . Note receivable, less current portion . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES Current Accounts payable and accrued expenses . . . . . . . . . Pension and other post-retirement benefit obligations, current portion . . . . . . . . . . . . . . . . . Debt, current portion. . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . Debt, less current portion . . . . . . . . . . . . . . . . . . . . . . Due to restricted group . . . . . . . . . . . . . . . . . . . . . . . . Unrealized derivative loss . . . . . . . . . . . . . . . . . . . . . . Pension and other post-retirement benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases and other . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SHAREHOLDERS EQUITY Total shareholders equity (deficit) . . . . . . . . . . . . . . . Total liabilities and shareholders equity . . . . . . . . . . .

A 26,176 57,258 642 59,801 2,573 146,450 351,009 4,425 18,439 55,925 3,529 A 579,777

A 16,276 13,000 42,900 38,656 1,619 112,451 530,695 5 13,227 A 656,378

(55,925)

42,452 13,000 100,158 642 98,457 4,192 258,901 881,704 4,430 31,666 3,529

A (55,925)

A 1,180,230

A 44,450 510 44,960 289,222 12,846 7,167 15,403 369,598 210,179 A 579,777

A 43,067 16,500 59,567 514,574 55,925 47,112 4,100 19,054 700,332 (43,954) A 656,378

(55,925) (55,925)

87,517 510 16,500 104,527 803,796 47,112 12,846 11,267 34,457 1,014,005 166,225

A (55,925)

A 1,180,230

103

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 20. Restricted Group Supplemental Disclosure (Continued)

Combined Condensed Balance Sheet December 31, 2007

Restricted Group Unrestricted Subsidiaries Eliminations Consolidated Group

ASSETS Current Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note receivable, current portion . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . Due from unrestricted group . . . . . . . . . . . . . . . . . . . . Note receivable, less current portion . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES Current Accounts payable and accrued expenses . . . . . . . . . Pension and other post-retirement benefit obligations, current portion . . . . . . . . . . . . . . . . . Debt, current portion. . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . Debt, less current portion . . . . . . . . . . . . . . . . . . . . . . Due to restricted group . . . . . . . . . . . . . . . . . . . . . . . . Unrealized derivative loss . . . . . . . . . . . . . . . . . . . . . . Pension & other post-retirement benefit obligations . . . Capital leases and other . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SHAREHOLDERS EQUITY Total shareholders equity (deficit) . . . . . . . . . . . . . . . Total liabilities and shareholders equity . . . . . . . . . . .

A 59,371 37,482 589 63,444 3,714 164,600 385,569 5,399 10,852 57,457 3,977 A 627,854

A 25,477 52,408 5,307 40,166 2,301 125,659 33,000 547,689 6,772 A 713,120

84,848 89,890 5,896 103,610 6,015

(57,457) A (57,457)

290,259 33,000 933,258 5,399 17,624 3,977 A 1,283,517

A 43,621 493 44,114 273,589 19,983 7,033 4,553 349,272 278,582 A 627,854

A 43,379 34,023 77,402 542,243 57,457 21,885 1,966 14,087 715,040 (1,920) A 713,120

(57,457) (57,457)

87,000 493 34,023 121,516 815,832 21,885 19,983 8,999 18,640 1,006,855 276,662

A (57,457)

A 1,283,517

104

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 20. Restricted Group Supplemental Disclosure (Continued)

Combined Condensed Statement of Operations December 31, 2008

Restricted Group Unrestricted Subsidiaries Eliminations Consolidated Group

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 413,088 Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating depreciation and amortization . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . (Sale) purchase of emission allowances . . . . . . . . . . . . Operating income from continuing operations . . . . Other income (expense) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (loss) . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments, net . . . . . . . . . . . . . Foreign exchange gain on debt . . . . . . . . . . . . . . . . . Total other income (expense) . . . . . . . . . . . . . . . . . . Income (loss) before income taxes and minority interest from continuing operations . . . . . . . . . . Income tax benefit (provision) Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before minority interest from continuing operations . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) from continuing operations . . . . 369,923 28,589 17,406 (433) (2,397) (27,027) 6,834 (4,114) (24,307) (26,704) (264) (3,464) (30,432) (30,432)

A 307,203 257,010 26,895 12,752 (5,180) 15,726 (43,117) (3,620) (25,228) (120) (72,085) (56,359) (237) 1,488 (55,108) 13,075 (42,033) A (42,033)

A 720,291 626,933 55,484 30,158 (5,613) 13,329 (65,756) (1,174) (25,228) (4,234) (96,392) (83,063) (501) (1,976) (85,540) 13,075 (72,465) A (72,465)

4,388 (4,388) A

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . A (30,432)

105

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 20. Restricted Group Supplemental Disclosure (Continued)

Combined Condensed Statement of Operations December 31, 2007

Restricted Group Unrestricted Subsidiaries Eliminations Consolidated Group

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 410,369 Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating depreciation and amortization . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . (Sale) purchase of emission allowances . . . . . . . . . . . . Operating income from continuing operations . . . . Other income (expense) Interest income (expense) . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments, net . . . . . . . . . . . . . Foreign exchange gain on debt . . . . . . . . . . . . . . . . . Total other income (expense) . . . . . . . . . . . . . . . . . . Income (loss) before income taxes and minority interest from continuing operations . . . . . . . . . . Income tax benefit (provision) Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before minority interest from continuing operations . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) from continuing operations . . . . Net income (loss) from discontinued operations. . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . A 328,954 28,661 17,650 (1,566) 36,670 (28,472) 5,303 10,629 (12,540) 24,130 (1,394) (5,034) 17,702 17,702 (210) 17,492

A 316,926 246,284 27,739 13,064 (3,077) 32,916 (46,653) 2,875 20,357 329 (23,092) 9,824 (776) (3,110) 5,938 (1,251) 4,687 A 4,687

A 727,295 575,238 56,400 30,714 (4,643) 69,586 (71,400) 4,453 20,357 10,958 (35,632) 33,954 (2,170) (8,144) 23,640 (1,251) 22,389 (210) A 22,179

3,725 (3,725)

106

MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Euros, except per share data) Note 20. Restricted Group Supplemental Disclosure (Continued)

Combined Condensed Statement of Operations December 31, 2006

Restricted Group Unrestricted Subsidiaries Eliminations Consolidated Group

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 368,016 Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating depreciation and amortization . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . (Sale) purchase of emission allowances . . . . . . . . . . . . Operating income from continuing operations . . . . Other income (expense) Interest income (expense) . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative financial instruments, net . . . . . . . . . . . . . Foreign exchange gain on debt . . . . . . . . . . . . . . . . . Total other income (expense) . . . . . . . . . . . . . . . . . . 287,867 27,819 22,861 (4,933) 34,402 (34,354) 5,316 15,245 (13,793)

A 276,883 189,659 28,015 11,783 (10,676) 58,102 (61,137) 4,334 105,848 49,045 107,147 (294) (45,891) 60,962 (1,071) 59,891 (6,032) A 53,859

A 644,899 477,526 55,834 34,644 (15,609) 92,504 (91,931) 6,090 105,848 15,245 35,252 127,756 (584) (56,859) 70,313 (1,071) 69,242 (6,032) A 63,210

3,560 (3,560)

Income (loss) before income taxes and minority interest from continuing operations . . . . . . . . . . 20,609 Income tax benefit (provision) Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (290) Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,968) Income (loss)before minority interest from continuing operations . . . . . . . . . . . . . . . . . . . . 9,351 Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) from continuing operations . . . . 9,351 Net income (loss) from discontinued operations. . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . A 9,351

107

SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) Quarterly Financial Data (In thousands of Euros, except per share amounts)
Quarter Ended March 31 June 30 September 30 December 31

2008 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 186,816 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,643 Income (loss) before extraordinary items and cumulative effect of a change in accounting from continuing operations . . . . . . . . . . . . . . . . . . . . . . . 2,869 Income (loss) before extraordinary items and cumulative effect of a change in accounting from continuing operations, per share* . . . . . . . . . . . . . . . 0.08 Net income (loss) from discontinued operations . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,869 Net income (loss) per share* . . . . . . . . . . . . . . . . . . . . 0.08 2007 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 175,773 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,477 Income before extraordinary items and cumulative effect of a change in accounting from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,093 Income before extraordinary items and cumulative effect of a change in accounting from continuing operations, per share* . . . . . . . . . . . . . . . . . . . . . . . 0.03 Net income (loss) from discontinued operations . . . . . . (7) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086 Net income (loss) per share* . . . . . . . . . . . . . . . . . . . . 0.03
* On a diluted basis

A 176,651 6,216

A 184,828 9,854

A 171,996 (21,384)

871

(17,173)

(59,032)

0.02 871 0.02 A 182,401 10,943

(0.47) (17,173) (0.47) A 195,734 21,457

(1.63) (59,032) (1.63) A 173,387 22,709

3,340

10,706

7,250

0.09 (181) 3,159 0.09

0.26 (10) 10,696 0.26

0.18 (12) 7,238 0.18

108

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INTERNATIONAL INC. Dated: March 2, 2009 By: /s/ JIMMY S.H. LEE

Jimmy S.H. Lee Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. JIMMY S.H. LEE Jimmy S.H. Lee Chairman, Chief Executive Officer and Director DAVID M. GANDOSSI David M. Gandossi Secretary, Executive Vice President, Chief Financial Officer and Principal Accounting Officer /s/ KENNETH A. SHIELDS Kenneth A. Shields Director /s/ ERIC LAURITZEN Eric Lauritzen Director /s/ /s/ Date: March 2, 2009

Date: March 2, 2009

Date: March 2, 2009

Date: March 2, 2009

/s/

WILLIAM D. MCCARTNEY William D. McCartney Director /s/ GRAEME A. WITTS Graeme A. Witts Director GUY W. ADAMS Guy W. Adams Director

Date: March 2, 2009

Date: March 2, 2009

/s/

Date: March 2, 2009

/s/ GEORGE MALPASS George Malpass Director

Date: March 2, 2009

109

EXHIBIT INDEX
Exhibit No. Description of Exhibit

1.1

Underwriting Agreement dated February 8, 2005 between Mercer International Inc. and RBC Capital Markets Corporation, on behalf of itself and CIBC World Markets Corp., Raymond James & Associates, Inc. and D.A. Davidson & Co. Incorporated by reference from Form 8-K dated February 10, 2005 Underwriting Agreement dated February 8, 2005 among Mercer International Inc. and RBC Capital Markets Corporation and Credit Suisse First Boston LLC, on behalf of themselves and CIBC World Markets Corp. Incorporated by reference from Form 8-K dated February 10, 2005 Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005 Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006 Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006 Indenture dated as of October 10, 2003 between Mercer International Inc. and Wells Fargo Bank Minnesota, N.A. Incorporated by reference from Form 8-K dated October 15, 2003 Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference from Form S-3 filed December 10, 2004 First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, N.A. Incorporated by reference from Form 8-K dated February 17, 2005 Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated February 3, 2009. Shareholders Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Losungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated September 10, 2002 Shareholders Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Losungen GmbH and FAHR Beteiligungen AG Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Losungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.16 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004 Form of Trustees Indemnity Agreement between Mercer International Inc. and its Trustees Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003 Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004 Asset Purchase Agreement by and among Mercer International Inc., 0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the assets and undertakings of Stone Venepal (Celgar) Pulp Inc. dated November 22, 2004. Incorporated by reference from Form 8-K dated November 23, 2004 Revolving Credit Facility Agreement dated February 9, 2005 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated February 17, 2005 110

1.2

2.1

3.1 3.2 4.1 4.2 4.3

10.1

10.2

10.3* 10.4*

10.5* 10.6 10.7 10.8 10.9

10.10

Exhibit No.

Description of Exhibit

10.11 10.12

10.13 10.14 10.15 10.16

Shareholders Undertaking Agreement dated February 9, 2005 relating to Revolving Credit Facility Agreement. Incorporated by reference from Form 8-K dated February 17, 2005 Revolving Term Credit Facility dated for reference May 19, 2006 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated May 30, 2006 Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006 Employment Agreement effective October 16, 2006 between Mercer International Inc. and David Ure dated September 22, 2006. Incorporated by reference from Form 8-K dated October 13, 2006 Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008

Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008 10.17*** Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority 14 99.1 99.2 99.3 99.4 21 23.1 23.2 31.1 31.2 32.1** 32.2**
* **

Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003 Exchange Agreement dated December 4, 2006 between Mercer International Inc. and Nisswa Master Fund Ltd. Incorporated by reference from Form 8-K dated December 5, 2006 Exchange Agreement dated December 4, 2006 between Mercer International Inc. and CC Arbitrage Ltd. Incorporated by reference from Form 8-K dated December 5, 2006 Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005 Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004 List of Subsidiaries of Registrant Consent of Independent Registered Chartered Accountants PricewaterhouseCoopers LLP Consent of Independent Registered Chartered Accountants Deloitte & Touche LLP Section 302 Certificate of Chief Executive Officer Section 302 Certificate of Chief Financial Officer Section 906 Certificate of Chief Executive Officer Section 906 Certificate of Chief Financial Officer

Filed in Form 10-K for prior years. 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 Companys 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.

*** Pursuant to 17 CFR 240.24b-2, Confidential Information has been omitted and filed separately with the Commission pursuant to a confidential treatment application filed with the Commission.

111

Exhibit 10.1 Execution Version Binding Version must be in German ZELLSTOFF STENDAL GMBH as Borrower MERCER INTERNATIONAL, INC. as Sponsor and BAYERISCHE HYPO- UND VEREINSBANK AG as Arranger, Agent, Security Agent and Original Lender and OTHERS as Lenders AMENDMENT, RESTATEMENT AND UNDERTAKING AGREEMENT relating to a EUR 827,950,000 Project Facility Agreement dated 26 August 2002 as amended pursuant to the Amendment and Restatement Agreement No 1 dated 23 March 2005

CLIFFORD CHANCE PARTNERSCHAFTSGESELLSCHAFT VON RECHTSANWLTEN, WIRTSCHAFTSPRFERN, STEUERBERATERN UND SOLICITORS SITZ:FRANKFURT AM MAIN AG FRANKFURT AM MAIN PR 1000

CONTENTS 1. Definitions and Interpretation 2. Amendment and Restatement of the Facility Agreement/ Mercer Pulp Sales Fee 3. Conditions Precedent 4. Close-out Settlement Agreement Proceeds 5. Representations and Warranties 6. Waiver Provisions 7. Security Agreements 8. Fees 9. Costs and Expenses 10. Notices 11. Miscellaneous 12. Acknowledgement SCHEDULE 1 Conditions Precedent SCHEDULE 2 Amended Facility Agreement 2 4 6 6 6 6 6 7 7 7 11 12 13 15

1 THIS AMENDMENT, RESTATEMENT AND UNDERTAKING AGREEMENT (the Agreement) is made on 31st January 2009 BETWEEN (1) (2) MERCER INTERNATIONAL, INC. (Mercer International) as Sponsor; ZELLSTOFF STENDAL GMBH, a limited liability company incorporated, organized and validly existing under the laws of the Federal Republic of Germany, having its office at Goldbecker Strasse 1, 39596 Arneburg, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Stendal, number HRB 2446 (the Borrower); BAYERISCHE HYPO- UND VEREINSBANK AG, a stock corporation incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Arabellastrasse 14, 81925 Munich, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Munich, number HRB 42148 (the Arranger, Agent, Security Agent); BAYERISCHE HYPO- UND VEREINSBANK AG, a stock corporation incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Arabellastrasse 14, 81925 Munich, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Munich, number HRB 42148 (the Original Lender); NORDDEUTSCHE LANDESBANK GIROZENTRALE, Friedrichswall 10, 30159 Hannover, Federal Republic of Germany (a Lender); LANDESBANK BADEN-WRTTEMBERG, Am Hauptbahnhof 2, 70173 Stuttgart, Federal Republic of Germany (a Lender); BANK OF SCOTLAND PLC, 1 st Floor, New Uberior House, Edinburgh EH3 9BN, Scotland, (a Lender); DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFTSBANK, FRANKFURT AM MAIN, Platz der Republik, 60265 Frankfurt am Main, Federal Republic of Germany (a Lender); NATIONAL BANK OF GREECE S.A., LONDON BRANCH, 75 King William Street, London EC4N7BE, England (a Lender);

(3)

(4)

(5) (6) (7) (8) (9)

(10) HSH NORDBANK AG, Gerhart-Hauptmann-Platz 50, 20095 Hamburg, Federal Republic of Germany (a Lender);

2 (11) BANCA MONTE DEI PASCHI DI SIENA S.P.A., LONDON BRANCH, 6 th Floor, Capital House, 85 King William Street, London EC4N 7BL, England (a Lender); (12) INVESTKREDIT BANK AG, Renngasse 10, 1013 Vienna, Republic of Austria (a Lender); and (13) NORDKAP BANK AG, Thurgauerstrasse 54, CH-8050 Zurich, Switzerland (a Lender); (together referred to as the Parties); (the parties under 4 to 13 above are referred to herein together as the Lenders and each a Lender) WHEREAS (A) The Borrower, the Agent, the Security Agent, the Arranger and the Original Lender have entered into a project financing facility agreement, dated 26 August 2002, as amended pursuant to the Amendment and Restatement Agreement No 1 dated 23 March 2005 in the aggregate amount of EUR 827,950,000 (the Facility Agreement) in order to provide financing to build and operate a bleached softwood kraft pulp mill located in Arneburg, Sachsen-Anhalt, Federal Republic of Germany. (B) (C) The Original Lender has, pursuant to Clause 31.2 (Assignments and Transfers by the Lenders) of the Facility Agreement, transferred certain of its rights, benefits and obligations under the Facility Agreement to the Lenders. The Parties hereto wish to agree on certain changes to the Facility Agreement as well as to supplement the obligations of Mercer International in connection with the transaction which shall be implemented by this Agreement.

IT IS AGREED as follows: 1. 1.1 DEFINITIONS AND INTERPRETATION Definitions In this Agreement: Amended Facility Agreement means the Facility Agreement, as amended by this Agreement, the terms of which are set out in Schedule 2 (Amended Facility Agreement). Amendment Date means the date on which the Agent confirms to the Borrower and the Lenders in writing that it has received each of the documents

3 listed in Schedule 1 (Conditions Precedent) in form and substance satisfactory to the Agent. Close-out Settlement Account means the following account: account number 668546951, bank code 70020270 at Bayerische Hypound Vereinsbank AG, Munich. Close-out Settlement Agreement means the close-out settlement agreement dated 20 August 2007 and entered into between the Borrower and E&Z Industrielsungen GmbH. Existing Shareholder Loans means (i) the following subordinated shareholder loan agreements between the Borrower and Stendal Pulp Holding GmbH: (ii) EUR 35.063.180 agreement dated 26 August 2002 EUR 9.537.000 agreement dated 27 September 2005 EUR 9.537.000 agreement dated 31 July 2006;

the following subordinated shareholder loan agreements between the Borrower and MFC Industrial Holdings AG, which have been assignend and transferred from MFC Industrial Holdings AG to Stendal Pulp Holding GmbH by way of assignment and transfer agreement dated 18 October 2006: EUR 3.890.290 agreement dated 26 August 2002 EUR 1.050.000 agreement dated 31 July 2006 EUR 1.050.000 agreement dated 27 September 2005; and

(iii) the following subordinated shareholder loan agreements between the Borrower and E&Z Industrie-Lsungen GmbH: EUR 16.302.176 agreement dated 26 August 2002 EUR 4.413.000 agreement dated 27 September 2005 EUR 4.413.000 agreement dated 31 July 2006.

Marketing and Pulp Sales Agreement means the agreement dated 23 December 2005 between Mercer International and the Borrower in respect of the payment of pulp sales and marketing fees.

4 Mercer Pulp Sales Fee means any pulp sales and marketing fees payable by the Borrower to Mercer International on pulp sales pursuant to the Marketing and Pulp Sales Agreement. 1.2 Incorporation of Defined Terms, Interpretation Terms defined in the Facility Agreement shall, unless otherwise defined herein, have the same meaning herein and the principles of construction set out in the Facility Agreement shall have effect as if set out in this Agreement. 1.3 Clauses and Schedules

1.3.1 In this Agreement any reference to a Clause or Schedule is, unless the context otherwise requires, a reference to a Clause or Schedule of this Agreement. 1.3.2 Clauses and Schedules headings are for ease of reference only. 1.4 Singular and Plural Words incorporating the singular number include the plural and vice versa. 2. 2.1 AMENDMENT AND RESTATEMENT OF THE FACILITY AGREEMENT / MERCER PULP SALES FEE Amendment and Restatement of the Facility Agreement The Facility Agreement shall be amended with effect from the Amendment Date in the form as set out in Schedule 2 (Amended Facility Agreement) so that the rights and obligations of the parties to the Facility Agreement shall, on and from the Amendment Date, be governed and construed in accordance with the provisions of the Amended Facility Agreement. Prior to the Amendment Date, the Facility Agreement in its present form shall govern the rights and obligations of the parties to the Facility Agreement. 2.2 Mercer Pulp Sales Fee 2.2.1 With effect from the Amendment Date and subject to Clause 2.2.3, prior to 1 January 2011 and thereafter until such time as the Target Balance on the Debt Service Reserve Account is reached for the first time in accordance with Clause 11.3 (Target Balance) of the Facility Agreement, payment by the Borrower of any Mercer Pulp Sales Fee shall be deferred until 30 September 2017. Subject always to the provisions of the Financing Documents, any Mercer Pulp Sales Fee payable after 1 January 2011 and after the Debt Service Reserve Account is fully funded in accordance with the terms of the Facility Agreement shall be payable

5 by the Borrower when due, unless an Event of Default has occurred and is continuing. Any Mercer Pulp Sales Fee accruing during an Event of Default shall be deferred until 30 September 2017; 2.2.2 any claim by Mercer International against the Borrower for payment of any Mercer Pulp Sales Fee deferred pursuant to Clause 2.2.1 (the Subordinated Amount) shall be (i) subordinated (tritt im Rang zurck) to any claims of the Finance Parties under or in connection with the Financing Documents and (ii) assigned to the Security Agent for the benefit of the Finance Parties as security for the fulfilment of the obligations of the Borrower towards the Finance Parties under or in connection with the Financing Documents; and 2.2.3 the Borrower may agree with Mercer International to convert any Subordinated Amount (i) into Shares of the Borrower by the Borrower issuing to Mercer International Shares of the Borrower at par (ii) into Shareholder Loans provided that such Shares or Shareholder Loans are subject to security for the benefit of the Finance Parties satisfactory to the Agent. 2.3 Non occurrence of Amendment Date If the Amendment Date does not occur by 15 March 2009, then this Agreement shall cease to have effect and shall cease to bind the Parties in respect of any obligations to be performed under this Agreement on or after such date, but all obligations and liabilities of the Parties prior to such date, or in respect of acts which are done, or events which occur, prior to such date, shall remain in full force and effect. 2.4 Continuing Obligations The provisions of the Facility Agreement shall, save as amended hereby, continue in full force and effect. 2.5 Further Assurance The Borrowers and Mercer International shall, at the request of the Agent and at their own expense, do all such reasonable acts and things necessary or desirable to give effect to the amendments effected or to be effected pursuant to this Agreement. 2.6 Financing Document This Agreement shall be a Financing Document.

6 3. CONDITIONS PRECEDENT The Agent shall notify the Borrower, Mercer International and the Lenders of the occurrence of the Amendment Date. If any of the conditions set out in Schedule 1 (Conditions Precedent) are waived or deferred by the Agent, the Agent may attach to such waiver or deferral such requirements and further or other conditions as agreed with the Borrower and the Borrower shall fulfill or procure fulfillment of all such requirements and further or other conditions as may be notified to the Borrower and Mercer International in writing in accordance with the terms of such notification as if such requirement or further or other condition was a term of the Amended Facility Agreement. 4. CLOSE-OUT SETTLEMENT AGREEMENT PROCEEDS Any amount standing to the credit of the Close-Out Settlement Account following completion of the works and undertaking assumed by the parties under the Close-Out Settlement Agreement (currently estimated to be approximately EUR 3,201,200.13) shall be transferred to the Proceeds Account for application in accordance with the provisions of the Amended Facility Agreement. 5. REPRESENTATIONS AND WARRANTIES The Borrower herewith represents and warrants to the Lenders that, as of the date of signing of this Agreement, the statements in Clause 16 (Representations and Warranties) of the Amended Facility Agreement are true and correct. The Borrower makes the representations and warranties as if each reference in those representations and warranties to this Agreement includes a reference to the Amended Facility Agreement. 6. WAIVER PROVISIONS Neither the entry into this Agreement, nor the non-satisfaction of any condition precedent under Clause 3 (Conditions Precedent), nor anything else in this Agreement shall operate as a waiver of any outstanding Event of Default, unless otherwise provided expressly herein. 7. SECURITY AGREEMENTS The Security Agreements shall continue in full force and effect in connection with the Facility Agreement as amended by this Agreement. The Parties acknowledge that all present and future, actual and contingent obligations and liabilities in their respective valid, amended, supplemented, or newly arranged forms of the Borrower and Mercer International to the Lenders, Agent and the Security Agent under each of the Financing Documents are to be regarded as secured obligations (as defined in each of the Security Agreements) under the Security Agreements.

7 8. 8.1 8.2 FEES The Borrower shall pay a fee in the amount of EUR 25,000 to each Lender. Such fee shall be due and payable on the date of this Agreement. The Borrower shall pay an additional fee in the amount of EUR 3,284,398. Such fee shall be due and payable after 1 January 2011 on the earlier of (i) in two equal installments on the date on which the Debt Service Reserve Account is fully funded for the first time and on the first Repayment Date following the date on which the Debt Service Reserve Account is fully funded for the first time and (ii) in full on the date of repayment or prepayment in full of Tranche A2, and shall be paid pro rata to each Lender (as defined in the Amended Facility Agreement). The fees payable by the Borrower pursuant to Clause 8.1 and Clause 8.2 above shall not be taken into account for the purpose of calculating the Scheduled Debt Service (as defined in the Amended Facility Agreement). COSTS AND EXPENSES The Borrower shall promptly reimburse each Lender, the Agent and the Security Agent for the amount of all costs and expenses (including legal fees) incurred in connection with the negotiation, preparation, printing and execution of this Agreement and any other document referred to in this Agreement. The Borrower and Mercer International shall also bear their own costs. 10. NOTICES

8.3 9.

10.1 Communications in Writing Each communication to be made by the Parties under this Agreement shall be made in writing and, unless otherwise stated, will be made by fax, letter or e-mail. Each communication will be in German or English. 10.2 Addresses Any communication, information or document to be made or delivered by the Parties pursuant to this Agreement will (unless the recipient of such communication or document has, by fifteen (15) days written notice to the Agent, specified another address or fax number) be made or delivered to the address set out below: (a) to the Borrower: Zellstoff Stendal GmbH Goldbecker Strasse 1

8 39596 Arneburg Federal Republic of Germany attn.: Managing Director Tel.: +49 (0) 39321 55 510 Fax.: +49 (0) 39321 55 129 (b) to Mercer International to Mercer International, Inc. (Registered Office) 14900 Interurban Avenue South Suite 282 Seattle, Washington 981 168 United States of America via (Executive Office) Suite 2840, PO Box 11576 650 West Georgia Street Vancouver, BC Canada V6B 4N8 attn.: Jimmy S.H. Lee Tel.: +1 604 684 1099 Fax.: +1 604 684 1094 (c) to the Arranger and Original Lender: Bayerische Hypo- und Vereinsbank AG Arabellastrasse 14 81925 Mnchen Federal Republic of Germany attn.: Claudia Schmidt Tel.: +49-(0) 89 378 46740 Fax.: +49-(0) 89 378 41518 (d) to the Agent and/or Security Agent: Bayerische Hypo- und Vereinsbank AG Arabellastrasse 14

9 81925 Mnchen Federal Republic of Germany attn.: Loans Agency Tel.: +49 (0) 89 378 25460 Fax.: +49 (0) 89 378 41517 (e) to the Lenders: Norddeutsche Landesbank Girozentrale Friedrichswall 10 30159 Hannover Federal Republic of Germany attn.: Holger Reinicke Tel.: +49 (0) 511 361 4634 Fax.: +49 (0) 511 361 4443 Landesbank Baden-Wrttemberg Am Haupbahnhof 2 D-70173 Stuttgart attn.: Tanja Reiter Tel.: +49 (0) 711 127 49702 Fax.: +49 (0) 711 127 6649702 attn.: Jrgen Klingel Tel.: +49 (0) 6131 64 36123 Fax.: +49 (0) 6131 64 37120 Bank of Scotland plc Project Finance 1st Floor, New Uberior House Edinburgh EH3 9BN Scotland attn.: Alistair Malcom and Martin Metcalf Tel.: +44 (0) 131 659 0086 and 0748 Fax.: +44 (0) 131 659 0763 DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main Platz der Republik 60265 Frankfurt am Main Federal Republic of Germany

10 attn.: Anja Brgging and Frank Menn Tel.: +49 (0) 69 7447 1330 and 7304 Fax.: +49 (0) 69 7447 6645 and 6098 National Bank of Greece S.A., London Branch 75 King William Street London EC4N7BE England attn.: Sotiris Charalambous Tel.: +44 (0) 207 015-0616 Fax.: +44 (0) 207 015-0687 HSH Nordbank AG Gerhart-Hauptmann-Platz 50 20095 Hamburg Federal Republic of Germany attn.: Werner Feldmann Tel.: +49 (0) 40 3333 13712 Fax.: +49 (0) 40 3333 613712 Banca Monte dei Paschi di Siena S.p.A., London Branch 6th Floor Capital House 85 King William Street London EC4N 7BL England attn.: Michael Given / Wendy Johnson Tel.: +44 (0)20 7645 7800 Fax.: +44 (0)20 7929 3343 Investkredit Bank AG Renngasse 10 1013 Vienna Republic of Austria attn.: Ernst Neuhold Tel.: +43 (0) 1 53135 465 Fax.: +43 (0) 1 53135 919 Nordkap Bank AG Thurgauerstrasse 54

11 8050 Zurich Switzerland attn.: Tel.: Fax.: 11. MISCELLANEOUS

11.1 Non-Applicability of Section 181 German Civil Code (Brgerliches Gesetzbuch) The Agent and the Security Agent shall, for the purpose of this Agreement, be exempted from the restrictions of Section 181 German Civil Code (Brgerliches Gesetzbuch). 11.2 Remedies and Waivers No failure to exercise, nor any delay in exercising, on the part of any Lender, Agent, Arranger or Security Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. 11.3 Partial Invalidity Should any provision of this Agreement be invalid or unenforceable, in whole or in part, or should any provision later become invalid or unenforceable, this shall not affect the validity of the remaining provisions of this Agreement. In lieu of the invalid or unenforceable provision another reasonable provision shall apply, which as far as legally possible comes as close as possible to the intention of the contracting parties, or to what would have been their intention, in correspondence with the spirit and the purpose of this Agreement, had the parties upon entering into this Agreement taken into consideration the invalidity or unenforceability of the respective provision. The same shall apply mutatis mutandis to fill possible gaps (Vertragslcken) in this Agreement. 11.4 Conflicts In the event of any conflict or inconsistency between the terms and conditions of either the Amended Facility Agreement and the terms and conditions hereof, the terms and conditions of this Agreement shall prevail. 11.5 Amendments

12 Changes to this Agreement, including this Clause 11.5 (Amendments) shall be made in writing. 11.6 Governing Law This Agreement shall be governed by, and construed in accordance with, the laws of the Federal Republic of Germany. 11.7 Jurisdiction The exclusive place of jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes which may arise out of or in connection with this Agreement is Munich. The Lenders, the Agent and the Security Agent may, however, also commence proceedings before any other court in which assets of the Borrower and Mercer International are located. Mandatory places of jurisdiction remain unaffected. 11.8 Counterparts This Agreement may be executed in any number of counterparts all of which taken together constitute one and the same instrument. 12. ACKNOWLEDGEMENT The Parties acknowledge and confirm that (a) (b) they have received a copy of the Amended Facility Agreement highlighting the amendments as a comparite against the Facility Agreement and comprising all amendments; and have taken notice of all amendments in the Amended Facility Agreement.

13

SCHEDULE 1 Conditions Precedent The following documentation and information in form and substance satisfactory to the Agent has been received by the Agent: (1) (2) (3) (4) A certified and up-to-date copy of the commercial register extract of the Borrower. An up-to-date certificate of incorporation/authorization issued by the Washington Secretary of State in respect of Mercer International. A copy of the corporate authorizations and/or shareholder resolutions or supervisory boards resolutions, as the case may be, of the Borrower relating to the execution, delivery and performance of this Agreement. A certified copy of the Secretary Certificates of the Corporate Secretary of Mercer International, a) b) (5) (6) (7) (8) (9) authorizing the execution, delivery and performance of this Agreement as approved by Mercer Internationals board of directors, and setting out the names and signatures of the authorized signatories for the signing of this Agreement duly certified to be true and correct.

Specimen signatures of the persons authorized to sign this Agreement. A legal opinion of the Borrowers counsel in form and substance satisfactory to the Agent with respect to the due execution and capacity of this Agreement relating to the Borrower. A legal opinion of Mercer Internationals counsel in form and substance satisfactory to the Agent with respect to the due execution and capacity of this Agreement relating to Mercer International. Evidence that Mercer International has irrevocably and unconditionally provided EUR 10m of capital contribution to the capital reserves of the Borrower or by way of Shareholder Loans. Evidence that all Existing Shareholder Loans (including accrued interest thereon) have been converted into Share Capital of the Borrower (such additional Share Capital to be subject to Security for the benefit of the Finance Parties).

(10) Confirmation by PricewaterhouseCoopers as auditor of the Borrower regarding the financial status of the Borrower as per 30 September 2008.

14 (11) Satisfactory legal memorandum from Cleary Gottlieb pursuant to which it is unlikely that the proposed amendments adversely effect the State Guarantee (the Cleary Gottlieb Memorandum). (12) Satisfactory legal memorandum from Clifford Chance regarding the Cleary Gottlieb Memorandum. (13) A standard enforceability legal opinion from Clifford Chance Partnerschaftsgesellschaft regarding this Agreement. (14) Approval of the amendments pursuant to this Agreement by the State Guarantors. (15) Payment of any and all fees (including, but not limited to, those due and payable pursuant to Clause 8.1 (Fees)), costs and expenses (including, but not limited to, those due and payable pursuant to Clause 9 (Costs and Expenses)).

15

SCHEDULE 2 Amended Facility Agreement

CLIFFORD CHANCE Conformed Copy as amended pursuant to the Amendment and Restatement Agreement No 1 dated 23 March 2005 and the Amendment, Restatement and Undertaking Agreement dated 3rd February 2009 Binding Version must be in German ZELLSTOFF STENDAL GMBH and BAYERISCHE HYPO- UND VEREINSBANK AG

EURO 827,950,000 PROJECT FINANCING FACILITY AGREEMENT

CLIFFORD CHANCE PARTNERSCHAFTSGESELLSCHAFT VON RECHTSANWLTEN, WIRTSCHAFTSPRFERN, STEUERBERATERN UND SOLICITORS SITZ: FRANKFURT AM MAIN AG FRANKFURT AM MAIN PR 1000

CONTENTS
CLAUSE PAGE

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

Definitions and Interpretation The Facility Utilisation of the Facility Interest Market Disruption Repayment Voluntary Prepayments Cancellation Payments Equity Reserve Account Debt Service Reserve Account Illegality Increased Costs Taxes Mitigation Representations And Warranties Financial Calculations (Wirtschaftlichkeitsberechnungen) Information Requirements Inspection Rights Hedging Requirements Covenants Insurances Events of Default Agent, Arranger and Lenders Advisers Fees Costs and Expenses Indemnity and Breakage Costs Set-Off

2 25 28 31 34 35 39 41 41 48 49 51 51 53 54 55 62 64 68 69 69 79 83 89 94 94 95 97 98

CLAUSE

PAGE

30. Pro-Rata Sharing 31. Assignments and Transfers 32. Sub-Participations 33. Calculations and Evidence of Debt 34. Non-Applicability of 181 BGB 35. Form Requirements and Amendments 36. Conditions of the State Guarantee 37. Remedies and Waivers, Cumulative Rights, Partial Invalidity 38. Notices 39. Governing Law 40. Jurisdiction 41. Counterparts 42. Confirmation pursuant to Section 8 of the German Money Laundering Act (Geldwschegesetz) SCHEDULE 1 Drawdown Request SCHEDULE 2 Conditions for the First Drawdown SCHEDULE 3 General Drawdown Conditions SCHEDULE 4 Conditions Subsequent SCHEDULE 5 Lenders and Commitments SCHEDULE 6 Mandatory Cost Formulae SCHEDULE 7 Form of Account Pledge Agreement SCHEDULE 8 Form of Luxemburg Account Pledge Agreement SCHEDULE 9 Security Agreements SCHEDULE 10 State Guarantee SCHEDULE 11 Financing of the Subsidiaries SCHEDULE 12 Minimum Insurance Schedule SCHEDULE 12a Minimum Insurance Operation Period Schedule SCHEDULE 13 Sample Table of Content Regarding Quarterly Construction Progress Reports SCHEDULE 14 Transfer Certificate SCHEDULE 15 Development Costs SCHEDULE 16 Brokers Letter of Undertaking

98 99 101 101 102 102 102 102 103 104 105 105 105 106 109 113 114 116 117 120 142 160 161 162 167 168 175 177 181 182

CLAUSE

PAGE

SCHEDULE 17 Archeological Sites SCHEDULE 18 Investment and Financing Plan

185 186

1 THIS AGREEMENT is made on 26 August 2002 BETWEEN (1) ZELLSTOFF STENDAL GMBH, a limited liability company incorporated, organized and validly existing under the laws of the Federal Republic of Germany, having its office at Goldbecker Strasse 1, 39596 Arneburg, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Stendal, number HRB 2446 (the Borrower); BAYERISCHE HYPO- UND VEREINSBANK AG, a stock corporation incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Am Tucherpark 16, 80538 Mnchen, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Munich, number HRB 42148 (the Arranger); BAYERISCHE HYPO- UND VEREINSBANK AG (the Agent and Security Agent); and BAYERISCHE HYPO- UND VEREINSBANK AG, (the Original Lender).

(2)

(3) (4)

(together referred to as the Parties). WHEREAS (A) (B) (C) The Borrower is a project company which was created as a limited liability company (Gesellschaft mit beschrnkter Haftung) in 1996 as a project development company. The Borrower intends to build and operate a 552,000 tonnes per annum bleached softwood kraft pulp mill located in Arneburg, Sachsen-Anhalt, Federal Republic of Germany. Mercer International, Inc., a company incorporated under the laws of the state of Washington, United States of America (Mercer International), RWE Industrie-Lsungen GmbH, a limited liability company incorporated under the laws of the Federal Republic of Germany (RWE-IN) and Altmark Industriepark AG (formerly AIG Altmark Industrie AG), a company incorporated under the laws of the Federal Republic of Germany (ALTMARK INDUSTRIEPARK AG) and MFC Industrial Holdings AG (formerly FAHR Beteiligungen AG), a limited liability company incorporated under the laws of the Federal Republic of Germany initially agreed to act as sponsors of the Project.

2 (D) The Federal Republic of Germany and the State of Sachsen-Anhalt have agreed to guarantee 80 % of the claims of the Lenders in connection with Tranche A and Tranche B (each as defined below) by issuing guarantees in favour of the Lenders which guarantees will be administered by C&L Deutsche Revision AG. The Original Lender has agreed to provide the Borrower with the Facility (as defined below) subject to the terms and conditions set out below. The Borrower acknowledges that the Facility will initially be provided by the Original Lender but that the Original Lender intend to further syndicate the Facility.

(E) (F)

IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions Acceptance: The date on which the Owner issues the Acceptance Certificate in accordance with the terms and conditions of the EPC Contract. Acceptance Waiver Agreement: The agreement dated [] entered into between the Borrower and RWE-IN. Additional Works: Has the same meaning as set out in the Acceptance Waiver Agreement. Advance: A principal sum drawn by the Borrower under this Agreement or, depending on the context, the principal sum outstanding as a result of such drawdown. Advisers: The Technical Adviser, the Wood Supply Adviser, the Pulp Market Adviser, the Insurance Adviser and any other consultant agreed from time to time between the Lenders and the Borrower to act as an adviser in relation to the Project or this Agreement. Agreement: This agreement including all of its schedules. Amortisation Schedule: The percentage amortisation Schedule pursuant to Clause 6.3.1 (Repayments other than First Repayment). Annual Debt Service Cover Ratio: On a Repayment Date following the First Repayment Date, the ratio of the Available Cash Flow for the twelve (12) calendar months ending on the previous 31 December or 30 June, as the case may be, to the total amount of interest, principal and fees payable pursuant to the Financing Documents (adjusted by interest rate hedging payments and currency rate hedging payments related to the debt service or receipts and excluding those

3 repayments of principal under Tranche E) for that period. In relation to the First Repayment Date, the relevant period for the Available Cash Flow and debt servicing will be from Acceptance to the 31 December or 30 June next proceeding the First Repayment Date (or, in the circumstances referred to in Clause 9.4.3(c)(ii) (Restricted Application), from Acceptance to the First Repayment Date). Assurance of Overall Financing: For the purposes of this Agreement, the overall financing is assured if in respect to the Project as a whole, the Overall Funding Requirements are covered by the Overall Funding Sources. Authority: Any national, supranational, regional or local government or governmental, administrative, fiscal, judicial, or government-owned body, department, commission, authority, tribunal, agency or entity, or any person, whether or not government owned and howsoever constituted or called, that exercises the functions of a central bank. Authorisation: Any consent, registration, filing, agreement, notarisation, certificate, license, approval, permit, authority or exemption from, by or with any Authority, whether given by express action or deemed given by failure to act within any specified time period and all corporate and creditors approvals or consents. Availability Period: The relevant period mentioned in Clause 2.2 (Availability of Facility). Available Cash Flow: In relation to any period, operating revenues (Umsatzerlse) of the Borrower (including any interest earnings on the Cash Collateral Accounts, insurance proceeds for loss of revenue or business interruption and delay liquidated damages and other compensations under the EPC Contract and receipts of any settlement payments in relation to Hedging Agreements and payments under any currency hedging not related to the debt service and receipt of payments under pulp price hedging and any receipts from carbon certificate trading) for such period minus all operating costs for such period (for the avoidance of doubt, excluding depreciation and Financing Costs), Capital Expenditures (for the avoidance of doubt, excluding capital expenditure financed by Shareholders funds standing to the credit of the Shareholders Account, or by additional equity contributions or Shareholder Loans), corporate tax payments and local and other taxes (except VAT) and any expenditures of any settlement payments in relation to Hedging Agreements and expenditures under any currency hedging not related to the debt service and expenditures under pulp price hedging and any expenditures or payments to be made under carbon certificate trading. Revenues in the form of Government Grants and recovery of VAT are not included in the Available Cash Flow.

4 Base Case: A statement of the technical, economic and tax assumptions relating to the Project in the form of a run of the Financial Model as updated from time to time. Breakage Costs: The costs pursuant to Clause 28.2(Breakage Costs). Business Day: A day (other than a Saturday or Sunday) which is not a public holiday and on which banks are open for general business in London, Munich and Frankfurt am Main and: (a) (b) (in relation to any date for payment or purchase of a sum denominated in a currency other than the euro) a day on which banks are open for general business in the financial centre of the country of such currency; or (in relation to any date for payment or purchase of a sum denominated in the euro) any TARGET Day.

C&L: C&L Deutsche Revision AG, Wirtschaftsprfungsgesellschaft, Dsseldorf as agent (Mandatar) of the Guarantors. Capital Contributions: means the subscription and purchase of Shares. Capital Expenditures: Costs and expenses of a capital nature pursuant to the generally accepted accounting principles in the Federal Republic of Germany incurred or to be incurred by the Borrower in the construction and operation of the Project and in the normal acquisition and/or replacement (but excluding any replacement cost which has been confirmed by the relevant insurers as being payable out of insurance proceeds) of fixed assets, machinery, parts and similar equipment in relation to the Project according to the Project Budget. Cash Collateral Accounts: The Disbursement Account, the Proceeds Account, the Insurance Account, Equity Reserve Account and the Debt Service Reserve Account. Change of Control: (a) Any change after Financial Close in the direct or indirect ownership of the Shares without the Majority Lenders written consent (such consent not to be unreasonably withheld or delayed) after which the aggregate direct or indirect shareholding of Mercer International (on a fully diluted basis) no longer is equal to or exceeds 51% of the voting rights in the Borrower; and/or any change before Acceptance in the direct or indirect ownership of the Shares held by RWE-IN or MFC IH at Financial Close.

(b)

5 Commitment: In relation to each Lender, the sum of such Lenders commitments under the Facility, as specified in Schedule 5 (Lenders and Commitments) (as reduced by any assignments/transfers in accordance with this Agreement) or as specified in the relevant Transfer Certificate(s), to the extent not cancelled or reduced hereunder. Construction Period: The period from the date of commencement of any of the Works under the EPC Contract up to and including Acceptance. Cost Overruns: (a) (b) (c) (d) Any Project Construction Costs and Development Costs over and above those set out in the Investment and Financing Plan; any Financing Costs, start up costs and Working Capital Costs until completion of the Additional Works over and above those set out in the Investment and Financing Plan; any shortfall in Start Up Cash Flows below the budgeted amount therefore as set out in the agreed Base Case delivered pursuant to Schedule 2 (Conditions for the First Drawdown), paragraph 9; and any shortfall in Government Grants determined on or before the First Repayment Date.

Debt Service Reserve Account: The accounts (including foreign currency and investment accounts) of the Borrower established for the purposes set out in Clause 11 (Debt Service Reserve Account) and maintained with Bayerische Hypo- und Vereinsbank AG or HVB Banque Luxembourg Socit Anonyme. Derivative Transaction: Any swap agreement, warrant agreement, futures and forward contracts or similar arrangement with respect to interest rates, currencies, carbon certificates or commodity prices. Development Costs: Those development costs, fees and expenses in connection with the development of the Project incurred prior to Financial Close and which are listed in Schedule 15 (Development Costs) hereto. Direct Agreement: The contractors direct agreement on or about the date hereof and made between the Borrower, RWE-IN, RWE Solutions AG and the Security Agent. Disbursement Account: The account of the Borrower established for the purposes set out in Clause 9.1 (Disbursement Account) and maintained with the Agent.

6 Drawdown Date: The day an Advance is made. Drawdown Request: A request for an Advance pursuant to Schedule 1 (Drawdown Request). EBITDA: The net profit of the Borrower before deducting any negative or adding any positive extraordinary or exceptional items, (a) (b) (c) (d) plus the amount of taxes set against the net profits of the Borrower in its audited financial statements and (without double counting) any provision by the Borrower for taxes, plus any amortisation and depreciation stated in the relevant audited financial statements, plus any interest or similar charges payable by the Borrower, plus any other non cash charges set against the net profits of the Borrower in the relevant audited financial statements (including exchange rate gains or losses).

Environmental Claim: Any claim, notice, prosecution, demand, action, official warning, abatement or other order (conditional or otherwise) relating to, or any notification or order requiring compliance with, any Environmental Law or Environmental Permits. Environmental Law: Any law applicable to the Project and the Borrower which relates to the protection of the environment or harm to or the protection of human health or the health of animals or plants. Environmental Permits: Any Authorisation required under any Environmental Law for the construction or operation of the Project and business of the Borrower conducted on or from the properties owned or used by the Borrower in connection with the Project. EPC Contract: The engineering, procurement and construction agreement dated 26 August 2002 between RWE-IN and the Borrower. EPC Contractor: RWE-IN. Equity Cure Measures: The Shareholders purchasing additional Shares in the Share Capital of the Borrower or making Shareholder Loans fully subordinated to the Finance Parties or making payments into the capital reserves of the Borrower, in each case in an amount at least equal to the Shortfall (provided such Shares or Shareholder Loans or amounts paid are subject to security for the benefit of the Finance Parties).

7 Equity Reserve Account: The accounts (including foreign currency and investment accounts) of the Borrower established for the purposes set out in Clause 10 (Equity Reserve Account) and maintained with Bayerische Hypo- und Vereinsbank AG or HVB Banque Luxembourg Socit Anonyme. Equity Sales means any sale or issuance of any share capital of Mercer International other than: (i) shares, options or units issued pursuant to Mercer International share or equity incentive plans or issued in respect of executive compensation plans or arrangements; (ii) share capital issued to third parties to acquire assets, shares or other ownership interests from third parties; (iii) share capital issued to settle, compromise or satisfy (in whole or in part) indebtedness or other obligations; or (iv) share capital issued in respect of any shareholder rights plan or as part of a strategy used by Mercer International to discourage a hostile takeover by another company (poison pill). Convertible debt shall be included in the definition of Equity Sales upon actual conversion (except for Mercer Internationals current 8.25% convertible notes and convertible notes issued for the purpose of replacing or refinancing the same). EU-Decision: The decision by the EU-Commission dated 19 June 2002 in respect of the State Guarantee and the Government Grants. EU-Equity Test: The EU-equity test as defined in the Financial Model. EURIBOR: In relation to any amount outstanding for a particular period: (a) the percentage rate per annum determined on the basis of quotations by first class banks in the European Interbank Euro Market for the relevant period which appears on the Telerate page Euribor for that period or any other page it is replaced by at 11.00 am; and if the Agent is unable to access the relevant screen rate or if a rate is not available on the relevant screen for the period, the arithmetic mean (rounded upwards to 4 decimal places) of the rates (as notified to the Agent) at which each of the Reference Banks was offered by prime banks in the European interbank market deposits in euro in such amount and for such period as of 12.00 noon,

(b)

in each case on the Quotation Date for such period. If fewer than two Reference Banks provide the Agent with notifications for a particular period, this method of determining EURIBOR will not be used for that period and Clause 5 (Market Disruption) will apply instead. Event of Default: Any of the events mentioned in Clause 23 (Events of Default).

8 Event of Force Majeure: An Event of Force Majeure as defined in the EPC-Contract. Excess Start up Cash Flows: Any amount of Start up Cash Flows that exceeds the budgeted amount therefore as set out in the agreed Base Case delivered pursuant to Schedule 2 (Conditions for the First Drawdown), paragraph 9. Existing Financial Indebtedness: (a) (b) the indebtedness under the loan made by Dresdner Bank in the amount of EUR 12,286,000; the indebtedness to RWE-IN, ALTMARK INDUSTRIEPARK AG and Thyssen Rheinstahl Technik Projektgesellschaft mbH for ancilliary costs for which RWE-IN, ALTMARK INDUSTRIEPARK AG, Thyssen Rheinstahl Technik GmbH and its legal successor Thyssen Rheinstahl Technik Projektgesellschaft mbH have provided funds to the Borrower in connection with the purchase of the Site, in the amount of not more than EUR 2,708,339; and the indebtedness for Shareholder Loans in an amount not exceeding EUR 55,255,646.

(c)

Facility: The facility comprising Tranche A, Tranche B, Tranche C, Tranche D1, Tranche D2 and Tranche E pursuant to Clause 2.1 (Granting of the Facility). Facility Office: The office or offices notified by a Lender to the Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than five (5) days written notice) as the office or offices through which it will perform its obligations under this Agreement. Federal Guarantor: The Federal Government of the Federal Republic of Germany. Fees: The fees payable pursuant to Clause 26 (Fees). Fee Letter: The fee letter by Bayerische Hypo- und Vereinsbank AG and addressed to the Borrower dated on or about the date hereof. Final Maturity Date: With respect to: (a) Tranche A: the first (1st) Repayment Date following the fifteenth (15th) anniversary of the first Advance under Tranche A;

9 (b) Sub-Tranches B1, B2 and B3: for each Sub-Tranche the first (1st) Repayment Date following the eighth (8th) anniversary of the first Advance under such Sub-Tranche; (c) Sub-Tranche B4: the first (1st) Repayment Date following the fifteenth (15th) anniversary of the first Advance under Tranche A; (d) (e) (f) (g) Tranche C: Tranche D1: Tranche D2: Tranche E: the third (3rd) Repayment Date following the Scheduled First Repayment Date; the third (3rd) Repayment Date following the Scheduled First Repayment Date; the third (3rd) Repayment Date following the Scheduled First Repayment Date; and the first (1st) Repayment Date following the fifth (5th) anniversary of the first Advance under Tranche A.

Finance Party: The Agent, the Arranger or a Lender. Financial Close: The date on which all conditions precedent to first drawdown pursuant to Clause 3.3 (Drawdown Conditions) and 3.4 (Drawdown Restrictions) are fulfilled or waived. Financial Indebtedness: Without duplication, any indebtedness for or in respect of: (a) (b) (c) (d) (e) moneys borrowed; any amount raised by acceptance under any acceptance credit facility; any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with German generally accepted accounting principles, be treated as a capital or finance lease; receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis);

10 (f) (g) any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing; any Derivative Transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and, when calculating the value of any Derivative Transaction, only the marked to market value shall be taken into account) unless entered into in accordance with the Hedging Strategy; any counter-indemnity obligation in respect of a guarantee, indemnity, surety, standby or documentary letter of credit or any other instrument issued by a bank or financial institution; and the amount of any liability in respect of any guarantee or indemnity for any of the items referred to in paragraphs (a) to (h) above.

(h) (i)

Financial Model: The audited financial model agreed between the Parties at the time of the signing of this Agreement as amended from time to time according to the provisions of this Agreement. Financing Costs: The interest costs and fees under the Financing Documents, but excluding during the Pre Production Period interest payments on and fees pursuant to Clauses 26.4 (Fees to the Federal Guarantor) and 26.5 (Fees to the State Guarantor) attributable to Tranche A Advances. Financing Documents: This Agreement, any agreement entered into with any Permitted Subsidiary in connection with the financing of the wood supply or logistics aspects of the Project, the Hedging Agreements, the Security Agreements, the Shareholders Undertaking Agreement, the Step-in-Rights Agreement between SP Holding, RWE-IN, MFC IH and the Agent dated on or about the date hereof, the RWE Solutions AG Guarantee, any agreement regarding Shareholder Loans and the corresponding subordination declarations, the Stand-By Equity Security, the Fee Letter, any waiver requests, waivers and other binding notifications, the Direct Agreement, the Parent Company Guarantee, the advance payment, performance and defects liability guarantee issued in favour of the Borrower by a first class bank in respect of the performance of the EPC Contractor under the EPC Contract, the State Guarantee and any other document in relation to the financing of the Project. First Repayment: bears the meaning ascribed to it in Clause 6.2 (First Repayment). First Repayment Date: The date on which the First Repayment is made in full.

11 Government Grants: The grants which will be given as direct grants (GA-Zuschuss (investment incentives)) by the State of Sachsen-Anhalt and as Investitionszulagen (tax grants) by the Federal Republic of Germany, both as approved by the EU-Decision, for the Project in favour of the Borrower. Group: The Borrower and its subsidiaries from time to time. Guarantors: The Federal Guarantor and the State Guarantor in their function as guarantors under the State Guarantee. Hedging Agreements: The agreements to be concluded in relation to any Derivative Transaction in accordance with the Hedging Strategy. Hedging Counterparty: Bayerische Hypo- und Vereinsbank AG. Hedging Strategy: The hedging strategy in relation to the Facility to be agreed in writing between the Borrower and the Arranger, as amended from time to time, for the hedging of the interest, currency and commodity price risks of the Borrower. Information Memorandum: The information memorandum relating to the Project to be sent to other credit institutions for their information with respect to the syndication of the Facility. Infrastructure Agreement: The infrastructure agreement (Vereinbarung ber die Durchfhrung von Infrastrukturmanahmen und die Bereitstellung finanzieller Mittel) dated 17 July 2002 between the Borrower and the city of Arneburg. Insurance Account: Account no. 57 53 171, banking code 700 202 70 with the Agent in the name of the Borrower to be maintained for certain payments by insurers. Insurance Adviser: Bankrisk Services Marsh Ltd. and its successors as advisers to the Lenders in relation to insurance issues. Intellectual Property Rights: Any patent, trade secret, trademark, copyright or other proprietary rights or knowhow, licences or design registrations required in connection with the Project. Interest Period: The interest periods pursuant to Clause 4.1 (Interest Period). Interest Rate: The interest rate pursuant to Clause 4.2 (Interest Rate).

12 Investment Account: The accounts referred to in Clause 9.2 (Proceeds Account) maintained with the Agent or HVB Banque Luxembourg Socit Anonyme in the name of the Borrower. Investment and Financing Plan: The investment and financing plan agreed by the Arranger and the Borrower at the time of the signing of this Agreement in relation to the Project and attached as Schedule 18 (Investment and Financing Plan). Lenders: The lenders (including the Original Lender), acting through their respective Facility Offices, and as far as permissible under this Agreement, their successors, transferees and assignees. Majority Lenders: Lenders representing at least 662/3% of the total aggregate of unutilised Commitments and outstanding Advances under the Facility. When collecting a vote of the Lenders, the voting rights of a Lender which does not respond within such period as is fixed by the Agent (being a period of at least five (5) Business Days) or, if requested by the Borrower, within thirty (30) Business Days from receipt of any request by the Borrower for a consent, waiver or amendment under the Financing Documents, will be disregarded in determining whether the required majority was achieved. Mandatory Costs: The percentage rate per annum calculated by the Agent in accordance with Schedule 6 (Mandatory Cost Formulae). Margin: For: (a) (b) Tranche A: Tranche B: 0.75 % per annum before 31 March 2003 and 1.05 % per annum from (and including) 31 March 2003; 0.60 % per annum before 31 March 2003 and 0.90 % per annum from (and including) 31 March 2003; (for the guaranteed portion of Tranche B); 1.50 % per annum before 31 March 2003 and 1.80 % per annum from (and including) 31 March 2003; (for the non guaranteed portion of Tranche B); (c) Tranche C: 1.55 % per annum before 31 March 2003 and 1.85 % per annum from (and including) 31 March 2003;

13 (d) (e) Tranches D1 and D2: Tranche E: 1.55 % per annum before 31 March 2003 and 1.85 % per annum from (and including) 31 March 2003; and 1.25% per annum before 31 March 2003 and 1.55 % per annum from (and including) 31 March 2003.

If repayments under the guaranteed portions of Tranche A and Tranche B are deferred according to Clause 6.5 (Deferred Amortisation), the margin in respect of the portions so deferred will be increased by 0.10 % per annum until such deferred repayments are paid. Material Adverse Effect: An event, occurrence or condition which has materially impaired, or which will materially impair (as compared with the situation which would have prevailed but for such event, occurrence or condition): (a) (b) the business, operation, property and financial condition of the Borrower and as a result, the ability of the Borrower to perform any of its obligations under the Financing Documents; or the validity or enforceability of the Financing Documents.

An event, occurrence or condition (other than an event, occurrence or condition affecting a Shareholder itself) shall not be capable of having a Material Adverse Effect if the risks and consequences of such event, occurrence or condition are fully borne by a Shareholder under the terms of any of the Transaction Documents within a period of thirty (30) days following such event, occurrence or condition. Material Insurances: All insurances required to be taken out by the Borrower pursuant to the Minimum Insurance Schedule as set out in Schedule 12 (Minimum Insurance Schedule) and Schedule 12a (Minimum Insurance Operation Period Schedule) apart from any employers liability or motor vehicle liability insurance. Minimum Insurance Schedule: The Schedule prepared by the Insurance Adviser and set out in Schedule 12 (Minimum Insurance Schedule) relating to insurances during the Construction Period and Schedule 12a (Minimum Insurance Operation Period Schedule) relating to insurance during the Operation Period. Operation Period: The period beginning on the day immediately following Acceptance.

14 Original Financial Statements: The financial statements of the Borrower as of 31 December 2001. Overall Funding Requirements (Gesamtfinanzierungs-Planbedarf): The financing requirements for the Project pursuant to the Project Budget as of the date hereof. Overall Funding Sources (Gesamtfinanzierungsquellen): The financing sources for the Project comprising: (a) (b) (c) (d) Shareholder Contributions; Government Grants (and, pending receipt thereof, Tranche E); the Facility; and Start up Cash Flows but excluding Excess Start-up Cash Flows.

Owners Scope: Has the meaning set out in the EPC-Contract. Parent Company Guarantee: The parent company guarantee to be granted by RWE Solutions AG in favour of the Borrower in respect of RWE-INs obligations under the EPC Contract. Permitted Disposals: (a) (b) Annual disposals of assets with an aggregate market value of not more than EUR 5 million if such disposals do not have a Material Adverse Effect; and disposals of assets which are replaced according to the Base Case or funded by Shareholders funds.

Permitted Encumbrances: Encumbrances: (a) (b) (c) (d) created by operation of law or arising in the ordinary course of business (including any retention of title arrangements) which do not secure indebtedness for money borrowed; existing at Financial Close which will be released following the first drawdown of an Advance under this Agreement; created with the Majority Lenders consent, which consent shall not be unreasonably withheld, provided all consents required by the Guarantors have been obtained; constituting Security; and

15 (e) additional encumbrances in an aggregate amount of not more than EUR 1 million.

Permitted Financial Indebtedness: Financial Indebtedness: (a) (b) (c) (d) (e) incurred under the Financing Documents; Existing Financial Indebtedness; which is unsecured and subordinated to the claims of the Lenders hereunder; incurred under Derivatives Transactions permitted under the Hedging Strategy; and an additional aggregate amount of not more than EUR 5 million.

Permitted Investments: Investments made in time deposits (Festgeld) and short term euro debt securities (and, to the extent that funds are held in USD, also in USD debt securities) with a maximum duration of 3 years of issuers with a short term BBB- rating or better of Standard & Poors Corporation or an equivalent rating from such other rating agency approved by the Agent. The average rating of the investments should be A+ or better of Standard & Poors Corporation or an equivalent rating agency approved by the Agent. Permitted Subsidiaries: The two support holding companies, the wood supply company and the logistic company and any subsidiary approved by the Agent. Post-Acceptance Costs: The amounts of costs specified by the Borrower in a Drawdown Request, requesting a drawdown at or about the last day of the Availability Period, as the Project Construction Costs (plus Cost Overruns in relation thereto) and Working Capital Costs expected to be incurred in relation to the Project after Acceptance. Potential Event of Default: Any event which might reasonably be expected to become (with the passage of time, the giving of notice, the making of any determination hereunder or any combination thereof) an Event of Default. Pre-Production Period: The portion of the Construction Period ending on the date of the production of saleable pulp from the Project. Proceeds Account: The Revenue Account and the Investment Account.

16 Project: The design, development, financing, construction and operation of a 552,000 tonnes per annum bleached softwood kraft pulp mill located in Arneburg, near Stendal in Sachsen-Anhalt, Federal Republic of Germany. Project Budget: The financial budget of the Borrower and its Permitted Subsidiaries in the form delivered to and agreed by the Agent from time to time pursuant to the provisions of Clause 18.3(Project Budget). Project Construction Costs: All Project Costs excluding: (a) (b) Financing Costs, start up costs to the extent not capitalised, Development Costs and Working Capital Costs; and recoverable VAT payments on such costs,

but including during the Pre Production Period interest payments on and fees pursuant to Clauses 26.4 (Fees to the Federal Guarantor) and 26.5 (Fees to the State Guarantor) attributable to Tranche A Advances. Project Contracts: The EPC contract as well as all other contracts in relation to the planning, development and construction of the Project as well as the construction of infrastructure, the sale of energy and the agreement on reserve electricity services. Project Costs: All costs of the Borrower in relation to the Project up to Acceptance (including, in any event, Post Acceptance Costs) as shown in the Financial Model or, as the case may be, as approved by the relevant Advisers. Pulp Market Adviser: NLK Consultants Inc., Canada and its successors as advisers to the Lenders in relation to pulp market issues. Quotation Date: With respect to any Interest Period, the Business Day which is two (2) Business Days prior to the commencement of such Interest Period. Reference Banks: Bayerische Hypo und Vereinsbank AG, Deutsche Bank AG and Barclays Bank PLC. Related Party: A company or person related to the Borrower, i.e. part of the Konzern within the meaning of 18 German Act on Stock Corporation (Aktiengesetz). Repayment Date: The First Repayment Date and each subsequent 31 March and 30 September on which a repayment of any part of any Tranche (or Sub-Tranche) is scheduled to take place.

17 Repayment Schedule: The repayment Schedule pursuant to Clause 6.4 (Repayment Schedule). Required Level: EUR 590 million plus 30% of the aggregate Advances made under Tranche D2, but in no event more than EUR 599 million. Responsible Officer: The chief executive officer or general manager, the senior financial officer and/or the responsible project manager. Revenue Account: The account referred to in Clause 9.2 (Proceeds Account) maintained with the Agent in the name of the Borrower. RWE Solutions AG Guarantee: The guarantee given by RWE Solutions AG in respect of RWE-INs obligations under the Shareholders Undertaking Agreement. Scheduled Debt Service: The total amount of interest, principal and fees payable pursuant to the Financing Documents (adjusted by payments and receipts under Hedging Agreements relating to the debt service for that period). Scheduled First Repayment Date: The repayment date set out in Clause 6.2.1 (First Repayment). Security: The security from time to time constituted by or pursuant to the Security Agreements securing all obligations of the Borrower and its Permitted Subsidiaries in relation to the Project. Security Agreements: The security agreements listed in Schedule 9 (Security Agreements), the Security Pooling Agreement and any other agreement pursuant to which the Borrower, the Shareholders, the Sponsors or any third party grant security to the Security Agent and/or the Lenders (other than the State Guarantee), including security agreements granting security in favour of or on behalf of the subsidiaries. Security Pooling Agreement: The security pooling agreement dated on or about the date hereof between the Security Agent, the Lenders, the Hedging Counterparty, the Shareholders, the Sponsors and the Borrower. Senior Debt: The total Advances outstanding as at each Repayment Date. Senior Debt/EBITDA Cover Ratio: The ratio of Senior Debt to EBITDA at a point in time. Share: An ordinary fully paid up share in the Share Capital.

18 Share Capital: The share capital of the Borrower as increased from time to time in accordance with this Agreement. Shareholder Contributions: Contributions of the Shareholders to be made by way of Capital Contributions or Shareholder Loans in accordance with the Shareholders Undertaking Agreement. Shareholder Loans: Loans by the Shareholders to the Borrower made and subordinated in accordance with the terms and conditions of the Shareholders Undertaking Agreement. Shareholders: As at the date of this Agreement, SP Holding, RWE-IN and MFC IH and thereafter includes any person to whom Shares may be transferred. Shareholders Account: An account in the name of the Borrower over which the Lenders have no security and to which the Borrower is allowed to make payments in accordance with Clauses 9.4.3(a) (Priority of Payments) and 9.4.3(c) (Restricted Application). Shareholders Agreement: The agreement dated on or about the date hereof between the Shareholders and the Borrower. Shareholders Undertaking Agreement: The agreement of even date between the Sponsors, the Shareholders, the Borrower and the Agent. Shortfall: An amount in Euro, being the greater of (a) the difference between the Available Cash Flow for a particular measurement period and the amount the Available Cash Flow for such period would have to have been for the then applicable Annual Debt Service Cover Ratio to be met, and (b) the amount by which the Senior Debt would be required to be reduced in order to meet the then applicable Senior Debt/EBITDA Cover Ratio. Site: That portion of land (a) more particularly defined in the Land Register (Grundbuch) of the Stendal Local Court (Amtsgericht) for Arneburg folio (Blatt) 3129, communal district (Gemarkung) Arneburg, under plot (Flur) 18, sub-plots (Flurstck) nos. 90, 105/0 and 107/0, under plot (Flur) 21, sub-plots (Flurstck) nos. 52, 36, 44, 35, 40 and 38, under plot (Flur) 22, sub-plot (Flurstck) no. 5 and under plot (Flur) 24, sub-plot (Flurstck) no. 14/8; more particularly defined in the Land Register (Grundbuch) of the Stendal Local Court (Amtsgericht) for Arneburg folio (Blatt) 3215, communal district (Gemarkung) Arneburg, under plot (Flur) 18, sub-plot (Flurstck) no. 108 and under plot (Flur) 21, sub-plot (Flurstck) no. 67;

(b)

19 (c) (d) (e) (f) more particularly defined in the Land Register (Grundbuch) of the Stendal Local Court (Amtsgericht) for Arneburg folio (Blatt) 3230, communal district (Gemarkung) Arneburg, under plot (Flur) 21, sub-plots (Flurstck) nos. 1/57 and 33; more particularly defined in the Land Register (Grundbuch) of the Osterburg Local Court (Amtsgericht) for Altenzaun folio (Blatt) 284, communal district (Gemarkung) Altenzaun, under plot (Flur) 1, sub-plot (Flurstck) 324; Land Register (Grundbuch) of the Stendal Local Court (Amtsgericht) for Schnfeld (for the time being) folio (Blatt) 542, plot (Flur) 9, sub-plot (Flurstck) no. 2/23; and that portion of land currently leased to the Borrower pursuant to a lease contract dated 16 May 2002 and made between ALTMARK INDUSTRIEPARK AG and the Borrower (Land Register (Grundbuch) of the Stendal Local Court (Amtsgericht) for Arneburg folio (Blatt) 3215, communal district (Gemarkung) Arneburg, under plot (Flur) 21, sub-plot (Flurstck) no. 61).

SP Holding: Stendal Pulp Holding GmbH. Sponsors: Mercer International, RWE-IN, ALTMARK INDUSTRIEPARK AG and MFC IH as defined in the Recitals to this Agreement and any of their respective successors. Stand-By Equity Security: (a) (b) an irrevocable letter of credit; or an unconditional guarantee on first demand,

in each case in form and substance satisfactory to the Agent and issued by a bank whose long term unsecured credit rating is at least A from Standard & Poors Rating Services and A 2 from Moodys Investors Services Inc.; or (c) an interest bearing cash deposit in the amount required by the Shareholders Undertaking Agreement to be held by the Agent or at HVB Banque Luxembourg Socit Anonyme, such account to be pledged in favour of the Lenders by entering into an account pledge agreement providing for similar terms as set out in Schedule 7 (Form of Account Pledge Agreement) in case the account is held by the Agent and an account pledge agreement providing for similar terms as set out in

20 Schedule 8 (Form of Luxembourg Account Pledge Agreement) in case the account is held by HVB Banque Luxembourg Socit Anonyme. Start-up: bears the meaning ascribed thereto in the EPC Contract. Start-Up Cash Flows: Net operating cash flows generated by the Project from the 18 September 2004 (as end of construction pursuant to the German Commercial Code, HGB) until Acceptance in the amount confirmed by an auditor acceptable to the Agent after Acceptance including the financing advantages arising out of the provision of funds made available by the European Investment Bank in the aggregate amount of EUR 4,022,725.80, proceeds resulting from the termination of a cross currency swap in the amount of EUR 29,394,000.00, proceeds resulting from forward sales in an amount of EUR 743,010.26 and EUR 1,820,459.00 and a penalty payment in the amount of EUR 250,000.00 paid by Hochtief AG to the Borrower according to an agreement dated 26 April 2004 entered into between the Borrower and Hochtief AG in respect of the installation of an effluent pipe to Elbesite. State Guarantee: The guarantees (Ausfallbrgschaften) issued by the Federal Republic of Germany (for 48 % of the aggregate amount of Advances under Tranches A and B) and the State of Sachsen-Anhalt (for 32 % of the aggregate amount of Advances under Tranches A and B) issued in the form attached to this Agreement as Schedule 10 (State Guarantee) in favour of the Lenders with respect to this Agreement including the Allgemeinen Bestimmungen fr Brgschaftsbernahmen durch die Bundesrepublik Deutschland (Bund) und parallel brgende Bundeslnder (General Conditions for the issuing of guarantees by the Federal Republic of Germany and Lnder). State Guarantor: The State Government of Sachsen-Anhalt. Sub-Tranche: a sub-tranche of Tranche B as more particularly referred to in Clause 2.1.1(b). Supplier: Suppliers and vendors of services and goods to the Borrower and the EPC Contractor in connection with the EPC Contract. Suspension Notice: The notice pursuant to Clause 5.1 (Market Disruption). TARGET: The Trans-European Automated Real-time Gross Settlement Express Transfer payment system. Target Balance: The balance targeted to be standing to the credit of the Debt Service Reserve Account pursuant to Clause 11.3 (Target Balance).

21 TARGET Day: Any day on which TARGET is open for the settlement of payments in euro. Technical Adviser: JP Management Consulting (Europe) OY, Vantaa, Finland and its successors as advisers to the Lenders in relation to technical issues. Tranche or Tranches: Any or all of Tranche A, Tranche B, Tranche C, Tranche D1, Tranche D2 and Tranche E as the case may be. Tranche A: That part of the Facility granted to the Borrower pursuant to Clause 2.1.1(a) (Granting of the Facility) and split into, and comprising thereafter, Tranche A1 and Tranche A2 pursuant to Clause 6.3.3. Tranche A1: Has the meaning ascribed thereto in Clause 6.3.3. Tranche A2: Has the meaning ascribed thereto in Clause 6.3.3. Tranche B: That part of the Facility granted to the Borrower pursuant to Clause 2.1.1(b) (Granting of the Facility) (comprising up to 4 separate Sub-Tranches). Tranche C: That part of the Facility granted to the Borrower pursuant to Clause 2.1.1(c) (Granting of the Facility). Tranche D1: That part of the Facility granted to the Borrower pursuant to Clause 2.1.1(d) (Granting of the Facility). Tranche D2: That part of the Facility granted to the Borrower pursuant to Clause 2.1.1(e) (Granting of the Facility). Tranche E: That part of the Facility granted to the Borrower pursuant to Clause 2.1.2 (Granting of the Facility). Transaction Documents: The Financing Documents, the Project Contracts and the Shareholders Agreement. Transfer Certificate: The transfer certificate pursuant to Schedule 14 (Transfer Certificate). Transferee: Any transferee pursuant to Clause 31.2 (Assignments and Transfers by the Lenders). Transferor: Any transferor pursuant to Clause 31.2 (Assignments and Transfers by the Lenders).

22 Wood Supply Adviser: JP Management Consulting (Europe) OY, Vantaa, Finland and its successors as advisers to the Lenders in relation to wood supply issues. Working Capital: Accounts receivable (a) (b) (c) (d) (e) (f) (g) (h) plus inventory, plus receivables in respect of taxes, plus accrued revenue (prepaids, accrued revenue and other), less accounts payable, less taxes payable, less accrued interest, less accrued liabilities, less unearned revenue.

Working Capital Costs: Costs of working capital needed for the operation of the Groups business, including operating costs, wood, chemicals and other raw material and consumables stock costs as well as intermediate and end products and funds for cash deposits which the Borrower needs to provide to banks as a security for the provision of guarantees by such banks. Works: Has the meaning as set out in the EPC Contract. 1.2 Interpretation Any reference in this Agreement to: an affiliate of a specified person is construed as any other person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the person specified, or who holds or beneficially owns 10% or more of the equity interest in the person specified or 10% or more of any class of voting securities of the person specified; the Agent, Arranger, Lender and Security Agent is construed so as to include it and any subsequent successors and permitted transferees and assigns in accordance with their respective interests; assets includes present and future properties, revenues and rights of every description;

23 calendar quarter is a reference to the period from (and including) January 1 to (and including) March 31, or from (and including) April 1 to (and including) June 30, or from (and including) July 1 to (and including) September 30, or from (and including) October 1 to (and including) December 31; continuing, in relation to an Event of Default, is construed as a reference to an Event of Default which has not been waived in accordance with the terms hereof or remedied and, in relation to a Potential Event of Default, one which has not been remedied within the relevant grace period or waived in accordance with the terms hereof; disposal is construed as any sale, lease, transfer, conveyance, assignment or other disposal and dispose and disposals is construed accordingly, but the payment of cash permitted hereunder shall not constitute a disposal; encumbrance is construed as a reference to a mortgage, pledge, lien, charge, hypothecation, security interest, title retention, preferential right or trust arrangement, obligations under leasing agreements and conditional purchase agreements, and any other collateral agreement or similar arrangement whether on existing or future assets (including, without limitation, Sicherungsbereignung, Sicherungsabtretung, Eigentumsvorbehalt, Pfandrecht, Grundpfandrechte, Treuhandvereinbarung, Niebrauch); include or including is construed without limitation and for avoidance of doubt; indebtedness is construed so as to include any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent; a law is construed as any law, statute, constitution, binding (bestandskrftig) decree, treaty, regulation, legally binding (bestandsoder rechtskrftig) directive, rules or any other legally binding (bestands- oder rechtskrftig) legislative measure of any government, supranational, local government, statutory or regulatory body or court; a month is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that: (a) if any such numerically corresponding day is not a Business Day, such period shall end on the immediately succeeding Business Day in that calendar month or, if none, it shall end on the immediately preceding Business Day; and

24 (b) if there is no numerically corresponding day in that next succeeding calendar month, that period shall end on the last Business Day in that next succeeding calendar month,

(and references to months shall be construed accordingly); a person is construed as a reference to any person, firm, company, corporation, state or Bundesland, or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing; repay (or any derivative form thereof) is, subject to any contrary indication, construed to include prepay (or, as the case may be, the corresponding derivative form thereof); a subsidiary of a company or corporation is construed as a reference to any company: (a) which is controlled, directly or indirectly, by the first-mentioned company or corporation and, for these purposes, a company shall be treated as being controlled by a company if that other company is able to direct its affairs and/or to control the composition of its board of directors or equivalent body; more than half the issued share capital or partnership interest of which is beneficially owned, directly or indirectly, by the first-mentioned company; or which is a subsidiary of another subsidiary of the first mentioned company;

(b) (c)

a successor is construed so as to include a permitted assignee or successor in title of such party and any person who under the laws of its jurisdiction of incorporation or domicile has assumed the rights and obligations of such party under this Agreement or to which, under such laws, such rights and obligations have been transferred; tax is construed so as to include any tax, levy, impost, duty or other charge of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same); VAT is construed as a reference to value added tax including any similar tax which may be imposed in place thereof from time to time; the winding-up or dissolution of a company or corporation is construed so as to include any equivalent or analogous proceedings under the law of the jurisdiction in which such company or corporation is incorporated or any

25 jurisdiction in which such company or corporation carries on business including the seeking of liquidation, winding-up, reorganisation, dissolution, administration, general arrangement, general adjustment, protection or relief of debtors. 1.3 Currency Symbols EUR and euro mean the single currency unit of the European Union as constituted by the Treaty on European Union as referred to in EMU legislation and euro unit means the currency unit of the euro as defined in EMU legislation. 1.4 Agreements and Statutes Any reference in this Agreement to: 1.4.1 1.4.2 1.5 this Agreement or any other agreement or document is construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented; and a statute or treaty is construed as a reference to such statute or treaty as the same may have been, or may from time to time be, amended or, in the case of a statute, re-enacted. Headings Clause, Part and Schedule headings are for ease of reference only. 1.6 Singular and Plural Words incorporating the singular number include the plural and vice versa. 1.7 Time Any reference in this Agreement to a time of day is, unless a contrary indication appears, a reference to German time. 1.8 Language Where a Financing Document is available in the English and German language, the German version prevails. 2. 2.1 THE FACILITY Granting of the Facility Subject to the terms and conditions of this Agreement, the Lenders will provide the Borrower with a Facility comprising: 2.1.1 a euro denominated term loan facility in an aggregate amount of up to EUR 668 million divided as follows:

26 (a) (b) Tranche A in an amount of EUR 464.55 million (Tranche A); Tranche B in an amount of EUR 122 million (Tranche B) containing no more than four (4) Sub-Tranches in the respective amounts of EUR 20,666,666 (Sub-Tranche B1), EUR 20,666,667 (Sub-Tranche B2), EUR 20,666,667 (Sub-Tranche B3) and EUR 60 million (Sub-Tranche B4); Tranche C in an amount of EUR 42 million (Tranche C); Tranche D1 in an amount of EUR 9.40 million (Tranche D1); and Tranche D2 that may be drawn in an amount of up to EUR 30 million (Tranche D2);

(c) (d) (e) 2.1.2 2.2

a euro denominated revolving loan facility in an aggregate amount of up to EUR 160 million (Tranche E). Availability of Facility Provided that the first Advance hereunder is made on or prior to the date falling three months after the date hereof, the Facility will, subject to the next following sentence, be available for disbursement, on and in accordance with the terms hereof, from Financial Close up to and including the date on which Acceptance is achieved, but no later than the date falling 40 months after Financial Close. However, Tranche C will be available until and including the 30 September 2005. Tranche D2 and E will, however, be available up to and including the date falling one (1) month prior to the First Repayment Date.

2.3 2.3.1 2.3.2 2.4

Borrowers Obligations The obligations of the Borrower to the Agent and each Lender hereunder are created vis--vis each of them as separate and independent obligations (Teilschuldnerschaft). Unless otherwise provided for under the Financing Documents, the Agent and each Lender may separately enforce their rights hereunder. Lenders Obligations The obligations of each Lender under this Agreement are several. Failure of a Lender to carry out its obligations pursuant to this Agreement in a proper manner does not relieve any other party of its obligations under this Agreement. No Lender is responsible for the obligations of any other party under this Agreement. Joint liability (gemeinschaftliche Schuld) or joint and several liability (Gesamtschuldnerschaft) is excluded.

27 2.5 Purpose and Application The Facility is intended to finance the Project in accordance with the Investment and Financing Plan. It will exclusively be used by the Borrower for the following purposes: 2.5.1 2.5.2 2.5.3 2.5.4 2.5.5 2.5.6 Tranche A will only be used by the Borrower for the financing of Project Construction Costs and Development Costs; Sub-Tranches B1, B2 and B3 will only be used by the Borrower for the financing of the Financing Costs, up until Acceptance, startup costs, up until Acceptance, and other Project Construction Costs and Development Costs not financed under Tranche A; Sub-Tranche B4 will only be used by the Borrower for the financing of Working Capital Costs; Tranche C will only be used by the Borrower to fund in part the Debt Service Reserve Account; Tranche D1 will only be used by the Borrower for the financing of Project Construction Costs; Up to the earlier of (i) the completion of Additional Works and (ii) one (1) month prior to the first Repayment Date, Tranche D2 will be used by the Borrower for the financing of Cost Overruns. Upto and including the date falling one (1) month prior to the First Repayment Date, Tranche D2 will be used for a prepayment of Tranche A (not already funded pursuant to Clause 2.6.2 (b) (iv) of the Shareholders Undertaking Agreement) to the extent necessary to meet the EU-Equity Test and for the financing of shortfalls in Government Grants (not already funded pursuant to Clause 2.6.2 (b) (i) of the Shareholders Undertaking Agreement or by an earlier drawing under Tranche D2) as finally calculated one month prior to the First Repayment Date; and Tranche E will only be used by the Borrower to bridge finance: (a) (b) 2.5.8 the portion of all costs in relation to the Project for which the Government Grants are expected to be received; and recoverable VAT payments on Project Construction Costs.

2.5.7

Without affecting the obligations of the Borrower, neither the Arranger, the Agent, the Security Agent, the Lenders nor any of them is required to monitor or verify the application of any amount borrowed pursuant to this Agreement. The Agent will however require from the Borrower the documents regarding the application of funds in accordance with Clause 3.4.3 (Drawdown Restrictions).

28 2.6 Cash Advances The Facility will be available only in the form of cash Advances. 2.7 Substitute Lenders In the event the Commitment of any Lender is terminated, and the Advances of such Lender are prepaid or may be prepaid, pursuant to Clause 12 or Clause 13, the Borrower shall have the right to seek a substitute lender (which may be a Lender) to assume the Commitment and acquire the Advances (or make new Advances in substitution for Advances prepaid) of such terminating Lender. 3. 3.1 UTILISATION OF THE FACILITY Delivery of Drawdown Request The Borrower may from time to time request the making of an Advance by delivery to the Agent of a duly completed Drawdown Request in form and substance as set out in Schedule 1 (Drawdown Request) not later than 11:00 a.m. on the fifth (5th) Business Day before the Drawdown Date proposed in the Drawdown Request. 3.2 Drawdown Details Each Drawdown Request delivered to the Agent pursuant to Clause 3.1 (Delivery of Drawdown Request) is irrevocable and will not be regarded as having been duly completed unless it specifies: 3.2.1 3.2.2 3.2.3 the proposed Drawdown Date which must be a Business Day within the Availability Period and in the case of the first Advance hereunder no later than the date falling three months after the date hereof; the term of the initial Interest Period; the amount of any Advance requested which, if it is not for the whole undrawn amount of the relevant Tranche or Sub-Tranche, must be (a) (b) 3.2.4 with respect to Tranche A a minimum amount of EUR 5 million or any larger amount which is an integral multiple of EUR 1 million unless it is in respect of Post-Acceptance Costs; and with respect to Tranches B, D1 and D2 a minimum amount of EUR 2 million or any larger amount which is an integral multiple of EUR 1 million unless it is in respect of Post-Acceptance Costs; and

the specific purposes for which the Advance will be used by the Borrower and which Tranche it forms part of; Advances made under Tranche B (other than in respect of Working Capital Costs which will be allocated to Sub-Tranche B4) will be allocated first to SubTranche B1, then to Sub-Tranche B2 and lastly to Sub-Tranche B3.

29 3.3 3.3.1 Drawdown Conditions The Borrower may only deliver a Drawdown Request to the Agent if: (a) the conditions precedent listed in Schedule 2 (Conditions for the First Drawdown) are met with respect to the first Advance and the Agent has notified the Borrower and the Lenders that it has received all of the documents and other evidence to be delivered in respect of such conditions precedent and each is in form and substance satisfactory to the Agent (and the Agent undertakes to promptly after receipt of such documents and evidence notify the Borrower that such conditions are met or inform the Borrower of the reasons they are not met); the conditions precedent listed in Schedule 3 (General Drawdown Conditions) are met with respect to any Advance; and each condition subsequent listed in Schedule 4 (Conditions Subsequent) has been met to the satisfaction of the Agent within three months of the date indicated in such Schedule for its satisfaction unless (i) the Agent, acting on the instruction of Majority Lenders, determines that failure to meet the relevant condition subsequent will not be materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents or (ii) such failure is subsequently remedied.

(b) (c)

3.3.2 3.4 3.4.1

The Agent may waive each drawdown condition with the Majority Lenders consent upon written request by the Borrower to the Agent. Drawdown Restrictions Drawings except under Tranche E will only be permitted to the extent that amounts standing to (or expected to be standing to) the credit of the Disbursement Account are not sufficient to meet the relevant funding requirements for which the Borrower has delivered the Drawdown Request. Drawings will further only be permitted if: (a) (b) on the Drawdown Date no Event of Default or Potential Event of Default has occurred and remains uncured or unwaived or would occur as a result of the making of the Advance to be drawn down; and the representations to be made by the Borrower remain true in all respects,

3.4.2

30 (c) 3.4.3 the Shareholders have made the additional Shareholder Loans which they are required to make under the last paragraph of Clause 2.6.1 of the Shareholders Undertaking Agreement.

Drawings in respect of Project Costs (excluding Financing Costs, costs for interest payments during the Construction Period and Post-Acceptance Costs) will further only be permitted against submission to the Agent of a list of all invoices as well as all detailed documents which the Agent requires in relation to any item listed thereon evidencing the Project Costs for which the Borrower has delivered a Drawdown Request or which have been or are to be paid from equity in accordance with Schedule 2 (Conditions for the First Drawdown), paragraphs 6(a) and (b), unless such Project Costs are anticipated to be incurred within one month from the Drawdown Date specified in the respective Drawdown Request. Upon receipt of the relevant invoice the Borrower shall deliver to the Agent without undue delay a list of any Project Costs not previously submitted as well as those detailed documents which the Agent has requested in relation to any item listed thereon. Drawings under Tranche D2 will be permitted only: (a) (b) if approved by the Agent, and, in the case of (b), the Technical Adviser and the Wood Supply Adviser, such approval or, as the case may be, the procurement of such approval not to be unreasonably withheld or delayed; up to and including the earlier of (i) the completion of the Additional Works and (ii) one (1) month prior to the First Repayment Date to the extent that such Cost Overruns are not required to be paid by the Shareholders under the Shareholders Undertaking Agreement and in any case only so long as the portion thereof required to be paid by the Shareholders under the Shareholders Undertaking Agreement has first been paid; up to a maximum amount of EUR 5,000,000 with respect to a prepayment of Tranche A (not already funded pursuant to Clause 2.6.2 (b) (iv) of the Shareholders Undertaking Agreement) to the extent necessary to meet the EU-Equity Test; and for the financing of shortfalls in Government Grants (not already funded pursuant to Clause 2.6.2 (b) (i) of the Shareholders Undertaking Agreement or by an earlier drawing under Tranche D2) as finally calculated at the earlier of the conclusion of the subsidy audit (Mittelverwendungsnachweis) and one month prior to the First Repayment Date.

3.4.4

(c) (d)

31 3.4.5 Drawings under Tranche C shall take place on or before 30 September 2005 to fund the Debt Service Reserve Account and will be permitted only to the extent that the Agent has received evidence that on or before the date of such Advance the Shareholders have deposited into the Debt Service Reserve Account the amount determined pursuant to Clause 2.6.2 (b) (iii) of the Shareholders Undertaking Agreement. Participation of the Lenders in Advances Each Lender will contribute to each Advance made hereunder in the proportion to which its Commitment bears to the total Commitments of all the Lenders at the relevant time. The Agent shall no later than three (3) Business Days prior to the Drawdown Date notify each Lender of the amount of the Advance, the Drawdown Date, the Interest Period and such Lenders participation in the Advance. Upon receipt of the written notice pursuant to the previous paragraph, each Lender will, no later than 10:00 a.m. on the Drawdown Date, credit the account in the name of the Agent with Bayerische Hypo- und Vereinsbank AG, which has been notified by the Agent to Lenders at the latest three (3) Business Days prior to such Drawdown Date, with its participation in the Advance and the Agent will, with same day value as the Drawdown Date, transfer the amount of the Advance to the Disbursement Account in accordance with Clause 9.3.1 (Payments to the Borrower). INTEREST AND LIQUIDITY CHARGE Interest Period Tranche A, Tranche B, Tranche C, Tranche D1 and Tranche D2 (a) Prior to the Scheduled First Repayment Date Interest Periods relating to Advances made under Tranche A, Tranche B, Tranche C, Tranche D1 or Tranche D2 will be of one (1), three (3) or six (6) months duration (or such lesser duration as may be necessary so that all Interest Periods in relation to Advances made under each Tranche will end on the Scheduled First Repayment Date) at the option of the Borrower provided that any Interest Period relating to an Advance made under any Tranche commencing at the same time as or during another Interest Period relating to an Advance made under the same Tranche shall be of such duration that it shall end on the same date as that other Interest Period. Interest Periods commencing on or after the Scheduled First Repayment Date relating to Advances made under Tranche A, Tranche B, Tranche

3.5 3.5.1 3.5.2 3.5.3

4. 4.1 4.1.1

(b)

32 C, Tranche D1 and Tranche D2 will, subject to paragraph (c) below, end on a Repayment Date, thus in each case (other than the first such Interest Period) being of six (6) months duration. (c) 4.1.2 Interest Periods relating to Advances made under Tranche A2 will end on the Business Day immediately following a Repayment Date.

Tranche E: The Interest Periods relating to Advances under Tranche E will be of one (1), three (3) or six (6) months duration at the option of the Borrower (or such shorter period as is required in order for the Interest Periods of the Advances under Tranche E to end on the Scheduled First Repayment Date). The Borrower will, where appropriate, give irrevocable notice to the Agent of the chosen Interest Period in the relevant Drawdown Request or, if the Advance has already been made, in an irrevocable written notice to be received by the Agent no later than 11:00 a.m. on the fifth (5th) Business Day prior to the commencement of that Interest Period. At the latest three (3) Business Days prior to the commencement of the Interest Period chosen by the Borrower, the Agent will give notice to the Lenders and the Guarantors of any notice given by the Borrower pursuant to this Clause 4.1.3. If the Borrower fails to give notice of an Interest Period, its term will be one (1) month, or any shorter period as the Agent determines to be necessary to comply with the requirements pursuant to Clauses 4.1.5. The first Interest Period with respect to an Advance will commence on its Drawdown Date, and each subsequent Interest Period will commence on the last day of its preceding Interest Period. The Agent may, with the approval of the Borrower, determine other Interest Periods with respect to any or all Advances if the Agent deems such other Interest Periods necessary or appropriate to facilitate syndication, provided that any such other Interest Period will not be shorter than five (5) Business Days nor longer than six (6) months. If two or more Interest Periods relating to Advances under the same Tranche end at the same time, then, on the last day of those Interest Periods, the Advances to which they relate will be consolidated into and treated as a single Advance under such Tranche. Advances under Tranche B forming part of any Sub-Tranche will however, not be consolidated with any Advance forming part of a different Sub-Tranche. The Agent will notify the Borrower and the Lenders of the duration of each Interest Period in respect of each Advance promptly after having determined the same.

4.1.3

4.1.4 4.1.5 4.1.6

4.1.7

4.1.8

33 4.2 Interest Rate The rate of interest applicable to an Advance under any of the Tranches from time to time during an Interest Period is the percentage rate per annum which is the aggregate of EURIBOR on the Quotation Date therefore, the applicable Margin and Mandatory Costs, if any. 4.3 Payment of Interest The Borrower will pay accrued interest for each Interest Period on the last day of such Interest Period. Interest will accrue during each Interest Period from and including the first day of such Interest Period to but excluding the last day of such Interest Period. 4.4 Notification The Agent will promptly notify the Borrower and the Lenders of each determination of the Interest Rate and interest payable in relation to each Advance. Each determination of the Interest Rate by the Agent will, in the absence of a manifest error, be conclusive and binding on the Borrower and the Lenders. 4.5 Liquidity Charge During the period commencing on 31 March 2009 and ending upon the full repayment of Tranche A2, the Borrower will pay a liquidity charge of 0.45 per cent p.a. in respect of the principal amount outstanding under Tranche A2. Such liquidity charge will be payable in arrears on each Repayment Date commencing with the Repayment Date falling on 30 September 2009 and calculated on the principal amount outstanding under Tranche A2 on such Repayment Date. 4.6 4.6.1 Default Interest If the Borrower fails to pay any amount (other than interest) payable by it hereunder on its due date, interest will accrue on the overdue amount from the due date up to the date of actual payment at a rate of 1.5 per cent. per annum above: (a) (b) 4.6.2 in relation to an amount becoming due and payable before expiration of the Interest Period applicable thereto, for the period until the expiration of such Interest Period the rate applicable to such overdue amount immediately prior to the due date; and in all other cases, the Interest Rate on the most recent Quotation Date for such periods as the Agent may designate, provided, however, that such Interest Period will not exceed three (3) months.

If the Borrower fails to pay any interest payable by it hereunder on its due date, it will make, at the time of payment of all arrears of interest, a lump sum

34 payment for all arrears of interest in the amount of 1.5 per cent. above EURIBOR applicable to the respective Interest Period of the amount due and payable. 4.6.3 4.6.4 5. 5.1 The right of the Lenders to compensation for any loss arising from the default remains unaffected. Payments made under Clause 4.6.2 will however be deducted from such compensation. The Agent will promptly notify the Borrower and the Lenders of the determination of any default interest. Each determination by the Agent will, in the absence of a manifest error, be conclusive and binding on the Borrower and the Lenders. MARKET DISRUPTION Market Disruption If, on any Quotation Date in relation to any Advance and any Interest Period: 5.1.1 EURIBOR is to be determined by reference to Reference Banks and at or about 11.00 a.m. on the Quotation Date for the relevant Interest Period none or only one of the Reference Banks supplies a rate for the purpose of determining the EURIBOR for the relevant Interest Period; or before the close of business in Frankfurt am Main on the Quotation Date for such Advance, the Agent has been notified by Lenders to whom in aggregate 50 per cent. or more of the principal of the relevant Advance is owed that EURIBOR does not, by reason of circumstances affecting the inter-bank market generally, accurately reflect the cost to them of obtaining matching deposits for their participation in such Advance, then, notwithstanding anything contrary in this Agreement, the Agent will promptly give written notice (the Suspension Notice) to the Borrower and the Lenders of such event. 5.2 5.2.1 Alternative Basis of Interest If Clause 5.1.1 (Market Disruption) applies, the applicable Interest Period will be one (1), three (3) or six (6) month(s) at the option of the Agent or such shorter period to end on any Repayment Date, and the interest rate applicable will be the weighted average of the interest rates notified by the Lenders to the Agent on or before the last day of the relevant Interest Period to reflect the cost of funding (regardless from what sources a Lender may reasonably select to fund its participation) their participation in the relevant Advance, expressed as a percentage per annum plus the Margin applicable to such Advance and Mandatory Costs, if any.

5.1.2

35 5.2.2 If Clause 5.1.2 (Market Disruption) applies, the interest rate applicable to the affected Lenders participation in the relevant Advance shall be: (a) (b) 5.3 in respect of each Lender having notified the Agent in accordance with Clause 5.1.2 (Market Disruption) the interest rate notified by it to the Agent pursuant to the principles as set out in Clause 5.2 (Alternative Basis of Interest); and in respect of all other Lenders EURIBOR and the Margin applicable to such Advance and Mandatory Costs, if any.

Negotiations During a period of thirty (30) days upon the giving of the Suspension Notice, the Agent, the Lenders and the Borrower will negotiate in good faith with a view to agreeing on the rate of interest or a substitute basis for determining the rate of interest, including without limitation alternative Interest Periods or alternative methods of determining the interest rate from time to time, (whereby a margin above the cost of funding of each Lenders participation in the Advance equivalent to the Margin has to be included) and any such rate of interest or substitute basis that is agreed will take effect in accordance with its terms and be binding on each party.

5.4

Prepayment The Borrower may elect at any time during which an interest rate is determined pursuant to Clause 5.2 (Alternative Basis of Interest) to give notice to a Lender in writing through the Agent that it intends to prepay in full such Lenders participation in each Advance on the last day of the then current Interest Period for that Advance.

6. 6.1

REPAYMENT General The Borrower shall repay in full all Advances under each Tranche outstanding on the Final Maturity Date with respect to such Tranche.

6.2 6.2.1

First Repayment Not later than the first (1st) 31 March or 30 September immediately following the fourth (4th) anniversary of the first Advance under Tranche A (the Scheduled First Repayment Date), the Borrower will repay an amount which will reduce the aggregate Advances outstanding (other than under Tranche E) to no more than the Required Level (the First Repayment). The First Repayment will be applied to the Tranches in the following order: (a) first, for the repayment of 70 % of Tranche D2;

6.2.2

36 (b) (c) (d) (e) 6.3 6.3.1 second, for the repayment of 70 % of Tranche D1; third, for the repayment of 70 % of Tranche C; fourth, for the repayment of part of any Sub-Tranche B1 to B3; fifth, for the repayment of Tranche A.

Repayments other than First Repayment Subject to Clauses 6.3.3 and 6.3.4, the Amortisation Schedule (expressed as a maximum percentage of the Required Level to be outstanding at the close of business in Munich on the relevant Repayment Date) to be delivered pursuant to paragraph 12 of Schedule 2 (Conditions for the First Drawdown) shall be prepared on the basis that a minimum Annual Debt Service Cover Ratio, as shown by the Base Case delivered pursuant to paragraph 9 of Schedule 2 (Conditions for the First Drawdown) of 1.73 is achieved at each Repayment Date assuming repayment of all Advances made hereunder (other than under Tranche E) in accordance with the following sub-clauses of this Clause 6.3 (Repayments other than First Repayment). Following the repayment referred to in Clause 6.2 (First Repayment) and subject to Clause 6.3.3, Clause 6.4.2 and Clause Error! Reference source not found., the Borrower will repay the outstanding Advances under Tranche A in 22 instalments semi-annually on each 31 March and 30 September following the Scheduled First Repayment Date in accordance with the Amortisation Schedule. The amount of each instalment shall be such that, after the repayments of Tranches B, C, D1 and D2 required to be made on the relevant Repayment Date pursuant to the following sub-clauses of this Clause 6.3 (Repayments other than first Repayment) have been made, the aggregate outstanding amount of all Advances, other than Advances under Tranche E, (at close of business in Munich on the relevant Repayment Date) expressed as a percentage of the Required Level does not exceed the percentage set out in the Amortisation Schedule against that Repayment Date. As of (and including) the Repayment Date falling on 31 March 2009, Tranche A shall be split into a sub-tranche of EUR 270,686,833 (Tranche A1) and a sub-tranche of EUR 164,219,900 (Tranche A2). The Borrower will repay the outstanding Advances under each of Sub-Tranche B1, B2 and B3, following the repayment referred to in Clause 6.2 (First Repayment), in eight (8) equal semi-annual instalments on the eight (8) Repayment Dates ending on the (1st) first Repayment Date following the eighth (8th) anniversary of the first Advance under the relevant Sub-Tranche.

6.3.2

6.3.3 6.3.4

37 6.3.5 6.3.6 6.3.7 6.3.8 6.3.9 The Borrower will repay Sub-Tranche B4 in one amount on the Final Maturity Date for Sub-Tranche B4. The Borrower will repay the outstanding Advances under Tranche C, following the repayment referred to in Clause 6.2, in three (3) equal semi-annual instalments on the three (3) Repayment Dates falling after the Scheduled First Repayment Date. The Borrower will repay the outstanding Advances under Tranche D1 in three (3) equal semi-annual instalments on the three (3) Repayment Dates falling after the Scheduled First Repayment Date. The Borrower will repay the outstanding Advances under Tranche D2 in three (3) equal semi-annual instalments on the three (3) Repayment Dates falling after the Scheduled First Repayment Date. The Borrower will repay the outstanding Advances under Tranche E in an amount equal to the proceeds of Government Grants and/or VAT refunds on Project Costs received from time to time and/or, as the case may be, out of one or more drawings made under Clause 2.6.2 (b) of the Shareholders Undertaking Agreement and/or moneys on the Proceeds Account which are available in accordance with Clause 9.4.3(a)(xi) (Application of Moneys on Proceeds Account). Any such repayment shall be made on the interest payment date(s) relating to any Advance(s) outstanding under Tranche E next following receipt of such proceeds or, in relation to the moneys on the Proceeds Account, with a seven (7) Banking Days prior written notice to the Agent on the relevant Repayment Date. Should there be less than seven (7) Banking Days between receipt of Government Grants and/or VAT refunds on Project Costs and/or, as the case may be, drawings made under Clause 2.6.2 (b) of the Shareholders Undertaking Agreement, and the interest payment date(s) mentioned in the previous sentence, then such repayment shall be made on the following interest payment date(s). Such repayment is, however, not necessary to the extent the Borrower uses the proceeds of Government Grants and/or VAT refunds for purposes corresponding to the purpose of Tranche E. Any Advances under Tranche E remaining outstanding at Tranche Es Final Maturity Date will be repaid on that date by the Borrower. Any such repayment shall be made together with accrued interest thereon and any other amounts outstanding under this Agreement in respect thereof. Repayment Schedule The Agent will forward to the Borrower and the Lenders with respect to Tranche A, Tranche B, Tranche C, Tranche D1 and Tranche D2 a repayment Schedule setting out in accordance with Clause 6.3 (Repayments other than First Repayment) the amount of the repayment instalments and their respective

6.4 6.4.1

38 payment dates at the latest 15 days prior to the Scheduled First Repayment Date (the Repayment Schedule), provided that the Repayment Schedule for Tranche A for the period commencing as of (and including) the Repayment Date falling on 31 March 2009 shall be as set out in Clause 6.4.2. The Repayment Schedule will be amended pro rata by the Agent following the making of any voluntary prepayments or mandatory prepayments according to this Agreement and will be submitted to the Borrower and the Lenders upon its amendment. 6.4.2 As of (and including) the Repayment Date falling on 31 March 2009, the Repayment Schedule in relation to Tranche A shall be as follows:
Repayment in Euro in relation to Tranche A1 Repayment in Euro in relation to Tranche A2

Repayment Date

31 March 2009 30 September 2009 31 March 2010 30 September 2010 31 March 2011 30 September 2011 31 March 2012 30 September 2012 31 March 2013 30 September 2013 31 March 2014 30 September 2014 31 March 2015 30 September 2015 31 March 2016 30 September 2016 31 March 2017 30 September 2017

500,000 500,000 500,000 500,000 12,000,000 6,000,000 7,000,000 15,000,000 20,000,000 20,000,000 20,000,000 20,000,000 22,000,000 22,000,000 22,000,000 22,000,000 24,906,733 35,780,100

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 164,219,900

39 6.5 6.5.1 Deferred Amortisation If there are insufficient funds available to meet scheduled amortisation payments from the Proceeds Account, the Equity Reserve Account and the Debt Service Reserve Account, deferral of the amortisation of the amounts outstanding (less any amount payable by the Shareholders pursuant to the proviso to Clause 2.6.2 (b) (vi) of the Shareholders Undertaking Agreement), excluding Advances under Tranche E, remaining after application of the available funds will, at the request of the Borrower, subject to Clause 6.1 (General), be permitted without triggering an Event of Default for a period of not more than six (6) months and subject to the maximum permitted deferred amortisation amount under any Tranche at any Repayment Date being no greater than the principal amortisation amount due on such Repayment Date. Any deferral shall be apportioned rateably across the Tranches due for repayment on the relevant Repayment Date. On the First Repayment Date any deferral shall, however, first be apportioned rateably across Tranches D2, D1 and C and only then rateably across Tranche A and Sub-Tranches B1, B2 and B3. No Other Repayments The Borrower will not repay all or any part of the Advances except at the times and in the manner expressly provided for in this Agreement. 7. 7.1 VOLUNTARY AND MANDATORY PREPAYMENTS General At any time after the Scheduled First Repayment Date the Borrower may, after having given to the Agent not less than fifteen (15) Business Days prior irrevocable written notice to that effect, prepay any part of the amount outstanding under Tranche A, Tranche B, Tranche C, Tranche D1 and Tranche D2 on a Repayment Date in respect of such Tranche without Breakage Costs, subject to a minimum prepayment amount of EUR 5 million or the total outstanding amount, whichever is smaller. Voluntary prepayments under this Clause 7.1 (General) will be applied first to Tranche D2, then to Tranche D1, then to Tranche C, then to Tranche B (in reduction of Sub-Tranche B1 and then Sub-Tranche B2 and then Sub-Tranche B3) then to Tranche A and will be applied pro rata over the remaining instalments of the respective Tranche and/or Sub-Tranche. The Borrower may, subject to paying Breakage Costs, where applicable, at any time following the Scheduled First Repayment Date, by submitting at least fifteen (15) Business Days in advance a written and

6.5.2

6.6

40 irrevocable notice thereof, repay on a Repayment Date any outstanding amounts under Tranche E in whole or in part. 7.2 Prepayment of First Repayment The Borrower may, by giving not less than seven (7) Business Days prior irrevocable and written notice to the Agent, prepay all or from time to time any part of the First Repayment prior to the Scheduled First Repayment Date. Such prepayment must fall on the last day of an Interest Period relating to one or more Advances having an aggregate principal amount at least equivalent to the amount of such prepayment. 7.3 Prepayment for meeting of EU-Equity Test The Borrower shall have the right, effective on the first day of any Interest Period commencing within 18 months after Acceptance, to prepay any amount outstanding under Tranche A by drawing an equivalent amount from the Equity Reserve Account or, if the balance standing to the credit of such account is insufficient for the purpose, by drawing an amount of up to EUR 5 million under Tranche D2 to the extent necessary to meet the EU-Equity Test. The Borrower shall give the Agent at least ten (10) Business Days prior written notice, specifying the principal amount outstanding under Tranche A to be prepaid, and the amount to be drawn under the Equity Reserve Account or, as the case may be, Tranche D2. Any such prepayment made by the Borrower shall satisfy rateably the remaining obligations of the Borrower to repay Tranche A. 7.4 Prepayment of Tranche A2 As of (and including) the Repayment Date falling on 30 September 2009, any surplus standing to the credit of the Proceeds Account after application in accordance with Clause 9.4.3(a)(i) to 9.4.3(a)(xi)(Proceeds Account) on a Repayment Date shall be applied on the Business Day following that Repayment Date in prepayment of Tranche A2 until Tranche A2 has been prepaid in full. 7.5 Scope of Prepayment All prepayments will be made together with accrued interest on the amount prepaid and all other amounts, if any, owing by the Borrower to the Lenders hereunder. 7.6 Notice of Prepayment Any notice of prepayment given by the Borrower pursuant to this Clause [] is irrevocable and will specify the date upon which such prepayment is to be made and the amount of such prepayment. The Agent will notify the Lenders promptly of receipt of any such notice.

41 7.7 No Other Voluntary Prepayments The Borrower will not voluntarily prepay all or any part of any Advances except at the times and in the manner expressly provided for in this Agreement. 7.8 No Re-Borrowing The Borrower will not be entitled to re-borrow any prepaid amount. 8. 8.1 8.1.1 8.1.2 8.2 CANCELLATION General The Borrower may, by giving to the Agent not less than fifteen (15) days prior written notice to that effect, without premium or penalty, cancel the whole or any part of the undrawn Commitments under any Tranche. Any notice of cancellation given by the Borrower pursuant to this paragraph will be irrevocable and specify the date upon which such cancellation is to be made and the amount of such cancellation. End of Availability Period; End of Period for first Advance The unutilised portion (if any) of the Facility will automatically be cancelled at close of business on the last day of the Availability Period or, if the first Advance has not been made hereunder on or before the date falling three months after the date hereof, on such later date unless the Agent acting on the instructions of all Lenders otherwise notifies the Borrower in writing. 8.3 No Re-borrowing Cancelled amounts are not available for re-borrowing. 8.4 Reduction of Commitments Any cancellation will reduce the Lenders Commitments proportionately across the relevant Tranches. 9. 9.1 9.1.1 PAYMENTS Disbursement Account The Borrower will open a disbursement account with the Agent at the latest at Financial Close, such account to be pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 7 (Form of Account Pledge Agreement). The Disbursement Account will be used to deposit (a) amounts which are disbursed under the Facility (Tranche E) (unless otherwise provided for in Clause 9.3.2 to 9.3.4),

9.1.2

42 (b) (c) (d) (e) amounts which are provided by the Shareholders as Shareholder Contributions up to Acceptance, Start-Up Cash Flows to the extent they do not exceed the budgeted amount therefore as set out in the Base Case delivered pursuant to Schedule 2 (Conditions for the First Drawdown), paragraph 9, material loss or damage insurance proceeds received prior to Acceptance which will be applied in making good the related loss; and delayed start-up or business interruption insurance proceeds and/or any delay liquidated damages under the EPC Contract received, in either case, prior to Acceptance which will be applied first in or towards any increased costs and expenses incurred by the Borrower as a result of the related delay.

9.1.3

Save as otherwise specifically provided herein, the Borrower is entitled to apply any moneys standing to the credit of the Disbursement Account exclusively, and, in the case of a continuing Event of Default, only with the Agents prior written consent, in or towards payment of all due and payable Project Costs. Any amount remaining on the Disbursement Account after Acceptance, except for amounts to be used for the payment of PostAcceptance Costs, shall be transferred by the Borrower on to the Revenue Account. Proceeds Account The Borrower will open a current account (Kontokorrentkonto) with the Agent at the latest at Financial Close, such account to be pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 7 (Form of Account Pledge Agreement) (the Revenue Account). The Revenue Account will be used to collect all revenues and income generated by the Borrowers business apart from the budgeted Start-up Cash Flows as set out in the Base Case delivered pursuant to Schedule 2 (Conditions for First Drawdown) paragraph 9 and Excess Start-up Cash Flows in an amount of up to EUR 15 million. The Borrower will ensure that all payments to be made by the respective counterparties to any agreement concluded with the Borrower, apart from Shareholder Contributions, are made into the Revenue Account. The Borrower may elect to open a further account with HVB Banque Luxembourg Socit Anonyme and/or the Agent in respect of investments which may be made by the Borrower pursuant to Clause 9.2.4 (each an Investment Account, together with the Revenue Account, the Proceeds Account), such

9.1.4 9.2 9.2.1

9.2.2

9.2.3

43 accounts to be pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 8 (Form of Luxembourg Account Pledge Agreement) in respect of the Investment Account maintained with HVB Banque Luxembourg Socit Anonyme and in the form set out in Schedule 7 (Form of Account Pledge Agreement) in respect of the Investment Account maintained with the Agent. The Borrower will at its own cost provide the Agent with a legal opinion satisfactory to the Agent and issued by a reputable Luxembourg law firm in respect of, inter alia, the validity and enforceability of such Luxembourg account pledge agreement. 9.2.4 The Borrower may invest the balance standing to the credit of the Revenue Account in Permitted Investments, provided that such Permitted Investments are deposited in the Investment Account and the maturity of such Permitted Investments does not conflict with the anticipated payments to be made by the Borrower pursuant to Clause 9.4.3 (Application of Moneys on Proceeds Account). To the extent necessary to make payments in accordance with Clause 9.4.3 (Application of Moneys on Proceeds Account), the Borrower will transfer sufficient funds from the Investment Account to the Revenue Account and will liquidate any of the Permitted Investments if necessary to meet its payment obligations. Payments to or on behalf of the Borrower The proceeds of all Advances to be made to the Borrower under this Agreement will, to the extent not otherwise provided in the following Clauses 9.3.2 and 9.3.4, be made into the Disbursement Account in accordance with Clause 3.5.3. The Borrower will procure that until Acceptance all funds in respect of Shareholder Contributions will be made into the Disbursement Account. The Borrower authorises the Agent to make payments on behalf of the Borrower relating to the Financing Costs until Acceptance and costs for interest payments for Tranche A Advances during the Pre Production Period directly to the Lender having incurred such costs. The Borrower authorises the Agent to make payments on behalf of the Borrower with respect to the provision of funds to the Debt Service Reserve Account directly into the Debt Service Reserve Account. The Borrower relieves the Agent from the restrictions of 181 BGB in respect of the authority conferred upon the Agent in Clauses 9.3.2 and 9.3.3. Payments by the Borrower and the Lenders Time and Currency: Unless otherwise permitted, all payments required to be made by the Borrower to the Lenders under any Financing Document will be

9.3 9.3.1

9.3.2

9.3.3 9.3.4 9.4 9.4.1

44 made in euro to the Agent on the due date therefore not later than 10:00 a.m. If a payment is due on a day which is not a Business Day, the due date for that payment will instead be the next Business Day in the same calendar month and, if there is none, on the immediately preceding Business Day. 9.4.2 9.4.3 Set-off and Retention Rights: All payments required to be made by the Borrower to the Lenders under any Financing Document (other than the Hedging Agreements) will be made without set-off or counterclaim. Application of Moneys on Proceeds Account: (a) Priority of Payments: The Borrower is entitled to apply any moneys standing to the credit of the Proceeds Account with the exception of proceeds from Government Grants and/or VAT refunds on Project Costs applied in accordance with Clauses 6.3.9 (Repayments other than First Repayment) and 21.1.11 (Payments and Application of Payments) exclusively in the following order and, in the case of a continuing Event of Default, only with the Agents written consent: (i) first, in or towards payment of all due and payable operating costs, on-going capital costs, and Working Capital Costs as well as extraordinary costs and expenses in relation to which a payment is due and any scheduled amount then due and payable under the Hedging Agreement; second, in and towards payment of any tax payment and fee for State Guarantee then due and payable; third, in and towards payment of any unpaid costs and expenses of the Lenders, the Agent and the Security Agent due from the Borrower pursuant to Clause 27 (Costs and Expenses) and any accrued interest and fees due and payable to the Lenders hereunder, with the exception of the payments mentioned under paragraphs 9.4.3(a)(iv) to 9.4.3(a)(vii); fourth, in or towards payment of any deferred principal then due and payable to the Lenders under Tranche D2, Tranche D1, Tranche C, Tranche B and Tranche A (in that order and rateably, other than in respect of any principal deferred on the First Repayment Date where any principal relating to Tranches A and B will be repaid first); fifth, in or towards payment of any principal then due and payable to the Lenders under Tranche D2, Tranche D1 and Tranche C (in that order);

(ii) (iii)

(iv)

(v)

45 (vi) (vii) sixth, at the Final Maturity Date of Tranche E in or towards payment of any principal due and payable to the Lenders under Tranche E, but not repaid due to delays in the receipt of Government Grants and/or VAT refunds; seventh, in or towards payment of any principal then due and payable to the Lenders under Tranche B and Tranche A and the net amount of any close-out or termination sums then due and payable under the Hedging Agreements;

(viii) eighth, in or towards payment of any interest and principal due and payable under any other Permitted Financial Indebtedness (ix) (x) (xi) (xii) ninth, an amount to be retained in the Proceeds Account such that the amount retained should be of such value so that the retained balance for operational liquidity purposes always be EUR 15,000,000; tenth, but only following Acceptance in or towards any payment due and payable into the Debt Service Reserve Account in accordance with Clause 11.3 (Target Balance); eleventh, on a Repayment Date, towards repayment of amounts outstanding under Tranche E; twelfth; any surplus in or towards prepayment of Tranche A2 in accordance with Clause 7.4 (Prepayment of Tranche A2);

(xiii) thirteenth, subject to Clause 9.4.3(c)) into the Shareholders Account to include any interest payable on any Shareholder Loan. (b) Authorisation of Agent: The Borrower authorises the Agent (on behalf of the Lenders) to debit and, to the extent necessary, to liquidate any Permitted Investments previously purchased with any funds standing to the credit of the relevant account: (i) (ii) the Proceeds Account with all amounts referred to in Clause 9.4.3(a)(ii) (but only regarding the payment of fees in relation to the State Guarantee) and Clause 9.4.3(a)(iv) to 9.4.3(a)(vii) inclusive when due; and if the funds in the Proceeds Account are not sufficient to pay any amounts set out in Clause 9.4.3(a)(iv) to 9.4.3(a)(vii) inclusive, to debit the Equity Reserve Account and then the Debt Service Reserve Account with any such amount,

46 and to apply any amount so debited in payment of the relevant amounts. (c) Restricted Application: (i) Payments by the Borrower from the Proceeds Account to the Shareholders Account pursuant to Clause 9.4.3(a)(xiii) are permitted only: (1) (2) (3) (4) (5) (ii) from the time the aggregate outstanding amounts have been paid down to the Required Level; Tranche E has been repaid in full; Tranche A2 has been prepaid in full in accordance with Clause 7.4 (Prepayment of Tranche A2); subject to the absence of a continuing Event of Default or Potential Event of Default; and within a period of ten Business Days following a Repayment Date.

If the Annual Debt Service Cover Ratio at any Repayment Date is less than 1.15, the moneys available to be paid into the Shareholders Account will be retained in the Proceeds Account, provided that if the Annual Debt Service Cover Ratio (taking Available Cash Flow from Acceptance to the 31 December or 30 June next preceding the First Repayment Date) is less than 1.15 on the First Repayment Date, the Borrower may nevertheless (notwithstanding Clause 9.4.3(c)(i)(5) make payments into the Shareholders Account pursuant to Clause 9.4.3(a)(xiii) prior to the next following Repayment Date if it submits to the Agent a further calculation of the Annual Debt Service Cover Ratio (taking into account Available Cash Flow from Acceptance to the First Repayment Date) certified by its independent auditors demonstrating that its Annual Debt Service Cover Ratio at the First Repayment Date equalled or exceeded 1.15.

9.4.4

Application of Insurance Proceeds: (a) Material loss or damage insurance proceeds each below or equal to EUR 10 million until Acceptance and below or equal to EUR 5 million after Acceptance will be applied, for repairs or replacements by the Borrower.

47 (b) Material loss or damage insurance proceeds, each in excess of EUR 10 million but only up to a total of EUR 50 million until Acceptance and each in excess of EUR 5 million after Acceptance, but only up to a total of EUR 50 million will be applied, if insured damage occurs which, in the opinion of the Technical Adviser and the Wood Supply Adviser, is repairable or replaceable by application of insurance proceeds (together with any monies then available to the Borrower), directly to meet the cost of such repairs or replacements. Material loss or damage insurance proceeds (i) in excess of EUR 10 million each, but only up to EUR 50 million until Acceptance and in excess of EUR 5 million each, but only up to EUR 50 million after Acceptance, if damage occurs which, in the opinion of the Technical Adviser and the Wood Supply Adviser, is not replaceable by application of insurance proceeds (together with any monies then available to the Borrower), in excess of EUR 50 million, will be applied at the direction of the Majority Lenders. For the avoidance of doubt, the Lenders will however forward to the Borrower any insurance proceeds received by them in respect of security measures provided by the EPC Contractor pursuant to Clause 13.2 of the EPC Contract. (d) Notwithstanding the provisions of Clauses 9.4.4(a) and 9.4.4(b) and to the extent no material interests (versicherte Interessen) under the Construction/Erection All Risks Material Damage Insurance Contract of any co-insured are affected, payments by the Borrower from the Insurance Account will be permitted only if no Event of Default has occurred and is continuing unless such Event of Default would be cured by the application of such payment.

(c)

(ii)

9.4.5

Distribution of Payments: (a) Each payment made to the Agent by the Borrower pursuant to this Clause 9 will be promptly distributed proportionately by the Agent among the Lenders entitled thereto. Each such distribution will be made in like funds as and for value the date on which such payment is received by the Agent. The previous paragraph applies mutatis mutandis to payments made to the Agent by third parties under any Financing Document.

(b)

48 10. 10.1 EQUITY RESERVE ACCOUNT Maintenance The Borrower will open an interest bearing equity reserve account at the latest at the First Repayment Date or earlier if required so that Excess Start-Up Cash Flows can be deposited into it as they arise. 10.2 Purpose The Equity Reserve Account will be used for securing the Lenders claims under the Financing Documents in priority to the funds on the Debt Service Reserve Account. 10.3 ERA-Balance The Equity Reserve Account will be funded by Excess Start-Up Cash Flows and by the amount determined in accordance with Clause 2.6.2 (b) (vi) of the Shareholders Undertaking Agreement in accordance with the provisions of the Shareholders Undertaking Agreement. 10.4 Set-off The Agent is entitled to set off the credit balance in the Equity Reserve Account against any obligations of the Borrower due and payable under the Financing Documents to the Lenders if the Borrower does not, does not on time or does not entirely perform such obligations. 10.5 10.5.1 Investments The Borrower may elect to open a further account with HVB Banque Luxembourg Socit Anonyme and/or the Agent in respect of investments which may be made by the Borrower pursuant to Clause 10.5.2 (the ERA Investment Account), such account to be pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 8 (Form of Luxembourg Account Pledge Agreement) in respect of the ERA Investment Account maintained with HVB Banque Luxembourg Socit Anonyme and in the form set out in Schedule 7 (Form of Account Pledge Agreement) in respect of the ERA Investment Account maintained with the Agent. The Borrower will at its own cost provide the Agent with a legal opinion satisfactory to the Agent and issued by a reputable Luxembourg law firm in respect of, inter alia, the validity and enforceability of such Luxembourg account pledge agreement. Any interest or other income earned on balances on the Equity Reserve Account may, so long as: (a) the balance standing to the credit of the Debt Service Reserve Account is at least equal to the then Target Balance; and

49 (b) no Event of Default or Potential Event of Default has occurred and is then continuing,

be paid into the Shareholders Account. 10.5.2 The Borrower may invest the balance standing to the credit of the ERA Investment Account in Permitted Investments, provided that such Permitted Investments are deposited in the ERA Investment Account and the maturity of such Permitted Investments does not conflict with any anticipated payments to be made by the Borrower out of the ERA Investment Account. To the extent necessary to make any payments out of the ERA Equity Account, the Borrower will transfer sufficient funds from the ERA Investment Account to the ERA Equity Account and will liquidate any of the Permitted Investments if necessary to meet its payment obligations. DEBT SERVICE RESERVE ACCOUNT Maintenance The Borrower will open an interest bearing debt service reserve account at the latest on 30 September 2005. 11.2 Purpose The Debt Service Reserve Account will be used for securing the Lenders claims under the Financing Documents. 11.3 Target Balance The target balance to be maintained on the Debt Service Reserve Account prior to the First Repayment Date is EUR 57 million and thereafter such amount as is sufficient to service the amounts due and payable under the Facility during the following twelve (12) months, taking into consideration any amounts held in USD in accordance with Clause 11.5 (Currency) (the Target Balance). Any balance on the Equity Reserve Account from time to time will count towards the Target Balance. The Debt Service Reserve Account will be funded through (a) (b) (c) a drawdown under Tranche C, the amount determined in accordance with Clause 2.6.2 (iii) of the Shareholders Undertaking Agreement, out of the Proceeds Account taking into consideration Clause 9.4.3(a) (Priority of Payments).

11. 11.1

When determining the twelve (12) months debt service, the Agent will estimate the costs of interest on the basis of the interest rates then currently payable on outstanding Advances (taking into consideration the Hedging Agreements entered into for the hedging of the interest risks and the hedging of the currency

50 rate risk related to the debt service of the Borrower) and that repayments are made only according to Clauses 6.1 (General) to 6.3 (Repayments other than First Repayment). The Agent will notify the Borrower of the Target Balance at the latest two (2) Business Days before the 30 September 2005 and each subsequent Repayment Date following the notification on such date pursuant to Clause 4.4 (Notification). 11.4 Set-off The Agent is entitled to set off the credit balance in the Debt Service Reserve Account against any obligations of the Borrower due and payable under the Financing Documents to the Lenders if the Borrower does not, does not on time or does not entirely perform such obligations. 11.5 Currency The Borrower may elect to hold the moneys on the Debt Service Reserve Account in USD up to an amount corresponding to the notional amount of interest payments and payments of principal with regard to the EUR/USD cross-currency-swaps concluded in accordance with the Hedging Strategy if (a) the respective USD-account is held with the Agent or HVB Banque Luxembourg Socit Anonyme, and (b) the USD account is pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 8 (Form of Luxembourg Account Pledge Agreement) in respect of the USDaccount maintained with HVB Banque Luxembourg Socit Anonyme and in the form set out in Schedule 7 (Form of Account Pledge Agreement) in respect of the USD-account maintained with the Agent, and (c) the Agent is provided with a legal opinion satisfactory to the Agent and issued by a reputable Luxembourg law firm in respect of, inter alia, the validity and enforceability of such account pledge agreement. The Agent will notify the Borrower of the minimum amount of the Debt Service Reserve Account that may be held in USD from time to time. 11.6 Investments The Borrower may elect to open a further account with HVB Banque Luxembourg Socit Anonyme and/or the Agent in respect of investments which may be made by the Borrower pursuant to Clause 11.6.1 (the DSRA Investment Account), such account to be pledged by the Borrower in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 8 (Form of Luxembourg Account Pledge Agreement) in respect of the DSRA Investment Account maintained with HVB Banque Luxembourg Socit Anonyme and in the form and substance of the Account Pledge Agreement between the Borrower and the Security Agent as of the date hereof in respect of the DSRA Investment Account maintained with the Agent. The Borrower will at its own cost provide the Agent with a legal opinion satisfactory to the Agent and issued by a reputable Luxembourg law firm in

51 respect of, inter alia, the validity and enforceability of such Luxembourg account pledge agreement. Any balance on the Debt Service Reserve Account in excess of the Target Balance from time to time may be paid into the Revenue Account. 11.6.1 The Borrower may invest the balance standing to the credit of the DSRA Investment Account in Permitted Investments, provided that such Permitted Investments are deposited in the DSRA Investment Account and the maturity of such Permitted Investments does not conflict with any anticipated payments to be made by the Borrower out of the DSRA Investment Account. To the extent necessary to make any payments out of the Debt Service Reserve Account, the Borrower will transfer sufficient funds from the DSRA Investment Account to the Debt Service Reserve Account and will liquidate any of the Permitted Investments if necessary to meet its payment obligations. ILLEGALITY If at any time it is or becomes unlawful or impracticable, by reason of any adoption, amendment or change of official application or interpretation of any law or regulation or any directive, request or requirement (whether or not having the force of law) from any central bank or other fiscal, monetary or other authority, having jurisdiction over any Lender for such Lender to fund, or to allow to remain outstanding, all or any of its participations in Advances made or to be made, or to maintain its Commitment, or to charge or receive interest or fees hereunder at the rate applicable, such Lender will promptly after becoming aware thereof notify the Borrower through the Agent and: 12.1 12.2 the Commitment of such Lender under the Facility will forthwith be reduced to zero; and the Borrower will prepay to such Lender its participation in any relevant Advances together with accrued interest and all other amounts owing to such Lender hereunder on the next following date on which interest is payable on the relevant Advance, or on such earlier date as such Lender certifies to be necessary having regard to the relevant circumstances. INCREASED COSTS Increased Costs Where any Lender certifies that, as a result of the adoption or amendment of or any change of official application or interpretation of any law, regulation, directive, request or requirement (being legally binding or, if not legally binding to the extent that noncompliance therewith would be impracticable) (including without limitation any law, regulation or requirement relating to taxation, reserve assets, special deposits, cash ratio, liquidity or capital adequacy

12.

13. 13.1

52 requirements, but not including any law, directive, request, regulation or requirement as in effect on the date hereof or already adopted but not yet in force on the date hereof): 13.1.1 13.1.2 13.1.3 13.1.4 13.1.5 such Lender or any of its affiliated companies incurs a cost in relation to such Lender being a party to and/or performing its obligations and/or exercising its rights under this Agreement; the cost to such Lender of making available or maintaining or funding its participation in any Advance or maintaining its Commitment is increased; any sum received or receivable by such Lender under or in connection with this Agreement is reduced; the effective return of such Lender in connection with this Agreement is reduced; or such Lender becomes liable to make any payment on account of tax or otherwise (except for taxes imposed on its net income or net worth) or is required to forego any interest or other return on or calculated by reference to the amount of any sum received or receivable by it under or in connection with this Agreement, then in any such case: (a) (b) a Lender intending to make a claim pursuant to the above will notify the Borrower through the Agent setting forth in reasonable detail the basis for such claim; the Borrower will pay to the Agent for the account of such Lender upon demand of the Agent such amounts as are certified by such Lender to be necessary to fully compensate such Lender for such cost, reduction, payment or foregone interest or other return, after reduction of benefits which accrue to such Lender directly or indirectly because of such event and reasonably allocable to such costs; and the Borrower may, by giving irrevocable notice to the Agent, prepay to such Lender its participation in each Advance together with accrued interest and all other amounts owing to such Lender hereunder on the last day of the then current Interest Period for that Advance, or on such earlier date as such Lender certifies to be necessary having regard to the relevant circumstances.

(c)

13.2

For the avoidance of doubt, this Clause 13 shall not apply in case of a removal of the guarantors liability (Gewhrtrgerhaftung) regarding German public

53 savings banks, state banks and public credit institutions of the Federal Republic of Germany and its states. 14. 14.1 14.1.1 14.1.2 TAXES All payments by the Borrower under this Agreement will be made without any deduction or withholding on account of any taxes unless the Borrower is required by law to make such deduction or withholding, in which case the Borrower will: ensure that the deduction or withholding does not exceed the minimum amount legally required; and forthwith pay to the Lenders such additional amounts so as to ensure that the amount received by each Lender will equal the full amount which would have been received by it had no deduction or withholding been made, provided that the foregoing obligation to pay such additional amounts will not apply in respect of: (a) (b) any taxes measured or imposed upon the overall net income or the overall capital or net worth of any Lender or its applicable lending office, or any branch or affiliate thereof, and all franchise taxes, branch taxes, or taxes on doing business; or any taxes that would not have been imposed but for the failure of any Lender to comply with any certification, identification, information, documentation or other reporting requirement, if compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or reduction in the rate of, such taxes.

14.2 14.3

The Borrower will pay all stamp, recording or similar taxes payable in respect of the execution, delivery and enforcement of the Transaction Documents promptly when due. If any Lender or the Agent is obliged to make any payment on account of taxes referred to in Clause 14.2 or if any other additional tax burdens occur in connection with the Transaction Documents the Borrower will indemnify each Lender and the Agent from any payment on account of such taxes. If, in the good faith determination of a Lender: (a) such Lender has obtained a tax refund or tax allowance or tax credit as a result of, and directly attributable to, an additional payment of the Borrower under Clause 14.1; and

14.4

54 (b) it can make a lawful payment to the Borrower in an amount leaving it in no better or worse position than it would have been had the payment by the Borrower been made without any deduction or withholding,

then after actual receipt or usage of such tax refund or tax allowance or tax credit it will pay such amount to the Agent for the account of the Borrower. The Lender will make commercially reasonable efforts where permitted by law to claim a refund or allowance or credit, but will not be obliged to disclose any information as to its tax situation to the Borrower or to any other person acting on the Borrowers behalf. 14.5 If the Borrower is required to make any payment to a relevant tax or other authority for which the Borrower has made a deduction or withholding under Clause 14.1, the Borrower will pay the full amount of the deduction or withholding within the applicable periods to the relevant authority and will deliver to the Agent for the account of each Lender concerned as soon as reasonably practical following the making of such payment the original receipt or a certified copy thereof and/or other evidence reasonably satisfactory to such Lender that the payment has been made. MITIGATION Mitigation Each Finance Party shall, in consultation with the Borrower, take all reasonable steps to mitigate any circumstances which arise and which would result in any amount becoming payable under or pursuant to, or cancelled pursuant to, any of Clause 12 (Illegality), Clause 13 (Increased Costs) or Clause 14 (Taxes), including, but not limited to, transferring its rights and obligations under the Financing Documents to another affiliate or Facility Office. Clause 15.1.1 does not in any way limit the obligations of the Borrower under the Financing Documents. Limitation of Liability The Borrower shall indemnify each Finance Party for all costs and expenses reasonably incurred by that Finance Party as a result of steps taken by it under Clause 15.1. A Finance Party is not obliged to take any steps under Clause 15.1 if, in the opinion of that Finance Party (acting reasonably), to do so might be prejudicial to it.

15. 15.1 15.1.1

15.1.2 15.2 15.2.1 15.2.2

55 16. 16.1 REPRESENTATIONS AND WARRANTIES Representations and Warranties The Borrower represents and warrants to each of the Arranger, Agent, Security Agent and Lenders that: 16.1.1 Status: it is a limited liability company duly organised and validly existing under the laws of the Federal Republic of Germany, has the capacity to sue and be sued in its own name and has the corporate power and authority to own its assets and to carry on its business as currently conducted and the Project; Powers and Authority: it has the corporate power and authority to enter into and perform its obligations under the Transaction Documents and has taken all necessary corporate and other action required to authorise the execution, delivery and performance of the Transaction Documents; Legal Validity: the Transaction Documents that have been executed by the Borrower on or before the date as of which this representation is made or repeated, create legal, valid and binding obligations of the Borrower and the other parties thereto (apart from the Lenders in their various capacities) enforceable in accordance with the terms and conditions of the respective agreements and such agreements are in proper form for enforcement in the courts of the Federal Republic of Germany, subject to applicable bankruptcy, insolvency, liquidation or other laws affecting creditors rights generally; Non-Conflict: the entry into and the execution and performance of the Transaction Documents by the Borrower do not and will not conflict: (a) (b) (c) 16.1.5 16.1.6 in any material respect with any agreement, mortgage, bond or other instrument or treaty to which it is a party or which is binding upon it or any of its assets which could reasonably be expected to have a Material Adverse Effect; with its constitutive documents; or with any applicable law in a manner which could reasonably be expected to be materially adverse in relation to its ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents;

16.1.2

16.1.3

16.1.4

No Event of Default: no Event of Default or Potential Event of Default has occurred and is continuing; Authorisations: except for such Authorisations not obtainable by the date as of which this representation is made or repeated, as to which the Borrower reasonably believes that they will be obtained as and when necessary for the

56 Project, all authorisations listed in Appendix 3, Exhibits 4.4 and 13 of the EPC Contract and any other material Authorisations required for the Project, including, without limitation, in connection with the performance by each of the parties of their obligations under the Infrastructure Agreement, or the performance of its obligations under the Transaction Documents are in full force and effect, have not been revoked or annulled by a first instance decision, to the best of the Borrowers knowledge and after inquiry with the relevant authority, have not been contested as a result of which the direct enforceability of such Authorisation has been suspended until a final decision and it has complied with the terms and conditions of such Authorisations in all material respects; and such Authorisations have not been modified or amended and there are no proposals to amend or modify the same unless such modification or amendment is not materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents; 16.1.7 Further Authorisations: to the best of its knowledge, having made due inquiry, it knows of no reason why any Authorisation required for the Project or the performance of its obligations under the Transaction Documents (i) will not be granted when applied for or requested, or (ii) will be withdrawn (zurckgenommen) or revoked (widerrufen); Financial Statements: its most recent audited consolidated annual financial statements: (a) (b) were prepared in accordance with accounting principles generally accepted in the Federal Republic of Germany and consistently applied; disclose all material liabilities (contingent or otherwise) and all unrealised or anticipated losses of any member of the Group required to be disclosed by accounting principles generally accepted and (except as disclosed therein) consistently applied in the Federal Republic of Germany; and give a true and fair view of the financial condition and operations of the Group during the relevant period.

16.1.8

(c)

Its financial year-end and the financial year end of the Group is 31 December; 16.1.9 No Material Adverse Change: since the date as at which the latest audited consolidated financial statements were stated to be prepared there has been no material adverse change in its business or financial condition (or the business or consolidated financial condition of the Group) apart from changes affecting the industry generally;

57 16.1.10 Taxation: each member of the Group has duly and punctually paid and discharged all taxes, assessments and governmental charges imposed upon it or its assets within the time period allowed therefore without imposing tax penalties, or creating any encumbrance having priority to the Lenders or the Security (save to the extent payment thereof is being contested in good faith by the relevant member of the Group and where payment thereof can lawfully be withheld and would not result in any encumbrance having priority to the Lenders or the Security); Claims Pari-Passu: the claims of the Lenders against it under the Financing Documents to which it is a party will rank at least pari passu with the claims of all its unsecured and unsubordinated creditors save for those preferred solely as a matter of law or resulting from those land charges which will be released following the first Advance; No Insolvency or Winding-Up: neither the Borrower or any of its material subsidiaries has taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against the Borrower or any such subsidiary for the opening of insolvency proceedings against it or its winding-up, dissolution, administration or reorganisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any or all of its assets or revenues; No Material Proceedings: no action or administrative proceeding of or before any court, arbitrator or agency (including, but not limited to, investigative proceedings), which is materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents, has been started or to the best of its knowledge threatened against any member of the Group or its assets, nor are there to the best of its knowledge any circumstances likely to give rise to any such action or proceedings which, if resolved adversely could reasonably be expected to be materially adverse to its ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents; No Material Defaults: it is not in breach of or in default under any agreement to which it is a party or which is binding on it or any of its assets in a way which is materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents;

16.1.11

16.1.12

16.1.13

16.1.14

58 16.1.15 Project Contracts: (i) all existing Project Contracts are or will be in full force and effect at the time of the first drawdown under this Agreement (except for the EPC Contract, which will be in full force and effect once the down payment under the EPC Contract has been made), (ii) no other material Project Contracts have been concluded, which have not been disclosed to the Agent, (iii) the Borrower has no notice of any material breaches by any contracting party under the Project Contracts, and (iv) with regard to Project Contracts, which will not be available before the day on which this representation and warranty is made or repeated, the Borrower assumes that these are produced as soon as and to the extent that they may become necessary for the Project; Information: all financial projections contained in the Financial Model were prepared or made in good faith and on the basis of assumptions believed by the Borrower to be reasonable; Environmental Compliance: it has duly performed and observed in all material respects all Environmental Law, Environmental Permits and all other material covenants, conditions, restrictions or agreements including in connection with any contamination, pollution, emissions, waste, release or discharge of any toxic or hazardous substance where failure to do so is materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents; Environmental Claims: no Environmental Claim has been commenced against it or its officers, or is to the best of its knowledge threatened against it or its officers materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents; Relevant Substances: no substance which is capable of causing harm to any living organism or damaging the environment, public health or welfare has been deposited, disposed of, kept, treated, imported, exported, transported, processed, manufactured, used, collected, sorted or produced at any time or is present in the environment (whether or not on property owned, leased, owned, occupied or controlled by any member of the Group) in circumstances which are likely to result in any liability of any member of the Group under Environmental Laws which is materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents; Ownership of Assets: the Borrower is the sole owner of or fully entitled to use all of its assets and is the legal and beneficial owner of its assets subject only to the Security Agreements and other Permitted Encumbrances;

16.1.16 16.1.17

16.1.18

16.1.19

16.1.20

59 16.1.21 16.1.22 Easements: it has all easements, rights of way, rights of ingress and egress necessary for the construction and operation of the Project, except for those as to which it has no reason to believe will not be in place when so necessary; Encumbrances: save for Permitted Encumbrances no encumbrance exists over all or any of the assets of any member of the Group and the execution of the Transaction Documents to which it is a party and the exercise by it of its rights thereunder will not result in the existence or imposition of nor oblige any member of the Group to create any encumbrance (save for Permitted Encumbrances) in favour of any person over any of its or any member of the Groups assets; Indebtedness: on the day of signing this Agreement, the Borrower has no indebtedness save for: (a) (b) (c) (d) (e) (f) (g) (h) 16.1.24 Permitted Financial Indebtedness (except for indebtedness named under paragraph (e) of the definition of Permitted Financial Indebtedness); indebtedness for Development Costs and other similar costs, not exceeding EUR 1.3 million, envisaged in the Investment and Financing Plan and incurred but not yet invoiced or paid); indebtedness under the Pre-Activity Agreement (as defined under the EPC Contract) not exceeding EUR 4,210,000 plus VAT; and indebtedness to the former shareholders, Kvaerner plc in the amount of EUR 478,687 and Thyssen Rheinstahl Technik Projektgesellschaft mbH in the amount of EUR 2,648,000; indebtedness for the payment of the second purchase price instalment for the Site towards ALTMARK INDUSTRIEPARK AG in the amount of EUR 1,755,686 plus VAT and for liabilities under the tenancy agreement dated 16 May 2002; further indebtedness to the Shareholders and ALTMARK INDUSTRIEPARK AG to be waived at the latest on the day after Financial Close; indebtedness for the ongoing payments which become due at the date the guarantee decision is delivered; and further indebtedness not exceeding EUR 100,000;

16.1.23

Tax Grants: it is not aware of any reason why the Tax Grants (Investitionszulagen) should not be paid in the amounts assumed in the Base

60 Case and no encumbrances exist over any of its claims thereunder or rights and title thereto; 16.1.25 Investment Incentives and State Guarantee: the Investment Incentives (GA-Zuschuss) given by the State of Sachsen-Anhalt and the State Guarantee are legal, valid and binding obligations of the State Guarantor and the Guarantors respectively and no encumbrances (other than as contemplated hereby) exist over any of its claims under the Investment Incentives (GA-Zuschuss) or rights and title thereto; EU-Decision: the EU-Decision is in full force and effect, it has complied with the terms and conditions of the EU-Decision in all respects, and the EU-Decision has not been modified or amended in any material respect, withdrawn or revoked, since the date of its issuance, and there are no proposals known to the Borrower to amend or modify in any material respect, withdraw or revoke the same, nor is it the subject of any existing challenge by any third party in connection with which the EU-Decision has been suspended pending the outcome of any appeal; Intellectual Property: it has, or as the case may be, will have available all material Intellectual Property Rights and is not in material breach of or has not infringed in any material respect any Intellectual Property Rights of any other person; Insurances: all insurances required to be in place, as provided in the Minimum Insurance Schedule, are in full force and effect and all premia then due in respect thereof have been paid in full or will be paid in full out of the proceeds of the next following Advance; No Deduction or Withholdings: under the laws of its jurisdiction of incorporation in force at the date hereof, it will not be required to make any deduction or withholding from any payment it may make hereunder; Shareholding: upon the making of the Capital Contributions pursuant to Clause 2.6.1 of the Shareholders Undertaking Agreement, the Share Capital will be EUR 15,000,000 and the Shareholders will be the owner of the following Shares
Number of Shares Nominal Value of Shares Percentage

16.1.26

16.1.27 16.1.28 16.1.29 16.1.30

Shareholder

SP Holding

EUR 27,360 EUR 27,360 EUR 9,160 EUR 30,320 EUR 9,442,800

63,58%

61
Shareholder Number of Shares Nominal Value of Shares Percentage

RWE-IN

EUR 51,130 EUR 31,100 EUR 38,970 EUR 4,291,800 EUR 27,360 EUR 12,940 EUR 1,009,700

29,42%

MFC IH

7%

and no person will have any right to subscribe for any additional Shares in the Share Capital; 16.1.31 Liability vis--vis Former Shareholders: it has no liabilities or outstanding obligations to any of its former shareholders other than those to be paid to (i) (ii) Kvaerner plc in the amount of EUR 478,687, Thyssen Rheinstahl Technik Projektgesellschaft mbH in the amount of EUR 2,648,000 for compensation payments and EUR 570,646 for ancilliary costs in relation to the purchase of the Site for which Thyssen Rheinstahl Technik GmbH and its legal successor Thyssen Rheinstahl Technik Projektgesellschaft mbH have provided funds; and ALTMARK INDUSTRIEPARK AG in the amount of EUR 1,755,686 plus VAT purchase price in relation to the Site, EUR 546,794 for ancilliary costs in relation to the purchase of the Site for which ALTMARK INDUSTRIEPARK AG has provided funds to the Borrower, and the lease agreement dated 16 May 2002 between the Borrower and ALTMARK INDUSTRIEPARK AG all of which (except for the obligations under the lease agreement) will be repaid under the first Advance;

(iii)

16.1.32 16.1.33 16.1.34

Assurance of Overall Financing: to the best of its knowledge there is an Assurance of Overall Financing; Accounts: the Borrower has no accounts other than those established or to be established in accordance with this Agreement; Subsidiaries and Affiliates: it does not have any subsidiaries, other than the Permitted Subsidiaries, or any investments in any other person other than Permitted Investments;

62 16.1.35 Utilities and Facilities: all utility services, means of transportation, facilities and other materials necessary for the importation, construction, installation, and operation of the Project (including, without limitation, gas, wood receiving, pulp dispatching, fuel, electrical, water supply, storm drainage, rail, port, telephone and sewage services and facilities, as necessary) are or, to the best of the Borrowers knowledge after due inquiry, will be available to the Project (in the case of utility services, at or within the boundaries of the Site) as soon as required for the construction, operation, testing and start-up of the Project, and to the extent necessary or desirable, arrangements have been made on commercially reasonable terms for such services, means of transportation, facilities and other materials, except for such arrangements as are not required to be made as of the date hereof by the applicable Transaction Documents, with respect to which arrangements the Borrower has no reason to believe such arrangements will not be made at the time so required; Adequate Facilities: other than those services to be performed and materials to be supplied that can reasonably be expected to be commercially available as and when required or those described in Clause 16.1.35 (Utilities and Facilities) which are not yet available, the services to be performed, the facilities and materials to be supplied and the property interests and other rights granted pursuant to the Project Contracts comprise all of the property interests and other rights necessary to secure any right or privilege which is material to the acquisition, development, construction, installation, completion, operation and maintenance of the Project in accordance in all material respects with the Transaction Documents and all Authorisations required for the Project or the performance of its obligations under the Transaction Documents; Repetition Each of the representations and warranties pursuant to Clause 16.1 (Representations and Warranties) (other than Clause 16.1.29) will be repeated by the Borrower by reference to the facts and circumstances then existing in each Drawdown Request and on the first day of each Interest Period. 17. 17.1 FINANCIAL CALCULATIONS (WIRTSCHAFTLICHKEITSBERECHNUNGEN) AND FINANCIAL COVENANTS Annual Debt Service Cover Ratio The Borrower shall ensure that the Annual Debt Service Cover Ratio does not fall below 110 per cent. in the period from 31 December 2011 to 31 December 2013 and 120 per cent. at any time thereafter.

16.1.36

16.2

63 17.2 Senior Debt/EBITDA Cover Ratio The Borrower shall ensure that the Senior Debt/EBITDA Cover Ratio does not exceed the ratios set out in the following table:
Testing Date Ratio

31 December 2009 30 June 2010 31 December 2010 30 June 2011 31 December 2011 30 June 2012 31 December 2012 30 June 2013 31 December 2013 30 June 2014 31 December 2014 30 June 2015 31 December 2015 30 June 2016 31 December 2016 30 June 2017 17.3 Ratio default cure right (a)

13.0 11.0 11.0 7.5 7.5 7.0 6.5 6.5 6.0 5.5 5.5 5.0 5.0 5.0 4.5 4.5

If, on any relevant date, the required ratios pursuant to Clause 17.1 (Annual Debt Service Cover Ratio) or 17.2 (Senior Debt/EBITDA Cover Ratio) is or would, but for paragraph (c) below, be breached (the Ratio Default), the Borrower may, within twenty Business Days of the breach being notified to the Borrower by the Agent, cure the Ratio Default by means of an Equity Cure Measure. The right to cure pursuant to paragraph (a) above may not be exercised more than once in each fiscal year of the Borrower for each of the ratios pursuant to 17.1 (Annual Debt Service Cover Ratio) or 17.2 (Senior Debt/EBITDA Cover Ratio). Subject to paragraph (b) above, no Event of Default shall arise in respect of any breach of the ratios pursuant to Clause 17.1 (Annual Debt Service Cover Ratio) or 17.2 (Senior Debt/EBITDA Cover Ratio), as the case may be, until the twenty Business Days period referred to in paragraph (a) above has expired.

(b) (c)

64 17.4 Method of Calculation of Annual Debt Service Cover Ratio The initial projected Annual Debt Service Cover Ratios are set out in the Base Case delivered pursuant to paragraph 9 of Schedule 2 (Conditions for the First Drawdown). 17.5 Recalculation The Borrower will calculate the Annual Debt Service Cover Ratio and the Senior Debt/EBITDA Cover Ratio on each Repayment Date and on the basis of the financial statements most recently delivered to the Agent pursuant to Clauses 18.1.1(a), 18.1.1(b) or as the case may be Clause 9.4.3(c)(ii). The Borrower will prepare a certificate of compliance, which shall be executed on behalf of the Borrower, in respect of the financial covenants in form and substance satisfactory to the Agent and containing details of the calculation of by the Borrower of the financial covenants enabling the Agent to ascertain compliance by the Borrower with the financial covenants. 17.6 Adjustments to Financial Model The Borrower will provide information reasonably requested by the Agent for the updating of the Financial Model. 18. 18.1 18.1.1 INFORMATION REQUIREMENTS Financial Statements The Borrower will deliver to the Agent and C&L in sufficient copies for each of the Lenders: (a) as soon as available, but no later than 90 days after the end of its financial year: (i) the balance sheet, profit and loss statement and cash flow statement for the Borrower and (on a consolidated basis) for the Group for such financial year, audited by a recognised firm of independent auditors licensed to practise in the Federal Republic of Germany, together with a statement from the Borrower reconciling such financial statements with the budgeted yearly accounts and explaining all material deviations of such financial statements from the budgeted yearly accounts referred to in Clause 18.3 (Project Budget); the related auditors report; and a confirmation by such auditors that all transactions effected by the Borrower with Related Parties in such financial year have been made on terms no less beneficial to the Borrower than those obtainable on an arms length basis;

(ii) (iii)

65 (b) as soon as available, but no later than 60 days after the end of its financial half year, the balance sheet, profit and loss statement and cash flow statement for the Borrower and (on a consolidated basis) for the Group for such period which will be in a form reasonably acceptable to the Lenders and will be accompanied by data necessary for the calculation of the Annual Debt Service Coverage Ratio, certified by its independent auditors; and no later than thirty (30) days after the end of each calendar quarter, a management commentary as to, inter alia, the Borrowers and the Groups performance during such calendar quarter and any material developments or proposals affecting the Borrower and the Group or its business.

(c)

18.1.2

The Borrower will ensure that each set of accounts delivered by it pursuant to this Clause 18 is prepared on the same basis as was used in the preparation of its Original Financial Statements or, in the case of a divergence therefrom, will be accompanied by a statement explaining each changed accounting principle and its effects. The Borrower will at the request of the Agent require and authorise its auditors to discuss with the Lenders matters reasonably related to or arising out of the annual audit of the Borrower by such auditors. The Borrower will provide the financial information required to be provided to the Lenders under this Clause 18 in the German and the English language. Compliance Certificates Each of the financial statements delivered by the Borrower under Clause 18.1.1(a) and 18.1.1(b) will be accompanied by a compliance certificate signed by two directors of the Borrower certifying that all payments effected by the Borrower out of the Proceeds Account were in compliance with the priorities set out in Clause 9.4.3 (Application of Moneys on Proceeds Account).

18.1.3 18.1.4 18.2

18.3 18.3.1

Project Budget The Borrower will deliver to the Agent, with sufficient copies for each of the Lenders, starting from the calendar year in which the Start-Up is expected to occur as soon as available, but no later than 30 days prior to the beginning of the relevant financial year, the budgeted balance sheet, the budgeted profit and loss statement and the budgeted cash flow statement for the next following financial year and the Borrower will be available for a meeting with the Lenders within two (2) weeks thereafter, to discuss such documents with the Lenders. Such statements will forecast the costs of maintenance, overhauls and Capital

66 Expenditure for the next following three years in each case for the Borrower and for the Group. 18.3.2 Following review by the Agent and if necessary the Technical Adviser and the Wood Supply Adviser, if the Agent is satisfied with the information supplied pursuant to Clause 18.3.1, it will confirm the same to the Borrower. If the Technical Adviser, the Wood Supply Adviser or the Agent is not satisfied with such information, the Borrower shall make such amendments to such documents as may be reasonably required by the Technical Advisor and/or Wood Supply Adviser and/or the Agent. Reports during Construction Period During the Construction Period the Borrower will provide the Agent, the Technical Adviser and the Wood Supply Adviser with the following information within fifteen (15) days of the last day of each calendar quarter: (a) (b) (c) quarterly construction progress reports in accordance with the conditions set out in Schedule 14 (Sample Table of Content regarding Quarterly Construction Progress Reports); and quarterly reports on the development of the costs budgeted for construction, including a confirmation or a proposal for a revised version of the Project Budget including a budgeted cost/actual cost comparison; and any material reports and other material notifications issued by the EPC Contractor and/or any of its sub-contractors to the Borrower in respect of the Project, including but not limited to the Detailed Program and any work around plan (both as described in Clauses 8.7 and 8.11, respectively, of the EPC Contract).

18.4 18.4.1

18.4.2

The Technical Adviser and the Wood Supply Adviser will review such reports as to their compliance with the requirements of this Agreement, the EPC Contract and the Investment and Financing Plan. If the Technical Adviser and the Wood Supply Adviser is satisfied with such reports, he will confirm the same to the Agent. If the Technical Adviser and/or the Wood Supply Adviser and/or the Agent is not satisfied with such reports, the Borrower shall consult with the Agent, the EPC Contractor and/or any of its subcontractors with a view to rectifying the situation and ensuring that all future reports are satisfactory to the Technical Adviser and/or Wood Supply Adviser and/or the Agent. Reports during Operation Period During the Operation Period the Borrower will provide the Agent with a quarterly production report, including, inter alia, actual production figures,

18.5

67 operating cost figures, sales and sales price figures and the budgeted figures thereof plus an actual/budget comparison within thirty (30) Business Days of the last day of each calendar quarter. 18.6 Other Financial Information The Borrower will from time to time on the request of the Agent or any Lender, furnish the Agent or such Lender with such information about its business, condition (financial or otherwise), operations, performance, properties or prospects as the Agent or such Lender through the Agent may reasonably require, in particular all information and documents as may be required under the provisions of the German Banking Act (Gesetz ber das Kreditwesen) and any material changes to the information included in the Information Memorandum and the Financial Model. 18.7 18.7.1 Miscellaneous Information The Borrower will inform the Agent in writing: (a) promptly upon a Responsible Officer becoming aware of it, of the occurrence of any Event of Default or Potential Event of Default and confirm to the Agent in each Drawdown Request and, after the Facility has been fully drawn, not later than thirty (30) days after the end of each calendar quarter that, save as previously notified to the Agent or as notified in such Drawdown Request or, as the case may be, confirmation, no Event of Default or Potential Event of Default has occurred and is continuing; promptly upon a Responsible Officer becoming aware of it, of any circumstances which are likely to delay in any material respect the completion of the Project in accordance with the Base Case, including any event which might reasonably be expected to result in Cost Overruns; promptly upon a Responsible Officer becoming aware of it, of any material delay in the payment or non-payment of the Government Grants compared with the assumption made in the Finance Model; promptly upon a Responsible Officer becoming aware of it, of any circumstances which are likely to have a materially adverse impact on the validity, enforceability and continuance of the State Guarantee, the Government Grants and the EUDecision; promptly upon a Responsible Officer becoming aware of it, of any Event of Force Majeure or any other event which might delay construction or operation or which might reasonably be expected to interrupt or reduce

(b)

(c) (d)

(e)

68 the operation of the plant excluding any planned outage or maintenance period previously notified to the Agent or which might reasonably be expected to have a Material Adverse Effect; (f) (g) (h) promptly upon a Responsible Officer becoming aware of it, of any Environmental Claim commenced or threatened against it; promptly upon a Responsible Officer becoming aware of it, of any material default of any party to a Project Contract; within ten (10) Business Days upon a Responsible Officer becoming aware thereof, of the details of each litigation, arbitration or administrative proceeding pending or threatened against it which is likely to result in a liability of the Borrower in an amount or amounts exceeding, in aggregate, EUR 2,000,000 or the equivalent in other currencies; of any Change of Control; of any changes in its senior management; as soon as reasonably possible after a Responsible Officer becoming aware of it, of possible Capital Expenditures in an amount of more than EUR 2 million in excess of the Project Budget for that financial year.

(i) (j) (k) 18.7.2

The Borrower will provide upon request such verbal or written information concerning the Project as the Agent or the Lenders may reasonably require including information that is publicly available. The Borrower will fulfil its reporting requirements pursuant to this Clause 18 in a form which will allow the Agent to make the information available to the Lenders without material effort. The Agent will notify the Borrower of the number of copies needed and the form (e-mail, fax, mail) in which the information will have to be provided. The Agent will promptly upon receipt forward any information to the Lenders and, to the extent necessary, to the Guarantors.

19.

INSPECTION RIGHTS The Borrower shall permit the Agent, the Lenders or any of their representatives or the Advisers to inspect the Site and its books and records during usual business hours, and upon reasonable prior notice, for the purpose of checking whether the Borrower is in compliance with the provisions of the Transaction Documents. Any requests for such inspections shall be made through the Agent.

69 20. 20.1 HEDGING REQUIREMENTS Implementation The Borrower will implement the Hedging Strategy in a manner which is in form and substance acceptable to the Agent and will enter into all Derivative Transactions necessary for such purpose with the Hedging Counterparty. 20.2 Compliance with Hedging Strategy The Borrower will not enter into any Derivative Transaction except in compliance with the Hedging Strategy. 20.3 Adjustments The Borrower and the Agent will negotiate in good faith and agree to adjustments of the Hedging Strategy from time to time whenever adjustments are considered necessary by the Borrower or the Agent at all times having regard to the interests of the Lenders and the financial condition of the Borrower. 21. 21.1 COVENANTS Positive Covenants The Borrower shall: 21.1.1 Maintenance of Legal Validity and Legal Status: do all things necessary to maintain its existence as a legal person and to ensure the legality, validity, enforceability or admissibility in evidence in the Federal Republic of Germany of the Transaction Documents including the obtaining and maintaining of all applicable Authorisations necessary for the Project and the performance of its obligations under the Transaction Documents, as and when required, and, on request of the Agent, shall supply copies (certified by a director of the Borrower as true, complete and up to date) of any such Authorisations; Applicable Laws and Authorisations: with the exception of Environmental Laws and Environmental Permits where the obligations of the Borrower with respect thereto are set out in Clause 21.1.15 (Environmental Compliance) comply in all material respects with all laws and comply with, obtain, maintain and renew, all applicable Authorisations in each case which are applicable in connection with the Project and the Borrowers business and operation generally and required for its ability to perform its obligations under the Transaction Documents. As soon as the Authorisations granted after the conclusion of this Agreement become valid and upon request by the Agent, the Borrower will obtain legal opinions on such validity from a reputable law firm addressed to and for the benefit of the Agent; Transaction Documents: Subject to Clause 21.2.15(b) (Additional Project Contracts and Amendments to Project Contracts) enter into, maintain in full force and effect and comply with all Transaction Documents;

21.1.2

21.1.3

70 21.1.4 21.1.5 21.1.6 Authorised signatories: provide the Agent with a list of persons authorised to sign Change Orders as defined in the EPC Contract and amendments to the EPC Contract; Relevant Advisers: from time to time and on the reasonable request of the Agent inform the relevant Advisers and co operate with them to enable each such Adviser fully to perform its obligations under its advisory agreement; Information regarding Permitted Encumbrances and Permitted Financial Indebtedness: provide details to the Agent of any newly created Permitted Encumbrance granted outside the ordinary course of business or any newly incurred Permitted Financial Indebtedness incurred to any person; Information of Technical Adviser and Wood Supply Adviser: provide the Technical Adviser and the Wood Supply Adviser during the Construction Period on a quarterly basis and upon request with all information and documentation reasonably required for the purposes of this Agreement and bear the reasonable costs of the report to be provided by the Technical Adviser and the Wood Supply Adviser pursuant to Clause 18.4.2 (Reports during Construction Period); Preservation of Assets: maintain and preserve all of its assets in good condition and undertake regular maintenance, except disposal of obsolete assets, in accordance with prudent industry practice or the EPC Contractors and Suppliers recommendations; Transactions with Third Parties: conclude and procure that any subsidiary of the Borrower concludes any transaction with a third party, irrespective of whether or not it is a Related Party, only on terms no less beneficial to it than those obtainable on an arms length basis. All contracts to be concluded by it with a Related Party will be submitted to the Agent in their final draft form for approval, such approval not to be unreasonably withheld. It will further waive any Financial Indebtedness owed by any person to it only for valuable market consideration; Conduct of Business: cause the Project to be built, operated and maintained in accordance with good industry practices, the Project Contracts and all conditions, obligations, requirements set out in any Authorisation or technical specifications from time to time agreed with the EPC Contractor or by Suppliers, or issued by any Authority in respect of the Borrower or the Project and ensure that all staff necessary for the proper and efficient operation of its business or that of its subsidiaries in place; Payments and Application of Payments: otherwise than as referred to in Clause 9.1.2 (Disbursement Account) and save for

21.1.7

21.1.8 21.1.9

21.1.10

21.1.11

71 (a) (b) (c) any proceeds of material loss and damage insurance obtained after Acceptance which will be paid to the Insurance Account and applied in accordance with Clause 9.4.4 (Application of Insurance Proceeds), any third party liability insurance which will be paid directly to the relevant third party, and Excess Start-up Cash Flows up to a maximum amount of EUR 15 million which will be paid into the Equity Reserve Account

ensure that all monies received by it in connection with the Project are paid to the Proceeds Account and applied in accordance with Clause 9.4.3 (Application of Moneys on Proceeds Account). Amounts received in respect of the Government Grants and VAT refunds shall, however, be applied to the repayment of Tranche E in accordance with Clause 6.3.9 (Repayments other than First Repayment) or for purposes corresponding to the purpose of Tranche E. To the extent that, at the time these amounts are received on a date after the First Repayment Date on which Tranche E has been completely repaid in accordance with Clause 9.4.3(a)(xi) (Application of Moneys on Proceeds Account), the Borrower will however transfer these amounts to the Shareholders Account. 21.1.12 Tax: duly and punctually pay and discharge: (a) all taxes, assessments and governmental charges imposed upon it or its assets within the time period allowed therefore without imposing penalties and without resulting in an encumbrance having priority to the Lenders or any security purported to be granted by or created pursuant to the Security Agreements; and all lawful claims which, if unpaid, would by law become encumbrances upon its assets

(b)

(save to the extent payment thereof is being contested in good faith by the Borrower and where payment thereof can lawfully be withheld and would not result in an encumbrance having priority to the Lenders or any security purported to be granted by or created pursuant to the Security Agreements). 21.1.13 21.1.14 Filing of Tax Returns: file or cause to be filed all tax returns required to be filed in all jurisdictions in which the Borrower or any of its subsidiaries is situated or carries on business or is otherwise subject to tax; Claims Pari-Passu: ensure that at all times the claims of the Lenders against it under the Financing Documents rank at least pari passu with the claims of all its

72 unsecured and unsubordinated creditors save those whose claims are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application and save for the claims resulting from those land charges, which will be released following first drawdown; 21.1.15 Environmental Compliance: comply in all material respects with all Environmental Law and obtain and maintain any Environmental Permits and notify the Agent, promptly after a Responsible Officer becomes aware of the same of: (a) (b) 21.1.16 21.1.17 any material Environmental Claim made on it or to any occupier of any property owned or leased by it under any Environmental Law which may affect the compliance with this Agreement; and any circumstances which arise whereby any material remedial action is likely to be required to be taken by, or at the expense of, it pursuant to any Environmental Law;

Enforcement: take all reasonable steps to promptly enforce its rights under any Project Contract where failure to do so is material in relation to the Project and the rights and obligations of the parties to any of the Financing Documents; Compliance with Conditions for State Guarantee and Government Grants: comply, at all times, with all conditions, obligations and requirements of, and assume all undertakings in, the EU-Decision, the State Guarantee and the Government Grants, in particular: (a) to allow inspections by the Guarantors or C&L (either by themselves or by agents appointed by them) at any time for the purpose of checking whether a drawdown under the State Guarantee may be made or whether the conditions for such drawdown are satisfied or have been satisfied; to authorise the Agent and the Lenders to submit to the Guarantors and C&L all documents concerning the Facility and the Security and to give to the Guarantors and C&L all information requested by each of them; to pay all fees in connection with the State Guarantee; and to discharge the Arranger, the Agent, the Security Agent and the Lenders vis--vis the Guarantor and C&L from any duty of discretion (Schweigepflicht) whereby any requests by the Lenders shall be made through the Agent;

(b) (c) (d)

73 21.1.18 21.1.19 Intellectual Property: procure and comply in all material respects with all material Intellectual Property Rights necessary to construct and operate the Project and conduct the Borrowers business; Security: provide and maintain the Security and any other security to be provided to the Lenders pursuant to the Financing Documents and procure that the Security is effective and maintained and upon reasonable request of the Agent provide additional security over its assets in favour of the Lenders. The Agent will determine the details of the additional security within its reasonable discretion (billiges Ermessen) pursuant to 315 BGB. The provision of additional security will not affect existing Permitted Encumbrances; Defects Liability Protection: refrain from any acts which may prejudice materially and adversely any defects liability protection afforded to the Borrower by the Contractor under the EPC Contract or, to the Borrowers knowledge, by any subcontractor (at any level) to the Contractor and/or the Borrower; Management: employ experienced professionals in the paper and pulp industry; Syndication: provide at its own cost assistance to the Original Lender in the syndication of the Facility, including without limitation, by taking all reasonable steps to make management available for the purpose of making presentations to, or meeting, potential lending institutions and comply with all reasonable requests for information from potential syndicate members; Technical Assistance: as and when reasonably requested obtain such assistance as may be necessary prior to Acceptance in connection with the construction, commissioning, testing, start-up, management, operation and maintenance of the Project; Information Memorandum: use best endeavours to assist the Arranger in the preparation of the Information Memorandum and ensure that, save as otherwise disclosed in the Information Memorandum, the factual information contained in the Information Memorandum is true and accurate and complete in all material respects on the date thereof (or, if different, as of the date when it is stated) and that the Borrower and the Sponsors do not omit to make any disclosure which would make the Information Memorandum misleading in any material respect, and in the case of any financial projections or expressions of opinion contained in the Information Memorandum, procure that such projections and expressions are prepared or made in good faith and on the basis of assumptions believed by the Borrower or any of its subsidiaries to be reasonable and ensure that, if in the opinion of the Arranger it is necessary for the purpose of syndication, the Information Memorandum is updated immediately prior to syndication;

21.1.20

21.1.21 21.1.22

21.1.23 21.1.24

74 21.1.25 21.1.26 Rented part of the Site: not terminate the site lease agreement dated 16 May 2002 and made between the Borrower and ALTMARK INDUSTRIEPARK AG, before the acquisition of the part of the Site leased to it without the Majority Lenders consent; Owners Scope: implement the Owners Scope in accordance with internationally recognised engineering standards in a prudent and timely manner so as not to hinder achievement of Acceptance by month 28 after the Commencement Date (as defined in the EPCContract) and so that such additional works are free from any Defects and do not violate any intellectual property rights of third parties; Permitted Subsidiaries: save as the Majority Lenders may otherwise agree (such agreement not to be unreasonably withheld) ensure that any Permitted Subsidiaries operate their respective businesses in a proper and efficient manner and in accordance with the principles set out in Schedule 11 (Financing of the Subsidiaries); Reduction of Existing Financial Indebtedness: repay in full, using funds from the first Advance, and in any event within 5 Business Days following such Advance: (a) (b) (c) (d) the EUR 12,286,000 loan made to the Borrower by Dresdner Bank AG and discharge all encumbrances securing any amounts payable thereunder; the claims of ex-shareholder Kvaerner plc in the amount of EUR 478,687 and Thyssen Rheinstahl Technik Projektgesellschaft mbH in the amount of EUR 2,648,000; the claims of ALTMARK INDUSTRIEPARK AG for the payment of the second instalment of the purchase price for the Site in the amount of EUR 1,755,686 plus VAT; and the claims of RWE-IN, ALTMARK INDUSTRIEPARK AG and Thyssen Rheinstahl Technik Projektgesellschaft mbH for the ancilliary costs in connection with the purchase of the Site for which RWE-IN, ALTMARK INDUSTRIEPARK AG, Thyssen Rheinstahl Technik GmbH and its successor in title Thyssen Rheinstahl Technik Projektgesellschaft mbH have provided to the Borrower funds in the amount of EUR 2,708,339.

21.1.27

21.1.28

21.1.29

Accounts: close any existing bank account within one (1) month after the first Advance other than as contemplated by this Agreement.

75 21.2 Negative Covenants The Borrower will not (by action or omission): 21.2.1 21.2.2 Negative Pledge: create or permit to subsist any encumbrance over all or any of its assets other than a Permitted Encumbrance or create any restriction or prohibition on encumbrances over all or any of its assets; Investments, Loans and Guarantees: make any investment in, make any loans to, grant any credit or other financial accommodation to or for the benefit of any person or give or have outstanding any guarantee or indemnity to or for the benefit of any person other than in respect of product liability assumed in the ordinary course of business or otherwise voluntarily assume any liability, whether actual or contingent, in respect of any obligation of any other person other than Permitted Investments and save as set out in the principles set out in Schedule 11 (Financing of the Subsidiaries), nor will it make any material fixed asset investments (Sachinvestitionen) or financial investments (Finanzinvestitionen) without the prior consent of the Guarantors or except as permitted by this Agreement in relation to the Project; Disposals: dispose of the whole or any part of its assets other than in the ordinary course of business or other than by way of Permitted Disposals, nor sell any material investments (Beteiligungen) or divisions of its business (Betriebsteile) without the prior consent of the Majority Lenders and the Guarantors. Any emission permits under the Kyoto Protocol to the United Nations Framework Convention on Climate Change dated 11. December 1997 shall, however, be disposed of only with the Agents consent; Financing: use the proceeds of any Advances for any other purposes than those set out herein; Transfer of Shares or Shareholder Loans: consent to any transfer of Shares or Shareholder Loans in violation of the Shareholders Undertaking Agreement; Shares in Subsidiaries: (a) (b) sell or otherwise dispose of (in any transaction or series of transactions whether related or not) its existing shares in any direct subsidiary; and procure that no direct subsidiary shall sell or dispose of (in any transaction or series of transactions whether related or not) its existing shares in any of its subsidiaries or issue any new shares to any third party where following any such sale more than 49% of the issued ordinary share capital of the relevant subsidiary would be owned by one or more third parties,

21.2.3

21.2.4 21.2.5 21.2.6

76 unless the terms of such sale and/or issue (including the terms upon which any new shareholder may enter into contracts with such subsidiary) have been previously approved in writing by the Majority Lenders, such approval not to be unreasonably withheld. In no event shall any such new shareholder be a Sponsor or any affiliate of a Sponsor unless previously approved in writing by the Majority Lenders (such approval not to be unreasonably withheld). 21.2.7 21.2.8 Shareholders Account: make any payments to the Shareholders Account other than in compliance with the provisions of this Agreement; Capital Expenditures: incur any Capital Expenditures at any time or in any amount of more than EUR 2 million in excess of the Project Budget for that financial year other than with the consent of the Majority Lenders unless the same is required to comply with applicable Environmental Law in Germany; Capital Reserves: repay any capital reserves set up for Kvaerner plcs, Thyssen Rheinstahl Technik Projektgesellschaft mbH or any Shareholders waivers of repayment claims under the shareholder loans granted by them to the Borrower unless (a) the tax audit of the accounts has accepted the amount of such capital reserves and (b) they are funded out of the Shareholders Account and identify such capital reserves as a separate balance sheet item; Shareholder Loans: (a) prior to the First Repayment Date pay interest on any Shareholder Loans and thereafter only in accordance with the terms hereof and of the Shareholder Loans and (b) prepay, repay, redeem, purchase or otherwise acquire any Shareholder Loans prior to the Tranche A Final Repayment Date and the repayment in full of each outstanding Advance hereunder; Financial Indebtedness: incur, create or permit to subsist or have outstanding any Financial Indebtedness or enter into any agreement or arrangement whereby it is entitled to incur, create or permit to subsist any Financial Indebtedness other than, in each case, Permitted Financial Indebtedness; Encumbrances: create or permit to subsist any encumbrance on any of its assets other than Permitted Encumbrances; Mergers: split, merge or consolidate with any other person, enter into any demerger transaction, or participate in any other type of corporate reconstruction without the prior consent of the Majority Lenders and the Guarantors; Subsidiaries: create any subsidiary or permit to exist any interest in any person (whether by shareholding, joint venture, partnership, whether any income or profits are, or would be, shared or transferred with any other party or otherwise), other than the Permitted Subsidiaries;

21.2.9

21.2.10

21.2.11

21.2.12 21.2.13 21.2.14

77 21.2.15 Additional Project Contracts and Amendments to Project Contracts: (a) enter into any additional material Project Contracts with a value of more than EUR 4 million or contracts for the sale of energy and the agreement on reserve electricity services save with the prior written consent of the Majority Lenders (such consent not to be unreasonably withheld or delayed); subject to Clause 21.2.16 (Project Specifications), only, amend in any material respect, or grant any waiver or consent under, any Project Contract if such amendment, waiver or consent would not reasonably be expected to be materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents. In the case of Project Contracts with a value of more than EUR 4 million or contracts for the sale of energy and the agreement on reserve electricity services such amendments, waivers and consents will have to be notified to the Agent in writing seven (7) days in advance; cancel or terminate any Project Contract with a value of more than EUR 4 million or any contract for the sale of energy and the agreement on reserve electricity services (other than the EPC Contract or any contract for the carrying out of the necessary infrastructure works at the Site), without having given thirty (30) days prior written notice to the Agent and then only so long as a replacement contract is in place on terms no less beneficial to the Borrower as the cancelled/terminated Project Contract; and cancel, terminate or suspend the EPC Contract or any contract for the carrying out of the necessary infrastructure works at the Site or (subject to Clause 21.2.16 (Project Specifications)) grant any waiver or consent under or amend the same without Majority Lenders prior written consent;

(b)

(c)

(d)

21.2.16

Project Specifications: make any changes to the design, specification or configuration of the plant without Majority Lenders consent except for such amendments and changes which are in conformity with the EPC Contract or are of a minor nature, it being understood that any such change which might result in an increase in the Project Costs in an aggregate amount of at least EUR 1 million or a delay in a System Start-Up as defined in the EPC Contract or in Acceptance will not be deemed to be of a minor nature; Waiver of tests under EPC Contract: waive or materially alter any test procedures or approve any test results in connection with the tests under Clauses

21.2.17

78 16 to 19 of the EPC Contract where this could have an adverse effect on the Project without Majority Lenders consent (such consent not to be unreasonably withheld or delayed); 21.2.18 21.2.19 Acceptance Certificate: issue the Acceptance Certificate as defined in the EPC Contract without the Agents consent (such consent not to be unreasonably withheld or delayed); Shares: purchase, cancel or redeem any Share Capital, reduce the Share Capital, issue any Shares otherwise than to an existing Shareholder, grant any option over or make any offer of Shares to any person or alter any material rights attaching to the Shares without the Majority Lenders and the Guarantors consent. Their consent is however not required in relation to the offer of Shares; Shareholders Agreement: change its articles of association in any manner which would be inconsistent with the provisions of any Transaction Document without Majority Lenders consent (such consent not to be unreasonably withheld); Change of Business: make any material changes to the general nature of its business as a pulp mill (including wood harvesting and procurement as well as logistic services) and any business incidental thereto or carry on any other business which results in any material change to the nature of such business; Abandonment: abandon the Project; Withdrawals from Cash Collateral Accounts: withdraw any moneys on the Cash Collateral Accounts other than pursuant to the provisions of the Financing Documents; Accounts: open or operate any bank accounts other than as contemplated by this Agreement; Assignment and Encumbrance of Government Grants: assign, pledge or otherwise charge, encumber or dispose of its claims, rights and title under and to the Government Grants except as provided in the Investment Incentives Assignment Agreement listed in Schedule 9 (Security Agreements); Financial Year: change its financial year; Obligations: incur any material obligations not contemplated by or permissible under this Agreement or which the Borrower assumes in connection with deliveries and services undertaken by it in the ordinary course of business without the prior consent of the Guarantors.

21.2.20 21.2.21

21.2.22 21.2.23 21.2.24 21.2.25

21.2.26 21.2.27

79 22. 22.1 INSURANCES General The Borrower will effect through brokers, previously approved in writing by the Agent, pay the premiums when due, maintain in full force and effect and comply with all provisions of the insurances for the Construction Period and the Operation Period, under forms of policies commonly accepted in the industry and with reputable insurance companies reasonably acceptable to the Agent. Such insurances include the insurances set out in Schedule 12 (Minimum Insurance Schedule) and Schedule 12a (Minimum Insurance Operation Period Schedule) and such other insurances as the Agent specifies are required to be maintained in connection with the Project in accordance with prudent operating practice. 22.2 Specific Provisions of the Insurances The Borrower will provide for the following with respect to all Material Insurances: 22.2.1 Sole Loss Payee: the Security Agent to be named as sole loss payee in all policies save, in relation to policies relating to third party liability, where payment is made directly to the third party claiming thereunder in full and final settlement of his claim. A payment to the loss payee in accordance with this Clause shall, to the extent of that payment, be made to the Insurance Account or any other account specified to the insurers by the Security Agent and discharge the liability of the respective insurer to pay the Borrower or other claimant insured party. The arrangements in this Clause shall continue to apply notwithstanding the liquidation or insolvency of the Borrower or any of the insurers; Waiver: the insurers to agree to waive all rights of subrogation or action against the Security Agent unless any of the members of the executive board (Vorstand) of the Security Agent acted with gross negligence or wilful misconduct (Vorsatz); Reduction of Insurance Proceeds: the insurers not to reduce any insurance proceeds due and payable to the Security Agent (on behalf of itself and other beneficiaries) as loss payee, save in respect of any unpaid premium if so required by the respective insurer; Insurance Claims Assignment: cause the insurers to acknowledge that they have noticed that, by the Insurance Claims Assignment Agreement as set out in Schedule 9 (Security Agreements), the Borrower assigned to the Security Agent (for and on behalf of the Lenders) all its existing and future rights and claims in and to the Material Insurances (including all claims of whatsoever nature thereunder and return of premiums and proceeds in respect thereof). The insurers

22.2.2 22.2.3 22.2.4

80 shall also confirm that they have not received notice of any other assignment, charge or other encumbrance of the Borrowers rights and claims under the respective insurance. 22.2.5 22.2.6 22.2.7 Adequate Information: the insurers to acknowledge that they have received adequate information in order to evaluate the risk of insuring the Borrower in respect of the risks hereby insured; Cancellation: the insurers not to cancel (kndigen) the Material Insurances during the Construction Period; Notices: the insurers to give in writing to the Security Agent (a) (b) (c) 22.2.8 subject to 22.2.6 a thirty (30) days notice of cancellation, non-renewal (whether for non-payment of premium or otherwise), suspension (if applicable) or adverse change of terms; a thirty (30) days notice of any reduction in limits or coverage, any increase in deductibles or any termination before the original expiry date is to take effect; and as soon as any of the insurers becomes aware, notice of any act, event or omission which such insurer considers may invalidate or render unenforceable in whole or in part any insurance.

Delivery of Notices and Documents: the policies to stipulate that any notice or document to be served in relation to any policy may be delivered or sent by prepaid recorded delivery post (if within the Federal Republic of Germany), by prepaid airmail (if elsewhere) or facsimile process to the party to be served at its registered office or at such other address as it may have notified to the other parties in writing in accordance with this Clause. Any such notice will be deemed to be given as follows: (a) (b) if delivered by hand or by mail, when delivered; and if by facsimile when transmitted, but only if, immediately after the transmission, the senders fax machine records the correct answerback;

22.2.9

Governing Law and Jurisdiction: the insurance policies to be governed by German law and each of the insurers and co-insured to agree that any legal proceedings arising out of or in connection with the policies will be brought in the exclusive jurisdiction of a German court. Insurance Documentation The Borrower will promptly provide to the Security Agent copies of all cover notes and policies (including endorsements) issued from time to time in relation

22.3

81 to each insurance, and of all changes requested or effected thereto, and, if so requested by the Security Agent, of placing slips and all documents disclosed or disclosable to the insurers of each insurance and relating to claims notified or notifiable to insurers or the insurance brokers. In addition, the Borrower will promptly deliver to the Security Agent the originals of all policies (including endorsements) and placing slips. 22.4 Inspection Right The Security Agent or any of its representatives or the Advisers will be entitled to review from time to time the compliance of the insurances effected by the Borrower with the above provisions and the provisions contained in the Minimum Insurance Schedule and the Borrower undertakes to co-operate with the Security Agent or any of its representatives or the Advisers, respectively, in this respect and to furnish to it all information requested by it for such purpose. 22.5 Brokers Letter of Undertaking The Borrower will procure that every insurance broker who effects an insurance writes a brokers letter of undertaking (substantially in the form set out in Schedule 16 (Brokers Letter of Undertaking)) to the Security Agent. Such letters have to be provided prior to Financial Close with respect to insurances during the Construction Period and at least five (5) Banking Days prior to inception with respect to insurances during the Operation Period. 22.6 22.6.1 Changes to Insurance Programme If any variation is proposed to be made to the terms of any insurance, the Borrower will give at least thirty (30) days prior written notice thereof to the Security Agent. No variation to any insurance should be effected or agreed by the Borrower until the Security Agent notifies the Borrower in writing either that the variation is not material to the Lenders or is otherwise agreeable to the Security Agent. The Security Agent will not unreasonably withhold or delay its agreement after obtaining any advice that it deems appropriate in considering the Borrowers request. No Event of Default occurs to the extent the Borrower has given notice pursuant to Clause 22.6.1 (Changes to Insurance Programme), and for so long as, cover required to be maintained is not available to the Borrower in the international insurance or reinsurance market on what the Security Agent accepts in writing to the Borrower to be reasonable commercial terms. In determining whether such cover is available on reasonable commercial terms, the Security Agent shall have on-going regard to the scope of such insurance, its cost in the context of the financing of the Project and the direct and indirect interests of the Lenders under the Financing Documents.

22.6.2

82 22.7 Notification The Borrower will promptly notify the Security Agent and the insurers of any increase or material change in any risk insured under any Material Insurance. 22.8 Claim Handling The Borrower will (a) (b) (c) (d) (e) 22.9 diligently pursue any valid claim under any insurance, promptly notify the Security Agent and the insurers of any matter for which it may be entitled to a claim under any insurance, keep the Security Agent informed on a regular basis regarding progress towards settling any such claim, take account of any representations made by the Security Agent in relation to any such claim, and not negotiate, compromise or settle any claims with a potential value in excess of EUR 5 million without the written consent of the Security Agent, such consent not to be reasonably withheld or delayed.

Renewals The Borrower will, at least thirty (30) days prior to the renewal of any insurance satisfy the Security Agent that the cover proposed to be effected for the renewal period will, on and after the renewal date, comply with the requirements of the Minimum Insurance Schedule.

22.10

Changes in Insurer Security If an insurer under a Material Insurance ceases to carry a claims paying rating from Standard & Poors Corporation of at least A-, or an equivalent rating from such other rating agency approved by the Security Agent, the Borrower will promptly inform the Security Agent thereof and, at the request of the Security Agent, promptly replace the affected cover with cover from another insurer, or insurers, reasonably acceptable to the Security Agent and terminate the affected insurers participation in the risk, provided that there will at no time be any period when any relevant risk is not insured as required by the Financing Documents.

22.11

Lenders Right to Insure if Borrower Defaults If at any time and for any reason any insurance is not in full force and effect on the terms or for the insured values required under the Financing Documents, then the Security Agent shall forthwith be entitled, at the cost and expense of the Borrower, to procure and pay for such insurance as the Borrower should have

83 effected or procured pursuant to the terms hereof or at any time whilst such failure is continuing. 22.12 Disputes over Availability of Cover Borrower Defaults Any disagreement between the Borrower and the Security Agent over the availability of cover in the international insurance market will be referred to an independent expert appointed with the agreement of the Borrower and the Security Agent, or, if the parties cannot so agree within 20 days of the notice given by the Borrower under the covenant referred to in Clause 22.6 (Changes to Insurance Programme), to a person nominated at the request of either party by the President of the German Association of Insurers, in each case acting as an independent expert. The experts decision will be final and binding on the parties hereto. The experts fees and disbursements will be borne by the Borrower. 23. 23.1 23.1.1 EVENTS OF DEFAULT Each of following circumstances constitutes an Event of Default for the purposes of this Agreement, irrespective of whether or not caused by any reason within the control of the Borrower or any other person: Payment Obligations: subject to Clause 6.5, failure by the Borrower to make: (a) (b) 23.1.2 any payment of principal or interest due under the Facility within seven (7) Business Days from the due date thereof; and any other payment due under the Financing Documents within five (5) Business Days from a notification by the Agent of the Borrowers failure to pay;

Representations and Warranties: any representation, warranty or statement made in any Financing Document, certificate, statement or opinion delivered by or on behalf of the Borrower hereunder or in connection herewith is or proves to have been incorrect, untrue or misleading in any material respect when made and which, if capable of being remedied, has not been remedied within thirty (30) days from notification by the Agent of such breach; Covenants: the Borrower or any of its Shareholders breaches any covenant or material obligation under the Financing Documents which, if capable of being remedied, has not been remedied within fifteen (15) Business Days from notification by the Agent of such breach; Debt Service Reserve: (i) Scheduled Debt Service for two consecutive half year periods is partially or wholly financed by drawings from the Debt Service Reserve Account, and as a result the balance standing to the credit of the Debt Service Reserve Account is less than one third of the Target Balance, or (ii) a

23.1.3

23.1.4

84 drawing on the Debt Service Reserve Account resulting in full utilisation of the Debt Service Reserve Account is followed on the Repayment Date immediately following such full utilisation by a deferred amortisation in accordance with Clause 6.5 (Deferred Amortisation), in each case unless waived by the Majority Lenders. 23.1.5 23.1.6 23.1.7 Annual Debt Service Cover Ratio: Failure by the Borrower to meet the Annual Debt Service Cover Ratio as provided for in Clause 17.1 (Annual Debt Service Cover Ratio), unless waived by the Majority Lenders. Senior Debt/EBITDA Cover Ratio: Failure by the Borrower to meet the Senior Debt/EBITDA Cover Ratio as provided for in Clause 17.2 (Senior Debt/EBITDA Cover Ratio), unless waived by the Majority Lenders. Consents and Approvals: any Authorisation necessary to enable the Borrower to comply with any of its material obligations under the Transaction Documents and Project is revoked, withheld or modified or is limited in a way which materially prejudices the validity and enforceability of the Transaction Documents and/or the ability of the Borrower to meet its obligations thereunder; EU-Decision, State Guarantee and Government Grants: any of the EU-Decision, State Guarantee or Government Grants is modified in any material respect, revoked, withdrawn, withheld or suspended, or does not remain in full force and effect; Insolvency and Rescheduling: any cause exists on the basis of which insolvency proceedings under the German Insolvency Code should be initiated against the Borrower, the Borrower commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its indebtedness or makes a composition with its creditors; Winding-up: (a) the Borrower, (b) while it has any liability under the Shareholders Undertaking Agreement any of the Shareholders or any of the Sponsors or (c) while it has any liability under the RWE Solutions AG Guarantee, the Direct Agreement or the Parent Company Guarantee RWE Solutions AG takes any corporate action or any other steps are taken or legal proceedings are started for its winding-up, dissolution or reorganisation or for the appointment of a liquidator, receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any part or all of its revenues and assets; Insolvency or Winding-up of EPC Contractor: the EPC-Contractor during the Construction Period is unable to pay its debts as they fall due, commences negotiations with any one or more of its creditors with a view to the general readjustments or rescheduling of its indebtedness, makes a composition with its

23.1.8 23.1.9

23.1.10

23.1.11

85 creditors, or takes any corporate action or other steps or legal proceedings are started for its winding-up, dissolution, re-organisation (except for a solvent re-organisation previously approved in writing by the Agent) or for the appointment of a liquidator, receiver, administrator, administrative receiver or similar officer of it or of any or all of its revenues and assets; 23.1.12 23.1.13 Indebtedness: failure by the Borrower to pay any other Financial Indebtedness over EUR 1,000,000 when due or after the expiry of any applicable grace period unless such payment is contested in good faith by the Borrower; Obligations of the Borrower: at any time it is unlawful for the Borrower to perform any of its material obligations under the Transaction Documents, or to own its material assets or to carry on its business in materially the same fashion as contemplated in the Financing Documents and such condition continues for period of sixty (60) days; Obligations of the Parties to Shareholders Undertaking Agreement and the RWE Solutions AG Guarantee: any of the Shareholders or Sponsors (or any of their successors) fails to comply with any obligation assumed by it in the Shareholders Undertaking Agreement and/or RWE Solutions AG (or any of its successors) fails to comply with any obligation assumed by it in the RWE Solutions AG Guarantee, the Direct Agreement or the Parent Company Guarantee and such failure, if capable of remedy, is not remedied within thirty (30) days after receipt of written notice from the Agent requesting the same; Change of Control: a Change of Control occurs without the prior written consent of the Majority Lenders; The Borrowers Business: the Borrower ceases or threatens to cease to carry on all or a substantial part of the business it carries on at the date hereof, abandons or threatens to abandon the Project or disposes of a substantial part of its business or assets or a substantial part of its business or assets is seized, nationalised or expropriated or compulsorily acquired by or under the authority of any government; Assets of the Borrower: except as permitted by the Financing Documents, the Borrower ceases to be the sole lawful and beneficial owner of, and having good title to, any material part of its assets, and such assets or part thereof, are not re-acquired or replaced in a manner satisfactory to the Lenders within fifteen (15) days of such cessation; Acceptance: Acceptance does not occur by the date falling 40 months after Financial Close;

23.1.14

23.1.15 23.1.16

23.1.17

23.1.18

86 23.1.19 Default under Transaction Documents: a material default under any of the Transaction Documents which, if capable of being remedied, has not been remedied within thirty (30) days in the case of any Financing Document and ninety (90) days in the case of any Project Contract in each case of notification by the Agent of such default; Invalid, Non-binding and Non-enforceable Obligations: a material provision of the Financing Documents is not, or is contested by a party other than a Lender to be not, legal, valid, binding and enforceable; Qualifications in the Auditors Report: the auditors have made a qualification in their report and there are reasonable doubts (vernnftige Zweifel) concerning the continuation of the Borrowers business on a going concern basis unless within twenty (20) Business Days from the date of the auditors report the Borrower has presented a certificate from the auditors showing that the reasons for the doubts raised have been remedied or sufficient measures have been taken for their remedy; Security: any Security ceases to be in full force and effect for any reason other than: (a) (b) 23.1.23 the assignment of any credit or portion of the finance to which such Security relates; the failure to make the required filings or registrations where such filings or registrations are under the control of the Lenders;

23.1.20 23.1.21

23.1.22

Litigation: any material judgement, award or decision on any litigation, arbitration, administrative proceedings or governmental or regulatory investigations, proceedings or disputes is commenced against the Borrower or its assets which is materially adverse in relation to the Borrowers ability to perform its obligations under the Transaction Documents and/or the validity or enforceability of the Transaction Documents unless such judgement, award or decision is stayed pending appeal without the necessity for the Borrower to provide any security in connection therewith; Enforceability of Encumbrance: any encumbrance over any assets of the Borrower securing an indebtedness of not less than EUR 100,000 becomes enforceable; Execution or Distress: any execution (Zwangsvollstreckung) or distress (Beschlagnahme) is levied against, or an encumbrancer takes possession of the whole, or any material part of the assets of the Borrower or any event which under the laws of any jurisdiction has a similar effect is not discharged within thirty (30) days;

23.1.24 23.1.25

87 23.1.26 23.1.27 23.1.28 23.1.29 23.1.30 Insurances: Subject to Clause 22.6.2 (Changes to Insurance Programme), the Borrower fails to maintain the insurances pursuant to the provisions of Clause 22 (Insurances); Destruction of Project: the Project or any substantial part thereof is destroyed or damaged in a manner which is not covered in full by proceeds of insurance, (excluding any agreed deductibles); Material Adverse Change: any event or circumstance (or series of events or circumstances) occurs which has a Material Adverse Effect; Force Majeure: an Event of Force Majeure occurs or a series of Events of Force Majeure occur the effects of which continue (on an aggregated basis) for a period of 230 days under the EPC-Contract. Registration of Capital Increase: (i) the Borrower has failed to produce within four (4) Business Days from receipt by it and the notary (who, in accordance with Clause 2.6.1 of the Shareholders Undertaking Agreement has certified the capital increase) of a written confirmation by the Agent that the Shareholder Contributions have been credited to the Disbursement Account, the confirmation by the notary required as proof thereof that the registration of the EUR 15,000,000 has been sent to the commercial register, or (ii) the registration of the capital increase has been revoked by the Shareholders. Equity Contribution: If at any time after 31 December 2011 (i) on the first day of trading of the shares issued under any Equity Sale the Debt Service Reserve Account is not fully funded, and (ii) Mercer International fails to contribute 50 per cent. of the net amount raised under any such Equity Sale (up to an aggregate maximum amount equal to EUR 10,000,000) to the Borrower, by way of Capital Contribution or Shareholder Loans, within 30 days of any Equity Sale. Acceleration and Cancellation Upon the occurrence of an Event of Default and at any time thereafter while such Event of Default is continuing, the Agent may and shall upon the direction of the Majority Lenders by notice to the Borrower: (a) declare all or any part of the Advances to be immediately due and payable or declare all or any part of the Advances to be due and payable on its demand (whereupon the same will become so payable together with accrued interest thereon and any other sums then owed by the Borrower under the Financing Documents);

23.1.31

23.2 23.2.1

88 (b) declare that any unutilised portion of the Facility will be cancelled, whereupon the Lenders undrawn Commitments shall be cancelled and each Lenders undrawn Commitment will be reduced to zero, provided that, notwithstanding the foregoing, upon the occurrence of an Event of Default specified in Clauses 23.1.8 (Insolvency and Rescheduling), 23.1.7 (Winding Up), the undrawn Commitments of each Lender will immediately be reduced to zero and all Advances and other sums then owed by the Borrower hereunder shall become immediately due and payable; and/or exercise all rights and remedies under any Financing Document or instruct the Security Agent to do so.

(c) 23.2.2

A notice of the Agent pursuant to Clause 23.2.1 may only be given (a) if an Event of Default pursuant to Clauses 23.1.1 (Payment Obligations), 23.1.6 (Insolvency and Rescheduling), 23.1.10 (Winding-Up), 23.1.16 (The Borrowers Business) and 23.1.24 (Destruction of Project) has occurred and is continuing, or (b) if any other Event of Default has occurred and is continuing only after careful consideration of the reasonable concerns of the Borrower or in case the Majority Lenders have determined in their reasonable opinion that due to such Event of Default the ability of the Borrower to perform any of its obligations under the Financing Documents has been materially impaired. Advances Due on Demand If, pursuant to Clause 23.2.1(a), the Agent declares all or any part of the Advances to be due and payable on demand of the Agent, then, and at any time thereafter within a period of three months, the Agent may by notice to the Borrower: (a) require repayment of all or such part of the Advances on such date as it may specify in such notice (whereupon the same will become due and payable on the date specified together with accrued interest thereon and any other sums then owed by the Borrower under the Financing Documents); and/or select as the duration of any Interest Period which begins whilst such declaration remains in effect a period of six months or less.

23.3

(b) 23.4

Waivers The Lenders may, subject to Clause 23.5.2, waive any Event of Default with the Majority Lenders consent upon written request by the Borrower to the Agent.

89 23.5 23.5.1 23.5.2 24. 24.1 Participation of Guarantors Upon the occurrence of an Event of Default the Agent will promptly inform the Guarantors thereof. The Lenders may waive any Event of Default pursuant to Clause 23.4 (Waivers) only with the consent of the Guarantors. AGENT, ARRANGER AND LENDERS Appointment and Authorisation Each Lender hereby irrevocably (except for a removal under Clause 24.15 (Resignation)) appoints the Agent to act as its agent in connection with the administration of the Facility under the Financing Documents, and irrevocably (except for a removal under Clause 24.15 (Resignation)) authorises the Agent, to take such action and to exercise and carry out such rights, discretions, authorities, powers and duties as are specifically delegated to the Agent in this Agreement, in the Shareholders Undertaking Agreement, the Security Agreements and the RWE Solutions AG Guarantee together with such rights, discretions, authorities, powers and duties as are reasonably incidental thereto, provided that the Agent will not commence any legal action or proceedings on behalf of any Lender without such Lenders consent. Each Lender hereby relieves the Agent from the restrictions of 181 BGB in respect of the authority conferred upon it in this Agreement. 24.2 No Obligation Neither the Agent nor the Arranger is obliged: 24.2.1 24.2.2 24.2.3 to take any action to ascertain whether any Event of Default has occurred or is outstanding; to ascertain the correctness of any representation made by the Borrower or any other party in connection with this Agreement or any other Transaction Document; to inquire as to the performance by the Borrower or any other party of its obligations under this Agreement or any other Transaction Document, or any breach of the Borrower or any other party of its obligations under this Agreement or any other Transaction Document; or to give notice to the Lenders of any information or event of which the Agent becomes aware otherwise than by notice given by a party to this Agreement or to any of the Advisers in accordance with this Agreement. The Agent will not be deemed to have knowledge of the occurrence of a Event of Default until it has received notice thereof from a party to this Agreement

24.2.4

90 describing the Event of Default and stating that the event is an Event of Default, in which case it will promptly notify the Lenders. 24.3 Reliance The Agent is entitled to rely on any communication or document believed by it to be genuine and correct, and on the advice given in connection with this Agreement by any of the Advisers appointed in connection with this Agreement, and will not be liable to any of the parties hereto and any of the Lenders for any of the consequences of such reliance where such reliance is in good faith. 24.4 Information Obligations Notwithstanding any specific provisions in this Agreement relating to reporting requirements, the Agent will within the scope of its appointment: 24.4.1 promptly upon receipt notify each of the Lenders affected thereby of any material information and notice received by it from the Borrower, any of its Shareholders or any of the Advisers and will, to the extent it has obtained a sufficient number of photocopies from the Borrower, any of its Shareholders or such Adviser, supply photocopies of relevant documents to the Lenders; promptly notify each of the Lenders of the occurrence of an Event of Default or any default by the Borrower, any of its Shareholders or any other party in the performance of or compliance with its respective obligations under this Agreement and the other Transaction Documents of which the Agent has received notice from a party to this Agreement or any of the Advisers in accordance with this Agreement. Compliance with Legal Provisions Nothing in this Agreement obliges the Agent to do anything which would or might in its opinion be contrary to the law of any relevant jurisdiction or render it liable to any person, and the Agent may do anything which in its opinion is necessary to comply with any such law. 24.6 Advisers The Agent may retain and pay for the advice or services of any of the Advisers or any expert whose advice in its opinion is necessary or appropriate and rely upon any advice so obtained and shall not be liable to any of the parties hereto or to any of the Lenders for any of the consequences where such reliance is in good faith. 24.7 Liability Neither the Agent nor the Arranger nor any of their respective directors, officers, employees or agents will be liable for any action taken or omitted by it, him or them under or in connection with this Agreement, the Security Agreements, the Shareholders Undertaking Agreement or any other Transaction Document and

24.4.2

24.5

91 any related documentation except, notwithstanding any other provision of this Agreement, to the extent of its, his, or their gross negligence, wilful misconduct or bad faith. 24.8 Agency The Agent will in performing its functions and duties under this Agreement, the Security Agreements, Shareholders Undertaking Agreement and any other Transaction Document solely act as the agent of the Lenders and will not assume or be deemed to have assumed any obligation as agent or otherwise for the Borrower or any of its Shareholders, except as specifically stated herein or in any other Transaction Document. The Agent will have no liability or responsibility to the Borrower or any Lender in connection with any failure or delay in performance or breach by any Lender or Lenders (other than the Agent in its capacity as a Lender) or the Borrower of any of its obligations under this Agreement, the Security Agreements, the Shareholders Undertaking Agreement or any other Transaction Document. 24.9 No Verification Duties Neither the Agent nor the Arranger will be responsible for or obliged to verify: 24.9.1 24.9.2 24.9.3 24.9.4 24.9.5 24.10 the accuracy and/or completeness of any statements, representations or warranties made in or in connection with this Agreement, the Security Agreements, the Shareholders Undertaking Agreement or any other Transaction Document; for any information given to any of the Lenders in respect of the Borrower or any matter relating to the Facility (including, without limitation, the Information Memorandum); the recoverability of any of the sums due or to become due under this Agreement; any failure, omission or defect in perfecting any Security, or the enforceability or value of any Security; or the legality, validity, effectiveness, adequacy or sufficiency of this Agreement, the Security Agreements and the other Financing Documents. Transaction Analysis Each Lender acknowledges that it has made its own analysis of this transaction (including, without limitation, all agreements entered into in connection with this Agreement) without relying on the Agent or the Arranger and based on such information as it has deemed appropriate, and has reached its decision to enter into this Agreement based on its own investigations, and that it will continue to make its decisions in taking or not taking action under this Agreement based on

92 such investigations as it shall deem appropriate. Each Lender hereby confirms that it does not have any objections against any agreements entered into in accordance with this Agreement. 24.11 Instruction by Majority Lenders In the exercise of any right or power and in relation to any matter not expressly provided for by this Agreement, the Security Agreements, the Shareholders Undertaking Agreement or any other Transaction Document the Agent may act (or refrain from acting) in accordance with the instructions of the Majority Lenders to be given by the Lenders within ten (10) Business Days of the Lenders having received a respective request from the Agent and will be fully protected in so doing, except to the extent of its own gross negligence, wilful misconduct or bad faith. In the absence of such instructions being given, or if the Agent were not provided with security satisfactory to it, whether by way of payment in advance or otherwise, against any liability or loss which it may incur in taking any proceedings or action in connection with this Agreement, the Security Agreements, the Shareholders Undertaking Agreement or any other Transaction Document, then the Agent may act (or refrain from acting) as it thinks fit provided that it shall only take action while the above period for the issue of instructions is running if it determines that there is an urgent need to do so. 24.12 Indemnity Each Lender will indemnify the Agent and the Arranger on demand from and against any and all liabilities, losses, damages, costs and expenses of any kind or nature whatsoever including any VAT thereon which the Agent or the Arranger may incur other than by reason of its own gross negligence or wilful misconduct in acting in its respective capacity as Agent or Arranger. Such indemnification will be made rateably in proportion to each Lenders Commitment. 24.13 Same Rights and Liabilities, Business with the Borrower In relation to its participation in the Facility which the Agent or any Lender and/or the Arranger will or may have from time to time, each of them will have the same rights, liabilities and powers under this Agreement as though it had not assumed such capacity. The Agent, the Arranger or any Lender or any of their respective associated companies may engage in any kind of business with the Borrower or any of their respective associated companies as if it were not the Agent, a Lender or, as the case may be, the Arranger. 24.14 Designation of New Office Subject to Clause 24.5 (Compliance with Legal Provisions), the Agent may from time to time by giving notice to the Borrower and the Lenders designate an office or branch different from that acting at the time of giving notice, from which its duties under this Agreement will be performed thereafter provided that the Borrower will not be obligated to pay any fees, taxes or other costs or

93 expenses to the extent the same would not have been payable in the absence of such designation. 24.15 Resignation The Agent may resign at any time its appointment under this Agreement by giving written notice thereof to the other parties hereto, and the Agent may be removed from its position under this Agreement by the Majority Lenders giving written notice to that effect to the Borrower and the Agent. Any such resignation or removal shall take effect upon the notification of the acceptance of the appointment by the successor in its respective position in accordance with Clause 24.16 (Appointment of Successor). 24.16 Appointment of Successor In the event of a resignation or removal of the Agent, the Majority Lenders will be entitled to appoint a successor in the position, upon agreement of the Borrower. If no such successor has been appointed within 30 days from the notice of resignation or notice of removal then the Agent will be entitled, upon agreement of the Borrower, to appoint any reputable and experienced bank or other financial institution as its successor. 24.17 Acceptance of Appointment The acceptance of the appointment will be notified by any Lender being appointed for such purpose by the Majority Lenders to the Agent and upon such notification the relevant successor will succeed to and become vested with all rights, powers, privileges and duties of its predecessor. The resigning or removed Agent will do all such things as may be necessary to give effect to the succession and will thereupon be discharged from its duties and obligations under this Agreement (except for those under Clause 24.7 (Liability)), but shall continue to benefit from the provisions of this Clause 24.7 (Liability) in respect of any actions or omissions taken in its capacity as Agent. Such discharges do not exempt the Borrower from any of its liabilities. 24.18 Arranger The Arranger has no duties or responsibilities whatsoever in connection with the operation or administration of the Facility. 24.19 Facility Office The Agent may assume that the Facility Office or, as the case may be, each Facility Office of each Lender is that identified in Schedule 5 (Lenders and Commitments) (or, in the case of a transferee, at the end of the Transfer Certificate to which it is a party as transferee) until it has received from such Lender a notice designating some other office of such Lender to replace any such Facility Office, and the Agent may act upon any such notice until the same is superseded by a further such notice.

94 24.20 Missing Communication The Agent may, if it is unable to obtain instructions or communicate with a Lender after making reasonable attempts to do so, either refrain from acting as Agent on behalf of such Lender or take such action on behalf of such Lender as it in its absolute discretion deems appropriate, and shall not be liable to such Lender as a result of any such action or inaction. 24.21 Majority Lenders Decisions To the extent not otherwise stated in the Financing Documents, all amendments, consents and waivers under the Financing Documents may be given by the Agent acting on the direction of the Majority Lenders. Any changes in maturity, amounts payable, size of Commitments, the definition of Majority Lenders and this Clause 24.21 will, however, require unanimity of all Lenders. 25. 25.1 25.2 25.3 ADVISERS The resignation or dismissal of an Adviser will be in accordance with its respective mandate. Subject to the terms of the relevant mandate the Agent or the Arranger, as the case may be, will, if so instructed by the Majority Lenders cancel the appointment of an Adviser. If the mandate of an Adviser is terminated prematurely for whatever reason, the Agent will, with the consent of the Majority Lenders and with the consent of the Borrower, appoint a successor at terms and conditions which are as similar to the terms and conditions on the initial mandate as is reasonably practical, and in such a manner that the duties of the relevant Adviser are continuously performed. The Borrower hereby consents to the appointment of the Technical Adviser and the Wood Supply Adviser until six (6) months after Acceptance upon the expiry of its existing mandate. FEES Commitment Fee From the date of signing of this Agreement the Borrower will pay to the Lenders quarterly in arrears on each 31 March, 30 June, 30 September and 31 December on the undrawn portion of each Tranche a commitment fee to be calculated at the following rates: Tranche A: Tranche B: Tranche C: Tranche D1: 0.375 % per annum 0.250 % per annum 0.375 % per annum 0.375 % per annum

25.4 26. 26.1

95 Tranche D2: Tranche E: 26.2 Arranging Fee The Borrower will pay to the Arranger an arranging fee in accordance with the Fee Letter. 26.3 Agency Fee The Borrower will pay to the Agent an agency fee in accordance with the Fee Letter. 26.4 Federal Guarantee Fee The Borrower will pay to the Federal Guarantor a guarantee fee on each 1 April and 1 October. The guarantee fee will be calculated for each half year starting at these dates at a per annum rate of 0.25 % of the amount guaranteed by the Federal Guarantor at those dates and is payable to C&L Deutsche Revision AG, Dsseldorf, Anderkonto Bundesminister der Finanzen, account 301 51 12 with Westdeutsche Landesbank Girozentrale, by making reference to the State Guarantee number. An amount of 0.25 % of the maximum guaranteed amount is due and payable by the Borrower in accordance with the grading granted by the Federal Guarantor. The Borrower will promptly inform the Agent of any payments made pursuant to this Clause 26.4 (Federal Guarantee Fee). 26.5 State Guarantee Fee The Borrower will pay to the State Guarantor a guarantee fee on each 1 April and 1 October. The guarantee fee will be calculated for each half year starting at these dates at a per annum rate of 0.25 % of the amount guaranteed by the State Guarantor at those dates and is payable to C&L Deutsche Revision AG, Dsseldorf, Anderkonto Bundesminister der Finanzen, account 301 51 12 with Westdeutsche Landesbank Girozentrale, by making reference to the State Guarantee number. An amount of 0.25 % of the maximum guaranteed amount is due and payable by the Borrower in accordance with the sliding scale granted by the State Guarantor. The Borrower will promptly inform the Agent of any payments made pursuant to this Clause 26.5 (State Guarantee Fee). 26.6 VAT Any fee referred to in this Clause 26 (Fees) is exclusive of any VAT or other tax which might be chargeable in connection with that fee. 27. 27.1 COSTS AND EXPENSES Transaction Expenses The Borrower will, from time to time on demand of the Agent, reimburse the Agent, the Security Agent and the Arranger for all reasonable external costs and expenses properly incurred (including travel and out-of-pocket expenses, 0.375 % per annum 0.375 % per annum

96 notarial fees, the reasonable fees for the Advisers and counsel to the Agent and related expenses) on a full indemnity basis together with any VAT thereon incurred by them in connection with: (a) (b) (c) (d) (e) (f) (g) the carrying out of all due diligence enquiries and searches in connection with the Transaction Documents; the negotiation, preparation and execution and translation of each of the Financing Documents and if any such party is involved in the negotiation of any Project Contract, the relevant Project Contract; the completion and performance of the transactions contemplated in the Transaction Documents; the activities of C&L pursuant to Clause 21.1.17 (Compliance with Conditions for State Guarantee and Government Grants); any initial syndication (excluding any legal counsels fees of any transferee under the syndication); the conduct of any audits; or any exercise or attempted exercise of any right, power or remedy under any Financing Document or any failure to exercise any right, power or remedy except where that failure is due to the wilful misconduct or gross negligence of, as the case may be, the Arranger, the Agent or the Security Agent; in each case subject to the terms of any agreement then made by the Borrower and the Agent relating to such costs and expenses. 27.2 Preservation and Enforcement of Rights The Borrower will, from time to time on demand of the Agent reimburse the Lenders, the Agent, the Security Agent and the Arranger for all reasonable costs and expenses (including reasonable legal fees) on a full indemnity basis together with any VAT thereon incurred by them in connection with the preservation and/or enforcement of any of the rights of the Agent, the Security Agent or the Lenders under the Financing Documents and any document referred to in the Financing Documents. 27.3 Registration Fee The Borrower will pay all registration and other fees to which the Financing Documents, any other document referred to in the Financing Documents or any judgment given in connection therewith is or at any time may be subject and shall, from time to time on demand of the Agent, indemnify the Lenders, the

97 Agent and the Security Agent against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such fees. 27.4 Amendment Costs If the Borrower requests any amendment, waiver or consent then it will, within five (5) Business Days of demand by the Agent, reimburse the Lenders for all reasonable external costs and expenses (including reasonable legal fees of one law firm for the Lenders selected by the Agent) together with any VAT thereon incurred by such Lender in responding to or complying with such request. 27.5 Lenders Liabilities for Costs If the Borrower fails to perform any of its obligations under this Clause 27 (Costs and Expenses), each Lender will, in proportion to its aggregate participation in the Advances (or, if no Advances have been made, the Facility) for the time being (or, if the Advances have been repaid in full, immediately prior to the final repayment), indemnify the Agent (or as the case may be the Security Agent) against any loss incurred by it as a result of the failure and the Borrower will immediately reimburse each Lender for any payment made by it pursuant to this Clause 27.5 (Lenders Liabilities for Costs). 28. 28.1 INDEMNITY AND BREAKAGE COSTS Indemnity The Borrower undertakes to indemnify the Lenders, the Agent and the Security Agent, except where any such costs, loss, expense or liability results from a Lenders, the Agents and the Security Agents gross negligence, wilful default, bad faith or the breach of any of a Lenders, the Agents and the Security Agents obligations under the Financing Documents against: 28.1.1 any reasonable cost, claim, loss, expense (including reasonable legal fees) or liability together with any VAT thereon, which it may sustain or incur as a consequence of the occurrence of any Event of Default or any default by the Borrower in the performance of any of the obligations expressed to be assumed by it in any of the Transaction Documents; and any reasonable cost or loss it may suffer as a result of any claim or proceeding against it relating to its involvement in the transactions contemplated hereby or any use of the proceeds of the Facility. Breakage Costs If: (a) any payment is made otherwise than on the last day of an Interest Period applicable thereto;

28.1.2 28.2 28.2.1

98 (b) (c) (d) any other payment is made otherwise than on the due date therefore; any Advance requested cannot be made because the Borrower has failed to fulfil a condition precedent; or the Borrower refuses to accept a requested Advance,

then the Borrower will pay to the Agent for the account of each Lender to which such payment is made or who participated in the Advance requested, such additional amount as the relevant Lender may reasonably certify as being necessary to compensate it for any loss (excluding however the Margin) or expense incurred on account of funds borrowed, funds contracted for or utilised to fund its participation in the amount so paid or the Advance so requested, which it has suffered or incurred as the result of such amount not having been paid on the last day of such Interest Period or on its due date or the Advance not having been disbursed or accepted, as the case may be. 28.2.2 The Borrower will pay to the Agent for the account of the Hedging Counterparty to which such payment is made, such additional amount as the Hedging Counterparty may reasonably certify as being necessary to compensate it for any loss or expense arising as a result of the termination, in whole or in part, of any Hedging Agreement entered into in relation to any amounts cancelled or prepaid hereunder. SET-OFF Each Lender may set off any matured obligation owed by the Borrower under this Agreement against any obligation owed by the Lender to the Borrower, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange in its usual course of business for the purpose of set-off. 30. 30.1 PRO-RATA SHARING If at any time the proportion received or recovered by any Lender by way of set-off or otherwise (other than through the Agent in accordance with Clause 9 (Payments)) in respect of its portion of any amounts due from the Borrower to the Lenders under this Agreement is greater than the proportion thereof which the Lender would have received through the Agent if distributed in accordance with Clause 9 (Payments) (the difference between the amount received or recovered (after deduction of any costs incurred by the Lender in connection with such receipt or recovery) by the Lender and the amount which the Lender would have received or recovered had the recovery been received through the Agent if distributed in accordance with Clause 9 (Payments) hereinafter called the Excess Amount), then:

29.

99 30.1.1 30.1.2 30.1.3 such Lender will promptly notify the Agent and pay to the Agent an amount equal to the Excess Amount within three (3) Business Days of such notification; the Agent will account for such payment to the Lenders (excluding the Lender having received the Excess Amount) as if it were a payment by the Borrower on account of the sum owed to the Lenders under this Agreement; and the liability of the Borrower to the Lenders will be adjusted in accordance with the distribution of the Excess Amount among the Lenders, provided that: (a) if the Excess Amount or any part thereof thereafter has to be repaid to the Borrower by the Lender having received the Excess Amount, each of the Lenders will repay to the Agent for the account of such Lender such proportion of the amount received by it out of the Excess Amount (plus any interest legally demanded by the Borrower in respect of such proportion) as corresponds to the proportion of the Excess Amount which has to be repaid by the relevant Lender to the Borrower; and sums recovered as a result of litigation started by a Lender to enforce its rights under this Agreement and resulting in an Excess Amount will only be shared with all Lenders other than Lenders which were aware of such litigation and did not join in such litigation without being legally prevented from doing so.

(b)

31. 31.1

ASSIGNMENTS AND TRANSFERS Assignments and Transfers by the Borrower The Borrower is not entitled to assign or transfer all or any of its rights, benefits and obligations under the Financing Documents.

31.2 31.2.1

Assignments and Transfers by the Lenders Each of the Lenders (a Transferor) may at any time assign all its rights and benefits under this Agreement or transfer its rights and obligations under this Agreement in whole or in part to members of the European Central Bank System, banks, financial service providers, financial institutions, insurance companies, institutional investors, funds, pension funds, public pension schemes and similar institutions (a Transferee) subject to Clause 31.2.2 and any such transfer will comprise a pro rata share of the entirety of the Transferors rights and obligations in relation to this Agreement. Participations in any disbursement of an Advance may not be transferred independently from corresponding participations in Commitments. A transfer will only be permissible:

31.2.2

100 (a) if the amount of the Commitment and/or Advance, as the case may be, under the Facilities which is transferred is not less than EUR 10 million applied rateably across the Tranches and in any particular Tranche rateably between the Transferors share in each outstanding Advance thereunder and its undrawn Commitment in relation thereto; with the consent of the Borrower, such consent not to be unreasonably withheld provided that consent will not be required if such transfer is made to an affiliate (belonging to the same group of companies within the meaning of 18 AktG) of a Lender or to another Lender provided there are no adverse tax or other detriments (e.g. Germanys thin capitalisation rules, 8a KStG) to the Borrower; and following such transfer the circumstances envisaged in Clauses 12 (Illegality) or 13 (Increased Costs) would neither apply, nor reasonably be expected to apply and the Borrower would not have, and would not reasonably be expected to have, any obligations under Clause 14.1.2 (Taxes).

(b)

(c)

31.2.3

A transfer will only become effective upon execution by the Transferor and the Transferee and countersignature by the Agent of a transfer certificate in the form of Schedule 14 (Transfer Certificate) (the Transfer Certificate) or, if later, at the time specified in the Transfer Certificate and the payment by the Transferee of a transfer fee of EUR 1,000. Upon the transfer becoming effective, and for such part of the Transferors rights and obligations, as is transferred, the Transferor shall be released from its obligations under the Financing Documents and all other related documentation, and its rights and obligations under such documents shall transfer to and vest in the Transferee provided that it will be the sole responsibility of the Transferee to ensure that any additional action which may be required for securing the valid transfer to it of any rights in respect of Security is taken. The Transferor will give prompt notice of any proposed transfer to the Agent who will promptly inform the Borrower. The Agent will promptly inform the Borrower of any perfected transfer. The Borrower will undertake all reasonable efforts to assist the Arranger in all acts in connection with a syndication pursuant to this Clause 31.2 (Assignments and Transfers by the Lenders). The Guarantors must consent to any transfer by the Lenders provided that consent shall not be required if the transfer is to a credit institution or branch of a credit institution within the European Union and the Transferor assumes the

31.2.4 31.2.5 31.2.6 31.2.7

101 Transferees rights and obligations under the Financing Documents on a fiduciary basis. 31.3 Disclosure of Information The Agent may disclose to any actual or potential assignee, participant or Transferee or to any person who may otherwise enter into contractual relations with such bank or financial institution in relation to any of the Financing Documents such information about the Borrower or such details of the Project Contracts as the Agent considers appropriate provided that such person has executed and delivered to the Borrower a confidentiality undertaking reasonably satisfactory to the Borrower. The Agent will not in any way be liable or responsible for such information not being kept confidential by such proposed assignee, participant or Transferee or other person if a reasonable confidentiality undertaking was obtained prior to such disclosure. 32. 32.1 32.2 33. 33.1 SUB-PARTICIPATIONS Each Transferor may, in accordance with standard banking practices, grant at any time sub-participations with respect to all or any part of its rights and claims under this Agreement to Transferees and may make dispositions with respect to such rights and claims. Clauses 31.2.4, 31.2.7 (Assignment and Transfers by the Lenders) and 31.3 (Disclosure of Information) apply mutatis mutandis. CALCULATIONS AND EVIDENCE OF DEBT Basis of Accrual Unless otherwise provided, interest and Fees payable per annum will accrue from day to day and be calculated for the actual number of days elapsed and on the basis of a year of 360 days. 33.2 33.2.1 Prima Facie Evidence In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained with the Agent and/or the Lenders are, in the absence of manifest error, prima facie evidence of the existence and amounts of the specified obligations of the Borrowers. A certificate of and determination by the Agent, Security Agent or a Lender as to the interest rate and amounts owed under the Financing Documents are, in the absence of manifest error, prima facie evidence of the existence and amounts of the specified obligations of the Borrower.

33.2.2

102 34. NON-APPLICABILITY OF 181 BGB 181 BGB does not apply to any authorisation the Borrower gives to the Arranger, Agent, Security Agent and Lenders. 35. 35.1 35.2 35.3 36. FORM REQUIREMENTS AND AMENDMENTS No oral agreements (Nebenabreden) have been made. Any modification or amendment of this Agreement, including this Clause, and any waiver by the Agent or any of the Lenders of its rights under this Agreement, must be made in writing. Any modification or amendment of this Agreement needs the Guarantors consent. CONDITIONS OF THE STATE GUARANTEE The conditions of the State Guarantee as set out in Schedule 10 (State Guarantee) are incorporated in this Agreement, even if they are not explicitly provided for in this Agreement. In the case of any discrepancies between the conditions of the State Guarantee and the terms of this Agreement, the former will apply. 37. 37.1 REMEDIES AND WAIVERS, CUMULATIVE RIGHTS, PARTIAL INVALIDITY Remedies and Waiver No failure to exercise, nor any delay in exercising, on the part of the Lenders, any right or remedy under any Financing Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. 37.2 Cumulative Rights The rights and remedies provided in the Financing Documents are cumulative and not exclusive of any other rights and remedies provided in the Financing Documents or by law. 37.3 Partial Invalidity Should any provision of this Agreement be invalid or unenforceable, in whole or in part, or should any provision later become invalid or unenforceable, this shall not affect the validity of the remaining provisions of this Agreement. In lieu of the invalid or unenforceable provision another reasonable provision shall apply, which as far as legally possible comes as close as possible to the intention of the contracting parties, or to what would have been their intention, in correspondence with the spirit and the purpose of this Agreement, had the parties upon entering into this Agreement taken into consideration the invalidity

103 or unenforceability of the respective provision. The same shall apply mutatis mutandis to fill possible gaps in this Agreement. 38. 38.1 NOTICES Communications in Writing Each communication to be made by the parties hereto under this Agreement or any other Financing Document that does not contain a provision comparable to this Clause 38.1 will be made in writing and, unless otherwise stated, will be made by fax, letter or e-mail. Each communication will be in German or English. 38.2 Addresses Any communication or document to be made or delivered by the parties hereto pursuant to this Agreement or to any other Financing Document that does not contain a provision comparable to this Clause 38.2 will (unless the recipient of such communication or document has, by fifteen (15) days written notice to the Agent, specified another address or fax number) be made or delivered to the address set out below: (a) to the Borrower: Zellstoff Stendal GmbH Goldbecker Strasse 1 D 39596 Arneburg attn.:Wolfram Ridder Tel.: +49 (0) 39321 55122 Fax.: +49 (0) 39321 55129 (b) to the Arranger: Bayerische Hypo- und Vereinsbank AG Am Tucherpark 1 (MCS3IN) D 80538 Mnchen attn.: Claudia Schmidt Tel.: +49 89 378 46740 Fax: +49 89 378 41518 (c) to the Agent and/or Security Agent: Bayerische Hypo- und Vereinsbank AG Am Tucherpark 1 (MCS4LA) D 80538 Mnchen

104 attn.: Loans Agency Tel.: +49 89-378 25460 Fax: +49 89 378 41517 (d) to the Lenders: to the contact addresses mentioned in Schedule 5 (Lenders and Commitments). 38.2.2 Communications or documents addressed to C&L in connection with this Agreement or any other Financing Document, not containing a provision corresponding to this Clause 38.2, shall be addressed to it at: C&L Deutsche Revision AG Moskauer Strasse 19 D-40227 Dsseldorf attn.: Katharina Vo Tel.: +49 (0) 211 981 2805 Fax.: +49 (0) 211 981 2810 38.3 Delivery Any communication or document to be made or delivered by one person to another pursuant to the Financing Documents will (if by way of fax) be deemed to have been received when transmission has been completed and evidenced by a positive transmission statement (and, if such date is not a Business Day or if transmission is completed after 5.30 p.m. in the place of receipt on a Business Day, will be deemed to have been received on the next Business Day) or (if by way of letter) deemed to have been delivered when left at that address or, as the case may be, ten days after being deposited in the post postage prepaid in an envelope addressed to it at that address, provided that any communication or document to be made or delivered to the Agent will be effective only when received by its agency division and then only if the same is expressly marked for the attention of the department or officer identified with the Agents signature below (or such other department or officer as the Agent shall from time to time specify for this purpose). 39. GOVERNING LAW This Agreement will be governed by, and construed in accordance with, the laws of the Federal Republic of Germany.

105 40. JURISDICTION The exclusive place of jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes which may arise out of or in connection with this Agreement is Munich. The Lenders, the Agent and the Security Agent may, however, also commence proceedings before any other court in which assets of the Borrower are located. Mandatory places of jurisdiction remain unaffected. 41. COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together constitute one and the same instrument. 42. CONFIRMATION PURSUANT TO SECTION 8 OF THE GERMAN MONEY LAUNDERING ACT (GELDWSCHEGESETZ) The Borrower expressly confirms to the Finance Parties, that all funds made or to be made available to it under this Agreement have been drawn for its own account and that it is the economic beneficiary within the meaning of Section 8 Money Laundering Act (Geldwschegesetz).

106 SCHEDULE 1 Drawdown Request [Borrowers Letterhead] To: Bayerische Hypo- und Vereinsbank AG Attn: Loans Agency Telefax: +49 89 378 41517 Date: [ ]

We refer to the EUR 827,950,000 facility agreement dated August 26, 2002 whereby a facility has been made available to Stendal Zellstoff GmbH by [a group of banks] on whose behalf Bayerische Hypo- und Vereinsbank AG is acting as agent in connection therewith (such agreement as from time to time amended being referred to herein as the Facility Agreement). Terms defined in the Facility Agreement shall have the same meanings herein unless specified otherwise herein. Pursuant to Clause 3.1 of the Facility Agreement, we hereby request the following drawdown under Tranche A Tranche B: Sub Tranche B1 Sub Tranche B2 Sub Tranche B3 Sub Tranche B4 Tranche C Tranche D1 Tranche D2 Tranche E of the Facility Agreement:

107 Draw down Date: Interest Period: Amount of Advance: EUR The Advance will be used for the following specific purposes: Tranche A: [Project Construction Costs, Development Costs], in particular

An amount of EUR [ ] hereof are Post-Acceptance Costs regarding Project Construction Costs. Tranche B[1, 2, 3]: [Financing Costs, start-up costs as well as construction costs and development costs which are not financed under Tranche A], in particular

Tranche B4:

Working Capital Costs of Borrower, in particular

An amount of EUR [ ] hereof are Post-Acceptance Costs. Tranche C: Tranche D1: Funding of the Debt Service Reserve Account Financing of Project Construction Costs, in particular

Tranche D2:

Financing of Cost Overruns/shortfall in Government Grants post Acceptance/prepayment of Tranche A for EUEquity Test, in particular

Tranche E:

[Bridge Financing of costs in relation to the Project for which Government Grants are to be received, recoverable VAT payments on Project Construction Costs], in particular

108

The amount of the Advance shall be credited to the Disbursement Account. We hereby confirm that 1. 2. 3. 4. 5. the representations and warranties pursuant to Clause 16.1 (Representation and Warranties) of the Facility Agreement are correct as at the date hereof and will be correct immediately after the Advance is made; no Event of Default or Potential Event of Default as set out in Article 21 of the Facility Agreement has occurred and is continuing or might result from the making of the Advance; no Material Adverse Effect has occurred and is continuing; Assurance of Overall Financing is still fulfilled; the drawdown conditions for the requested Advance have been met [unless otherwise waived pursuant to Clause 3.3.2 (Drawdown Conditions) of the Facility Agreement].

Zellstoff Stendal GmbH by:

109 SCHEDULE 2 Conditions for the First Drawdown The following documentation and information in form and substance satisfactory to the Agent has been received by the Agent: 1. 2. 3. A certified and up-to-date copy of the commercial register extract and the articles of association of the Borrower, RWE-IN, ALTMARK INDUSTRIEPARK AG, MFC IH, Mercer International and SP Holding. A copy of the corporate authorisations and/or shareholder resolutions of the Borrower relating to the execution, delivery and performance of all Financing Documents to which it is a party. A certified copy of the Secretary Certificates of the Corporate Secretary of Mercer International: (a) (b) 4. 5. authorising the execution, delivery and performance of all Financing Documents to which Mercer International is a party as approved by Mercer Internationals board of trustees; and setting out the names and signatures of the authorised signatories for the signing of such documents duly certified to be true and correct.

Specimen signatures of the persons authorised to sign the Financing Documents and notices thereunder. Original executed copies of the Transaction Documents, in each case, in full force and effect (with respect to the Hedging Agreements, however, only the agreement for the interest rate swaps) other than: (a) (b) in the case of the Transaction Documents, which will be concluded or be in full force and effect upon first drawdown hereunder and in the case of the EPC Contract, which will be in full force and effect upon the payment of the down payment under the EPC Contract,

together, in each case, with any necessary notices of assignment and acknowledgements thereof in form and substance acceptable to the Agent, registrations (save for the land charges to be created) etc in each case, in full force and effect. 6. Evidence that the Shareholders have paid into the Disbursement Account the following funds:

110 (a) (b) EUR 14,744,354 in the form of equity in respect of a subscription for Share Capital; and EUR 37,520,412 million in the form of Shareholder Loans,

and have made Shareholder Loans in the amount of EUR 17,735,234. 7. Evidence that the Government Grants for the Project as contemplated in the Investment and Financing Plan in an amount of not less than EUR 274,7 million are available of which EUR 109,2 will be given as direct grants (GA-Zuschuss (Investment Incentives)) by the State of Sachsen-Anhalt and the Agent is satisfied that EUR 165,5 million as Investitionszulagen (Tax Grants) by the Federal Republic of Germany will be granted, both approved by EU notification, for the Project in favour of the Borrower. A copy of the EU-Decision the contents of which is satisfactory to the Agent and its legal advisors. The audited Financial Model and the agreed Base Case and the model auditors report thereon as well as the Investment and Financing Plan. Provision of the Amortisation Schedule. The Project Budget in accordance with the Financial Model setting out all costs over the Construction Phase. Execution by the parties thereto of the letter setting out the Hedging Strategy. Uncontested (nicht angefochten) official approval of the subsidies (Frdermittelzuwendungsbescheid) to be granted by the State of Sachsen-Anhalt to the city of Arneburg with respect to infrastructure measures. Evidence from RWE-IN satisfactory to the Agent that such part of the Owners Scope in relation to the EPC Contract required to have been completed prior to first drawdown has been fulfilled. All Authorisations required for the Project and the performance of the Borrowers obligations under the Transaction Documents required as of the first Drawdown Date as contemplated by Clause 16.1.6 (Authorisations) have been obtained. Written confirmation by the Borrower that the official approval of the plan (Planfeststellungsbeschlu) has not been contested (nicht angefochten) and all Authorisations required for the Project and the performance of the Borrowers obligations under the Transaction Documents required as of the first Drawdown Date as contemplated by Clause 16.1.6 (Authorisations) have been obtained. The

8. 9. 10. 11. 12. 13. 14. 15. 16.

111 Borrower will further present copies of the official approval of the plan (Planfeststellungsbeschlu) and the other Authorisations required for the Project and the performance of the Borrowers obligations under the Transaction Documents required as of the first Drawdown Date as contemplated by Clause 16.1.6 (Authorisations). 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Written confirmation from the Technical Adviser and the Wood Supply Adviser and an auditor acceptable to Agent that the Development Costs are reasonable. Delivery of final reports from the Technical Adviser and the Wood Supply Adviser and the Pulp Market Adviser satisfactory to the Agent. Delivery of plan concepts prepared by the Borrower regarding wood supply, logistics (and sales). Presentation of wood supply Letters of Intent (LOI) covering, together with own procured volumes, 1.25x the required wood volume of 3 Mio. m3. Report by the Insurance Adviser containing, inter alia, the confirmation that the insurances entered into are satisfactory. Brokers letter(s) of undertaking, insurance cover notes and agreed draft policy wordings satisfactory to the Insurance Advisor. Presentation of clearance letter by the German Federal Cartel Office (Bundeskartellamt) concerning a positive decision on the capital increase in the Borrower. The most recent audited financial statements of the Borrower. The most recent audited accounts of each of the Sponsors and Shareholders. Written confirmation by Kvaerner plc that, vis--vis the Borrower, it only has one claim in the amount of EUR 478,687, by Thyssen Rheinstahl Technik Projektgesellschaft mbH that it only has claims in the amount of EUR 2,648,000 (compensation payment) and EUR 570,646 for ancilliary costs for the provision of funds by Thyssen Rheinstahl Technik GmbH and its successor Thyssen Rheinstahl Technik Projektgesellschaft mbH to the Borrower in connection with the purchase of the Site. Written confirmation by RWE-IN that the profit loss transfer agreement between RWE AG and RWE Solutions AG dated 27/29 June 2000 is in full force and effect at Financial Close. Evidence that all real estate necessary for the construction of the Project has been acquired and is free of any right of third parties (save under that certain site

27. 28.

112 lease agreement dated 16 May 2002 and made between the Borrower and ALTMARK INDUSTRIEPARK AG and except for Permitted Encumbrances) which may interfere with the Project as contemplated in the Financing Documents. 29. 30. 31. Delivery of the confirmation by the local office of archeology (Landesamt fr Archologie) declaring that the excavations on locations 1 to 4 as set out in Schedule 17 (Archeological Sites) have been finalised. All Advisers fees and amounts payable hereunder have been paid in full or will be paid in full out of the first Advance. Receipt by the Agent of evidence that the proceeds of the first Advance will be used, inter alia, to repay indebtedness of the Borrower to Dresdner Bank AG; to Kvaerner plc in the amount of EUR 478,687; to Thyssen Rheinstahl Technik Projektgesellschaft mbH in the amount of EUR 2,648,000; to ALTMARK INDUSTRIEPARK AG in the amount of EUR 546,794; to RWE-IN in the amount of EUR 1,590,899; and to Thyssen Rheinstahl Technik Projektgesellschaft mbH in the amount of EUR 570,646 for ancilliary costs for the provision of funds by ALTMARK INDUSTRIEPARK AG, RWE-IN and Thyssen Rheinstahl Technik Projektgesellschaft to the Borrower in connection with the purchase of the Site; and for payment of the second instalment of the purchase price to ALTMARK INDUSTRIEPARK AG for the Site. The Lenders are satisfied in all respects with the construction and operating arrangements for the Project. Evidence satisfactory to the Agent that SP Holding (on a fully diluted basis) holds at least 63.58 % of the voting rights in the Borrower and has control over the board of directors of the Borrower and that SP Holding is a wholly owned subsidiary of Mercer International. A legal opinion from Cleary, Gottlieb, Steen & Hamilton with respect to the obligations of Mercer International, SP Holding, ALTMARK INDUSTRIEPARK AG, MFC IH and RWE-IN under the Transaction Documents to which it is a party. A legal opinion of the Borrowers legal counsel with respect to the EU-Decision having been validly issued together with a report analysing the risks of an appeal from this decision. A legal opinion of the Agents German legal counsel regarding the transaction in form and substance satisfactory to the Agent.

32. 33.

34. 35. 36.

113

SCHEDULE 3 General Drawdown Conditions 1. 2. 3. 4. 5. 6. The Agent has received a duly completed irrevocable Drawdown Request not later than 11:00 a.m. on the fifth (5th) Business Day before the Drawdown Date proposed in the Drawdown Request. The representations and warranties continue to be true and correct. No Event of Default or Potential Event of Default has occurred and remains uncured or unwaived or would occur as a result of the making of the Advance to be drawn down. Neither of the events mentioned in Clauses 5.1.1 and 5.1.2 has occurred. All terms and conditions of the State Guarantee are met, no event has occurred, as a result of which C&L refuses to allow disbursements under this Agreement and the State Guarantee continues to be valid and in full force and effect. Certificate by the Insurance Adviser stating that the Project is sufficiently insured in accordance with the construction progress. Such certificate is not needed if the respective insurance company is obliged to inform the Lenders promptly of a termination of any insurance. The Borrower has: (a) (b) paid all due and unpaid fees and expenses due under any of the Financing Documents; or instructed the Lenders to deduct the amount of such fees and expenses from the amount of the Advance to be disbursed to the Borrower and the amount of the Advance is sufficient to satisfy all such outstanding fees and expenses.

7.

114

SCHEDULE 4 Conditions Subsequent (A) Wood and Logistic related Issues Employment of a wood supply manager satisfactory to the Agent Management, in particular a purchasing director and a harvesting manager, in place satisfactory to the Agent The wood supply company and the logistic company have been incorporated Final company agreement of the wood supply company and the logistic company and final agreements to be entered into between the Borrower and the Permitted Subsidiaries in place and heads of terms regarding the agreements to be entered into between the Borrower and the Permitted Subsidiaries in place Presentation of final agreements, including prices and volume, for 45 % of the required first year volume of about 2.2 mio. m3 of round wood and chips volumes with chips making up at least 20 % of the contracted volume All staff required for the Start-up with regard to the wood supply company and the logistic company has been contracted Wood inventory of 230.000 m3 at the mill or road side Presentation of final agreements, including prices and volume, for 55 % in aggregate of the required first year volume of about 2.2 mio. m3 of round wood and chips volumes with chips making up at least 20 % of the contracted volume

6 months after first drawdown 10 months after first drawdown 10 months after first drawdown 10 months after first drawdown 5 months before expected Start-up 3 months before expected Start-up 2 months before expected Start-up 2 months before expected Start-up

(B)

Pulp production related Issues Employment of a Pulp Mill manager satisfactory to the Agent Technical plans regarding railroad and natural gas connection in place

4 months after first drawdown 4 months after first drawdown

115 10 months after first drawdown 11 months after first drawdown 3 months before expected Start-up Presentation of final personnel recruitment and training plan Employment of senior production, sales and maintenance management Presentation of a detailed production start-up and operation plan showing that the whole corporate structure will be in place for operation

116 SCHEDULE 5 Lenders and Commitments Lender Bayerische Hypo- und Vereinsbank AG Am Tucherpark 1 (MCS3IN) D 80538 Mnchen attn.: Claudia Schmidt Tel.: +49 89-378 46740 Fax: +49 89 378 41518 Total Commitments Commitment in Euro 827,950,000

827,950,000

117 SCHEDULE 6 Mandatory Cost Formulae 1. The Mandatory Cost is an addition to the interest rate to compensate Lenders for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other authority which replaces all or any of their functions) or (b) the requirements of the European Central Bank. On the first day of each Interest Period (or as soon as possible thereafter) the Agent shall calculate, as a percentage rate, a rate (the Additional Cost Rate) for each Lender, in accordance with the paragraphs set out below. The Mandatory Cost will be calculated by the Agent as a weighted average of the Lenders Additional Cost Rates (weighted in proportion to the percentage participation of each Lender in the relevant Advance) and will be expressed as a percentage rate per annum. The Additional Cost Rate for any Lender lending from a Facility Office in a Participating Member State will be the percentage notified by that Lender to the Agent. This percentage will be certified by that Lender in its notice to the Agent to be its reasonable determination of the cost (expressed as a percentage of that Lenders participation in all Advances made from that Facility Office) of complying in respect of Advances made from that Facility Office. The Additional Cost Rate for any Lender lending from a Facility Office in the United Kingdom will be calculated by the Agent in accordance with the formula set out below (expressed as a percentage rate per annum): A x 0.01 % per annum. 300 Where A is the rate of charge payable by that Lender to the Financial Services Authority pursuant to the Fees Rules (calculated for this purpose by the Agent as being the average of the fee tariffs specified in the Fees Rules under the activity group A.1 Deposit acceptors, ignoring any minimum fee or zero related fee required pursuant to the Fees Rules) and expressed in pounds per 1,000,000 of the Tariff Base of that Lender. 5. For the purposes of this Schedule: (a) Fee Rules means the Banking Supervision (Fees) Regulations 2000 or such other law as may be in force from time to time in respect of the payment of fees for banking supervision;

2.

3.

4.

118 (b) (c) (d) (e) 6. Participating Member State means any member state of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Union relating to European Monetary Union; Special Deposits has the meanings given to it from time to time under or pursuant to the Bank of England Act 1998 or (as may be appropriate) by the Bank of England; Tariff Base has the meaning given to it in, and will be calculated in accordance with, the Fees Rules; and the resulting figure will be rounded to four decimal places.

The Agent may from time to time, after consultation with the Borrower and the Lenders, determine and notify to all parties hereto any amendments or variations which are required to be made to this Schedule in order to comply with any change in law, regulation or any requirements from time to time imposed by the Bank of England, the Financial Services Authority and/or the European Central Bank (or, in any case, any other authority which replaces all or any of their functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all the parties hereto. Each Lender shall supply any information required by the Agent for the purpose of calculating its Additional Cost Rate. In particular, but without limitation, each Lender shall supply the following information in writing on or prior to the date on which it becomes a Lender: (a) (b) its jurisdiction of incorporation and the jurisdiction of its Facility Office; and any other information that the Agent may reasonably require for such purpose.

7.

Each Lender shall promptly notify the Agent in writing of any change to the information provided by it pursuant to this paragraph. 8. The percentages or rates of charge of each Lender for the purpose of A above shall be determined b the Agent based upon the information supplied to it pursuant to paragraph 7 above and on the assumption that, unless a Lender notifies the Agent to the contrary, each Lenders obligations in relation to cash ratio deposits, Special Deposits and the Fee Rules are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office.

119 9. The Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Lender and shall be entitled to assume that the information provided by any Lender pursuant to paragraphs 3 and 7 above is true and correct in all respects. The Agent shall distribute the additional amounts received as a result of the Mandatory Cost to the Lenders on the basis of the Additional Cost Rate for each Lender based on the information provided by each Lender pursuant to paragraphs 3 and 7 above. Any determination by the Agent pursuant to this Schedule in relation to the formula, the Mandatory Cost, an Additional Cost Rate or any amount payable to a Lender shall, in the absence of manifest error, be conclusive and binding on all of the parties to this Agreement.

10. 11.

120 SCHEDULE 7 Form of Account Pledge Agreement

121 ZELLSTOFF STENDAL GMBH as Borrower and Pledgor and BAYERISCHE HYPO- UND VEREINSBANK AKTIENGESELLSCHAFT as Original Pledgee and Security Agent

ACCOUNT PLEDGE AGREEMENT

122 CONTENTS

123 THIS ACCOUNT PLEDGE AGREEMENT is made on the [Date] (the Agreement) BETWEEN: (1) ZELLSTOFF STENDAL GMBH, a limited liability company incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Goldbecker Strasse 1, 39596 Arneburg, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Stendal, number HRB 2446 (the Borrower and Pledgor); BAYERISCHE HYPO- UND VEREINSBANK AG, a stock corporation incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Am Tucherpark 16, 80538 Mnchen, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Munich, number HRB 42148 (the Original Pledgee and Security Agent).

(2)

WHEREAS: (A) The Lenders and the Pledgor have concluded a facility agreement dated [] August 2002 in the amount of EUR 827,950,000 for the purpose of the design, development, construction and operation of a pulp mill located in Arneburg, near Stendal in Sachsen-Anhalt (the Facility Agreement). (B) Pursuant to the Facility Agreement the Pledgor and its shareholders are obliged to grant certain security for the purpose of securing the obligations under the Financing Documents in accordance with the terms and conditions therein.

NOW, IT IS HEREBY AGREED as follows: 1. 1.1 1.2 DEFINITIONS Unless otherwise stated in this Agreement or required by the context the definitions and principles of interpretation in the Facility Agreement are to be used in this Agreement. Definitions: Accounts: The bank accounts listed in Schedule 1 hereto and Account means any of them. Account Bank: A bank administering any of the Accounts.

124 Advance: A principal sum drawn by the Borrower under the Facility Agreement or, depending on the context, the principal sum outstanding as a result of such drawdown. Agent: Bayerische Hypo- und Vereinsbank AG or its successor. ALTMARK INDUSTRIEPARK AG: Altmark Industriepark AG, a company incorporated under the laws of the Federal Republic of Germany. Arranger: Bayerische Hypo- und Vereinsbank AG and its successors. Derivative Transaction: Any swap agreement, option agreement, futures contract, forward contract or similar arrangement with respect to interest rates, currencies or commodity prices. EPC Contract: The engineering, procurement and construction agreement dated 26 August 2002 between REW-IN and the Borrower. EPC-Contractor: RWE-IN. EU-Decision: The decision by the EU-Commission dated 19 June 2002 in respect of the State Guarantee and the Government Grants. Event of Default: Any of the events mentioned in Clause 23 (Events of Default) of the Facility Agreement. Facility: The facility comprising Tranche A, Tranche B, Tranche C, Tranche D1, Tranche D2 and Tranche E pursuant to Clause 2.1 (Granting of the Facility) of the Facility Agreement. Facility Office: The office or offices notified by a Lender to the Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than (5) five days written notice) as the office or offices through which it will perform its obligations under the Facility Agreement. Fee Letter: The fee letter by Bayerische Hypo- und Vereinsbank AG and addressed to the Borrower dated on or about the date hereof. Financing Documents: The Facility Agreement, any agreement entered into with any Permitted Subsidiary in connection with the financing of the wood supply or logistics aspects of the Project, the Hedging Agreements, the Security Agreements, the Shareholders Undertaking Agreement, the Step-In-Rights Agreement between SP Holding, RWE-In, MFC IH and the agent on or about the date hereof, the RWE Solutions AG Guarantee, any agreement regarding Shareholder Loans and the corresponding subordination declarations, the Stand-By Equity Security, the Fee Letter, any waiver requests, waivers and other

125 binding notifications, the Direct Agreement, the Parent Company Guarantee, the advance payment, performance and defects liability guarantee issued in favour of the Borrower by a first class bank in respect of the performance of the EPC Contractor under the EPCContract, the State Guarantee and any other document in relation to the financing of the Project. Future Pledgees: any entity which may become a pledgee hereunder by way of (i) transfer of the Pledges by operation of law following the transfer or assignment (including by way of novation or assumption (Vertragsbernahme)) of any part of the Secured Obligations (as defined hereinafter) from the Original Pledgee or any Future Pledgee to such future pledgee and/or (ii) accession to this Agreement pursuant to Clause 2.6 hereof as pledgee. Government Grants: The grants which will be given as direct grants (GA-Zuschuss (investment incentives)) by the State of SachsenAnhalt and as Investitionszulagen (tax grants) by the Federal Republic of Germany, both as approved by the EU-Decision, for the Project in favour of the Borrower. Hedging Agreements: The Hedging Agreement dated 26 August 2002 between the Hedging Counterparts and the Borrower in relation to any swap agreements, cap agreements, collar agreements, future agreements, forward agreements and similar agreements with respect to interest rates, currencies or commodity prices as well as any single transactions to be concluded by the Hedging Agreement. Hedging Counterparty: Bayerische Hypo- und Vereinsbank AG. Hedging Strategy: The hedging strategy in relation to the Facility to be agreed in writing between the Borrower and the Arranger, as amended from time to time, for the hedging of the interest, currency and commodity price risks of the Pledgor. Lenders: The lenders (including the Original Lender), acting through their respective Facility Offices, and their successors, transferees and assignees, as permitted under the Facility Agreement. Mercer International: Mercer International Inc., a Massachussetts trust incorporated und the laws of the state of Washington, United States of America. MFC IH: MFC Industrial Holdings AG. Original Lender: Bayerische Hypo- und Vereinsbank AG.

126 Parent Company Guarantee: The parent company guarantee to be granted by RWE Solutions AG in favour of the Borrower in respect of RWE-INs obligations under the EPC Contract. Permitted Subsidiaries: The two support holding companies, the wood supply company and the logistic company. Pledgees: the Original Pledgee and the Future Pledgees. Project: The design, development, financing, construction and operation of a 552,000 tonnes per annum bleached softwood kraft pulp mill located in Arneburg, near Stendal in Sachsen-Anhalt, Federal Republic of Germany. RWE Solutions AG Guarantee: The guarantee given by RWE Solutions AG in respect of RWE-INs obligations under the Shareholders Undertaking Agreement. RWE-IN: RWE Industrie-Lsungen GmbH, a limited liability company incorporated under the laws of the Federal Republic of Germany. Secured Creditors: The Lenders and the Hedging Counterparty. Security Agreements: The security agreements listed in Schedule 2 (Security Agreements), the Security Pooling Agreement and any other agreement pursuant to which the Borrower, the Shareholders, the Sponsors or any third party grant security to the Security Agent and/or the Lenders (other than the State Guarantee), including security agreements granting security in favour of or on behalf of the subsidiaries. Security Pooling Agreement: The security pooling agreement dated on or about the date hereof between the Security Agent, the Lenders, the Hedging Counterparty, SP Holding, RWE-IN, MFC IH and the Borrower. Share Capital: The share capital of the Borrower as increased from time to time in accordance with the Facility Agreement. Share: An ordinary fully paid up share in the Share Capital. Shareholder Loans: Loans by the Shareholders to the Borrower made and subordinated in accordance with the terms and conditions of the Shareholders Undertaking Agreement. Shareholders Undertaking Agreement: The agreement of even date between the Sponsors, the Shareholders, the Borrower and the Agent.

127 Shareholders: As at the date of this Agreement, SP Holding, RWE-IN and MFC IH, and thereafter includes any person to whom Shares may be transferred. Shareholders Account: An account in the name of the Borrower over which the Lenders have no security and to which the Borrower is allowed to make payments in accordance with Clauses 9.4.3(a) (Priority of Payments) and 9.4.3(c) (Restricted Application) of the Facility Agreement. Sponsors: Mercer International, RWE-IN and ALTMARK INDUSTRIEPARK AG and any of their respective successors. Stand-By Equity Security: (a) (b) an unconditional letter of credit; or an unconditional guarantee on first demand,

in each case in form and substance satisfactory to the Agent and issued by a bank whose long term unsecured credit rating is at least A from Standard & Poors Rating Services and A 2 from Moodys Investors Services Inc.; or an interest bearing cash deposit in the amount required by the Shareholders Undertaking Agreement to be held by the Agent or at HVB Banque Luxembourg Socit Anonyme, such account to be pledged in favour of the Lenders by entering into an account pledge agreement substantially in the form set out in Schedule 7 (Form of Account Pledge Agreement) of the Facility Agreement in case the account is held by the Agent and an account pledge agreement substantially in the form set out in Schedule 8 (Form of Luxembourg Account Pledge Agreement) of the Facility Agreement in case the account is held by HVB Banque Luxembourg Socit Anonyme. State Guarantee: The guarantees (Ausfallbrgschaften) issued by the Federal Republic of Germany (for 48 % of the aggregate amount of Advances under Tranches A and B) and the State of Sachsen-Anhalt (for 32 % of the aggregate amount of Advances under Tranches A and B) issued pursuant to the EU-Decision in the form attached to the Facility Agreement as Schedule 11 (State Guarantee) of the Facility Agreement in favour of the Lenders with respect to this Agreement including the Allgemeinen Bestimmungen fr Brgschaftsbernahmen durch die Bundesrepublik Deutschland (Bund) und parallel brgende Bundeslnder (General Conditions for the issuing of guarantees by the Federal Republic of Germany and Lnder). 2. 2.1 PLEDGE The Pledgor hereby pledges to the Pledgees:

128 (a) all present, conditional and future claims including the account balances (Salden) of current accounts (Kontokorrentkonten), as the case may be, and all respective rights of the Pledgor arising under all of its accounts, including the bank accounts listed in Schedule 1 hereto and all such accounts which will be mentioned in the relevant Account Lists pursuant to Clause 4; all securities and other instruments including all secondary rights, in particular the rights from interest and profit share coupons, which are or will in the future be credited into the custody accounts mentioned in Schedule 1 hereto;

(b)

(each right of the Pledgees created hereunder is hereinafter referred to as a Pledge). 2.2 2.3 2.4 Excluded from the Pledge is the Shareholders Account. The Original Pledgee hereby accepts its Pledges for itself. For the purpose of the Pledges the Pledgor hereby assigns to the Pledgees its claims for possession regarding the items listed in Clause 2.1(b) above against the account holding bank. If order papers (Orderpapiere) are deposited or will be deposited in the deposit of security mentioned under Clause 2.1(b) the Pledgor of such order papers will be provided with a blank endorsement, if it has not been provided with such blank endorsement already. The Pledgor undertakes to notify the Account Bank and any other relevant third party of the Pledges in substantially the form set out in Schedule 4 attached to this Agreement without undue delay requesting to acknowledge receipt of the notification of and acceptance of the terms thereof to the Security Agent.

2.5

2.6 (a) Upon transfer or assignment (including by way of assumption (Vertragsbernahme)) of all or part of the Secured Obligations by a Pledgee the Pledges created hereunder shall transfer by operation of law pursuant to para. 401 BGB. In the event that for any reason such transfer by operation of law is not totally effective then the Security Agent shall, and hereby does accept, as representative without power of attorney (Vertreter ohne Vertretungsmacht), the respective Pledges for and on behalf of each Future Pledgee. Each Future Pledgee ratifies and confirms the declarations and acts so made by the Security Agent on its behalf by accepting the transfer or assignment (including by way of novation or assumption (Vertragsbernahme)) of the Secured Obligations (or part of them) from a Pledgee. Upon such ratification

129 (Genehmigung) such Future Pledgee becomes a party to this Agreement, it being understood that any future or conditional claim (zuknftiger oder bedingter Anspruch) of such Future Pledgee arising under the Secured Obligations shall be secured by the Pledges constituted hereunder. (b) (c) All parties hereby confirm that the validity of the Pledges granted hereunder shall not be affected by the Security Agent acting as representative without power of attorney for each Future Pledgee. The Pledgor herewith authorises the Security Agent to notify the identity of such Future Pledgee and the new pledges created pursuant to Clause 2.6(a) above to the Pledgor and the Account Bank. Upon request of the Security Agent, the Pledgor shall without undue delay give such notice and provide the Security Agent with a copy thereof.

2.7 2.8 2.9 3.

The validity and effect of each of the Pledges shall be independent from the validity and the effect of the other Pledges created hereunder. The Pledges to each of the Pledgees shall be separate and individual pledges ranking pari passu with the other Pledges created hereunder. Each of the Pledges is in addition, and without prejudice, to any other security a Pledgee may now or hereafter hold in respect of the Secured Obligations. The Pledgor is not entitled to demand the delivery of interest and profit share coupons with regard to securities which are pledged hereunder other than provided in Clause 10.5.1 of the Facility Agreement. SECURED OBLIGATIONS The Pledges hereunder shall secure all claims (present and future, actual and contingent) of the Secured Creditors which are or become owing by the Pledgor pursuant to or in connection with: (i) (ii) the Facility Agreement; the Security Agreements and all of the other Financing Documents; and

(iii) the Hedging Agreements between the Hedging Counterparty and the Pledgor; in their respective valid, amended, supplemented, novated or newly arranged forms. (The claims mentioned in this Clause 3 will be hereinafter referred to as the Secured Obligations).

130 4. 4.1 4.2 4.3 4.4 5. 5.1 LIST OF BANK ACCOUNTS The Pledgor shall supply at its own expense to the Security Agent a list of the pledged accounts referred to in this Agreement within a period of ten (10) days from the end of each calendar quarter. The first list shall be supplied on the [Date] (the Account List). The Account List shall contain the account number, the accounting balances, the bank code number and the addresses of the banks holding these accounts. The parties to this Agreement agree that all claims from the bank accounts that are specified in the Account List pursuant to Clause 4.1 are pledged to the Pledgees having equal priority. The Pledgees are entitled to request further Account Lists from the Pledgor at its expense, such Account Lists to be supplied by the Pledgor to the Security Agent. ENFORCEMENT OF THE PLEDGES Until the Security Agent gives notice to the contrary to the Pledgor, the Pledgor shall be authorised to withdraw money from the pledged accounts and to transfer monies within the ordinary course of its business and pursuant to Clause 9.2 of the Facility Agreement. The same does apply mutatis mutandis with regard to transactions concerning the pledged custody accounts. If the requirements set forth in Section 1204 et seq. of the German Civil Code (Brgerliches Gesetzbuch) with regard to the enforcement of any of the Pledges are met (Pfandreife), in particular, if any of the Secured Obligations have become due and payable and, in addition, an Enforcement Event pursuant to the Facility Agreement has occurred, then in order to enforce the Pledges, the Pledgees (acting through the Security Agent) may at any time hereafter avail themselves of all rights and remedies to enforce the pledges that a pledgee has upon default of a pledgor by rights (the Enforcement Event). Notwithstanding Section 1277 of the German Civil Code, the Pledgees, acting through the Security Agent are entitled to exercise their rights without obtaining enforceable judgment or other instrument (vollstreckbarer Titel). The Pledgor hereby expressly agrees that two (2) weeks prior written notice to the Pledgor of the place and time of any such public auction shall be sufficient. The public auction may take place at any place in the Federal Republic of Germany designated by the Security Agent, acting for and on behalf of the Pledgees.

5.2

5.3 5.4

131 5.5 5.6 The Pledgor hereby expressly waives all defences of voidability and set-off pursuant to sections 770 and 1211 of the German Civil Code (Einrede der Anfechtbarkeit und der Aufrechenbarkeit). Provided that the other requirements in Clause 5.2 are met and to the extent permissible under the applicable law the Pledgees acting through the Security Agent shall be entitled to: (a) (b) (c) (d) collect the monies standing to the credit of the pledged accounts and to apply them to the satisfaction of the Secured Obligations; realise the securities booked on the Accounts; request that all documents relating to the Pledge be handed over to the Security Agent and the Pledgor hereby agrees to comply promptly with any such request; and take any other actions not mentioned in Section 5.5 (a) to 5.5 (c) above which are necessary or appropriate for the purpose of realising the security granted by the Pledgor in accordance with this Agreement, to the extent that such actions are permissible under the applicable law.

5.7 5.8

The Pledgees acting through the Security Agent may realise the Pledges only to the extent necessary to satisfy any outstanding Secured Obligations. Among several claims the Pledgees acting through the Security Agent may select at their own discretion which claims shall be realised. The Pledgees shall, however, use their best efforts to give priority to actions which will not endanger the ongoing concern of the Pledgors business. Other actions shall only be taken if necessary to satisfy in full the Secured Obligations. The proceeds resulting from the realisation of the Pledges shall be applied pursuant to Clause 7.7 of the Security Pooling Agreement. RIGHT OF INSPECTION The Security Agent is entitled during usual business-hours and with a reasonable advance notice to demand and to inspect all information, records and instruments which are required or useful in order to examine or to assert the value of the Pledges created under this Agreement. If the Pledgor employs data processing systems it will at its own cost and on reasonable request of the Security Agent produce print-outs of the information, records and instruments which are required or useful for the aforementioned purposes or will supply data carriers to the Security Agent on which such information, records and instruments are recorded.

5.9 6. 6.1

132 6.2 In case any third party other than the Pledgor has access to information, records and instruments described in Section 6 the Pledgor already hereby irrevocably authorises the Security Agent and its successors acting for and on behalf of the Pledgees to obtain such information, records and instruments in the name of the Pledgor. The Security Agent shall immediately inform the Pledgor of any such acts under the conditions set out in Clause 6.2. The Pledgor shall on request update all information, records and instruments relating to the claims and securities pledged under this Agreement. A consultant or adviser authorised by the Security Agent may exercise the Security Agents rights under this Section 6. REPRESENTATIONS AND WARRANTIES The Pledgor represents and warrants to the Pledgees that: (a) (b) (c) it alone holds title to and may freely dispose of the Accounts; the Accounts have not been pledged to third parties or encumbered in any other way in favour of third parties; no counterclaims as to which a right to set-off or a right of retention could be exercised exist to date and, to the extent that this is legally practicable and from a reasonable business perspective appropriate and within the ordinary course of business, such counterclaims will not be allowed to come into existence in the future; and it does not hold any bank accounts other than the accounts allowed under the Facility Agreement.

6.3 6.4 7. 7.1

(d) 7.2

If any of the warranties of the Pledgor under Section 7.1 should be incorrect, wholly or in part, the Pledgor will place the Pledgees in the same position as if the respective warranty given by the Pledgor had been correct. The aforementioned claim of the Pledgees does not require negligence on the part of the Pledgor. PLEDGORS UNDERTAKINGS The Pledgor undertakes: (e) unless permitted in this Agreement and the Facility Agreement, not to dispose of any assets booked on the accounts pledged hereunder other than in the ordinary course of its business and in accordance with the Facility Agreement as well as to refrain from encumbrances or any acts or omissions which might result in a material decline of the aggregate

8.

133 value or in a loss of the assets and not to enter into obligations to refrain from disposals of assets (Verfgungsverbote); (f) (g) (h) to identify the Pledge immediately in its books and records and to refrain from any acts or omissions which could prevent third parties who may have a legitimate interest in obtaining knowledge of the Pledge from obtaining knowledge thereof; to open a new account only with prior written consent of the Pledgees, which consent shall not be unreasonably withheld. In such a case, the Pledgor shall grant a corresponding account pledge to the Pledgees over the newly established account; to inform the Security Agent as soon as possible in the case the Pledgees rights in respect of the Pledge are prejudiced or jeopardised by attachment or are prejudiced or jeopardised by other material actions of third parties. Such information shall be accompanied, in the case of any attachment, by a copy of the order for attachment as well as all documents required for the filing of an objection against the attachment, and, in case of any other actions by third parties, by copies evidencing which actions have or will be taken, respectively, as well as all documents required for the filing of an objection against such actions. The Pledgor shall further be obliged to inform as soon as possible the attaching creditors or other third parties asserting rights with respect to the transferred rights and claims in writing of the Pledgees rights in respect of the assets. All reasonable and adequately documented costs and expenses for countermeasures of the Pledgees shall be borne by the Pledgor. This shall also apply to the institution of legal action which the Pledgees reasonably consider necessary; to inform the Security Agent promptly of any subsequent material changes in the value of the accounts pledged hereunder resulting from any set off or other reasons, after becoming aware of such changes other than in the ordinary course of business; and to notify the Security Agent promptly of any event or circumstance which might be expected to have a material adverse effect on the validity or enforceability of this Agreement.

(i) (j) 9. 9.1

NOTICES Communications in Writing Each communication to be made by the parties hereto under this Agreement will be made in writing and, unless otherwise stated, will be made by letter, fax or

134 e-mail. Any communication to be made by the parties hereto in connection with the enforcement of the security created hereunder shall, however, only be made by letter. Each communication will be in German or English. 9.2 Addresses Any communication, information or document to be made or delivered by the parties hereto pursuant to this Agreement will (unless the recipient of such communication or document has, by fifteen (15) days written notice to the Security Agent, specified another address or fax number) be made or delivered to the address set out below: (a) to the Pledgor: Zellstoff Stendal GmbH Goldbecker Strasse 1 D 39596 Arneburg attn.: Wolfram Ridder Tel.: +49 (0) 39321 50321 Fax.: +49 (0) 39321 50422 (b) to the Security Agent: Bayerische Hypo- und Vereinsbank AG Am Tucherpark 1 (MCS4LA) D 80538 Mnchen attn.: Loans Agency Tel.: +49 (0)89-378 25460 Fax: +49 (0)89-378 41517 10. LEGAL SUCCESSION

10.1 This Agreement shall create rights and obligations of the parties hereto and of their respective permitted successors. 10.2 The Security Agent may transfer its rights and obligations under this Agreement to third parties at any time after having resigned from its office as Security Agent. However, all rights and obligations shall only be transferred collectively to the same third party. The Borrower hereby irrevocably grants its consent that the relevant third party shall become a party hereto in lieu and as successor of the Security Agent upon the transfer becoming effective. The Borrower is

135 obliged not to transfer its rights and obligations under this Agreement without the prior written consent of the Security Agent. 10.3 This Agreement shall continue to apply in the case of a change of the Pledgors shareholders or legal form and in the case of a universal succession (Gesamtrechtsnachfolge) on the part of the Pledgor or the Security Agent. 11. AMENDMENTS Changes to this Agreement and any waiver of rights under this Agreement shall be made in writing. The parties may waive this form requirement by written agreement only. 12. RELEASE (PFANDFREIGABE) Upon complete and irrevocable satisfaction of the Secured Obligations, the Pledgees will as soon as reasonably practical declare the release of the Pledges (Pfandfreigabe) to the Pledgor as a matter of record. For the avoidance of doubt, the parties are aware that upon full and complete satisfaction of the Secured Obligations the Pledges, due to their accessory nature (Akzessoriett) cease to exist by operation of German mandatory law. 13. PARTIAL INVALIDITY, WAIVER

13.1 Should any provision of this Agreement be invalid or unenforceable, wholly or in part, or should any provision later become invalid or unenforceable, this shall not affect the validity of the remaining provisions of this Agreement. In lieu of the invalid or unenforceable provision another reasonable and enforceable provision shall apply which corresponds to what the parties would have agreed taking into account the spirit and purpose of this Agreement had they considered the invalidity or lack of enforceability of the relevant provision upon conclusion of this Agreement, and which corresponds to the intentions of the parties in relation to the spirit and purpose of this Agreement. The above provision shall apply mutatis mutandis to fill possible gaps in this Agreement. 13.2 No failure to exercise, nor any delay in exercising, on the part of the Security Agent, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies provided hereunder are cumulative and not exclusive of any rights or remedies provided by law. 14. MISCELLANEOUS

136 14.1 The Security Agent acts as agent for each of the Stendal Creditors against the Borrower in the event of an assertion of the rights and obligations under this Agreement. The Security Agent is authorised to authorise a third party if necessary. The Security Agent and the third party are exempt from the restrictions laid down in Section 181 of the German Civil Code (BGB). 14.2 Each Pledgee authorises the Security Agent to act as agent for the Pledgees in the event of an assertion of the rights and obligations under this Agreement. The Security Agent is authorised to authorise a third party if necessary. The Security Agent and the third party are exempt from the restrictions laid down in Section 181 of the German Civil Code (BGB). 14.3 The Security Agent in its capacity as account keeping bank herewith agrees that its lien pursuant to its general business conditions (AGBPfandrecht) shall rank behind all the pledges over the Account granted to the Pledgees by the Pledgor pursuant to this Agreement. 14.4 This Agreement has been translated into the English language for convenience purposes only. For the avoidance of doubt, the German version of this Agreement shall prevail. 15. APPLICABLE LAW, JURISDICTION

15.1 This Agreement shall be governed by the laws of the Federal Republic of Germany. 15.2 The courts in Munich shall have exclusive jurisdiction in respect of any dispute out of or in connection with this Agreement. The Pledgees, however, shall be entitled to take action against the Pledgor in any other court of competent jurisdiction.

137

Schedule 1 List Of Accounts

Bank Currency Account Number Use

138 Schedule 2 Security Agreements 1. First ranking Land Charge by the Borrower in an aggregate amount of EUR 827,950,000 on the site of the Borrower dated on or about the date hereof whereby the Borrower submits in a separate certificate to the immediate enforcement of judgement concerning the Site in an amount of EUR 60,000,000; 2. Security Purpose Agreement between the Borrower and the Security Agent dated on or about the date hereof; 3. Security Transfer Agreement between the Borrower and the Security Agent as of the date hereof; 4. Global Assignment Agreement between the Borrower and the Security Agent dated on or about the date hereof; 5. Insurance Claims Assignment Agreement between the Borrower and the Security Agent dated on or about the date hereof; 6. Investment Incentives Assignment Agreement between the Borrower and the Security Agent dated on or about the date hereof; 7. Account Pledge Agreement between the Borrower and the Security Agent dated on or about the date hereof; 8. Pledge of Hedging Claims between the Borrower and the Security Agent dated on or about the date hereof; 9. Share Pledge Agreement between SP Holding, RWE-IN and MFC IH and the Security Agent dated on or about the date hereof; and

139

Schedule 3 Notice Of Pledge From: Zellstoff Stendal GmbH To: [Account Bank] Date: Dear Sirs Re: [Account No. [ ], Banking Code [ ] (the Account)] We hereby give you notice that by an account pledge agreement dated [Date] (the ACCOUNT PLEDGE AGREEMENT) we have pledged in favour of Bayerische Hypo- und Vereinsbank Aktiengesellschaft (the SECURITY AGENT) and others as pledgees all of our right, title and interest in and to the above account (which shall include all sub-accounts, renewals, replacements and redesignations thereof) and all monies and interest from time to time standing or accruing to the credit thereof. Until notice to the contrary from the Security Agent to be served on you as Account Bank we may continue to operate the Account and in particular may dispose over the amounts standing to the credit of the Account. Upon receipt of such aforesaid notice to the contrary you, as Account Bank, shall not allow any dispositions by ourselves of amounts standing to the credit of the Account. Please acknowledge receipt of this notice and your agreement to the terms hereof by signing the enclosed copy and returning the same to Bayerische Hypo- und Vereinsbank Aktiengesellschaft, Am Tucherpark 1, MCS4LA, D-80538 Mnchen. Yours faithfully,

For and on behalf of Zellstoff Stendal GmbH

140 Annex to the Notice of Pledge [Letterhead of the Account Bank] To: Bayerische Hypo- und Vereinsbank AG Am Tucherpark 1 (MCS4LA) 80538 Mnchen Re: [Account No. -[ ], Banking Code [ ] (the Account)] Dear Sirs, We acknowledge receipt of the above notice and our agreement to the terms thereof and confirm that we have neither received any previous notice of pledge relating to this Account nor are we aware of any third party rights in relation to this Account. We hereby grant our consent on behalf of ourselves and our legal successors in title to the pledge of any claims arising out of the Account. We hereby irrevocably and unconditionally waive our rights in respect of and agree not to make any set-off or deduction from the Account or invoke any rights of retention in relation to this Account. We agree that the pledge in our favour over the Account granted pursuant to our General Business Conditions shall rank behind all the pledges over the Account granted to the Pledgees by the Pledgor pursuant to the Account Pledge Agreement of which we have been notified by the Pledgor.

For and on behalf of [Account Bank]

Date

141 EXECUTION PAGE ACCOUNT PLEDGE AGREEMENT Zellstoff Stendal GmbH as Borrower and Pledgor)

Name: Address: Goldbecker Strasse 1 D-39596 Arneburg Bayerische Hypo- und Vereinsbank AG as Original Pledgee and Security Agent

Name:

Name: Address: Am Tucherpark 16 D-80538 Mnchen

Name:

142 SCHEDULE 8 Form of Luxemburg Account Pledge Agreement

143 ZELLSTOFF STENDAL GMBH as Pledgor HVB BANQUE LUXEMBOURG SOCIT ANONYME as Account Bank BAYERISCHE HYPO- UND VEREINSBANK AKTIENGESELLSCHAFT as Security Agent

[] LUXEMBOURG ACCOUNT PLEDGE AGREEMENT

144 CONTENTS

145 THIS ACCOUNT PLEDGE AGREEMENT (the Pledge Agreement) is dated as of 26 August 2002 and made between: (1) ZELLSTOFF STENDAL GMBH, a limited liability company incorporated, organised and validly existing under the laws of the Federal Republic of Germany, having its office at Goldbecker Strasse 1, 39596 Arneburg, Federal Republic of Germany and registered in the commercial register (Amtsgericht) of Stendal, number HRB 2446 (the Pledgor); BAYERISCHE HYPO- UND VEREINSBANK AKTIENGESELLSCHAFT, a stock corporation incorporated organised and validly under the laws of the Federal Republic of Germany as Security Agent and as such acting for and on behalf of the secured creditors (the Security Agent);

(2)

AND IN THE PRESENCE OF (3) HVB BANQUE LUXEMBOURG SOCIT ANONYME, a company duly organized and existing under the laws of the Grand Duchy of Luxembourg, having its registered office in 4, rue Alphonse Weicker, 2099 luxembourg (the Account Bank);

WHEREAS: (A) The Lenders and the Pledgor have concluded a Facility Agreement dated 26 August 2002 in the amount of EUR 827,950,000 for the purpose of the design, development, construction and operation of a pulp mill located in Arneburg, near Stendal in Sachsen-Anhalt (the Facility Agreement). Pursuant to the Facility Agreement the Pledgor is obliged to grant certain security for the purpose of securing the obligations under the Facility Agreement in accordance with the terms and conditions therein.

(B)

NOW IT IS HEREBY AGREED as follows: 1. 1.1 DEFINITIONS Unless otherwise stated in this Agreement the definitions and principles of interpretation in the Facility Agreement shall apply to this Agreement. 2001 Law means the Luxembourg law dated 1 August 2001 on the circulation of securities and other fungible instruments (loi du 1er aot 2001 sur la circulation de titres et dautres instruments fongibles).

146 Bank Account means the bank account held with the Account Bank as set out in Schedule 1 (List of Bank Accounts) including any sub account, renewal, redesignation or replacement thereof. Eligible Securities means investments made in short term [euro] debt securities with a maximum duration of 3 years of issuers with a short term A1 rating or better of Standard & Poor s Corporation or an equivalent rating from such other rating agency approved by the agent. Hedging Counterparty means Bayerische Hypo- und Vereinsbank AG. Lenders means the financial institutions being, from time to time, Lenders under the Facility Agreement. Pledged Assets means the Pledged Account Claims, the Pledged Securities and the Related Assets. Pledged Account Claims means any claim to the cash credit balance of the Bank Account as well as any other claim the Pledgor may have against the Account Bank in relation to such Bank Account, including, for the avoidance of doubt, any pecuniary claim for the payment of the relevant credit balance or for the repayment of a terms deposit (Festgeld) as well as any other claim, regardless of the nature thereof in relation to the Bank Account, including, for the avoidance of doubt, any claim for the payment of the interests paid into the Bank Account. Pledged Securities means any securities and, in particular, any Eligible Securities which, from time to time will be deposited by the Pledgor on the securities ledger of the Bank Account. Related Assets means all dividends, interest and other monies payable in respect of the Pledged Securities and all other rights, benefits and proceeds in respect of or derived from the Pledged Securities (whether by way of redemption, bonus, preference, option, substitution, conversion or otherwise). Secured Creditors means the Lenders and the Hedging Counterparty. Secured Obligations means all present and future, conditional and unconditional claims, rights, title, interests (whether actual or contingent) of the Secured Creditors or any of them against the Pledgor or any of its successors which are or become owing by the Pledgor or any of its successors to the Secured Creditors under or in connection with the Facility Agreement, the Security Agreements, all other Financing Documents, the Hedging Agreement between the Hedging Counterparty and the Pledgor and any other agreement including any renewal, extension, novation or any other amendment,

147 modification or supplement to such agreements including the Financing Documents concluded between the Pledgor, on the one hand, and the Secured Creditors or any of them, on the other hand, in connection with or related to the Financing Documents irrespective of whether any other persons or entities are parties to such agreements or supplements including letters of credit and/or guarantees including all obligations of the Pledgor now or hereafter existing under this Agreement including, without limitation, all fees, costs and expenses whether in connection with a collection action hereunder or other enforcement action hereunder. 1.2 2. 2.1 References to Clauses, Recitals and Schedules are to clauses, recitals and schedules of this Agreement. PLEDGE OVER PLEDGED ACCOUNT CLAIMS Pursuant to Article 110 et seq. of the Luxembourg Code of Commerce, the Pledgor hereby irrevocably and unconditionally grants a first priority pledge (gage) over the Pledged Account Claims (the Pledge over Account ) in favour of the Security Agent, who accepts, as security for the due and full payment and discharge of all of the Secured Obligations. Pursuant to Article 110 et seq. of the Luxembourg Code of Commerce and Article 9 of the 2001 Law, the Pledgor hereby irrevocably and unconditionally grants a first priority pledge (gage) over the Pledged Securities (the Pledge over Securities, and together with the Pledge over Accounts, the Pledges) in favour of the Security Agent, who accepts, as security for the due and full payment and discharge of all of the Secured Obligations. The parties agree, to the extent necessary, that the Pledged Securities shall be subject to the fungibility regime organised by the 2001 Law. The Pledgor undertakes that the Pledge over Securities shall at all times remain perfected in accordance with article 9 of the 2001 Law and, in particular, that the Pledged Securities shall be held in a sub-account to the Bank Account which shall be identified as an account holding securities pledged in favour of the Security Agent (the Securities Sub-Account). Without prejudice to the above provisions, the Pledgor hereby irrevocably authorises and empowers the Security Agent to cause any formal steps to be taken by the Account Bank or any other person for the purpose of perfecting the Pledges and, for the avoidance of doubt, undertakes to take any such steps itself if so directed by the Security Agent. In particular, should any such steps be required in relation to Pledged Securities acquired in the future, the Pledgor undertakes to take any such steps immediately upon acquisition or delivery of the relevant Pledged Securities.

2.2

2.3 2.4

2.5

148 2.6 Without prejudice to the restrictions contained in this respect in the Facility Agreement, the Pledgor shall be allowed to dispose of any monies standing to the credit of the Bank Account. The parties however expressly agree that the Account Bank shall not be under an obligation to monitor compliance with the restrictions contained in the Facility Agreement. UNDERTAKING The Pledgor undertakes to the Security Agent during the subsistence of this Agreement that: 3.1 it shall from time to time promptly execute, acknowledge, deliver, file and register all such additional documents, instruments, agreements, certificates, consents and assurances and do all such other acts and things as may be necessary or as the Security Agent may reasonably request from time to time in order to perfect the security constituted by this Agreement and to exercise and enforce the rights and remedies under this Pledge Agreement or in respect of the Pledged Assets; it shall promptly furnish to the Security Agent such information, reports and records in respect of the Pledged Assets as the Security Agent may reasonably request from time to time; it shall abstain from any act or omissions affecting the enforceability of the pledge or through which the rights and interests of the Security Agent as the owner of security rights therein may be impaired; it shall not close the Bank Account without the prior written consent of the Security Agent; it shall refrain from any acts or omissions including but not limited to, the creation of any encumbrances, which might result in a material decline of the aggregate value or in a loss of the Bank Account; it shall identify the Pledge immediately in its books and records and refrain from any acts or omissions which would reasonably be likely to prevent third parties who may have a legitimate interest in obtaining knowledge of the Pledge; it shall inform the Security Agent as soon as possible in case the Security Agents rights in respect of the Bank Account are prejudiced or jeopardised by attachment or are materially prejudiced or jeopardised by other actions of third parties. Such information shall be accompanied, in case of any attachment, by a copy of the order for attachment, as well as all documents required for the filing of an objection against the attachment, and, in case of any other actions by third parties, by copies evidencing which actions have or will be taken, respectively,

3.

3.2 3.3 3.4 3.5 3.6 3.7

149 as well as all documents required for the filing of an objection against such actions. The Pledgor shall further be obliged to promptly inform as soon as possible the attaching creditors or other third parties asserting rights with respect to the Bank Account in writing of the Security Agents rights in respect of the claims. All reasonable and adequately documented costs and expenses for any actions of intervention and countermeasures of the Security Agent shall be borne by the Pledgor. This shall also apply to the institution of legal action, which the Security Agent considers necessary; 3.8 3.9 3.10 4. 4.1 it shall inform the Security Agent, forthwith upon becoming aware of such event, in the event that any Pledged Securities no longer qualify as Eligible Securities; it shall sell, if so requested by the Security Agent, any Pledged Securities in accordance with (i) Clauses 2.3 and 3.5 and (ii) any particular instructions the Security Agent may have given; and it shall notify the Security Agent as soon as possible of any event or circumstance which may be expected to have a material adverse effect on the validity or enforceability of this Agreement. POWER OF ATTORNEY The Pledgor irrevocably appoints the Security Agent to be its attorney and in its name and on its behalf to execute, deliver and perfect all documents and do all things that the Security Agent may consider to be requisite for (a) carrying out any obligation imposed on the Pledgor under this Agreement, (b) perfecting or maintaining the security interest created hereunder or (c) exercising any of the rights conferred on the Security Agent by this Agreement or by law, it being understood that the enforcement of the pledge over the Pledged Assets must be carried out as described in Clause 5 (Remedies upon Default) hereunder. The Pledgor shall ratify and confirm all things done and all documents executed by the Security Agent in the exercise of that power of attorney. REMEDIES UPON DEFAULT Three Eight days after a demand to pay (mise en demeure) the Secured Obligations (or any part thereof) which may only be made if an Event of Default (Kndigungsgrund) according to Clause 23.1.1 of the Facility Agreement has occurred and is continuing is given to the Pledgor in the form provided for in Clause 13, the Security Agent shall be entitled, and in addition to all other rights and remedies granted hereunder and under any other instrument or agreement securing, evidencing or relating to the Secured Obligations, to exercise all rights and remedies of a pledgee under the laws of Luxembourg (or any other applicable laws) and may enforce the Pledge in the most favourable manner

5. 5.1

150 available under applicable law, including, but not limited to, by using any right of set off arising under Article 118 (2) of the Code of Commerce or by requesting direct payment from the Account Bank pursuant to the same provision. 5.2 For that purpose, the Security Agent shall be irrevocably empowered and authorised to represent the Pledgor in relation to the Account Bank, in particular but not limited to for the purpose of requesting the temporary closure (arrt de compte) of the Bank Accounts or for the purpose of making any other administrative arrangements necessary for the enforcement of the Pledge. It may also request the attribution judiciaire of any claim or asset pursuant to Article 2078 of the Civil Code, as well as exercise all other rights to which it is entitled in such circumstances under Luxembourg law or any other applicable laws. CHANGE OF VALUE In the event the Bank Account will substantially change in its value due to objections, suspension or due to set offs or for any other reasons the Pledgor is obliged to promptly inform the Security Agent thereof. 7. 7.1 7.2 INDEMNITY The Security Agent and the Secured Creditors shall not be liable for any loss or damage suffered by the Pledgor save in respect of such loss or damage which is suffered as a result of wilful misconduct or gross negligence of either of them. The Pledgor will indemnify the Secured Creditors and the Security Agent and keep the Secured Creditors and the Security Agent indemnified against all damages, losses, actions, claims, expenses, demands and liabilities which may be incurred by or made against the Secured Creditors and the Security Agent for anything done or omitted in the exercise or purported exercise of the powers contained herein and occasioned by any breach of the Pledgor of any of its obligations or undertakings herein contained other than to the extent that such damages, losses, actions, claims, expenses, demands and liabilities are incurred or made against the Secured Creditors or the Security Agent as a result of gross negligence or wilful misconduct of the Secured Creditors or the Security Agent. REPRESENTATIONS AND WARRANTIES The Pledgor represents and warrants to the Security Agent that, except as expressly provided in the Facility Agreement and the Security Documents: 8.1.1 it alone holds title to and may, except for the Pledge created hereunder, freely dispose of the Bank Account;

6.

8. 8.1

151 8.1.2 the Bank Account has not been pledged to third parties or encumbered in any way in favour of third parties; 8.1.3 the pledgeability of the Bank Account is neither excluded nor restricted in any way; 8.1.4 it has the power to execute and perform its obligations under this Agreement and all necessary corporate, shareholder and other action has been taken to authorise the execution and performance of the same; 8.1.5 no litigation, arbitration or administrative proceeding is presently in progress, and the Pledgor has not received notice that the initiation of any such proceedings is intended, to restrain the entry into, exercise of any of the Pledgors rights under and/or performance or enforcement of or compliance with any of its obligations under this Agreement, which, if adversely determined, is reasonably likely to have a material adverse effect on the ability of the Pledgor to perform its obligations under this Agreement; and 8.1.6 no counterclaims as to which a right to set off or right of retention could be exercised exist with respect to the Bank Account. 8.2 8.3 The representations under Clause 8.1 (Representations and Warranties) shall be expressly repeated by the Pledgor by reference to the facts and circumstances then existing at each Drawdown Date. If any of the representations and warranties of the Pledgor under Clause 8.1 (Representations and Warranties) should be incorrect, in whole or in part, the Pledgor will use its best efforts to place the Security Agent in the same position as if the respective representation or warranty given by the Pledgor had been correct. The rights and claims of the Security Agent contained in this Clause 8.3 do not require negligence on the part of the Pledgor. RELEASE OF SECURITY The Pledge shall be discharged by, and only by, the express release thereof granted by the Security Agent. The Pledgor shall be entitled to demand the release and the Security Agent shall be under the obligation to grant such release upon good and final discharge of the Secured Obligations. 10. PARTIAL ENFORCEMENT The Security Agent shall have the right, pursuant to the procedures set forth in Clause 5 (Remedies upon Default) of this Agreement, to request enforcement of all or part of the Pledge in its most absolute discretion. In particular, the

9.

152 Security Agent shall, in its most absolute discretion, be entitled to enforce the Pledge over all or part of the Pledged Account Claims only and/or over all or part of the Pledged Securities only. No action, choice or absence of action in this respect, or partial enforcement, shall in any manner affect the Pledge as it then shall be. The security interest/pledge thereover shall continue to remain in full and valid existence until the Security Agent releases the Pledges in accordance with Clause 9. 11. 11.1 EFFECTIVENESS OF COLLATERAL The Pledge shall be a continuing security and shall not be considered as satisfied or discharged or prejudiced by any partial payment, satisfaction or settlement of any part of the Secured Obligations and shall remain in full force and effect until the Security Agent releases the Pledges in accordance with Clause 9. The Pledge shall be cumulative, in addition to and independent of every other security which the Security Agent may at any time hold as security for the Secured Obligations or any rights, powers and remedies provided by law and shall not operate so as in any way to prejudice or affect or be prejudiced or affected by any security interest or other right or remedy which the Secured Creditors or the Security Agent may now or at any time in the future have in respect of the Secured Obligations. This Pledge shall not be prejudiced by any time or indulgence granted to any person, or any abstention or delay by the Secured Creditors or the Security Agent in perfecting or enforcing any security interest or rights or remedies that they may now or at any time in the future have from or against the Pledgor or any other person having granted security for the Secured Obligations. No failure on the part of the Security Agent to exercise, or delay on its part in exercising, any of the rights under this Pledge Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any further or other exercise of that or any other rights. None of the Secured Creditors or the Security Agent or any of their agents shall be liable by reason of (a) taking any action permitted by this Pledge Agreement or (b) any neglect or default in connection with the Pledged Assets or (c) the realisation of all or any part of the Pledged Assets, except in the case of gross negligence or wilful default upon its part. The Pledgor hereby expressly renounces the benefit of article 2037 of the Luxembourg Civil Code.

11.2

11.3

11.4

11.5

11.6

153 12. 12.1 COST AND EXPENSES All reasonable costs, charges, fees and expenses incurred in connection with the negotiation, preparation, execution registration, implementation and preservation and amendments, waivers or consents of this Agreement and all reasonable costs, charges, fees and expenses incurred in connection with the enforcement of this Agreement (in each case including fees for legal advisers to the Security Agent) shall be borne by the Pledgor. NOTICES All notices or communications pursuant, under or in connection with this Agreement shall be made pursuant to and in accordance with Clause 38 (Notices) of the Facility Agreement. Any notice or other communication under or in connection with this Agreement to the Account Bank shall be made or delivered with a copy to the Security Agent to the following address of the Account Bank: HVB Banque Luxembourg Socit Anonyme address: 4, rue Alphonse Weicker L-2099 Luxembourg Luxembourg attention of: FKA/PKR telephone: +352 42 722 131 fax: +352 42 724 548 For the avoidance of doubt, unless another address has been communicated in accordance with Clause 38 (Notices) of the Facility Agreement the addresses of any other party to the Agreement shall be determined pursuant to Clause 38 (Notices) of the Facility Agreement. 13.3 Any notice or other communication under or in connection with this Agreement shall be in the English language or, if in any other language, accompanied by a translation into English. In the event of any conflict between the English text and the text in any other language, the English text shall prevail. LEGAL SUCCESSORS This Pledge Agreement shall remain in effect despite any amalgamation or merger (howsoever effected) relating to Secured Creditors or the Security Agent, and references to the Secured Creditors or the Security Agent shall be deemed to include any assignee or successor in title of Secured Creditors or the Security Agent and any person who, under any applicable law, has assumed the rights

13. 13.1 13.2

14. 14.1

154 and obligations of Secured Creditors or the Security Agent hereunder or under any other agreements or to which under such laws the same have been transferred or novated or assigned in any manner. To the extent a further notification or registration or any other step is required by law to give effect to the above, such further registration shall be made and the Pledgor hereby gives power of attorney to the Security Agent to make any notifications, or to take any other steps, and undertakes to do so himself if so requested by the Security Agent. 14.2 For the purpose of Article 1278 of the Luxembourg Civil Code, to the extent required under applicable law and without prejudice to any other terms hereof or of any other agreements and in particular paragraph 1 of this Clause, the Security Agent hereby expressly reserve and the Pledgor agrees to the preservation of this Pledge and the security interest created thereunder in case of assignment, novation, amendment or any other transfer of the Secured Obligations or any other rights arising for it under the Financing Documents or any other agreements to which the Pledgor is a party. AMENDMENTS AND PARTIAL INVALIDITY Changes to this Agreement and any waiver of rights under this Agreement shall require written form. The parties may waive this form requirement by written agreement only. Should any provision of this Agreement be invalid or unenforceable, wholly or in part, or should any provision later become invalid or unenforceable, this shall not affect the validity of the remaining provisions of this Agreement. In lieu of the invalid or unenforceable provision another reasonable and enforceable provision shall apply which corresponds to what the parties would have agreed taking into account the spirit and purpose of this Agreement had they considered the invalidity or lack of enforceability of the relevant provision upon conclusion of this Agreement, and which corresponds to the intentions of the parties in relation to the spirit and purpose of this Agreement. LAW AND JURISDICTION This Pledge Agreement shall be governed by Luxembourg law and the courts of Luxembourg City shall have exclusive jurisdiction to settle any dispute which may arise from or in connection with it. To the extent that the Pledgor may in any jurisdiction claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgement or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Pledgor hereby irrevocably agrees not to claim and hereby

15. 15.1 15.2

16. 16.1 16.2

155 irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction.

156 SCHEDULE 1 List of Bank Accounts

Bank Address Currency and amount outstanding Account No.:

HVB Banque Luxembourg Socit Anonyme

4, rue Alphonse Weicker 2099 Luxembourg

EUR []

[]

157 SIGNATURE PAGE OF THE [] LUXEMBOURG ACCOUNT PLEDGE AGREEMENT IN WITNESS WHERE OF this Pledge Agreement has been duly executed by the parties. SIGNATORIES TO THE ACCOUNT PLEDGE AGREEMENT The Pledgor ZELLSTOFF STENDAL GMBH By: Name: Harald Gatzke Title: Address: Goldbecker Strasse Damm 1 D-39596 Arneburg Federal Republic of Germany The Security Agent BAYERISCHE HYPO- UND VEREINSBANK AKTIENGESELLSCHAFT By: Name: Thomas Reppenthien Title: Address: Am Tucherpark 1 D-80538 Mnchen Federal Republic of Germany Name: Christoph Wagner Title: Name: Wolfram Ridder Title:

158 SIGNATURE PAGE OF THE [] LUXEMBOURG ACCOUNT PLEDGE AGREEMENT By signing below, the Pledgor hereby expressly and specifically accepts the limitation of liability in favour of the Security Agent (Clauses 4, 7, 11.5 and 11.6) and the jurisdiction of the Luxembourg courts (Clause 16.2). The Pledgor ZELLSTOFF STENDAL GMBH By: Name: Harald Gatzke Title: ACKNOWLEDGEMENT By signing hereunder for acceptance, the Account Bank acknowledges and accepts the existence of this Pledge Agreement and of the security interest created hereunder over the Pledged Account Claims for the purposes of Article 114 of the Luxembourg Code of Commerce and article 2074 of the Luxembourg Civil Code and takes notice of the terms of the Pledge Agreement. Furthermore, by signing hereunder for acceptance, the Account Bank acknowledges and accepts the security interest created hereunder over the Pledged Securities for the purposes of Article 9 of the 2001 Law and undertakes to mark the Securities Sub-Account in accordance with Clause 2.3 of this Pledge Agreement. The Account Bank confirms that it is not aware of any prior encumbrances over the Bank Account or the Pledged Assets. The Account Bank hereby releases any pledge or lien resulting from the application of its general terms and conditions or any other agreement over the Bank Account or Pledged Assets and waives its right of retention, set-off rights and, more generally, any rights that may adversely affect the Pledge and waives any option to create new pledges or liens over future accounts of the Pledgor. The Account Bank HVB BANQUE LUXEMBOURG SOCIT ANONYME By: Name: Title: By: Name: Title: By: Name: Wolfram Ridder Title:

159 Address: 4, rue Alphonse Weicker L-2099 Luxembourg Luxembourg

160 SCHEDULE 9 Security Agreements 1. First ranking Land Charge by the Borrower in an aggregate amount of EUR 827,950,000 on the Site of the Borrower dated on or about the date hereof whereby the Borrower submits in a separate certificate to the immediate enforcement of judgement concerning the Site in an amount of EUR 60,000,000; Security Purpose Agreement with regard to the first ranking Land Charge between the Borrower and the Security Agent dated on or about the date hereof; Security Transfer Agreement as security transfer of equipment (plant or machinery) and as security transfer of all assets of the Borrower on the Secured Site between the Borrower and the Security Agent as of the date hereof; Global Assignment Agreement (including claims out of pocket and delivery agreements) between the Borrower and the Security Agent dated on or about the date hereof; Insurance Claims Assignment Agreement between the Borrower and the Security Agent dated on or about the date hereof; Investment Incentives Assignment Agreement between the Borrower and the Security Agent dated on or about the date hereof; Account Pledge Agreement between the Borrower and the Security Agent dated on or about the date hereof; Pledge of Hedging Claims Agreement between the Borrower and the Security Agent dated on or about the date hereof; and Share Pledge Agreement between SP Holding, RWE-IN and MFC IH and the Security Agent dated on or about the date hereof.

2. 3. 4. 5. 6. 7. 8. 9.

161

SCHEDULE 10 State Guarantee

162 SCHEDULE 11 Financing of the Subsidiaries Structure

Contractual Matrix All pulp sales contracts entered into by ZSG as principal. Up to 50% of the wood will be sourced through the wood supply operating company acting as principal. Contracts for the balance will be entered into by ZSG as principal acting either directly or through the wood supply operating company as its agent. Profit and Loss Transfer Agreement entered into between ZSG and support holding companies. Maximum working capital limited to EUR 12mn down-streamed by ZSG to the support holding companies and, from such companies, to subsidaries. Service agreement entered into between ZSG and wood supply operating company providing for provision of up to 100% of total wood supply requirement. Payment for wood supplied by wood supply operating company only against actual delivery at mill. Average price over any 12 month period not

163 to exceed average market price over similar period as evidenced by contracts entered into by ZSG as principal unless justified by ZSG to the reasonable satisfaction of the Majority Lenders for exceptional reasons (e.g start-up, initial development of new sources of supply etc.). Support holding companies employ all employees except management. Support holding companies will enter into leasing agreements for wood harvesting equipment and trucks with a maximum exposure of EUR 17 mn. Each support holding company enters into a service agreement with its respective operating company pursuant to which it will make available personnel, wood harvesting equipment and trucks against payment of fee covering annual operating / financing costs etc. of such Support Holding Company.

Other Issues Pledge of all bank accounts of Support Holding Companies to secure ZSG debt and of Operating Companies to extent of working capital loans downstreamed to them from time to time from ZSG. Direct Agreement (substantially in the form annexed hereto) between ZSG lenders and leasing companies providing that leasing companies cannot terminate leases without giving prior notice to ZSG lenders and not at all if the ZSG lenders step-in to the leases making good any existing payment default. The Borrower to deliver to the Agent: (a) as soon as possible and no later than ninety (90) days after the close of its financial year (i) the balance sheet, the profit and loss account and the cashflow statement for the subsidiaries in respect of that financial year, audited by a recognised independent firm of accountants with a license to practice in the Federal Republic of Germany as well as a reconciliation of the annual financial statements with the annual budgeted accounts made by the Borrower to include an explanation of all material deviations from the budgeted annual financial statements; and (ii) the corresponding auditing report of the firm of accountants; and (iii) a certificate of such firm of accountants certifying that all business contracts of the Borrower with Related Parties in the relevant financial year have been entered into on conditions not less advantageous to the Borrower than achievable with third parties; upon request by the Agent semi-annually unaudited management accounts (with a list of sales and outstanding receivables) and a

(b)

164 statement of the board of directors in respect of the development of the subsidiaries.

165

Annex THIS DIRECT AGREEMENT is made on [ (1) (2) (3) (4) ], 200[ ] between

[LEASING COMPANY] (the Leasing Company) ZELLSTOFF STENDAL GmbH (ZSG) ZSG SUPPORT HOLDING COMPANY (Holding) and BAYERISCHE HYPO-UND VEREINSBANK AG (the Agent)

WHEREAS A. B. ZSG [will build and operate/has built and operates] a bleached softwood kraft pulpmill located at Arneburg, Sachsen-Anhalt, Federal Republic of Germany (the Mill). The Leasing Company has agreed to lease certain [trucks/harvesters"] (the Equipment) to Holding (a wholly-owned subsidiary of ZSG) as more particularly identified in that certain Leasing Agreement dated [ ], 200[ ] (the Leasing Agreement) for use in the operation of the Mill. The Agent is agent for a syndicate of banks who have lent money to ZSG to finance the construction and operation of the Mill.

C.

IT IS AGREED as follows: 1. The Leasing Company agrees not to take any steps (Enforcement Steps) to terminate, rescind or suspend performance of the Leasing Agreement or to repossess or seek to repossess any of the Equipment without first giving not less that 30 days prior written notice thereof to the Agent specifying the amount of any existing payment default under the Leasing Agreement. If during such 30 day period the Agent or its nominee makes good such payment default and undertakes by notice (a Step-in-Notice) to the Leasing Company that it will assume together with Holding responsibility for compliance with the Leasing Agreement from the date of its notice until the date it serves on the Leasing Company a further notice (a Step-out Notice) specifying that it will no longer be responsible for such compliance, the Leasing Company undertakes not to take any Enforcement Steps in respect of any default by Holding under the Leasing Agreement which occurred prior to the effective date of the Step-in Notice. During the 30 day period referred to in Clause 1 and thereafter if the Agent makes good the payment default and serves a Step-in Notice the Leasing

2.

3.

166 Company shall continue to perform its obligations under the Leasing Agreement. If the Agent does not make good the payment default and serve a Step-in Notice or if having done so it serves a Step-out Notice the Leasing Company may take such action as it thinks fit to enforce its rights against Holding under the Leasing Agreement with effect from the expiry of such 30 day period or, as the case may be, the effective date of the Step-Out Notice 4. All notices or other communications required or permitted hereunder shall be in writing addressed to the relevant party at its address identified with its signature below or such other address as any party may, by notice to each of the other parties, specify. All notices shall be deemed delivered upon receipt. This Direct Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Germany. The exclusive place of jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute which may arise out of or in connection with this Direct Agreement is Munich. Mandatory places of jurisdiction remain unaffected.

5. 6.

AS WITNESS the hands of the parties [LEASING COMPANY] By: Address: Fax No: BAYERISCHE HYPO-UND VEREINSBANK AG By: Address: Fax No: ZELLSTOFF STENDAL GmbH By: Address: Fax No: ZSG SUPPORT HOLDING COMPANY By: Address: Fax No:

167 SCHEDULE 12 Minimum Insurance Schedule

168 SCHEDULE 12a Minimum Insurance Operation Period Schedule OPERATIONAL PHASE INSURANCE 1. 1.1 Material Damage All Risks (including Machinery Breakdown) The Insured Parties (a) (b) (c) (d) (e) Borrower and any Subsidiary Companies; The EPC Contractor and/or Contractors Suppliers in respect of the Contract and the Contractor and/or Contractors Suppliers in respect of the non- ancillary Contracts for the duration of the relevant Defects Liability Periods only; Any consultants and suppliers for their site activities only; The Independent Engineer; The Agent and the Lenders and their technical adviser,

Each for their respective rights and interests. 1.2 The Insured Property All property comprising the entire Project, including but not limited to: the Plant, Machinery, Rail, Gas, Water and Electrical Interconnections, buildings and their contents, stock, fixtures, fittings and all other property being the Insureds own or in their custody or control. 1.3 Geographical Limits Federal Republic of Germany but in respect of temporary removal, Europe and Scandinavia. 1.4 Sum Insured An amount of EUR 625,000,000 being an amount not less than equivalent to the full replacement value from time to time of the Project (Including an allowance for professional fees, removal of debris) and Customs Duties. A sub-limit representing the new replacement value of machinery and plant may apply for Machinery Breakdown. 1.5 Indemnity All risks of physical loss of or damage to any part of the Insured Property from any cause not excluded in the Policy.

169 1.6 Period of Insurance From the earlier of the time that: cover expires under Part 1, Paragraph 1 Construction/ Erection All Risks Material Damage insurance of this Minimum Insurance Schedule and the date of Start Up and, to be maintained by renewals of the Period of Insurance, until the full repayment of the loan. 1.7 Main Exclusions (a) (b) (c) (d) (e) (f) 1.8 War, Civil War, etc., including Terrorism (until such time as insurance against acts of Terrorism becomes available in the international market on what the Security Agent accepts to be reasonable commercial terms); radioactive contamination; Costs incurred arising out of wear, tear, wasting or wearing away, gradual deterioration, rust, oxidation, corrosion or erosion but not consequent damage Wear and Tear and gradual deterioration but this shall not exclude consequent loss or damage; Date Recognition Clause; Loss of cash, banknotes, treasury notes, money orders, cheques or stamps Vehicles licensed for road use.

Maximum Deductible Not more than EUR 250,000 each and every loss.

1.9

Main Extensions/Conditions (a) Including loss or damage arising from acts of Terrorism, strikes, riots, civil commotion and criminal/malicious damage (except that insurance against acts of terrorism will be excluded until such time as that insurance becomes available in the international market on what the Security Agent accepts to be reasonable commercial terms); Unlimited Natural Perils cover; Debris removal; Professional Fees; Local Authorities clause; Automatic Increase Clause; Waiver of Average; Escalation Clause; Automatic Capital Additions Clause; Expediting Expenses; Computer Systems, Data Processing and Ancillary Equipment;

(b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

170 (l) Malicious & Accidental Erasure of Data, replacement of computer records; Full Machinery Breakdown, Pressure Explosion/Collapse; and

(m) Temporary Removal and Inland Transit. 2. 2.1 Business Interruption The Insured Parties (a) (b) The Borrower; and The Agent and the Lenders,

Each for their respective rights and interests. 2.2 Indemnity Fixed operating costs and standing charges including loss of debt service (interest -including fees- and Principal) ; plus any minimum take or pay obligations; plus increased cost of working following an interruption to the business as a direct result of physical loss or damage covered under Paragraph 1, Material Damage All Risks Insurance of this Minimum Insurance Schedule including loss or damage, which would be insured but for the application of any deductible, that causes interruption to or interference with the operations of the Project. 2.3 Period of Insurance From the time that cover expires under Part 1, Paragraph 2 (Delay in Start Up/Advance Loss of Revenue (construction) of this Minimum Insurance Schedule and to be maintained by renewals of the Period of Insurance, until the full repayment of the loan. 2.4 Sum Insured EUR 160 million for any 12 months period of indemnification being an amount sufficient to cover the Projects fixed operating costs including interest, fees and principal payable plus any minimum take or pay obligations for the duration of the maximum Indemnity Period. 2.5 Maximum Deductible Not more than 60 days any one occurrence. 2.6 Indemnity Period Not less than 18 months from the date of the occurrence of loss or damage.

171 2.7 Main Exclusions The insurance excludes any event not insured under Paragraph 1, Material Damage All Risks Insurance of this Minimum Insurance Schedule. 2.8 Main Extensions/Conditions (a) (b) (c) 3. 3.1 Suppliers extension; Denial of Access ; Failure of utilities extension (Water, Gas, electricity, telecommunications).

Third Party Liability The Insured Parties (a) (b) (c) (d) (e) Borrower and any Subsidiary Companies; The EPC Contractor and/or Contractors Suppliers in respect of the Contract and the Contractor and/or Contractors Suppliers in respect of the non-EPC ancillary Contracts for the duration of the relevant Defects Liability Periods only; Any consultants and suppliers for their site activities only; The Independent Engineer; The Agent and the Lenders and their technical adviser,

Each for their respective rights and interests. 3.2 Period of Insurance From the earlier of expiry of cover under Part 1, Paragraph 5 Third Party Liability of this Schedule and the date of Start Up and to be maintained by renewals of the Period of Insurance, until the full repayment of the loan. 3.3 Indemnity The legal and contractual liability of an Insured to pay damages, costs and expenses as a result of: (a) (b) (c) Death, bodily injury and disease (including mental shock) of any person; loss or damage to any property and/or loss of use thereof; interference with traffic or property or any easement, right of air, light, water, support or way or enjoyment of use by obstruction, loss of amenities, nuisance, trespass or any like cause; and

172 (d) libel, slander, defamation, false arrest, invasion of privacy, detention, eviction or any like cause,

arising out of or in the course of or in connection with the performance, maintenance and operation of the Project. 3.4 3.5 Geographical Limits World-wide. Limit of Indemnity Not less than EUR 30,000,000 for any one occurrence, or all occurrences of a series consequent upon or attributable to one source or original source, but with respect to Products Liability in the aggregate. 3.6 Maximum Deductible Not more than EUR 50,000 in respect of third party property damage only. 3.7 Main Extensions/Conditions (a) (b) (c) (d) (e) 3.8 Products Liability; Cross Liabilities Clause; World-wide jurisdiction clause; Legal costs and expenses; and Contingent Motor Liability.

Main Exclusions (a) (b) (c) (d) (e) Death of, or bodily injury to, or illness or disease contracted by, the employees of the Insured claiming indemnity arising out of or in the course of their employment; Property belonging to or in the charge or under the control of the Insured; Liability arising out of the use of mechanically propelled vehicles for which compulsory insurance or security is required by legislation, except whilst in use as a tool of trade; The cost of making good loss of or damage to property indemnified under the insurance referred to in paragraph 1, Material Damage All Risks Insurance of this Minimum Insurance Schedule; and, Liability arising from ownership, possession, use or control of any aircraft or watercraft.

4. 4.1

Environmental Impairment Insurance (Umwelthaftpflichtversicherung) The Insured Parties

173 (a) (b) (c) The Borrower and any Subsidiary Companies; The Independent Engineer; The Agent and the Lenders and their technical adviser,

Each of their respective assigns, employees, agents, officers, partners and Directors, Each for their respective rights and interests. 4.2 Period of Insurance From the date of Start Up and to be maintained by renewals of the `Period of Insurance until the full repayment of the loan. 4.3 Indemnity All sums for which the Borrower becomes liable to pay in respect of: (a) legal liabilities to third parties arising from contamination of the Project Site, both pre-existing and that which occurs during the Operation of the Project, which results in a pollution event causing third party bodily injury or property damage

and/or (b) 4.4 That triggers a statutory requirement to clean up the Project Site (Bodenkasko).

Limits of Indemnity (a) (b) EUR 25,000,000 any one occurrence and in the annual aggregate in respect of liabilities to Third Parties. EUR 10,000,000 any one occurrence and in the annual aggregate in respect of additional (unbudgeted) clean-up costs incurred to clean up the Project Site.

4.5

Main Exclusions Liabilities arising from sudden unintended and unexpected events that are insured under the Third Party Liability insurance required under Paragraph 4, Third Party Liability, of this Minimum Insurance Schedule.

4.6

Main Extensions/Conditions

174 (a) (b) (c) 4.7 5. 5.1 Cover Component 2.6 of the Umwelthaftpflicht-Modell des HUK-Verbandes; Loss Mitigation/Avoidance Costs; Pure Financial Loss following loss of rights to operate.

Maximum Deductible Not exceeding EUR 250,000. Other Required Insurance Insurance required by Law Insurance to comply with all statutory requirements including Motor Vehicle Third Party Liability insurance for any vehicle owned, hired, leased or borrowed by the Borrower in connection with the Project.

5.2

Other Insurance

Insurance as is customary, desirable or necessary to comply with the Project Documents, and to fulfil prudent Developer practice.

175 SCHEDULE 13 Sample Table of Content Regarding Quarterly Construction Progress Reports Summary 1. 1.1 1.2 2. 2.1 2.2 3. 3.1 3.2 3.3 3.4 3.5 Inspection Programme Visits and Events Next Steps Organisation and Staffing Recruitment Site Organisation General Progress and Observations Pulp Mill, General Pulp Mill, Technical Issues Review of Quality of Installations Training Owners Scope of Work

3.5.1 Works 3.5.2 Infrastructure and Connections 3.5.3 Municipalities 3.5.4 Utilities Supply 3.5.5 Administration 3.5.6 Chemicals and Supplies 4. 4.1 4.2 5. Permits Review of Permit Situation New Permits and Inspections Commissioning Plan

176 5.1 5.2 5.3 5.4 5.5 6. 7. 8. 8.1 8.2 8.3 8.4 8.5 8.6 9. 9.1 9.2 Departmental Plans Start-up of Pulp Production Operational budget Wood Supply Wood Transport Investment Budget Follow-up Main Events Causing Deviations and Change Orders Milestones Intermediate Steps CMC 4 Start-up Operational Acceptance PAC 4 Performance Tests FAC 4 Certificates Certificates Issued New Certificates

ANNEXES (A) Recruitment Plan (B) (C) Time Schedules Time Schedule Follow-up

177

SCHEDULE 14 Transfer Certificate Transfer Agreement Between [ ] (the Assigning Lender) and [ ] (the Assignee) Preamble Whereas, by the agreement dated 26 August 2002 (the Facility Agreement) the Assigning Lender together with the other Lenders has provided to the Borrower the Facility Agreement for an aggregate principal amount of up to EUR 827,950,000. The Assigning Lender has assumed a Lenders Commitment in the amount of EUR [ ]. Whereas, the Assigning Lender has pursuant to Clause 31.2 of the Facility Agreement the right to assign to a bank or financial institution its legal position as Lender including all its rights, benefits and obligations under the Facility Agreement in whole or in part in amounts of not less than EUR 10 million. Whereas, the Assigning Lender is desirous to transfer its rights, benefits and obligations related to an amount of EUR [ ] of the Facility Agreement to the Assignee and the Assignee is desirous of assuming the legal position of the Assigning Lender related thereto including all rights, benefits and obligations. Now therefore, the parties to this Transfer Agreement hereby agree as follows: 1. Definitions Terms used but not otherwise defined herein shall have the meaning given to them in the Facility Agreement. 2. Transfer of Assigning Lenders Participation in Advances Subject to the payment to the Agent of a fee in the amount of EUR 1,000 and to the condition precedent that the Assignee pays the transfer price on the date of payment as defined in Clause 6.2, the Assigning Lender herewith assigns and

178 transfers and the Assignee herewith assumes, the Assigning Lenders legal position related to such Lenders portion of its participation in each outstanding Advance and/or the Commitments (applied rateably across the Tranches and in any particular Tranche rateably between the Assigning Lenders share in each outstanding Advance thereunder and its undrawn Commitment in relation thereto) in the amount set out in Clause 6.2 hereof, including but not limited to all rights, benefits and obligations of the Assigning Lender under the Facility Agreement, the Shareholders Undertaking Agreement, the Security Agreements and the Security Pooling Agreement as against the Borrower (if transferable) and the other parties thereto (the Transferred Position) effective as of the date of payment as defined in Clause 6.2. Upon the transfer as set forth above becoming effective, the Assigning Lender shall be released from the obligations related to the Transferred Position to the Borrower on the one hand and to the Lenders on the other hand. 3. 3.1 3.2 Confirmations The Assignee confirms that it has received a copy of the Facility Agreement and all other documentation and information required by it in connection with the transaction contemplated by this Transfer Agreement. The Assignee confirms that it has made and will continue to make its own assessment of the validity, enforceability and sufficiency of the Facility Agreement and the Transfer Agreement and has not relied and will not rely on the Assigning Lender, the Original Lender and the Agent or any statements made by any of them in this respect. The Assigning Lender hereby confirms that it has fulfilled its obligations arising out of the Facility Agreement with respect to the Transferred Position until the date hereof. The Assigning Lender gives no representation or warranty and assumes no responsibility with respect to the validity or enforceability of the Facility Agreement or any document related thereto and assumes no responsibility for the financial conditions of the Borrower or any other party to the Facility Agreement or for the performance and observance by the Borrower or any other party of any of its obligations under the Facility Agreement and all such representations and warranties, whether expressed or implied by law or otherwise, are hereby excluded. The Assignee hereby ratifies and confirms the declarations and acts made by the Security Agent on its behalf pursuant to Clause 4.4 of the Share Pledge Agreement dated 26 August 2002 between the Shareholders as pledgors and the Security Agent as pledgee (as amended from time to time) and Clause 2.6 of the Account Pledge Agreement dated 26 August 2002 between the Borrower as pledgor and the Security Agent as pledgee (as amended from time to time).

3.3

3.4

179 4. 4.1 4.2 4.3 Miscellaneous The Assigning Lender shall inform the Agent without undue delay of the transfer of the Transferred Position pursuant to Clause 2 by sending an executed copy of this Transfer Agreement to it. The Assignee herewith empowers the Agent to exercise such rights, powers of attorney and discretions as set forth in the provisions of the Financing Documents. Without prejudice to any future change of address, all correspondence to the Assignee shall be sent to the following address: [] Attn.: Fax: 5. 5.1 5.2 Legal Provisions Any alteration or amendment to this Transfer Agreement shall be in writing. The form and content of this Transfer Agreement shall be subject to and construed in accordance with the laws of the Federal Republic of Germany in every respect. Non-exclusive place of jurisdiction for all disputes arising out of or in connection with this Transfer Agreement shall be Munich. Should any provision of this Transfer Agreement be or become wholly or partly invalid, then the remaining provisions shall remain valid. Invalid provisions shall be construed in accordance with the intent of the parties and the purpose of this Transfer Agreement. This Transfer Agreement has been executed in the German language in three (3) counterparts. One executed copy shall be provided to the Assigning Lender, the Assignee and the Agent. Each executed copy shall have the effect of an original. Commitments and Advances Subject to Transfer Assigning Lenders Commitment prior to transfer: Assigning Lenders participation in Advances prior to transfer: Position transferred to Assignee: Assigning Lenders Commitment upon transfer: Date of payment by Assignee to Assigning Lender: Account of Assigning Lender to which payment shall be effected: EUR [ EUR [ EUR [ EUR [ [ [ ] ] ] ] ] ]

5.3 5.4 6. 6.1

6.2 6.3

180 [Assigning Lender] [Assignee] We hereby confirm the Borrower has consented to the above assignment and transfer and we hereby agree on our own behalf as Lender and on behalf of the other Lenders to the above Transfer Agreement. [place], [date] [Agent]

181 SCHEDULE 15 Development Costs Development costs in the amount of EUR 26.5 million which, in the course of the planning of the project until 31 July 2002, have been confirmed by the Technical Adviser to be project development costs until Financial Close and which have been incurred mainly in the following areas: project management conceptual pre-planning of the process technology obtaining of authorisations and approval (Genehmigungsplanung) (Behrdenengineering) availability/provision of wood and logistics financing and subsidies, EU notification, state guarantees ordering/commissioning and legal advice business management and local operating costs archeological excavations

182

SCHEDULE 16 Brokers Letter of Undertaking [Letterhead of insurance broker] LETTER OF UNDERTAKING To: Bayerische Hypo-und Vereinsbank AG (the Agent and Security Agent) Dear Sirs, [ ] (the Project)

We have been requested by Zellstoff Stendal GmbH (the Borrower), to provide you with certain confirmations relating to certain insurances arranged by us in relation to the Project. Accordingly we provide you with the confirmations set out below. The insurances summarised in Appendix 1 attached to this letter (the Insurances) are, at the date hereof, in full force and effect in respect of the risks and liabilities as set out in the insurance policies evidenced in the policies/cover notes attached as Appendix 2 (the Policies). We further confirm in our capacity as insurance brokers to the Borrower that the Insurances are, to the best of our knowledge and belief placed with insurers, which as at the time of placement, are reputable and financially sound. We do not, however, make any representations regarding such insurers current or future solvency or ability to pay claims. We have arranged the Insurances on the basis of information and instructions given by the Borrower. We have not made any particular or special enquiries regarding the Insurances beyond those that we normally make in the ordinary course of arranging insurances on behalf of our insurance broking clients. The confirmations set out in this letter are given by reference to our state of knowledge at the date hereof. We shall use our best endeavours to notify the Borrower and the Security Agent as soon as reasonably practicable after we become aware of an insurer ceasing to carry a claims rating from Standard & Poors Rating Agency of at least BBB+ or a comparable rating. Pursuant to instructions received from the Borrower in connection with the Insurances, we hereby undertake: (a) to notify you as soon as reasonably practicable prior to the expiry of the Insurances if we have not received instructions from the Borrower and/or any insured parties or the agents of any such party to negotiate renewal, and, in the

183 event of our receiving instructions to renew, to advise you as soon as reasonably practicable after receipt of the details thereof; (b) (c) to notify you as soon as reasonably practicable after giving or receiving notice of termination of our appointment as brokers in relation to the Insurances; to pay into the Revenue Account or such other account as you may inform us in writing from time to time, without any set-off or deduction of any kind, for any reason, all payments received by us from the insurers in relation to the Insurances (including refunds of premium) other than as may be permitted in the relevant loss payable clauses in the Endorsements; to advise you as soon as reasonably practicable after receiving notice of any insurers cancellation or suspension of any of the Insurances or receiving notice of any insurers intention to cancel or suspend any of the Insurances; in accordance with our duties to our clients, make the Borrower aware of its pre-contractual duties of disclosure to the insurers by advising the Borrower of the type of information which generally needs to be disclosed to the insurers; subject to the Borrowers consent, to hold the insurance slips or contracts, the policies and any renewals thereof or any new or substitute policies to the extent held by us, to the order of the Security Agent; and to treat as confidential all information in relation to the Insurances marked as confidential and supplied to us by the Borrower or the Security Agent and not to disclose such information, without the written consent of the supplier, to any third party other than those persons who, in our reasonable opinion, have a need to have access to such information from time to time. Our obligations of confidentiality shall not conflict with our duties owed to the Borrower and shall not apply to disclosure required by an order of a court of competent jurisdiction, or pursuant to any applicable law or regulations having the force of law or to information which is in the public domain.

(d) (e) (f) (g)

The above undertakings are subject to our continuing appointment as insurance brokers to the Borrower in relation to the Insurances and, following termination of such appointment, our immediate release from all our obligations set out in this letter (except for those mentioned in paragraph (g) above). Nothing in this letter shall prejudice the right that any insurer may have to cancel any of the Insurances following default in excess of 30 days in payment of premiums, nor shall the exercise of such right in circumstances amount to a breach of any obligations accepted by us pursuant to the terms of this letter. In accordance with paragraph (d) above we will give you notice as soon as reasonably practicable after receiving notice of any insurers intention to cancel any of the Insurances and where insurers wish to cancel

184 for reasons of non-payment of premium, we will request that insurers give you a reasonable opportunity to pay amounts outstanding before such insurers issue a notice of cancellation. For the avoidance of doubt, all undertakings and other confirmations given in this letter relate solely to the Insurances. They do not apply to any other insurances and nothing in this letter should be taken as providing any undertakings or confirmations in relation to any insurance that ought to have been placed or may at some future date be placed by other brokers. This letter is given by us on the instructions of the Borrower and with the Borrowers full knowledge and consent as to its terms, as evidenced by the Borrowers signature below. This letter shall be governed by and shall be construed in accordance with German law and any dispute as to its terms shall be submitted to the exclusive jurisdiction of the courts of Germany. Yours faithfully, For and on behalf of [insurance broker] For and on behalf of [Zellstoff Stendal GmbH]

185 SCHEDULE 17 Archeological Sites

186 SCHEDULE 18 Investment and Financing Plan

187 AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written: The Borrower Zellstoff Stendal GmbH By: W. Ridder Name: Wolfram Ridder Title: Managing Director Goldbecker Strasse 1 39596 Arneburg Federal Republic of Germany H. Gatzke Name: Harald Gatzke Title: Managing Director

Address:

The Arranger, Agent, Security Agent and Lender Bayerische Hypo- und Vereinsbank AG By: Claudia Schmidt Name: Claudia Schmidt Title: Am Tucherpark 16 80538 Mnchen Federal Republic of Germany ppa Christoph Wagner Name: Christoph Wagner Title: authorised officer

Address:

16 EXECUTION PAGE AMENDMENT, RESTATEMENT AND UNDERTAKING AGREEMENT Zellstoff Stendal GmbH as Borrower By: Name: Title: Mercer International, Inc. as Sponsor By: Name: Title: Bayerische Hypo- und Vereinsbank AG as Arranger, Agent and Security Agent By: Name: Title: Bayerische Hypo- und Vereinsbank AG as Original Lender By: Name: Title: Norddeutsche Landesbank Girozentrale as Lender By: Name: Title: By: Name: Title: By: Name: Title: By: Name: Title: By: Name: Title: By: Name: Title:

17 Landesbank Baden-Wrttemberg as Lender By: Name: Title: Bank of Scotland as Lender By: Name: Title: By: Name: Title: By: Name: Title:

DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main as Lender By: Name: Title: National Bank of Greece S.A., London Branch as Lender By: Name: Title: HSH Nordbank AG as Lender By: Name: Title: Banca Monte dei Paschi di Siena, Frankfurt am Main Branch as Lender By: Name: Title: By: Name: Title: By: Name: Title: By: Name: Title: By: Name: Title:

18 Investkredit Bank AG as Lender By: Name: Title: Nordkap Bank AG as Lender By: Name: Title: By: Name: Title: By: Name: Title:

Exhibit 10.15 EMPLOYMENT AGREEMENT dated the 5 th day of December 2008 (hereinafter referred to as the Agreement) made by and between Mercer International Inc. Suite 282 14900 Interurban Avenue South, Seattle, Washington, USA 98168 (hereinafter referred to as the Company) and Claes-Inge Isacson c/o Stendal Pulp Holding GmbH, Charlottenstrae 59, 10117 Berlin, Germany (hereinafter referred to as the Executive) Whereas the Executive assumed the position of Chief Operating Officer of the Company in November 2006, the Company and the Executive now wish to formally set forth in this Agreement the terms and conditions of the Executives employment with the Company. 1 Functions and Responsibilities 1. The Executive agrees to serve, at no additional remuneration, in such other executive capacities and to assume such responsibilities and perform such duties consonant with his position as an executive of the Company as the Company may require and assign to him from time to time, including with subsidiaries of the Company. In accordance with this Section, the Executive shall serve as the Managing Director of the Companys wholly-owned subsidiary Stendal Pulp Holding GmbH (SPH). 2. As the Chief Operating Officer of the Company, the Executive will be responsible for all of the companys activities related to fiber management, pulp manufacturing, and human resources. The Executive is responsible to develop strategic operating plans and processes to increase overall efficiency and safety of all facilities. In general terms he is responsible for cost effective production and developing plans to maximize efficiency at all locations. As the Managing Director of SPH, the Executive will be responsible for the representation of the Company to third parties. 3. The Executive shall carry out the duties and responsibilities of his position as Chief Operating Officer of the Company and Managing Director of SPH in accordance with all applicable laws, the articles and by-laws of the Company, the articles of association of SPH and the

2 directives of the board of directors of the Company and the shareholder of SPH. 4. The Executive shall be responsible to and shall report to the Chief Executive Officer and Chairman of the Company. 5. The Executives office location is Berlin, Germany. 2 Term of Agreement 1. This Agreement is effective as of the date first above written and replaces all earlier agreements between the parties. 2. This Agreement is entered into for an indefinite term and will remain in effect until terminated as provided herein. 3. This Agreement may be terminated by either party upon the provision of six (6) months written notice (a Termination Notice), unless the termination is due to Just Cause as a result of the occurrence of any of the following events: (i) serious misconduct, dishonestly or disloyalty of the Executive related to the performance of his duties, functions or responsibilities under this Agreement; (ii) willful and continued failure by the Executive to substantially perform his duties, functions or responsibilities under this Agreement; (iii) any other material breach of this Agreement by the Executive; or (iv) any event or circumstance that would constitute cause for termination of employment at law. No notice period is required in the case of termination for Just Cause and this Agreement may be immediately terminated at the option of the Company. For purposes of this Agreement, no act, or failure to act, by the Executive shall be willful unless it is done, or omitted to be done, in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company. 4. If a Termination Notice is given with respect to this Agreement, regardless by which party, the Company shall be entitled to suspend the Executives obligation to perform services for the Company until the actual termination date or may, for the transitory period until the actual termination date, assign the Executive to other positions with the Company or its affiliates. 5. This Agreement shall terminate without a Termination Notice on the last day of the month in which the Executive completes his 65th year of life. 3

3 Compensation 1. During the term of this Agreement the Company shall pay and provide the Executive the following compensation for his services: a) An annual base salary of 325,000 which amount is reviewed by the Company in January of each year. The annual base salary shall be paid in twelve (12) equal installments at the end of each calendar month subject to deductions in respect of statutory remittances including deductions for applicable tax and social security. Subject to the financial performance of the Company, an annual target bonus based on two months salary and the achievement of specific objectives with an opportunity to exceed same in the event of exceptional performance. The bonus is paid in arrears at the beginning of the following year. In case of termination of this Agreement within the year, the bonus is paid pro rata.

b)

2. In connection with his appointment as Chief Operating Officer of the Company, the Executive has previously received from the Company a one-time signing bonus in the amount of 20,000, a grant of 15,000 shares of restricted stock of the Company, temporary housing assistance as well as reimbursement of certain travel costs and moving and relocation expenses incurred by the Executive in connection with his relocation from Sweden to Germany. 4 Benefits and Insurance 1. The Executive and, as applicable, his family, shall be entitled to receive such health, dental, life, short-term and long-term disability insurance benefits as are commonly provided by the Company to executive officers at a level commensurate with the Executives position. 3. In case of temporary incapacitation of the Executive caused by illness or another reason for which the Executive is not responsible, German statutory law is applicable for the continuation of compensation payments. 4. The Executive shall be eligible to participate in the Companys defined contribution retirement program for its European based executive officers. The Executive shall be entitled to a contribution by the Company to such program in the amount of 10% of the Executives base salary plus 5% of any bonus received by the Executive and the Company shall fund such contribution on a monthly basis. 5. The Executive shall be entitled to the lease and use of an automobile pursuant to the Companys policy on automobiles for executives as may be in effect from time to time. Specifically, the Executive shall be provided with an upper middle class company car (e.g. Audi A 6) which he may also use for personal purposes. All costs arising in connection with the use of the vehicle, including auto lease, insurance, maintenance and operating costs shall be borne

4 by the Company. The income tax on the monetary advantage of the private use shall be paid by the Executive. 5 Vacation The Executive shall be entitled to an annual vacation of five weeks. The time during which such vacation is taken shall be decided in consultation with the Company. 6 Severance In the event of dismissal without Just Cause or a change of control of the Company, the Executive shall be entitled to receive a severance amount equal to eighteen (18) months of the Executives then base salary plus bonus. A change of control of the Company shall mean the consummation of a merger, amalgamation or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entitys securities outstanding immediately after such merger, amalgamation, consolidation or reorganization are owned by persons who were not shareholders of the Company immediately prior to such merger, amalgamation, consolidation or reorganization. 7 Indemnification The Company agrees to indemnify the Executive on the terms and conditions set out in the Indemnity Agreement entered into between the Executive and the Company. 8 Additional Employment, Non-Competition Clause 1. The Executive shall devote his full attention and time, as well as professional knowledge and experience, exclusively to the Company and its affiliates. The acceptance of any additional employment, whether or not compensated, including the service on supervisory or advisory boards or similar position is subject to the prior written consent of the Company, which consent may be withheld in the discretion of the Company. 2. During the time of his employment with the Company the Executive shall not engage, directly or indirectly, in any venture, business or enterprise which competes with the Company or with which the Company maintains relations. 9 Confidentiality The Executive agrees that he will keep all affairs of the Company absolutely confidential to third parties. This obligation shall survive the termination of this Agreement.

5 9 Records and other Company Property When leaving the service of the Company, or after being suspended from his obligation to render services pursuant to 2 subparagraph 4, the Executive agrees to return to the Company any and all documents, correspondence, records, drafts and the like which concern Company matters and which are still in his possession. The Executive is not entitled to exercise a right of retention with respect to such records and objects. 10 Final Provisions 1. Amendments and additions to this Agreement, including this provision, must be in writing. There are no oral side agreements to this Agreement. This Agreement supersedes all earlier agreements. 2. Should any provision of this Agreement become wholly or in part invalid, the remaining parts of this Agreement shall not be affected. The invalid provision shall be replaced in such case by such valid provision which comes as close as possible to the economic intent of the parties. 3. This Agreement may be executed in several parts in the same form, and by facsimile, and such other parts as so executed shall together constitute one original document, and such parts, if more than one, shall be read together and construed as if all the signing parties had executed one copy of the said Agreement. IN WITNESS WHEREOF the parties have executed this Agreement as of the date first above written. MERCER INTERNATIONAL INC. By: /s/ David Gandossi Authorized Signatory

/s/ Claes-Inge Isacson CLAES-INGE ISACSON

Exhibit 10.17 BC Hydro Bioenergy Call for Power (Phase I) EPA

CERTAIN NON-PUBLIC INFORMATION HAS BEEN OMITTED FROM THIS AGREEMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 2009. SUCH NON-PUBLIC INFORMATION HAS BEEN FILED WITH THE SEC ON A CONFIDENTIAL BASIS. THE LOCATION OF THESE OMISSIONS HAS BEEN NOTED BY [*] BC HYDRO AND ZELLSTOFF CELGAR LIMITED PARTNERSHIP ELECTRICITY PURCHASE AGREEMENT BIOENERGY CALL FOR POWER PHASE I Effective Date: January 27, 2009 -1-

BC Hydro Bioenergy Call for Power (Phase I) EPA TABLE OF CONTENTS

Page No.

1. INTERPRETATION 1.1 Definitions 1.2 Appendices 1.3 Headings 1.4 Plurality and Gender 1.5 Governing Law 1.6 Industry Terms 1.7 Statutory References 1.8 Currency 1.9 Reference Indices 1.10 Conversions 1.11 Acknowledgement 1.12 Additional Interpretive Rules 1.13 General Partner 2. TERM 2.1 Term 3. REGULATORY REVIEW 3.1 Regulatory Review Termination 3.2 Regulatory Filing 3.3 EPA Support 3.4 Termination 3.5 Effect of Termination 3.6 Exemption 4. DEVELOPMENT 4.1 Development and Construction of the Incremental Sellers Plant 4.2 Permits 4.3 Development Reports 4.4 Buyer Cost Responsibilities 4.5 Changes to Sellers Plant before COD 5. COMMERCIAL OPERATION DATE 5.1 Guaranteed COD 5.2 Requirements for COD 5.3 Buyer Right to Observe 5.4 COD Disputes 5.5 Early COD 5.6 No Liability for Delay 5.7 Early Network Upgrades 5.8 Postponement of Guaranteed COD 6. OPERATION OF SELLERS PLANT 6.1 Owner and Operator 6.2 Standard of Operation

1 1 1 2 2 2 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 7 7 8 8 8 8 8 8 8 Celgar Green Energy i

BC Hydro Bioenergy Call for Power (Phase I) EPA

Page No.

6.3 Planned Outages 6.4 Records 6.5 Reports to the Buyer 6.6 Changes to Sellers Plant 6.7 Exemption from Utility Regulation 6.8 Disclosure of Information by FortisBC and Transmission Authority 7. PURCHASE AND SALE OBLIGATIONS 7.1 Pre-COD Energy 7.2 Post-COD Sale of Energy 7.3 Post-COD Purchase of Energy 7.4 Exclusivity 7.5 Custody, Control and Risk of, and Title to, Energy 7.6 Price and Payment Obligation 7.7 Limitations on Delivery and Acceptance Obligations 7.8 Deemed Deliveries 7.9 Modification to Seasonally Firm Energy Amount 7.10 Modification to Seasonal GBL 7.11 Buyer Capacity Right 8. ENVIRONMENTAL ATTRIBUTES 8.1 Transfer of Environmental Attributes 8.2 Exclusivity 8.3 Representations and Warranties 8.4 EcoLogoM Certification 8.5 Alternate Certification 9. METERING 9.1 Installation of Metering Equipment 9.2 Operation of Metering Equipment 9.3 Duplicate Metering Equipment 9.4 Delivery Verification 10. STATEMENTS AND PAYMENT 10.1 Statements 10.2 Payment 10.3 Taxes 10.4 Billing Guideline 10.5 Set-off 11. INSURANCE/DAMAGE AND DESTRUCTION 11.1 Insurance 11.2 Damage or Destruction of the Sellers Plant 12. FORCE MAJEURE 12.1 Invoking Force Majeure and Notice 12.2 Exclusions 13. LIQUIDATED DAMAGES 13.1 COD Delay 13.2 Delivery Shortfalls (Seasonal)

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13.3 Capacity Call Delivery Shortfalls (Hourly) 13.4 Hourly Firm Credit Table 13.5 Exclusive Remedies for Buyer 13.6 Exclusive Remedies for Seller 13.7 Limits of Liability 13.8 Consequential Damages 14. PERFORMANCE AND INTERCONNECTION SECURITY 14.1 Delivery 14.2 Return 14.3 Enforcement 14.4 Form 14.5 Replenishment 14.6 Right to Withhold Payment 14.7 Letter of Credit Failure 15. SUSPENSION 15.1 Buyer Suspension 15.2 Seller Suspension 15.3 Resuming Deliveries 16. TERMINATION 16.1 Termination by the Buyer 16.2 Termination by the Seller 16.3 Effect of Termination 16.4 Payment on Termination by the Buyer 16.5 Payment on Termination by the Seller 16.6 Calculation of Gains, Economic Losses and Costs 16.7 Interconnection Costs Payable on Termination 16.8 Termination Payment Date 16.9 Exclusive Remedies 17. ASSIGNMENT 17.1 Assignment 17.2 Preconditions to Assignment 17.3 Assignment to Facility Lender 17.4 No Implied Consent to Exercise of Rights 17.5 Costs 17.6 No Assignment Before COD 18. INSPECTION AND AUDIT 18.1 General Inspection and Audit Rights 18.2 Inspection and Audit Rights Regarding Environmental Attributes 18.3 Consents Regarding Clean or Renewable Electricity 19. REPRESENTATIONS AND WARRANTIES 19.1 By Seller 19.2 By Buyer 20. INDEMNITIES 20.1 Seller Indemnity

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20.2 Buyer Indemnity 20.3 Indemnification Conditions 20.4 Third Party Beneficiary Conditions 21. CONFIDENTIALITY 21.1 RFP Confidentiality Agreement 21.2 Additional Confidentiality Obligation 21.3 Freedom of Information and Protection of Privacy Act 21.4 Exemption from Disclosure 22. GENERAL PROVISIONS 22.1 Independence 22.2 Enurement 22.3 Notices 22.4 Entire Agreement and Amendment 22.5 No Waiver 22.6 Dispute Resolution 22.7 Eligible Financial Contract/Forward Contract 22.8 Further Assurances 22.9 Severability 22.10 Counterparts APPENDIX 1 DEFINITIONS APPENDIX 2 ENERGY PROFILE APPENDIX 3 ENERGY PRICE SEASONALLY FIRM APPENDIX 4 SELLERS PLANT DESCRIPTION APPENDIX 5 FUEL PLAN APPENDIX 6 COD CERTIFICATE APPENDIX 7 SAMPLE FORM PERFORMANCE SECURITY / INTERCONNECTION SECURITY LETTER OF CREDIT APPENDIX 8 SAMPLE FORM LENDER CONSENT AGREEMENT APPENDIX 9 SAMPLE FORM DEVELOPMENT PROGRESS REPORT APPENDIX 10 ADDRESSES FOR DELIVERY OF NOTICES APPENDIX 11 RFP CONFIDENTIALITY AGREEMENT

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BC HYDRO ELECTRICITY PURCHASE AGREEMENT THIS ELECTRICITY PURCHASE AGREEMENT (EPA) is made as of BETWEEN: ZELLSTOFF CELGAR LIMITED PARTNERSHIP, a limited partnership formed under the laws of British Columbia represented by its general partner, Zellstoff Celgar Limited, a corporation incorporated under the laws of British Columbia (the General Partner), with its head office at Suite 2840, PO Box 11576, 650 West Georgia Street, Vancouver, BC V6B 4N8 (Seller) AND: BRITISH COLUMBIA HYDRO AND POWER AUTHORITY, a corporation continued under the Hydro and Power Authority Act, R.S.B.C. 1996, c. 212, with its head office at 333 Dunsmuir Street, Vancouver, BC V6B 5R3 (Buyer). WHEREAS: A. The Buyer issued a Bioenergy Call for Power (Phase I) Request for Proposals on February 6, 2008 for the supply of electrical energy to the Buyer generated from Forest-based Biomass by projects located in British Columbia. B. A Proposal in respect of the Project was submitted in response to the RFP. C. The Seller desires to sell to the Buyer, and the Buyer desires to purchase from the Seller, Eligible Energy from the Sellers Plant on the terms and conditions set forth in this EPA. 1. INTERPRETATION 1.1 Definitions Appendix 1 sets out or references the definitions applicable to certain words and phrases used in this EPA. 1.2 Appendices Attached to and forming part of this EPA are the following Appendices: , 2008 (the Effective Date)

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Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 Appendix 10 Appendix 11

Definitions Energy Profile Energy Price Seasonally Firm Sellers Plant Description Fuel Plan COD Certificate Sample Form Performance Security / Interconnection Security Letter of Credit Sample Form Lender Consent Agreement Sample Form Development Progress Report Addresses for Delivery of Notices RFP Confidentiality Agreement

1.3 Headings The division of this EPA into Articles, sections, subsections, paragraphs, subparagraphs and Appendices and the insertion of headings are for convenience of reference only and do not affect the interpretation of this EPA. 1.4 Plurality and Gender Words in the singular include the plural and vice versa, and words importing gender include the masculine, feminine and neuter genders, in each case as the context requires. 1.5 Governing Law This EPA is made under, and shall be interpreted in accordance with, the laws of the Province of British Columbia. Subject to section 22.6, any suit, action or proceeding (a Proceeding) arising out of, or relating to, this EPA may be brought in the courts of the Province of British Columbia at Vancouver. Those courts have non-exclusive jurisdiction in respect of any Proceeding. The Parties hereby irrevocably attorn to the jurisdiction of such courts in respect of any Proceeding. 1.6 Industry Terms Technical or industry specific words or phrases not otherwise defined in this EPA have the well known meaning given to those terms as of the date of this EPA in the industry or trade in which they are applied or used. 1.7 Statutory References Reference to a statute means, unless otherwise stated, the statute and regulations, if any, under that statute, in force from time to time, and any statute or regulation passed and in force which has the effect of supplementing or superseding that statute or those regulations. 1.8 Currency References to dollars or $ means Canadian dollars, unless otherwise stated. References to US$ or US dollars means United States dollars. 1.9 Reference Indices Except as otherwise provided in Appendix 3, if any index, tariff or price quotation referred to in this EPA ceases to be published, or if the basis therefor is changed materially, there shall be substituted an available replacement index, tariff or price quotation that most nearly, of those then publicly available, approximates the intent and purpose of the index, tariff or price quotation that has so ceased or changed. This EPA shall be amended as necessary to accommodate such replacement index, tariff or price quotation, all as determined by written agreement between the Parties, or failing agreement, by arbitration under section 22.6. 1.10 Conversions If a value used in a calculation in this EPA must be converted to another unit of measurement for purposes of consistency or to achieve a meaningful answer, the value shall be converted to that different unit for purposes of the calculation.

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1.11 Acknowledgement The Seller and the General Partner as to itself only hereby acknowledge, represent, warrant and agree that they have obtained their own independent legal, financial, tax, technical and other advice on all issues relating to this EPA and all transactions contemplated under this EPA. This EPA shall be interpreted as would an agreement that has been negotiated and drafted by, and entered into between, commercially sophisticated parties dealing at arms length. 1.12 Additional Interpretive Rules For the purposes of this EPA, except as otherwise expressly stated: (a) (b) (c) (d) (e) (f) (g) (h) this EPA means this EPA as it may from time to time be supplemented or amended and in effect, and includes the Appendices attached to this EPA; the words herein, hereof and hereunder and other words of similar import refer to this EPA as a whole and not to any particular section, subsection or other subdivision; the word including or includes is not limiting whether or not non-limiting language (such as without limitation or but not limited to or words of similar import) is used with reference thereto; the words year, month and day refer to a calendar year, a calendar month and a calendar day respectively; any consent, approval or waiver contemplated by this EPA must be in writing and signed by the Party against whom its enforcement is sought, and may be given, withheld, delayed or conditioned in the unfettered discretion of the Party of whom it is requested; all rights and remedies of either Party under this EPA are cumulative and not exclusive of any other remedies to which either Party may be lawfully entitled, and either Party may pursue any and all of its remedies concurrently, consecutively and alternatively; where a dollar amount in this EPA is to be adjusted for CPI from January 1, 2008 to any date after 2008, such dollar amount is to be multiplied by CPI January 1, N / CPIJanuary 1, 2008, where N is the year in which that date falls; and any notice required or permitted to be given, or other thing required or permitted to be done, under this EPA on or before a day that is not a Business Day, shall be deemed to be given or done when required or permitted hereunder if given or done on or before the next following Business Day.

1.13 General Partner All references to the Seller herein include the General Partner, unless the contrary is expressly indicated. Acts or omissions of the General Partner in relation to this EPA are deemed to be acts or omissions of the Seller. 2. TERM 2.1 Term The term (Term) of this EPA commences on the Effective Date and continues until the 10th anniversary of COD, subject to extension for the period specified pursuant to subsection 11.2(c), unless it is terminated earlier as authorized under this EPA.

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3. REGULATORY REVIEW 3.1 Regulatory Review Termination Subject to section 3.4, either Party may terminate this EPA if within 150 days after the Effective Date this EPA has not been accepted for filing by the BCUC as an Energy Supply Contract without conditions (such acceptance without conditions being herein called the BCUC Acceptance). 3.2 Regulatory Filing The Buyer, on behalf of itself and the Seller, shall file this EPA with the BCUC within a reasonable time after the Effective Date. 3.3 EPA Support The Buyer shall take all steps reasonably required to secure BCUC Acceptance, which shall consist of those procedural steps related to filing this EPA and providing argument and witnesses in support of the filing. The Seller shall provide any assistance reasonably requested by the Buyer to secure BCUC Acceptance. The Parties shall not take, and shall cause their Affiliates not to take, any action inconsistent with the performance by the Parties of their obligations under this section 3.3. If a Party fails to comply with this section 3.3 (the Breaching Party) and, as a result, this EPA is terminated under section 3.1, the Breaching Party shall pay the non-Breaching Party as liquidated damages, by not later than 5 Business Days after the date of termination, an amount equal to $2.50/MWh multiplied by the Annual Firm Energy Amount. Notwithstanding any other provision of this EPA, the Breaching Partys liability for a breach of this section 3.3 is limited to the amount set out in this section 3.3. 3.4 Termination A Party entitled to terminate under section 3.1 must do so by giving notice to terminate to the other Party at any time after the right to terminate arises pursuant to section 3.1 and prior to the earlier of: (a) (b) (c) the date of issuance of the BCUC Acceptance; the date of issuance of an Exemption; and the date that is 180 days after the Effective Date.

3.5 Effect of Termination If this EPA is terminated by either Party in accordance with sections 3.1 and 3.4, the following provisions shall apply: (a) (b) on or before the 30th day following the date of termination the Buyer shall return the Performance Security to the Seller after deducting any amount to which the Buyer is entitled but which has not been paid pursuant to section 3.3 of this EPA; and except as set out in section 16.3, the Parties shall have no further liabilities or obligations under, or in relation to, this EPA.

3.6 Exemption Sections 3.1 to 3.5 are of no effect if an Exemption exists before termination of this EPA under section 3.1. Nothing in this EPA obliges either Party to seek an Exemption, and the Parties acknowledge that they have entered into this EPA in the expectation that no Exemption will exist.

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4. DEVELOPMENT 4.1 Development and Construction of the Incremental Sellers Plant The Seller shall: (a) design, engineer, construct and commission the Incremental Sellers Plant, perform all additional work required to incorporate the Incremental Sellers Plant into the Sellers Plant, and interconnect the Sellers Plant to the Fortis System, all in compliance with the Project Standards and all other terms and conditions of this EPA; and commence the work described in subsection 4.1(a) by the date that is the later of (i) 30 days after BCUC Acceptance or Exemption, as applicable, and (ii) if a right to terminate arises under section 3.1, 30 days after that right to terminate has expired, and shall thereafter diligently and continuously carry out such Project activities.

(b)

Without limiting the foregoing, all equipment and material installed in the Sellers Plant shall conform to the codes, standards and rules applicable to power plants in British Columbia. The Seller shall ensure that the Sellers Plant is designed, engineered and constructed to operate in accordance with the requirements of this EPA for the full term of this EPA. 4.2 Permits The Seller shall promptly obtain, comply with and maintain in full force and effect, all Permits. The Seller shall on request promptly provide to the Buyer copies of all Material Permits. The Seller acknowledges that this EPA and the terms and conditions of this EPA are not intended to, and do not, fetter the discretion of any Governmental Authority with respect to any decision or action by that Governmental Authority with respect to the Project and the Buyer shall be entitled to exercise any rights and remedies available to it under this EPA resulting from any such decision or action including, the right to terminate this EPA if any of the circumstances described in section 16.1 occur as a result of the decision or action and the right to receive any Termination Payment payable by the Seller under section 16.4 as a result of such termination. 4.3 Development Reports On each January 1, April 1, July 1 and October 1 after the Effective Date and continuing until COD, the Seller shall deliver to the Buyer a report in the form specified in Appendix 9 describing the progress of development of the Project. 4.4 Buyer Cost Responsibilities Except as otherwise expressly provided in this EPA, the Buyer shall be responsible for paying all costs incurred by the Transmission Authority for the design, engineering, procurement, construction and commissioning of the Interconnection Network Upgrades. 4.5 Changes to Sellers Plant before COD The Seller shall not make any material change to the Sellers Plant, including any change in the Plant Capacity or the POI or to any assets that would result in such assets being materially different than as disclosed to the Transmission Authority for purposes of the Seller Optional Study Report or to FortisBC for the purposes of an interconnection study relating to the Project prepared by FortisBC, before COD without the prior consent of the Buyer, such consent not to be unreasonably withheld, delayed or conditioned, provided that the Seller, without such consent, may implement any change reasonably required by the Seller in connection with its pulp production operations to any portion of the Sellers Plant that is also used in the conduct of the Sellers pulp production operations and which does not materially and adversely affect the quantity or reliability of the Firm Energy to be delivered. The Parties acknowledge that the Buyer may require, as a condition of any consent, that:

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(a) (b) (c)

any change, and all changes in the aggregate, in the Plant Capacity made prior to COD do not exceed 6 MW; the Seller obtain, and deliver to the Buyer, a study report prepared by FortisBC confirming that the change is technically feasible on the Fortis System; that the Seller request, and the Buyer obtain, a new study report prepared by the Transmission Authority confirming that the change is technically feasible on the Transmission System, including an estimate of the incremental cost, if any, of completing Interconnection Network Upgrades; the Seller provide a legally binding written commitment to pay to the Buyer the amount of all incremental costs incurred, or to be incurred, by the Buyer as a result of the change, including any incremental Network Upgrade Costs; and the Seller increase the amount of the Interconnection Security by, or provide alternate security reasonably acceptable to the Buyer in, an amount equal to the sum of the estimate referenced in subsection 4.5(b) above plus the Buyers reasonable estimate of any other incremental costs referenced in subsection 4.5(c) above.

(d) (e)

5. COMMERCIAL OPERATION DATE 5.1 Guaranteed COD The Seller shall ensure that the Sellers Plant achieves COD by the Guaranteed COD plus Force Majeure Days. 5.2 Requirements for COD Subject to section 5.5, COD shall occur at 24:00 PPT on the day on which all of the following conditions have been satisfied: (a) (b) the Seller has obtained all Material Permits and all such Material Permits are in full force and effect; the Sellers Plant has generated Energy in compliance with all Material Permits for 72 continuous hours in an amount in each hour of not less than 90% of (i) the sum of the Seasonally Firm Energy Amount for that Season and the corresponding Seasonal GBL, divided by (ii) the number of hours in such complete Season; the Seller is not: (i) (ii) Bankrupt or Insolvent; in default of any payment obligation or requirement to post security under this EPA;

(c)

(iii) in material default of any of its other covenants, representations, warranties or obligations under this EPA, other than those defaults in respect of which the Seller has paid all LDs owing under this EPA; or (iv) in material default under any Material Permit, including any tenure agreement for the site on which the Sellers Plant is located, or the Interconnection Agreement;

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and (d) the Seller has delivered to the Buyer: (i) (ii) a Declaration of Compatibility-Generator (Operating), or such other document(s) of similar effect as may be substituted therefor, in respect of the Plant Capacity issued by FortisBC to the Seller under the Interconnection Agreement; copies of all Material Permits in a form sufficient to demonstrate the Sellers compliance with subsection 5.2(a);

(iii) data from the Metering Equipment sufficient to demonstrate compliance by the Seller with subsection 5.2(b); (iv) proof of registration by the Seller with Measurement Canada as an electricity seller with respect to the Sellers Plant; and (v) a long-term firm point to point transmission service agreement between the Seller and FortisBC of not less than one year in duration which, subject to renewal from time to time, will provide for firm transmission service to the Point of Interconnection for an amount not less than the Firm Energy to be delivered under this EPA.

provided that, except as hereinafter provided, within 30 days after the last of the requirements set out above is satisfied the Seller delivers to the Buyer: (I) a COD Certificate; (II) the Long Term Operating Plan; and (III) the Annual Operating Plan for the period from COD to December 31 next following COD or if COD occurs after September 30, for the period from COD to December 31 in the year following COD. If the COD Certificate, Long Term Operating Plan and Annual Operating Plan are not delivered by that date, COD shall occur at 24:00 PPT on the day of delivery to the Buyer of the last of the foregoing documents. For greater certainty, the Parties acknowledge that, notwithstanding satisfaction of all the conditions set out in subsections 5.2(a) to (d) above, the Seller may defer delivery of the documents described in (I), (II) and (III) above until, and COD shall not occur earlier than, the date determined under section 5.5. 5.3 Buyer Right to Observe The Seller shall provide not less than 10 days prior notice to the Buyer of the commencement of any proposed testing under subsection 5.2(b) and the Buyer may attend and observe each test under subsection 5.2(b). If the Seller has given notice to the Buyer in accordance with this section 5.3, the Seller shall not be required to give a notice to the Buyer of any further tests which are commenced within 72 hours of the prior test under subsection 5.2(b). The Seller shall provide a new notice in accordance with this section 5.3 in respect of any test that commences more than 72 hours after the end of an unsuccessful test under subsection 5.2(b). 5.4 COD Disputes The Buyer may, by notice to the Seller within 10 Business Days after the date of delivery to the Buyer of a COD Certificate, contest the COD Certificate on the grounds that the Seller has not satisfied the requirements for COD in section 5.2. Pending the final resolution of any dispute relating to whether the requirements for COD have been satisfied, the Seller shall not be required to remit any COD Delay LDs, provided that upon final determination of the matter, if the determination is made that COD has not been achieved, the Seller shall forthwith remit COD Delay LDs in accordance with section 13.1 calculated from the Guaranteed COD plus Force Majeure Days, if any, together with applicable interest in accordance with subsection 10.2(b). If the Buyer does not deliver a notice to the

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Seller contesting the COD Certificate within the time specified in this section 5.4, COD shall be deemed to have occurred as provided in section 5.2. 5.5 Early COD Except with the Buyers prior consent, not to be unreasonably withheld, delayed or conditioned, and subject to section 5.7, COD may not occur earlier than 180 days prior to the Guaranteed COD. 5.6 No Liability for Delay The Buyer shall have no liability for delays in completion of (i) any Network Upgrades, or (ii) any work undertaken by FortisBC on the Fortis System or on the Sellers Plants side of the point at which the Sellers Plant interconnects with the Fortis System, in each case howsoever arising. 5.7 Early Network Upgrades Rescheduling completion of any Interconnection Network Upgrades prior to the Estimated Interconnection Facilities Completion Date shall require the prior consent of each of the Transmission Authority, the Buyer and the Seller. The Seller acknowledges that the Buyer may require as a condition of any consent, any or all of the conditions set out in subsection 4.5(b), 4.5(c) or 4.5(d). 5.8 Postponement of Guaranteed COD If the Estimated Interconnection Facilities Completion Date is later than 90 days prior to the Guaranteed COD, and unless otherwise agreed by the Parties in writing, the Guaranteed COD shall be postponed to the Estimated Interconnection Facilities Completion Date plus 90 days. 6. OPERATION OF SELLERS PLANT 6.1 Owner and Operator The Seller shall own the Sellers Plant and shall ensure that the Sellers Plant is operated by qualified and experienced individuals. 6.2 Standard of Operation (a) (b) The Seller shall cause the Sellers Plant to be operated and maintained in compliance with the Project Standards. Without limiting section 7.2 but subject to subsection 7.7(a), when the Seller is delivering Energy to the Buyer, the Seller shall make commercially reasonable efforts to operate the Sellers Plant in a manner that ensures delivery of Energy at the point at which the Sellers Plant interconnects with the Fortis System at a uniform rate within each hour during which Eligible Energy is delivered. The Seller shall, except with the Buyers prior consent, such consent not to be unreasonably withheld, delayed or conditioned, comply in all material respects with the Fuel Plan. The Buyer, in determining whether to grant any such consent, shall review and consider in good faith the Sellers reasonable requirements for any variation from the Fuel Plan. The Seller shall maintain during the Term after COD a firm point to point transmission service agreement between the Seller and FortisBC providing firm transmission service to the Point of Interconnection for an amount not less than the Firm Energy to be delivered under this EPA.

(c)

(d)

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6.3 Planned Outages The Seller shall: (a) give the Buyer not less than 90 days prior notice of any Planned Outage, or such shorter period to which the Buyer may consent, such consent not to be withheld, delayed or conditioned, and such notice, when reasonably possible, shall state the start date and hour and the end date and hour for the Planned Outage. Notwithstanding the foregoing, at any time prior to 48 hours before the start of a Planned Outage that will be more than 7 days long, the Seller may change the proposed start time for the Planned Outage by not more than 48 hours and at any time prior to 48 hours before the end of the Planned Outage, the Seller may change the proposed end time of the Planned Outage on notice to, and without the consent of, the Buyer, provided that if as a result of such notice from the Seller the Planned Outage starts later than originally scheduled, there will be no deemed Eligible Energy under section 7.8 during the period between the originally scheduled start time and the revised start time, and if as a result of such notice from the Seller the Planned Outage ends earlier than originally scheduled, the Energy produced between the originally scheduled end time and the revised end time shall be purchased by the Buyer pursuant to section 7.3; in accordance with the Buyers written instructions, use the Buyers web-based application or other system for communicating Planned Outages to the Buyer; make commercially reasonable efforts to coordinate all Planned Outages with the Buyers requirements as notified to the Seller; and make commercially reasonable efforts to coordinate all Planned Outages with the maintenance schedules of the Transmission Authority and FortisBC where such schedules are publicly available or otherwise notified to the Seller.

(b) (c) (d)

Not less than 30 days before a Planned Outage is scheduled to commence, the Buyer may request the Seller to reschedule that Planned Outage. Within 14 days after receipt of such a request, the Seller shall provide the Buyer with an estimate, together with reasonable supporting detail, of the costs, if any, the Seller expects to incur, acting reasonably, as a result of rescheduling the Planned Outage in accordance with the Buyers request. Within 7 days after receipt of such cost estimate, the Buyer shall notify the Seller if the Buyer requires the Seller to reschedule the Planned Outage, and upon receipt of such notice from the Buyer, the Seller shall adjust the schedule for the Planned Outage as required by the Buyer, provided that the rescheduling is consistent with Good Utility Practice and does not have a materially adverse effect on the operation of the Sellers Plant or on any facility that is a thermal host for the Sellers Plant. The Buyer shall reimburse the Seller for all costs reasonably incurred by the Seller as a result of such rescheduling, but not exceeding the estimate delivered by the Seller to the Buyer under this section 6.3. For payment and all other purposes of this EPA, all Planned Outages shall be deemed to start at the beginning of the hour in which that Outage actually commences and to end at the start of the hour immediately following the hour in which that Outage actually terminates. 6.4 Records The Seller shall prepare and maintain all Records or duplicates of such Records, at the Sellers Plant, or following the expiry of the Term or the earlier termination of this EPA, at such other location as may be agreed in writing between the Parties, for a period of not less than 7 years from the date on which each such Record is created.

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6.5 Reports to the Buyer (a) Fuel Plan (i) Not less than 60 days prior to the fifth anniversary of COD (the Five-Year Anniversary), the Seller shall deliver to the Buyer a Fuel Plan for the remainder of the Term containing information of the type and detail set out in the then existing Fuel Plan, any proposed variations from the then existing Fuel Plan, and such other planning data relating to the Fuel as the Buyer may reasonably request. Subject to the Buyers prior consent, which shall not be unreasonably withheld, delayed or conditioned, such replacement Fuel Plan shall replace the then existing Fuel Plan effective as of the Five-Year Anniversary. The Seller may revise the Fuel Plan at any time with the Buyers prior consent, such consent not to be unreasonably withheld, delayed or conditioned. The Seller shall give prompt and due consideration to any revisions to the Fuel Plan that the Buyer may reasonably request.

(ii)

(b)

Annual Fuel Report Not less than 60 days following the end of each Contract Year, the Seller shall deliver to the Buyer a report setting out with reference to the Fuel Plan: (i) (ii) a description of the source and volume of Fuel consumed in that Contract Year, together with such additional information relating to the Fuel as the Buyer may reasonably require; a report on all material variances in that Contract Year between the Fuel Plan and the Sellers actual procurement and consumption of Fuel;

(iii) the total Forest-based Biomass, Auxiliary Fuel and Start-up Fuel (all expressed in GJ) used to generate Eligible Energy in that Contract Year; and (iv) the Auxiliary Fuel Overage and the Auxiliary Fuel Energy Overage (determined by utilizing the average heat rate applicable to the conversion of Fuel to Eligible Energy) for that Contract Year. (c) Long Term Operating Plan - By the date specified in section 5.2, the Seller shall provide to the Buyer an operating plan for the Sellers Plant for a five-year period commencing at COD and ending on December 31 of the year in which the Five-Year Anniversary occurs, including the long-term major maintenance schedule. On or before September 30 in each year during the Term after the year in which COD occurs, the Seller shall provide the Buyer with an updated plan for the five-year period commencing on the next succeeding January 1 or to the end of the Term, whichever is less. The Seller shall promptly provide the Buyer with copies of any amendments or modifications to the Long Term Operating Plan. The Long Term Operating Plan shall be consistent with Good Utility Practice and is intended to assist the Buyer in planning activities and is not a guarantee of the timing of Planned Outages; Annual Operating Plan - On or before September 30 in each year during the Term, the Seller shall provide to the Buyer an operating plan for the Sellers Plant for the 14-month period commencing on the next succeeding November 1, including any necessary update

(d)

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in respect of the then current Annual Operating Plan, which plan may be included in the Long Term Operating Plan. The plan shall include a schedule of Planned Outages for that 14-month period which shall comply with the provisions of section 6.3 and be consistent with Good Utility Practice. The Seller may, on not less than 90 days prior notice to the Buyer, amend the Annual Operating Plan, subject to the provisions of section 6.3. The Annual Operating Plan shall be consistent with Good Utility Practice and is intended to assist the Buyer in planning activities and is not a guarantee of the timing of Planned Outages; (e) Notice of Outages - Other than for a Planned Outage for which notice has been given pursuant to section 6.3, the Seller shall promptly notify the Buyer of any Outage, or any anticipated Outage, of the Sellers Plant. Any notice under this subsection shall include a statement of the cause of the Outage, the proposed corrective action and the Sellers estimate of the expected duration of the Outage, and the Seller shall promptly communicate such information to the Buyer in such manner as the Buyer may instruct the Seller from time to time. The Seller shall, except with the Buyers consent, such consent not to be unreasonably withheld, delayed or conditioned, use best efforts to promptly remove or mitigate any Forced Outage. The Seller shall deliver to the Buyer concurrently with delivery of the statement described in subsection 10.1(a), a report of all Outages during the month for which the statement described in subsection 10.1(a) is issued, including a statement of the cause of each Outage; Interconnection Agreement Defaults - The Seller shall give promptly to the Buyer a copy of any notice of a breach of, or default under, the Interconnection Agreement, whether given or received by the Seller; Notice of Buyer Termination Event - The Seller shall notify the Buyer promptly of any Buyer Termination Event, or any material risk that a Buyer Termination Event or any default by the Seller under any agreement with a Facility Lender may occur; Energy Schedules - After COD: (i) (ii) on each Thursday by 12:00 PPT, the Seller shall deliver to the Buyer a schedule of the expected deliveries of Eligible Energy in each hour of each day for the next succeeding week commencing at 00:00 PPT on Monday; and on each day by 12:00 PPT, the Seller shall deliver to the Buyer a schedule of the expected deliveries of Eligible Energy for the next succeeding 24 hour period commencing at 00:00 PPT,

(f) (g) (h)

provided that such schedules are provided for planning purposes only and do not constitute a guarantee by the Seller that Energy shall be delivered in accordance with the schedules and do not limit the amount of Energy the Seller may deliver during the periods covered by the schedules. The Seller shall deliver a revised schedule to the Buyer promptly after becoming aware of any expected material change in a filed Energy schedule; (i) Reporting on Clean or Renewable Electricity - The Seller shall within 10 Business Days after a request from the Buyer, provide to the Buyer all information the Buyer

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reasonably requires to verify qualification of the output from the Sellers Plant as Clean or Renewable Electricity; (j) Reporting on Environmental Certification The Seller shall within 10 Business Days after a request from the Buyer, provide to the Buyer: (i) all information the Buyer requires to verify the quantity of Energy generated by the Sellers Plant, qualification of the Sellers Plant and all or part of the Energy for the Environmental Certification, if any, the status of the Environmental Certification, if any, and the existence, nature and quantity of Environmental Attributes; any information required for the purposes of any Environmental Attribute or energy tracking system as directed by the Buyer; and

(ii)

(iii) any other information the Buyer requires to enable the Buyer or its Affiliates to obtain or realize the full benefit of the Environmental Attributes, including sales of the Environmental Attributes to third Persons; and (k) Reporting on Environmental Impacts The Seller shall deliver to the Buyer not later than February 28 in each year after COD, or in accordance with any other periodic reporting requirement prescribed by Laws or terms and conditions of Permits, environmental impact reports that comply with this subsection, and any reasonable written guidelines issued by the Buyer from time to time relative to the form and content of such reports. Environmental impact reports shall provide annual data concerning the impact of the operation of the Sellers Plant on the environment, including GHG emissions, and the air and water quality, land use, biota and habitat impacts. Data relative to GHG emissions may include Fuel use by Fuel type, heat rate, and energy content of fuel and other relevant data.

6.6 Changes to Sellers Plant The Seller shall not make any material change to the Sellers Plant after COD without the prior consent of the Buyer, such consent not to be unreasonably withheld, delayed or conditioned, provided that the Seller may implement any change reasonably required by the Seller, without the Buyers consent, in connection with its pulp production operations, which does not materially and adversely affect the quantity or reliability of the Firm Energy to be delivered, to any portion of the Sellers Plant that is also used in the conduct of the Sellers pulp production operations. The Seller acknowledges that the Buyer may require, as a condition of any consent, any or all of the conditions set out in subsection 4.5(b), 4.5(c), or 4.5(d), provided that notwithstanding the foregoing, the Seller shall not make any change to the Plant Capacity or the POI without the consent of the Buyer. 6.7 Exemption from Utility Regulation Neither the Seller nor the General Partner shall take any action that would cause the Seller or the General Partner to cease to be exempt, or omit to take any action necessary for the Seller or the General Partner to continue to be exempt, from regulation as a public utility, as defined in the UCA, with respect to the Sellers Plant, the sale of Energy and the performance by the Seller of its obligations under this EPA if such designation as a public utility could reasonably be expected to have an adverse effect on the Buyer or its interests under this EPA. 6.8 Disclosure of Information by FortisBC and Transmission Authority The Seller consents to FortisBC and the Transmission Authority disclosing to the Buyer on its request:

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(a)

all information directly related to Network Upgrades, including any information provided by the Seller to FortisBC or the Transmission Authority that relates to, or affects, Network Upgrades including any interconnection request, studies or reports that contain information reasonably related to Network Upgrades; any studies that FortisBC or the Transmission Authority may have and applications that may be filed in respect thereof from time to time with respect to the Sellers Plant; all metering data collected by, or provided to, FortisBC or the Transmission Authority with respect to the Sellers Plant; copies of any notice of a breach of, or default under, the Interconnection Agreement given or received by FortisBC and particulars of any such breach or default; and any other information provided by the Seller to the Transmission Authority or FortisBC, or by the Transmission Authority or FortisBC to the Seller, that is relevant to the administration of this EPA.

(b) (c) (d) (e)

The Seller shall promptly on request by the Buyer provide to the Buyer written confirmation of the foregoing consent for delivery by the Buyer to FortisBC and the Transmission Authority. 7. PURCHASE AND SALE OBLIGATIONS 7.1 Pre-COD Energy The Buyer shall make commercially reasonable efforts, excluding any acceleration of the Estimated Interconnection Facilities Completion Date, to accept delivery at the POI of all Pre-COD Energy. Prior to the earlier of COD and the Guaranteed COD the Seller may, on prior notice to the Buyer, sell any Energy to any Person other than the Buyer, and in that case such Energy shall not be delivered, or be deemed to be delivered, to the Buyer. 7.2 Post-COD Sale of Energy Subject to subsection 7.7(a) in each Season during the Term after COD, the Seller shall sell and deliver to the Buyer at the POI, the Seasonally Firm Energy Amount for the applicable Season. 7.3 Post-COD Purchase of Energy Subject to subsection 7.7(b) in each Season during the Term after COD, the Buyer shall purchase, and shall accept delivery from the Seller at the POI of, all Eligible Energy. 7.4 Exclusivity The Seller shall not at any time during the Term commit, sell or deliver any Energy to any Person, other than the Buyer under this EPA, except: (a) (b) (c) (d) Pre-COD Energy sold to third Persons in accordance with section 7.1; * during any period in which the Buyer is in breach of its obligations under section 7.3; and during any period in which the Buyer is not accepting deliveries of Eligible Energy from the Seller due to Force Majeure invoked by the Buyer.

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7.5 Custody, Control and Risk of, and Title to, Energy Custody, control and risk of, and title to, all Pre-COD Energy delivered to the Buyer and all Eligible Energy passes from the Seller to the Buyer at the POI. The Seller shall ensure that all Eligible Energy delivered to the Buyer under this EPA is free and clear of all liens, claims, charges and encumbrances. The Seller shall be responsible for all transmission losses and costs, if any, relating to the transmission of Eligible Energy from the Sellers Plant to the POI. 7.6 Price and Payment Obligation The Buyer shall pay for all Test Energy in respect of which the Seller has not given a notice under section 7.1, and all Eligible Energy, in accordance with Appendix 3. 7.7 Limitations on Delivery and Acceptance Obligations (a) Limitations on Delivery Obligations - The obligations of the Seller under section 7.2 and subsection 7.11(c) are excused during the occurrence of: (i) (ii) Force Majeure invoked by the Seller in accordance with Article 12; any Transmission System Outage for reasons that are not attributable to the Seller or the Sellers Plant;

(iii) disconnection of the Sellers Plant from the Fortis System for reasons that are not attributable to the Seller or the Sellers Plant; (iv) disconnection of the Fortis System from the Transmission System or an Outage on the Fortis System, in either case for reasons that are not attributable to the Seller or the Sellers Plant; (v) the exercise by the Seller of its right to suspend its performance under this EPA in accordance with Article 15; and

(vi) Authorized Planned Outages. (b) Limitations on Acceptance Obligations - The obligations of the Buyer under sections 7.1 and 7.3 are excused during the occurrence of: (i) (ii) Force Majeure invoked by the Buyer in accordance with Article 12; any Transmission System Outage for reasons not attributable to the Buyer;

(iii) disconnection of the Sellers Plant from the Fortis System for reasons not attributable to the Buyer; (iv) disconnection of the Fortis System from the Transmission System or an Outage on the Fortis System, in either case for reasons not attributable to the Buyer; and (v) the exercise by the Buyer of its right to suspend the Sellers performance under this EPA in accordance with Article 15.

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7.8 Deemed Deliveries (a) If in any hour after COD the Seller is unable to deliver Eligible Energy at the POI at any time during that hour solely as a result of a Transmission System Outage not caused by (i) the Seller or the Sellers Plant or (ii) events beyond the control of the Buyer or the Transmission Authority (a Delivery Interruption Outage), then notwithstanding that the Buyer is excused under subsection 7.7 (b) from its obligations to purchase under section 7.3, the Eligible Energy that could have been generated and delivered to the POI in each hour as Eligible Energy but for the occurrence of the Delivery Interruption Outage shall be deemed to be Eligible Energy. Deemed Eligible Energy shall be determined based on the best available information, including the Sellers Energy schedule for each hour during the Delivery Interruption Outage and readings of the Metering Equipment before and after the occurrence of the Delivery Interruption Outage. There shall be no deemed Eligible Energy during any period specified as a Planned Outage in a notice delivered by the Seller under section 6.3. For greater certainty, the provisions of this section 7.8 shall not apply during any period when either Party is excused, in accordance with Article 12, from its obligation to deliver, or to accept delivery of, Eligible Energy as a result of Force Majeure.

(b)

(c) (d)

7.9 Modification to Seasonally Firm Energy Amount At any time prior to the first anniversary of COD, the Seller may, by exercising the election described in subsection 7.9(b), elect to increase or decrease the Seasonally Firm Energy Amount in each Season, subject to the following: (a) any such increases or decreases in the Seasonally Firm Energy Amounts must not result in: (i) (ii) the Annual Firm Energy Amount increasing or decreasing by more than 10%; the Seasonally Firm Energy Amount for the period from May 1 to July 31, inclusive, exceeding one-quarter of the Annual Firm Energy Amount;

(iii) the sum of the resulting Seasonally Firm Energy Amount and the Seasonal GBL exceeding the Plant Capacity then prevailing multiplied by the number of hours in that Season; or (iv) the Seasonally Firm Energy Amount in Season 1 (February 1 to April 30) or Season 4 (November 1 to January 31) decreasing by more than 10%; (b) the Seller may only exercise its election to increase or decrease the Seasonally Firm Energy Amounts by delivering to the Buyer prior to the first anniversary of COD a Firm Energy Table that has been revised only to incorporate the proposed increase or decrease in the Seasonally Firm Energy Amounts in a manner that complies with subsection 7.9(a). The revised Firm Energy Table shall be deemed to replace the then existing Firm Energy Table effective:

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(i) (ii) (c)

if the revised Firm Energy Table is delivered to the Buyer within 30 days of the end of the Season in which the delivery occurs, on the first day of the second complete Season that immediately follows such delivery; and if the revised Firm Energy Table is delivered to the Buyer more than 30 days before the end of the Season in which the delivery occurs, on the first day of the first complete Season that immediately follows such delivery;

concurrently with the delivery of a revised Firm Energy Table pursuant to subsection 7.9(b), the Seller shall amend or replace the Performance Security to adjust the amount thereof to reflect any change to the Annual Firm Energy Amount that arises as a result of the Sellers election to increase or decrease any Seasonally Firm Energy Amount pursuant to this section 7.9; and the Seller may elect to increase or decrease the Seasonally Firm Energy Amounts under this Section 7.9 only once.

(d)

7.10 Modification to Seasonal GBL At any time after COD, the Seller may, with the consent of the Buyer, such consent not to be unreasonably delayed, withheld or conditioned, by exercising the election described in subsection 7.10(b), elect to increase or decrease the Seasonal GBL subject to the following: (a) (b) any such increase or decrease in the Seasonal GBL must reconcile with the Annual GBL, such that the aggregate Seasonal GBL following any such change equals the Annual GBL; the Seller may only exercise its election to increase or decrease the Seasonal GBL by delivering to the Buyer in any month other than December a Seasonal GBL Table that has been revised only to incorporate the proposed increase or decrease in the Seasonal GBL in a manner that complies with subsection 7.10(a). The revised Seasonal GBL Table shall be deemed to replace the then existing Seasonal GBL Table effective on the first day of January immediately following the date on which the Buyer provides its consent to such revised Seasonal GBL Table; and the Seller may elect to increase or decrease the Seasonal GBL under this section 7.10 only once in any year.

(c)

For greater certainty, the Seller may not modify the Annual GBL without the Buyers consent. 7.11 Buyer Capacity Right The Buyer, in its sole discretion, may require the Seller to deliver up to the Hourly Firm Energy Amount of Hourly Eligible Energy in any hour during a period specified by the Buyer (in each case, a Capacity Call), and the Seller shall comply with any such direction, subject to the following: (a) upon providing the Seller with at least 24 hours prior notice, the Buyer may require a Capacity Call for a period of not less than one day and not exceeding seven continuous days, provided that: (i) the Capacity Call may only occur in the period from and including November 1 through the last day of February in the following year (the Capacity Call Period);

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(ii)

the number of all Capacity Calls in any Capacity Call Period may not exceed four, for a combined total of no greater than 14 days;

(iii) during a Capacity Call, Hourly Eligible Energy shall be deliverable only during On-Peak Hours; (iv) the period between successive Capacity Calls must be not less than the number of days of the previous Capacity Call or two days, whichever is greater; (v) the Capacity Call may not occur during an Authorized Planned Outage; and

(vi) for the sake of clarity, the Energy delivered pursuant to a Capacity Call shall be Eligible Energy and included in the calculation of the Seasonally Firm Energy Amount; (b) the Buyer shall provide notice of a Capacity Call by email (the Capacity Call Notice), and shall include in its notice: (i) (ii) (c) (d) the duration of the Capacity Call; and the Hourly Firm Energy Amount which the Buyer requires the Seller to make available in each hour during the Capacity Call (the Capacity Call Amount);

subject to subsection 7.7(a), for the duration of a Capacity Call, the Seller shall deliver Hourly Eligible Energy in each hour that is equal to or greater than the Capacity Call Amount; and the Parties will cooperate with each other in discussing the schedule of expected Capacity Calls in each Capacity Call Period, provided that the terms of this subsection 7.11(d) will not in any way limit or constrain the Capacity Calls that the Buyer may require.

8. ENVIRONMENTAL ATTRIBUTES 8.1 Transfer of Environmental Attributes The Seller hereby transfers, assigns and sets over to the Buyer all right, title and interest in and to the Environmental Attributes. The Buyer shall not be required to make any payment for the Environmental Attributes. The Seller, upon the reasonable request of the Buyer, shall do, sign and deliver to the Buyer, or cause to be done or signed and delivered to the Buyer, all further acts, deeds, things, documents and assurances required to give effect to this section 8.1. 8.2 Exclusivity The Seller shall not at any time during the Term commit, sell or deliver any Environmental Attributes to any Person, other than the Buyer. The Seller shall not use or apply any Environmental Attributes for any purpose whatsoever. The Seller shall ensure that all marketing materials produced by or for the Seller, all public or other statements by the Seller and all other communications by the Seller in any form whatsoever, contain no false or misleading statements concerning the ownership of the Eligible Energy or Environmental Attributes or the destination, end user or recipient of the Eligible Energy or Environmental Attributes. The Seller acknowledges and agrees that the exclusive rights conferred by this section 8.2 are of fundamental importance, and that, without prejudice to any right to claim damages, compensation or an accounting of profits, the granting of an

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interim, interlocutory and permanent injunction is an appropriate remedy to restrain any breach or threatened breach by the Seller of the obligation set out in this section 8.2. 8.3 Representations and Warranties The Seller and the General Partner as to itself only, represent and warrant to the Buyer and acknowledge that the Buyer is relying on those representations and warranties in entering into this EPA, that the Seller is the legal and beneficial owner of the Environmental Attributes free and clear of all liens, claims, charges and encumbrances of any kind whatsoever and no other Person has any agreement or right of any kind whatsoever to purchase or otherwise to acquire or to claim or otherwise make any use whatsoever of the Environmental Attributes. 8.4 EcoLogoM Certification Without limiting the Sellers obligation to comply with subsection (e) of the definition of Project Standards, if required by the Buyer, the Seller shall use commercially reasonable efforts to obtain EcoLogo M Certification for the Sellers Plant and all the Eligible Energy, other than that attributable to the use of Auxiliary Fuel to the extent permitted under this EPA, and shall use commercially reasonable efforts to maintain the EcoLogoM Certification for such period during the remainder of the Term as the Buyer may require. The Seller shall notify the Buyer forthwith if the Seller fails to obtain EcoLogoM Certification as required hereunder or if, at any time during the period of Term specified by the Buyer, the Seller does not have EcoLogo M Certification. If the Buyer requires the Seller to obtain EcoLogoM Certification, the Buyer shall be responsible for all certification, audit and licensing fees required to obtain the EcoLogo M Certification, unless the Seller requires the EcoLogo M Certification to comply with subsection (e) of the definition of the Project Standards or the Seller fails to obtain or maintain the EcoLogoM Certification, in either of which cases the Seller shall be responsible for all such costs. 8.5 Alternate Certification The Seller shall, at the Buyers request and at the Buyers cost, use commercially reasonable efforts to apply for, and diligently pursue and maintain, any certification, licensing or approval offered by any Governmental Authority or independent certification agency evidencing that the Sellers Plant and the Eligible Energy has Environmental Attributes as an addition or an alternative to the EcoLogoM Certification. Any failure by the Seller to use commercially reasonable efforts pursuant to this section is a material default for the purposes of this EPA, and the Buyer may terminate this EPA under subsection 16.1(e). 9. METERING 9.1 Installation of Metering Equipment The Seller shall ensure that revenue metering equipment (the Metering Equipment) is installed, operated and maintained in accordance with the requirements of FortisBC and the Transmission Authority and the requirements of this section. The Seller shall ensure that the Sellers Plant is equipped with electronic meters and SCADA capability. The Metering Equipment shall be installed at a location approved by the Buyer, acting reasonably, which location shall be such that the Metering Equipment can measure the Energy generated by the Sellers Plant independent of any other generation equipment or facilities. The Seller shall ensure that the Metering Equipment is: (a) (b) (c) capable of being remotely interrogated; sufficient to accurately meter the quantity of Test Energy and Eligible Energy; calibrated to measure the quantity of Test Energy and Eligible Energy delivered to the interconnection between the Sellers Plant and the Fortis System, after adjusting for any line losses from the Sellers Plant to that interconnection; and

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(d)

in compliance with all requirements set out in the Electricity and Gas Inspection Act (Canada) and associated regulations.

9.2 Operation of Metering Equipment The Metering Equipment shall be used for purposes of calculating the amount of Test Energy and Eligible Energy. In the event of any failure of the Metering Equipment, the Parties shall, until such time as the Metering Equipment has been repaired or replaced, rely upon information provided by any back-up meter installed pursuant to section 9.3, or, in the absence of such back-up meter, the Sellers metering equipment, if any, for purposes of calculating payments due under this EPA. If there is any dispute regarding the accuracy of the Metering Equipment, either Party may give notice to the other Party of the dispute, in which case the Buyer and the Seller shall proceed to rectify the matter in accordance with the Electricity and Gas Inspection Act (Canada). The Seller shall allow the Buyer to access the Sellers Plant at any time during normal business hours on reasonable advance notice for purposes of inspecting the Metering Equipment. The Seller shall, on the Buyers request, cause the Metering Equipment to be inspected, tested and adjusted provided that, except as set out below, the Buyer shall not make such a request more than once in each year during the Term. The Seller shall give the Buyer reasonable prior notice of all inspections, tests and calibrations of the Metering Equipment and shall permit a representative of the Buyer to witness and verify such inspections, tests and calibration. If either Party has reason to believe that the Metering Equipment is inaccurate, the Seller shall cause the Metering Equipment to be tested forthwith upon becoming aware of the potential inaccuracy. The Seller shall provide the Buyer with copies of all meter calibration test results and all other results of any test of the Metering Equipment. If any test of the Metering Equipment discloses an inaccuracy outside the inaccuracies permitted under the Electricity and Gas Inspection Act (Canada), any payments or adjustments made or calculated under this EPA that would have been affected by the inaccuracy shall, so far as practicable, be recalculated to correct for the inaccuracy. For purposes of such correction, if the inaccuracy is traceable to a specific event or occurrence at a reasonably ascertainable time, then the adjustment shall extend back to that time; otherwise, it shall be assumed that the error has existed for a period equal to one half of the time elapsed since COD or one half of the time since the last meter test, whichever is shorter, but in any event shall not extend back more than 36 months. Any amounts which are determined to be payable or subject to refund as a result of such re-computations shall be paid to the Party entitled to such amounts within 30 days after the paying Party is notified of the re-computation. 9.3 Duplicate Metering Equipment The Buyer may at any time at the Buyers sole cost, on not less than 30 days prior notice to the Seller, install a duplicate revenue meter at the Sellers Plant at a location to be agreed upon by the Buyer and the Seller, acting reasonably, and the Seller shall allow the Buyer to access the Sellers Plant for such purpose and for the purpose of inspecting and maintaining such equipment. The Seller shall make transformers, transformer connections and telephone access available to the Buyer, as required, if the Buyer elects to install a duplicate revenue meter. Any duplicate revenue meter and metering equipment installed by the Buyer shall remain the property of the Buyer, and the Seller shall not tamper with, remove or move such meter or equipment. 9.4 Delivery Verification The Buyer, in consultation with FortisBC and the Seller, shall establish and implement a system (the Tracking System), to be recorded in writing, for verifying deliveries of Eligible Energy at the POI, which may include e-tagging. Notwithstanding any other provision of this EPA and in the absence of any manifest error in the Tracking System, in the event of any inconsistency between the quantity of Eligible Energy verified by the Tracking System and the Metered Energy, the Tracking System will govern.

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10. STATEMENTS AND PAYMENT 10.1 Statements (a) Subject to the provisions of Articles 4 and 5 of Appendix 3, in each month after the month in which Pre-COD Energy is first delivered to the Buyer, the Seller shall, by the 15 th day of the month, deliver to the Buyer a statement prepared by the Seller for the preceding month. The statement must comply with Articles 4 and 5 of Appendix 3 and any billing guideline issued by the Buyer pursuant to section 10.4 and must indicate, among other things, (i) the amount of Test Energy and/or Eligible Energy, (ii) the price payable for the Test Energy and/or Eligible Energy, (iii) any LDs payable by the Seller to the Buyer, (iv) any Auxiliary Fuel Overage Credit, (v) any Avoidable Costs, and (vi) any Final Amounts owing by either Party to the other Party, and set out in reasonable detail the manner by which the statement and the amounts shown thereon were computed. To the extent not previously delivered pursuant to the requirements of this EPA, the statement must be accompanied by sufficient data to enable the Buyer, acting reasonably, to satisfy itself as to the accuracy of the statement. Either Party may give notice to the other Party of an error, omission or disputed amount on a statement within 36 months after the statement was first issued together with reasonable detail to support its claim. After expiry of that 36 month period, except in the case of wilful misstatement or concealment, amounts on a previously issued statement shall be deemed to be accurate and amounts which were omitted shall be deemed to be nil, other than amounts disputed in accordance with this subsection 10.1(b) within the 36 month period, which shall be resolved in accordance with this EPA.

(b)

10.2 Payment (a) Within 30 days after receipt of a statement delivered pursuant to subsection 10.1(a) and subject to sections 10.5 and 14.6, the Buyer shall pay to the Seller the amount set out in the statement, except to the extent the Buyer in good faith disputes all or part of the statement by notice to the Seller in compliance with subsection 10.1(b). If the Buyer disputes any portion of a statement, the Buyer must nevertheless pay the undisputed net amount payable by the Buyer pursuant to the statement. Any amount required to be paid in accordance with this EPA, but not paid by either Party when due, shall accrue interest at an annual rate equal to the Prime Rate plus 2%, compounded monthly. Any disputed amount that is found to be payable shall be deemed to have been due within 30 days after the date of receipt of the statement which included or should have included the disputed amount.

(b)

10.3 Taxes All dollar amounts in this EPA do not include any value added, consumption, commodity or similar taxes applicable to the purchase by the Buyer of the Test Energy or the Eligible Energy, including GST and PST, which, if applicable, shall be borne by the Buyer and added to each statement. 10.4 Billing Guideline The Seller shall comply with any reasonable written billing guideline, including any requirements with respect to the form of statements pursuant to section 10.1, issued by the Buyer, provided that any such billing guideline shall not vary the express terms of this EPA. If there is any conflict between a billing guideline and this EPA, this EPA shall govern.

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10.5 Set-off If the Buyer and the Seller each owe the other an amount under this EPA in the same month, then such amounts with respect to each Party shall be aggregated and the Parties may discharge their obligations to pay through netting, in which case the Party, if any, owing the greater aggregate amount shall pay to the other Party the difference between the amounts owed, provided that: (a) this section 10.5 applies only to: (i) (ii) any purchase price for Test Energy and/or Eligible Energy owing by the Buyer to the Seller; any LDs owing by the Seller to the Buyer;

(iii) any amount owing by the Seller to the Buyer under Article 5 of Appendix 3; (iv) any Termination Payment or Final Amount owing by either Party to the other Party; and (v) (b) any amount owing by the Seller to the Buyer in respect of any Auxiliary Fuel Overage Credit; and

no LD, Termination Payment or Final Amount shall be added to or deducted from the price owing by the Buyer to the Seller for Eligible Energy unless the LD, Termination Payment or Final Amount remains unpaid 15 days after the Party owed the LD, Termination Payment or Final Amount gives notice to the other Party. For greater certainty, this subsection (b) does not apply to any amount owing by the Seller to the Buyer under Article 5 of Appendix 3.

Except as otherwise expressly provided herein, each Party reserves all rights, counterclaims and other remedies and defences which such Party has or may be entitled to arising from or related to this EPA. 11. INSURANCE/DAMAGE AND DESTRUCTION 11.1 Insurance The Seller shall, by the date specified in section 4.1 for the commencement of the Project activities necessary to construct the Incremental Sellers Plant, obtain, maintain and pay for (i) policies of commercial general liability insurance with a per occurrence limit of liability not less than $10,000,000 applicable to the Mill separate from all other projects and operations of the Seller, and (ii) Construction Insurance and, in respect of the Sellers Plant, property insurance, with limits of liability and deductibles consistent with those a prudent owner of a facility similar to the Sellers Plant would maintain and those the Facility Lender requires. All commercial general liability policies must include the Buyer, its directors, officers, employees and agents as additional insureds and must contain a cross liability and severability of interest clause. All policies of insurance must be placed with insurers that have a minimum rating of A- (or equivalent) by A.M. Best Company and are licensed to transact business in the Province of British Columbia and must be endorsed to provide to the Buyer 30 days prior written notice of cancellation, non-renewal or any material amendment that results in a reduction in coverage. The Seller shall give the Buyer a copy of the insurance certificate(s) for the insurance required to be maintained by the Seller under this section 11.1 not more than 30 days after the effective date of coverage and immediately upon renewal thereafter. The Seller shall be responsible for the full amount of all deductibles under all insurance policies required to be maintained by the Seller under this section 11.1.

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11.2 Damage or Destruction of the Sellers Plant (a) Major Damage - If the Sellers Plant suffers Major Damage caused by Force Majeure in respect of which the Seller has invoked Force Majeure in accordance with Article 12, then the Seller may at its option exercisable by notice to the Buyer within 120 days after the occurrence thereof, either (i) proceed diligently and expeditiously to repair the Major Damage and restore the Sellers Plant to at least the condition in which it was in immediately prior to the Major Damage and resume deliveries of Energy hereunder, or (ii) terminate this EPA, and in that event, the provisions of section 16.3 and subsection 16.5(c) apply. If the Seller fails to give notice exercising its option within such 120-day period, it shall be deemed to have exercised the option described in (i) above. Nothing in this section 11.2 limits the rights of either Party to terminate this EPA under any other section of this EPA. Non-Major Damage - If the Sellers Plant is damaged or destroyed, in whole or in part, by any cause or peril, then, except in the case of Major Damage caused by Force Majeure in respect of which the Seller has invoked Force Majeure in accordance with Article 12, the Seller shall within 30 days after the date of the damage or destruction provide notice to the Buyer setting out the date by which the Seller, acting reasonably, can resume delivering Energy to the Buyer which date shall be not more than 365 days after the date of occurrence of the damage or destruction. The Seller shall diligently and expeditiously repair the Sellers Plant and restore the same to at least the condition in which it was immediately prior to the damage or destruction and shall complete such work not later than the date specified in the notice delivered by the Seller to the Buyer under this subsection 11.2(b). Extension of Term - Provided the Seller complies with its obligations under this section 11.2, the Term shall be extended by the number of days from the date of the event of damage or destruction to the date on which the Seller resumes delivering Energy to the Buyer.

(b)

(c)

12. FORCE MAJEURE 12.1 Invoking Force Majeure and Notice (a) Neither Party shall be in breach or default as to any obligation under this EPA if that Party is unable to perform that obligation due to an event or circumstance of Force Majeure, of which notice is given as required in this section 12.1. Subject to any limitations expressly set out in this EPA, the time for performance of such obligation shall be extended by the number of days that Party is unable to perform such obligation as a result of the event or circumstance of Force Majeure of which notice is so given. If there is a Force Majeure preventing a Party from performing an obligation under this EPA, that Party shall promptly notify the other Party of the Force Majeure. The notice must identify the nature of the Force Majeure, its expected duration and the particular obligations affected by the Force Majeure. The affected Party shall provide reports to the other Party with respect to the Force Majeure at such intervals as the other Party may reasonably request while the Force Majeure continues. A Party shall be deemed to have invoked Force Majeure from the later of:

(b)

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(i) (ii)

the date when that Party gives notice of the Force Majeure in accordance with this subsection 12.1(b); and if such date is not a Business Day, the next following Business Day;

provided that if such notice is given by 17:00 PPT on the first Business Day following the later of: (iii) the day on which the Force Majeure occurs; and (iv) the day when the Party knew, or reasonably ought to have known, of the occurrence of the Force Majeure; the Party shall be deemed to have invoked Force Majeure from the date on which the event of Force Majeure occurred. The Party invoking Force Majeure shall promptly respond to any inquiry from the other Party regarding the efforts being undertaken to remove the Force Majeure. The Party invoking Force Majeure shall give prompt notice of the end of the Force Majeure. 12.2 Exclusions A Party may not invoke Force Majeure: (a) (b) (c) for any economic hardship, or for lack of money, credit or markets; if the Force Majeure is the result of a breach by the Party seeking to invoke Force Majeure of a Permit or of any applicable Laws; for a mechanical breakdown or control system hardware or software failure, unless the Party seeking to invoke Force Majeure can demonstrate that the breakdown or failure was caused by a latent defect in the design or manufacture of the equipment, hardware or software, which could not reasonably have been identified by normal inspection or testing of the equipment, hardware or software; if the Force Majeure was caused by a breach of, or default under, this EPA or a wilful or negligent act or omission by the Party seeking to invoke Force Majeure; for any acts or omissions of third Persons, including any Affiliate of the Seller, or any vendor, supplier, contractor or customer of a Party, but excluding Governmental Authorities, unless such acts or omissions are themselves excused by reason of Force Majeure as defined in this EPA; for any disconnection of the Sellers Plant from the Fortis System, or the Fortis System from the Transmission System, or any outage on the Fortis System, or any Transmission System Outage; or based on the cost or unavailability of Fuel for any reason, including natural causes, unless transport of the Fuel to the Sellers Plant is prevented by an event or circumstance that constitutes Force Majeure as defined in this EPA.

(d) (e)

(f) (g)

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13. LIQUIDATED DAMAGES 13.1 COD Delay If the Sellers Plant fails to achieve COD by the Guaranteed COD plus Force Majeure Days, the Seller shall pay COD Delay LDs to the Buyer calculated in the same manner as for LDs under section 13.2 until the Buyers right to terminate this EPA arises under subsection 16.1(b), whether or not such right is exercised. The Seller shall pay any COD Delay LDs owing by the Seller to the Buyer in respect of the immediately preceding Season on the 30th day after the last day of the Season. If the commencement date for COD Delay LDs under this section 13.1 is any day other than the first day of a Season, the Seasonally Firm Energy Amount for that Season will be prorated based on the number of days remaining in the Season from and after the commencement date for COD Delay LDs. 13.2 Delivery Shortfalls (Seasonal) If in any complete Season after the expiry of four consecutive complete Seasons following COD, the Delivered Eligible Energy (as defined in this section 13.2) in that Season is less than the Seasonally Firm Energy Amount for that Season, the Seller shall pay LDs to the Buyer calculated as follows: LD Amount = (LD Factor * (Designated SFE Amount Delivered Eligible Energy) * (1-L)) Capacity LD Factor where: (a) Capacity LD Factor means the lesser of: (i) (ii) (b) LDs owing and paid by the Seller to the Buyer pursuant to section 13.3, where the delivery shortfall associated with such LDs occurs in the relevant Season; and LD Factor * (Designated SFE Amount Delivered Eligible (Energy) * (I-L);

Designated SFE Amount means (i) the Seasonally Firm Energy Amount for the relevant Season minus (ii) an amount equal to the Seasonally Firm Energy Amount for the relevant Season, divided by the number of minutes in that Season, multiplied by the number of minutes in the Season for which the Seller is excused under subsection 7.7(a) from the obligation to deliver Energy; Delivered Eligible Energy means in each Season the amount of Eligible Energy determined pursuant to subsection (i) of the definition of Eligible Energy for that Season, but excluding any Energy delivered after the start time and prior to the end time for an Authorized Planned Outage as set out in the notice with respect to the Authorized Planned Outage under section 6.3; L or Losses has the meaning given in Appendix 3; LD Factor = the greater of: (i) A and (ii) Mid-C Price [(EFEP * STDF)/(1-L)] where: A = $5.00/MWh * (CPIJan 1, N/CPI Jan 1, 2008); N = the year for which A is being calculated;

(c)

(d) (e)

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EFEP or Escalated Firm Energy Price has the meaning given in Appendix 3; STDF or Seasonal Time of Delivery Factor means the time-weighted average of the TDFs based on Peak Hours, Super-Peak Hours and Off-Peak Hours for each month in the Season; TDF or Time of Delivery Factor has the meaning given in Appendix 3; and Mid-C Price = [(the number of On-Peak Hours in the Season * the simple average of the Dow Jones Mid-C Daily Firm On-Peak Index in the Season) + (the number of Off-Peak Hours in the Season * the simple average of the Dow Jones Mid-C Daily Firm OffPeak Index in the Season)] / the total number of hours in the Season; where: each of the Dow Jones Mid-C Daily Firm On-Peak Index and the Dow Jones Mid-C Daily Firm Off-Peak Index shall be expressed in US$/MWh and converted to Canadian dollars using the average Bank of Canada Daily noon rate for the Season in which the delivery shortfall occurred. Any LDs owing by the Seller to the Buyer pursuant to this section 13.2 shall be payable on the 15 th day of the first month following the end of the Season in which the delivery shortfall occurred. 13.3 Capacity Call Delivery Shortfalls (Hourly) If in any hour after the first anniversary of COD, the Delivered Hourly Eligible Energy (as defined in this section 13.3) in that hour is less than the Capacity Call Amount for that hour, the Seller shall pay LDs to the Buyer calculated as follows: Capacity LD Amount = LD Factor * (Designated CC Amount Delivered Hourly Eligible Energy) * (1-L) where: (a) Designated CC Amount means (i) the Capacity Call Amount for the relevant hour minus (ii) an amount equal to the Capacity Call Amount for the relevant hour, divided by 60 minutes multiplied by the number of minutes in the hour for which the Seller is excused under subsection 7.7(a) from the obligation to deliver Energy; Delivered Hourly Eligible Energy means in each hour the amount of Hourly Eligible Energy determined pursuant to subsection (i) of the definition of Hourly Eligible Energy for that hour, but excluding any Energy delivered after the start time and prior to the end time for an Authorized Planned Outage as set out in the notice with respect to the Authorized Planned Outage under section 6.3; L or Losses has the meaning given in Appendix 3; LD Factor = the greater of: (i) A and (ii) Mid-C Price [(EFEP * TDF)/(1-L) HFC * (CPI Jan 1, N/CPI Jan 1, 2008)] where:

(b)

(c) (d)

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A = $5.00/MWh * (CPIJan 1, N/CPI Jan 1, 2008); N = the year for which A is being calculated; EFEP or Escalated Firm Energy Price has the meaning given in Appendix 3; TDF or Time of Delivery Factor has the meaning given in Appendix 3; HFC or Hourly Firm Credit means the applicable $/MWh from the Hourly Firm Credit Table set forth in section 13.4; and Mid-C Price means: (i) (ii) For Off-Peak Hours, the Dow Jones Mid-C Daily Firm Off-Peak Index; For Peak Hours, the Dow Jones Mid-C Daily Firm On-Peak Index multiplied by the quotient of the Peak TDF for the relevant month divided by the On-Peak TDF for the same month; and

(iii) For Super-Peak Hours, the Dow Jones Mid-C Daily Firm On-Peak Index multiplied by the quotient of the Super-Peak TDF for the relevant month divided by the On-Peak TDF for the same month. where: each of Peak TDF, Super-Peak TDF and On-Peak TDF has the meaning given in Appendix 3; and each of the Dow Jones Mid-C Daily Firm On-Peak Index and the Dow Jones Mid-C Daily Firm Off-Peak Index shall be expressed in US$/MWh and converted to Canadian dollars using the Bank of Canada Daily noon rate for the day in which the delivery shortfall occurred. Any LDs owing by the Seller to the Buyer pursuant to this section 13.3 shall be payable on the 15 th day of the month following the month in which the delivery shortfall occurred. 13.4 Hourly Firm Credit Table The Hourly Firm Credit Table is as follows, where each value is shown in $/MWh (in January 1, 2008 dollars):
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Super-Peak Peak Off-Peak

20.0 20.0 0.0

13.3 13.3 0.0

4.0 4.0 0.0

2.1 2.1 0.0

0.0 0.0 0.0

0.0 0.0 0.0

2.0 2.0 0.0

4.0 4.0 0.0

4.1 4.1 0.0

4.0 4.0 0.0

8.3 8.3 0.0

20.0 20.0 0.0

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13.5 Exclusive Remedies for Buyer Except in the case of Deliberate Breach, payment by the Seller of the LDs in this Article 13 is the exclusive remedy to which the Buyer is entitled for: (a) (b) (c) (d) the Sellers failure to achieve COD by the Guaranteed COD; the Sellers failure to deliver the Seasonally Firm Energy Amount; the Sellers failure, during the duration of a Capacity Call, to deliver Hourly Eligible Energy in each hour in an amount equal to the Capacity Call Amount; and any other failure to comply with section 7.2, subsection 7.11(c) or subsection 6.2(b);

provided that the foregoing does not limit or otherwise affect any right to receive interest on LDs, any right to terminate this EPA, or any right to receive a Termination Payment, in each case as expressly set out in this EPA, or the exercise of any other right or remedy expressly set out in this EPA, including any rights under section 10.5, or Article 14, or any right to apply any invoice adjustments in accordance with Appendix 3. 13.6 Exclusive Remedies for Seller The Sellers exclusive remedy for the Buyers failure to take or pay for Eligible Energy is the right to recover the price payable by the Buyer for Eligible Energy pursuant to Appendix 3 and any interest on any such amount owing by the Buyer to the Seller, provided that the foregoing does not limit or otherwise affect any right to terminate this EPA, any rights under section 10.5, or any right to receive a Termination Payment expressly set out in this EPA. 13.7 Limits of Liability Except in the case of Deliberate Breach, in each year the Sellers liability for damages for all breaches of, or defaults under, this EPA in that year is limited to an amount equal to 200% of the required amount of the Performance Security for the relevant year, provided that the foregoing does not apply to: (a) (b) (c) (d) (e) (f) any invoice credit owing by the Seller under Appendix 3; any liability under section 20.1; interest on any amount owing under this EPA; any payment commitment of the Seller for incremental costs pursuant to section 4.5, 5.7 or 6.6; any right to receive a Termination Payment expressly set out in this EPA; and any other provision in this EPA that is expressly excluded from the limit of liability in this section 13.7.

13.8 Consequential Damages Neither Party shall be liable to the other Party for any special, incidental, exemplary, punitive or consequential damages with respect to, arising out of, relating to or in any way connected with a Partys performance or non-performance under this EPA.

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14. PERFORMANCE AND INTERCONNECTION SECURITY 14.1 Delivery (a) The Parties acknowledge that the Seller has delivered the Performance Security to the Buyer concurrently with execution and delivery of this EPA. The Seller shall maintain the Performance Security until the time provided in subsection 14.2(a), and shall amend or replace the Performance Security to ensure that the Performance Security at all times complies with (i) the requirements set forth in the definition of Performance Security in Appendix 1, and (ii) the requirement set forth in subsection 7.9(c). The Seller shall deliver the Interconnection Security to the Buyer by not later than 15 days after written request from the Buyer. The Seller shall maintain such Interconnection Security until the time provided in subsection 14.2(b), and shall amend or replace the Interconnection Security to ensure that the Interconnection Security complies at all times with (i) the requirements set forth in the definition of Interconnection Security in Appendix 1, and (ii) the requirements of any conditional consent given under sections 4.5, 5.7 and 6.6. The Performance Security and the Interconnection Security do not limit the Sellers liability in respect of any breach of, or default under, this EPA.

(b)

(c)

14.2 Return (a) The Buyer shall return or release the Performance Security to the Seller, without deduction, other than prior deductions, if any, properly made hereunder on the earlier of: (i) (ii) (b) in the case of termination of this EPA under section 3.1, by the date specified in subsection 3.5(a); or 30 Business Days after the later of (I) termination of this EPA under subsection 11.2(a), section 16.1 or section 16.2, and (II) discharge of all obligations and liabilities of the Seller to the Buyer under this EPA.

The Buyer shall return or release the Interconnection Security to the Seller, without deduction, other than prior deductions, if any, properly made hereunder on the earlier of: (i) (ii) the Five-Year Anniversary; the end of any four consecutive complete Seasons following COD in which the Seller has delivered an amount of Firm Energy not less than 95% of the Annual Firm Energy Amount for that four Season period, provided that for the purposes of this subsection 14.2(b)(ii), Firm Energy in any applicable period shall be deemed to include: (I) deemed Eligible Energy pursuant to section 7.8 that would have constituted Firm Energy if actually delivered; and

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(II)

all other amounts of Firm Energy that could have been generated and delivered to the Buyer during that period but for the Seller being excused under subsection 7.7(a) from its obligations under section 7.2; and

(iii) 30 Business Days after the later of (I) termination of this EPA under subsection 11.2(a), section 16.1 or section 16.2, and (II) discharge of all obligations and liabilities of the Seller to the Buyer under subsection 14.3(b). 14.3 Enforcement (a) In the case of Performance Security, if: (i) (ii) the Seller fails to pay any Final Amount owing by the Seller to the Buyer; or the Seller fails to pay any LDs owing by the Seller to the Buyer; or

(iii) the Seller fails to pay any Termination Payment owing by the Seller to the Buyer, and, in each case, the Seller fails to cure such failure to pay within 15 days after notice from the Buyer to the Seller, then the Buyer may enforce the Performance Security and apply the proceeds thereof on account of amounts owing to the Buyer in respect of any or all of the foregoing. (b) In the case of Interconnection Security, if the Seller fails to pay any amounts owing by the Seller under commitments given pursuant to section 4.5, 5.7 or 6.6, or under section 16.7, and, in each case, the Seller fails to cure such failure to pay within 15 days after notice from the Buyer to the Seller, then the Buyer may enforce the Interconnection Security and apply the proceeds thereof on account of the amounts owing to the Buyer in respect of any or all of the foregoing.

14.4 Form The Seller shall maintain each of the Performance Security and the Interconnection Security in the form of a letter of credit that is: (a) issued or advised by a branch in Canada of a financial institution having a credit rating not less than Standard & Poors A-, Moodys A3 or Dominion Bond Rating Service A (low) and if such credit rating agencies publish differing credit ratings for the same financial institution, the lowest credit rating of any of the credit rating agencies shall apply for purposes of this section 14.4; in the form set out in Appendix 7, or in such other form to which the Buyer may consent; and for a term of not less than one year and providing that it is renewed automatically, unless the issuing or confirming financial institution advises otherwise by the date specified in Appendix 7.

(b) (c)

14.5 Replenishment If the Buyer draws on the Performance Security, as permitted hereunder, then the Seller shall within 3 Business Days after such draw provide additional security in the form specified in section 14.4 sufficient to replenish or maintain the aggregate amount of the Performance Security at the amount required hereunder.

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14.6 Right to Withhold Payment If the Seller has failed to maintain the Performance Security or the Interconnection Security in the amount required hereunder, subject, in the case of the Performance Security, to the cure period specified in section 14.5, the Buyer shall be entitled to withhold payment of any amount owing by the Buyer to the Seller under this EPA until 5 days after the date when the Seller has delivered the required amount of Performance Security or the Interconnection Security, as the case may be, to the Buyer. Any amounts withheld by the Buyer in accordance with this section 14.6 shall not bear interest. 14.7 Letter of Credit Failure The Buyer shall be entitled to enforce the Performance Security or the Interconnection Security in the event of a Letter of Credit Failure and the Buyer shall be entitled to hold the proceeds of such enforcement until such time as the Seller delivers replacement Performance Security or Interconnection Security, as the case may be, in the amount and in the form required under this EPA. Upon receipt of such replacement security, the Buyer shall return the proceeds of enforcement of the original Performance Security or Interconnection Security, as the case may be, to the Seller without interest after deducting any amounts the Buyer is entitled to deduct under this EPA. The Seller shall notify the Buyer promptly of any Letter of Credit Failure. 15. SUSPENSION 15.1 Buyer Suspension If a Buyer Termination Event occurs and is continuing, the Buyer may, upon notice to the Seller, suspend performance and payment by the Buyer under this EPA, provided that: (a) (b) (c) the suspension may not continue for longer than 90 days; the suspension shall not affect the obligations of the Buyer or the Seller to pay any amount owing by it to the other in respect of performance of, or failure to perform, obligations under this EPA prior to the date of suspension by the Buyer; and the suspension shall not limit any right the Buyer may have under this EPA to terminate this EPA as a result of the occurrence of the Buyer Termination Event.

15.2 Seller Suspension If a Seller Termination Event occurs and is continuing, the Seller may, upon notice to the Buyer, suspend performance by the Seller under this EPA, provided that the suspension shall not affect the obligations of the Seller or the Buyer to pay any amount owing by it to the other in respect of performance of, or failure to perform, the Sellers obligations under this EPA prior to the date of suspension by the Seller. The suspension shall not limit any right the Seller may have under this EPA to terminate this EPA as a result of the occurrence of the Seller Termination Event. 15.3 Resuming Deliveries The non-defaulting Partys right to suspend performance pursuant to this Article 15 shall cease when the defaulting Party has demonstrated to the satisfaction of the non-defaulting Party, acting reasonably, that the defaulting Party has cured the cause for the suspension. 16. TERMINATION 16.1 Termination by the Buyer In addition to any other right to terminate this EPA expressly set out in any other provision of this EPA, the Buyer may terminate this EPA, by notice to the Seller if:

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(a)

the Seller has failed to obtain all Material Permits on or before the date that is the earlier of: (i) (ii) Guaranteed COD; and the third anniversary of the Effective Date;

provided that the Buyer may terminate this EPA under this provision only if the Buyer delivers a termination notice before the date on which the Seller has secured all Material Permits, and if the Seller has not already delivered a notice of termination under subsection 16.2(a); (b) COD does not occur by Guaranteed COD plus 365 days plus all Force Majeure Days (not exceeding 180 Force Majeure Days), provided that if the Seller can demonstrate on or before such date by clear and convincing evidence acceptable to the Buyer, acting reasonably, that construction of the Incremental Sellers Plant and the integration of the Incremental Sellers Plant into the Sellers Plant is 80% complete by such date, the Buyer may terminate this EPA under this provision, by notice to the Seller, only if the Seller fails to achieve COD within a further 180 days plus any further Force Majeure Days (not exceeding 180 Force Majeure Days) after such date, and provided further that the Buyer shall be entitled to terminate this EPA under this provision only if the Buyer delivers a termination notice before COD; either Party has received a notice from the other Party invoking Force Majeure and the Force Majeure has not been terminated by the date that is 730 days after the date of notice invoking Force Majeure, provided that the Buyer may terminate this EPA under this provision only if the Buyer delivers a termination notice before the end of the Force Majeure; a Transmission System Outage that is directly caused by a Force Majeure has persisted continuously for 730 or more days after the commencement of Force Majeure, provided that the Buyer may terminate this EPA under this provision only if the Buyer delivers a termination notice before the end of such Transmission System Outage; or a Buyer Termination Event occurs.

(c)

(d)

(e)

Any termination pursuant to this section 16.1 shall be effective immediately upon delivery of the notice of termination to the Seller. 16.2 Termination by the Seller In addition to any other right to terminate this EPA expressly set out in any other provision of this EPA, the Seller may terminate this EPA by notice to the Buyer if: (a) the Seller, after using commercially reasonable efforts, has failed to obtain all Material Permits on terms satisfactory to the Seller, acting reasonably, on or before the date that is the earlier of: (i) (ii) 180 days before the Guaranteed COD; and the second anniversary of the Effective Date;

Celgar Green Energy 31

provided that if the Seller has not given notice of termination pursuant to this subsection 16.2(a) by the date that is 15 days after the Sellers right to terminate arises under this subsection 16.2(a), the Seller shall be deemed to have elected not to terminate this EPA and may not thereafter terminate this EPA under this subsection 16.2(a); (b) either Party has received a notice from the other Party invoking Force Majeure and the Force Majeure has not been terminated by the date that is 730 days after the date of notice invoking Force Majeure, provided that the Seller shall be entitled to terminate this EPA under this provision only if the Seller delivers a termination notice before the end of the Force Majeure; a Transmission System Outage that is directly caused by a Force Majeure has persisted continuously for 730 or more days after the commencement of Force Majeure, provided that the Seller may terminate this EPA under this provision only if the Seller delivers a termination notice before the end of such Transmission System Outage; or a Seller Termination Event occurs.

(c)

(d)

Any termination pursuant to this section 16.2 shall be effective immediately upon delivery of the notice of termination to the Buyer. 16.3 Effect of Termination Upon expiry of the Term or if this EPA is terminated pursuant to section 3.1, subsection 11.2(a) or this Article 16: (a) the Parties may pursue and enforce any rights and remedies permitted by law or equity in respect of any prior breach or breaches of this EPA, and may enforce any liabilities and obligations that have accrued under this EPA prior to the expiry of the Term or the date of termination, including any claims by the Buyer for amounts that would have been payable by the Seller under commitments given pursuant to any of section 4.5, 5.7 or 6.6 but for the expiry or termination of this EPA, subject to any express restrictions on remedies and limitations or exclusions of liability set out in this EPA; and (i) with respect to a termination under section 3.1 only, both Parties shall remain bound by (I) Article 20, Article 21 and section 22.6, and (II) sections 3.3 (if applicable), 3.5, 14.2 and 14.3, in respect of the satisfaction of residual obligations specified to arise on termination only; (i) upon expiry of the Term or upon any termination other than a termination under section 3.1: (A) both Parties shall remain bound by: (I) Article 10 in respect of any final billing and resolution of disputed amounts only; (II) Article 14 and Article 16, in respect of the satisfaction of residual obligations specified to arise on termination only; (III) Article 20, Article 21 and section 22.6; and (IV) Article 8 with respect only to Environmental Attributes associated with Eligible Energy delivered prior to termination of this EPA; and

(b)

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(B)

the Seller shall remain bound by: (I) section 6.4; and (II) for a period of 36 months following expiry of the Term or termination of this EPA, Article 18, with respect to Records only,

and, in all such cases, both Parties shall remain bound by any other provisions necessary for the interpretation and enforcement of the foregoing provisions. 16.4 Payment on Termination by the Buyer (a) If the Buyer terminates this EPA under subsection 16.1(a), 16.1(b) or 16.1(e), the Seller shall pay to the Buyer an amount equal to the lesser of: (i) (ii) (b) the then required amount of the Performance Security; and an amount equal to the positive amount, if any, by which the Buyers Economic Losses and Costs exceed the aggregate of the Buyers Gains.

If the Buyer terminates this EPA under subsection 16.1(c) or 16.1(d), no Termination Payment is payable by either Party to the other, except as set out in section 16.7.

16.5 Payment on Termination by the Seller (a) (b) (c) (d) If the Seller terminates this EPA under subsection 16.2(a), the Seller shall pay to the Buyer an amount equal to $2.50/MWh multiplied by the Annual Firm Energy Amount and any amount payable under section 16.7. If the Seller terminates this EPA under subsection 16.2(b) or 16.2(c), no Termination Payment is payable by either Party to the other, except as set out in section 16.7. If the Seller terminates this EPA under subsection 11.2(a), no Termination Payment is payable by the Seller to the Buyer, except as set out in section 16.7. If the Seller terminates this EPA under subsection 16.2(d) prior to COD, the Buyer shall pay to the Seller an amount equal to: (i) (ii) 115% of the Development Costs; less the Net Realizable Value of the Project Assets that comprise the Incremental Sellers Plant (the Incremental Project Assets), where Net Realizable Value means the amount that the Seller receives, or could reasonably be expected to receive, after the exercise of commercially reasonable efforts, from a disposition of the Incremental Project Assets, net of transaction costs, as of the date of termination.

(e)

If the Seller terminates this EPA under subsection 16.2(d) on or after COD, the Buyer shall pay to the Seller an amount equal to the positive amount, if any, by which the Sellers Economic Losses and Costs exceed the Sellers aggregate Gains.

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16.6 Calculation of Gains, Economic Losses and Costs For the purposes of calculating the Gains, Economic Losses and Costs of a Party that is terminating this EPA (the Terminating Party) pursuant to subsection 16.4(a)(ii) or 16.5(e), the following conditions shall apply: (a) The Terminating Partys Gains, Economic Losses and Costs shall be determined by comparing the value of the remaining Term, contract quantities and price payable under this EPA had it not been terminated to the relevant market prices for equivalent quantities for the remaining Term either quoted by a bona fide arms length third Person or which are reasonably expected to be available in the market under a replacement contract for this EPA. Market prices shall be adjusted for differences between the product subject to the market prices and a product, inclusive of Environmental Attributes, equivalent to that specified under this EPA available from a generator meeting the eligibility requirements set forth in section 14 of the RFP, including with respect to quantity, place of delivery and length of term and each element of those eligibility requirements. The Terminating Party shall not be required to enter into a replacement transaction in order to determine the amount payable by the other Party. The Terminating Party shall determine the amount of any Termination Payment owed by the other Party, and shall notify the other Party of such amount and provide reasonable particulars with respect to its determination within 120 days after the effective date of termination of this EPA, failing which the Terminating Party shall not be entitled to any Termination Payment under such section. If the Terminating Partys aggregate Gains exceed its aggregate Economic Losses and Costs, if any, resulting from the termination of this EPA, the amount of the Termination Payment shall be zero. The Terminating Partys Gains, Economic Losses and Costs shall be discounted to the date of termination of this EPA using the Present Value Rate applicable at the date of termination of this EPA. In this Article 16: (i) Costs means brokerage fees, commissions and other similar transaction costs and expenses reasonably incurred, or that would reasonably be expected to be incurred, by the Terminating Party in entering into new arrangements which replace this EPA, and legal fees, if any, incurred in connection with enforcing the Terminating Partys rights under this EPA; Economic Losses means an amount equal to the present value of the economic loss, exclusive of Costs, if any, to the Terminating Party resulting from the termination of this EPA, determined in a commercially reasonable manner; and

(b) (c)

(d) (e) (f)

(ii)

(iii) Gains means an amount equal to the present value of the economic benefit, exclusive of Costs, if any, to the Terminating Party resulting from the termination of this EPA, determined in a commercially reasonable manner.

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16.7 Interconnection Costs Payable on Termination - If this EPA is terminated under section 11.2, 16.1 or 16.2, but excluding any termination under subsection 16.2(d), the Seller shall pay to the Buyer within 30 days after delivery by the Buyer of an invoice, the sum of the following amounts: (a) if notice of termination is given before the Five-Year Anniversary, an amount equal to: INU Costs * [1 (X/60)] where: INU Costs means all reasonable costs incurred or committed by the Transmission Authority and/or the Buyer for design, engineering, construction and commissioning of Interconnection Network Upgrades; X means the number of months, prorated for any portion of a month, from COD to the date on which notice of termination of this EPA is given; and (b) all reasonable incremental costs payable by the Seller pursuant to any commitment given pursuant to section 4.5, 5.7 or 6.6, less any such costs paid by the Seller.

16.8 Termination Payment Date A Party required to make a Termination Payment to the other Party shall, except in the case of a Termination Payment payable pursuant to subsection 16.4(a), 16.5(d) or 16.5(e), pay the Termination Payment within 30 Business Days after the effective date of termination of this EPA. The Seller shall pay any Termination Payment owing by the Seller pursuant to subsection 16.4(a), or the Buyer shall pay any Termination Payment owing by the Buyer pursuant to subsection 16.5(d) or (e), in either case within 30 Business Days after the date of delivery of an invoice by the payee. At the time for payment of the Termination Payment, each Party shall pay to the other Party all additional amounts payable by it pursuant to this EPA, but all such amounts shall be netted and aggregated with any Termination Payment. 16.9 Exclusive Remedies (a) (b) Termination under Section 3.1 - Subject to section 16.3, the payments and actions contemplated by sections 3.3 and 3.5 are the exclusive remedies to which the Parties are entitled for termination of this EPA pursuant to section 3.1. Termination under Section 16.1 - Except in the case of Deliberate Breach or as otherwise expressly set out in this EPA, and subject to section 16.3: (i) (ii) (c) payment by the Seller of the Termination Payment and any payment payable under section 16.7 is the exclusive remedy to which the Buyer is entitled for termination of this EPA pursuant to subsection 16.1(a), (b) or (e); and payment by the Seller of any amount payable pursuant to section 16.7 is the exclusive remedy to which the Buyer is entitled for termination of this EPA pursuant to subsection 16.1(c) or 16.1(d).

Termination under Subsection 16.2(a) Subject to section 16.3, payment by the Seller of the Termination Payment and any amount payable under section 16.7 is the exclusive

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remedy to which the Buyer is entitled for termination of this EPA pursuant to subsection 16.2(a). (d) Termination under Section 11.2, or Subsection 16.2(b) or 16.2(c) Subject to section 16.3, payment by the Seller of any amount payable under section 16.7 is the exclusive remedy to which the Buyer is entitled for termination of this EPA pursuant to section 11.2, or subsection 16.2(b) or 16.2(c). Termination under Subsection 16.2(d) Subject to section 16.3, payment by the Buyer of the Termination Payment is the exclusive remedy to which the Seller is entitled for termination of this EPA pursuant to subsection 16.2(d).

(e)

17. ASSIGNMENT 17.1 Assignment A Party (which in the case of the Seller, includes the General Partner) may not assign or dispose of this EPA or any direct or indirect interest in this EPA, in whole or in part, for all or part of the Term, except: (a) (b) with the consent of the other Party, such consent not to be unreasonably withheld, delayed or conditioned; or to an Affiliate, on notice to, but without the consent of, the other Party, provided that the assignor shall remain liable for the obligations of the assignee under this EPA, unless otherwise agreed in writing by the other Party.

Notice of intent to assign, and where applicable a request for consent to assign, must be given by the assignor to the other Party not less than 30 days before the date of assignment, and, except in the case of assignment to a Facility Lender, must be accompanied by a proposed form of assignment and assumption agreement, and, in the case of an assignment pursuant to subsection 17.1(a), other than to a Facility Lender, evidence of the capability of the assignee as required by subsection 17.2(b). Consent to an assignment to a Facility Lender shall not be given, or be deemed to be given, until full execution and delivery of the agreement contemplated by section 17.3. Any sale or other disposition of the Sellers Plant that results in the Seller holding less than a 50% interest in the Sellers Plant, any sale or other disposition of all or any interest of the Seller or the General Partner in this EPA or revenue derived from this EPA, and any mortgage, pledge, charge or grant of a security interest in all or any part of the Sellers or the General Partners ownership interest in the Project Assets and any change of Control, merger, amalgamation or reorganization of the Seller or the General Partner is deemed to be an assignment of this EPA by the Seller or the General Partner for the purpose of this Article 17, including section 17.2, provided that where Control is transferred to an Affiliate or where the Seller or the General Partner merges or amalgamates with an Affiliate or enters into a reorganization with an Affiliate, subsection 17.1(b) shall apply. 17.2 Preconditions to Assignment Without limiting subsection 17.1(a), any assignment pursuant to section 17.1, other than an assignment to a Facility Lender, is subject to: (a) the assignee entering into and becoming bound by this EPA, assuming all the obligations and liabilities of the assignor under this EPA arising both before and after the assignment of this EPA, providing any Performance Security, Interconnection Security, or other security then required under any conditional consent given under section 4.5, 5.7 or 6.6,

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as applicable at the time of assignment and providing the representations and warranties set out in section 19.1 effective as at the time of assignment; and (b) except for an assignment under subsection 17.1(b), the assignee demonstrating to the reasonable satisfaction of the other Party its capability (financial, technical and otherwise) to fulfil the obligations of the assignor under this EPA or, in the case of a change of Control, merger, amalgamation or reorganization of the Seller or the General Partner, the parties to that transaction demonstrating to the reasonable satisfaction of the Buyer, the continued ability of the Seller to perform its obligations under this EPA and, in the case only of an assignment of 100% of the assignors interest in the Project Assets, the Sellers Plant, or this EPA or revenue derived from this EPA, upon such demonstration and concurrently with the agreement providing for the assumption of liabilities and obligations and the provision of Performance Security and Interconnection Security and any other security required under subsection 17.2(a), the assignor shall be released from all future obligations and liabilities under this EPA and the Performance Security and Interconnection Security and any other security provided by it shall be returned or released.

17.3 Assignment to Facility Lender If the Seller seeks consent to assign this EPA to a Facility Lender, the Seller acknowledges that the Buyer is entitled to require, as a condition of the Buyers consent to such assignment, that the Seller and the Facility Lender enter into an agreement with the Buyer substantially in the form attached as Appendix 8. 17.4 No Implied Consent to Exercise of Rights No consent to any assignment given by the Buyer under this Article 17 implies or constitutes a consent to the exercise by the assignee, or any Affiliate of the assignee, whether or not a Facility Lender, of any right if the exercise of that right, at the time it was acquired, would require the consent of the Buyer under this Article 17, and the exercise of any such right shall require the further consent of the Buyer. 17.5 Costs The assignor shall reimburse the other Party for all costs reasonably incurred by the other Party in connection with an assignment. 17.6 No Assignment Before COD Notwithstanding subsection 17.1(a), the Seller or the General Partner shall not assign, including any event or action that is deemed under section 17.1 to be an assignment, or otherwise dispose of any interest in this EPA prior to COD, except: (i) to an Affiliate as permitted under subsection 17.1(b); (ii) to a Facility Lender as permitted under subsection 17.1(a) and section 17.3; or (iii) with the prior consent of the Buyer. 18. INSPECTION AND AUDIT 18.1 General Inspection and Audit Rights For the sole purpose of verifying: (a) compliance with this EPA, including verifying (i) the Sellers compliance with the Fuel Plan, and (ii) that Eligible Energy, excluding Energy generated from Auxiliary Fuel to the extent the use of which is permitted hereunder, qualifies as Clean or Renewable Electricity; the portion, if any, of Energy delivered to the Buyer in any Season during the Term that is equal to or less than the Seasonal GBL applicable in that Season;

(b)

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(c) (d) (e)

the accuracy of invoices and other statements or calculations delivered by the Seller to the Buyer under this EPA; the Sellers right to rely on any relief claimed by the Seller under this EPA; and the Development Costs;

on reasonable prior notice to the Seller, the Seller shall provide the Buyer and the Buyers representatives and advisors with prompt access during normal business hours to the Sellers Plant and to all Records and the Seller shall promptly provide copies of any Records to the Buyer on request by the Buyer at any time. The Buyer and the Buyers representatives and advisors may take copies of any Records. The Buyer shall exercise any access under this Article 18 at the Buyers cost and in a manner that minimizes disruption to the operation of the Sellers Plant. Any review, inspection or audit by the Buyer of the Sellers Plant, its design, construction, operation, maintenance, repair, records or other activities of the Seller may not be relied upon by the Seller, or others, as confirming or approving those matters. 18.2 Inspection and Audit Rights Regarding Environmental Attributes The Buyer, any Affiliate of the Buyer and any third Person who has entered into a contract with the Buyer or any Affiliate of the Buyer to purchase Environmental Attributes may at any time conduct or have a third Person with the necessary expertise conduct, at the Buyers expense, an audit of the Project Assets and Records to verify compliance with the requirements for the Environmental Certification. The Seller shall promptly provide any consents required to enable the Buyer, any Affiliate of the Buyer or any third Person who has entered into a contract with the Buyer to purchase Environmental Attributes to: (a) (b) (c) make enquiries with Governmental Authorities concerning the status of compliance by the Seller and the Sellers Plant with applicable Laws and Permits; make enquiries of TerraChoice Environmental Marketing or any other third Person regarding the status of the Environmental Certification; and obtain copies of all audits, reviews or inspections conducted by the Seller, TerraChoice Environmental Marketing or any other third Person in connection with the application by the Seller to obtain and maintain the Environmental Certification.

18.3 Consents Regarding Clean or Renewable Electricity The Seller shall promptly provide to the Buyer any consents required to enable the Buyer to make enquiries with, and obtain information from, any Governmental Authorities concerning the qualification of the output from the Sellers Plant as Clean or Renewable Electricity. 19. REPRESENTATIONS AND WARRANTIES 19.1 By Seller The Seller and the General Partner as to itself only, represent and warrant to the Buyer, and acknowledge that the Buyer is relying on those representations and warranties in entering into this EPA, as follows as of the Effective Date: (a) Corporate Status - The General Partner is duly incorporated, organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is registered or otherwise lawfully authorized to carry on business in British Columbia, and has full

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power, capacity and authority to own its assets and to carry on its business as now conducted and to enter into and to perform its obligations under this EPA; (b) Bankruptcy - No actions are threatened, or have been taken or authorized by the General Partner or any other Person to initiate proceedings for, or in respect of, the bankruptcy, insolvency, liquidation, dissolution or winding-up of the Seller or the General Partner or to appoint a receiver, liquidator, trustee or assignee in bankruptcy in respect of the Seller or the General Partner; Assets - No appropriation, expropriation or seizure of all or any portion of the Sellers Plant, or any of its material properties or assets, is pending or threatened; No Conflict - Neither the signing of this EPA, nor the carrying out of the Sellers obligations under this EPA shall (i) constitute or cause a breach of, default under, or violation of, the constating documents or bylaws of the General Partner, any permit, franchise, lease, license, approval or agreement to which the General Partner is a party, or any other covenant or obligation binding on the Seller of the General Partner or affecting any of their properties, (ii) cause a lien or encumbrance to attach to the Sellers Plant, other than a security interest granted in respect of financing the design, construction or operation of the Sellers Plant, or (iii) result in the acceleration, or the right to accelerate, any obligation under, or the termination of, or the right to terminate, any permit, franchise, lease, license, approval or agreement related to the Sellers Plant; Binding Obligation - This EPA constitutes a valid and binding obligation of the Seller and the General Partner enforceable against the Seller and the General Partner in accordance with its terms; Authorization, Execution and Delivery - This EPA has been duly authorized, executed and delivered by the General Partner; Proposal Documents - All material information in the Proposal Documents is true and correct in all material respects and there is no material information omitted from the Proposal Documents which makes the information in the Proposal Documents misleading or inaccurate in any material respect; Appendix 4 There is no material inconsistency between the description of the Sellers Plant on which the Seller Optional Study Report was based and the information contained in Appendix 4; and Exemption From Regulation - The Seller and the General Partner are exempt from regulation as a public utility, as defined in the UCA, with respect to the Sellers Plant, the sale of Energy and the performance by the Seller of its obligations under this EPA.

(c) (d)

(e) (f) (g)

(h) (i)

19.2 By Buyer The Buyer represents and warrants to the Seller, and acknowledges that the Seller is relying on those representations and warranties in entering into this EPA, as follows as of the Effective Date: (a) Corporate Status - The Buyer is a corporation continued under the Hydro and Power Authority Act, R.S.B.C. 1996, c. 212, is validly existing and is in good standing under the laws of British Columbia, is lawfully authorized to carry on business in British Columbia,

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and has full corporate power and capacity to own its assets and to carry on its business as now conducted and to enter into and to perform its obligations under this EPA; (b) Bankruptcy - No actions are threatened, or have been taken or authorized by the Buyer or any other Person to initiate proceedings for, or in respect of, the bankruptcy, insolvency, liquidation, dissolution or winding-up of the Buyer or to appoint a receiver, liquidator, trustee or assignee in bankruptcy in respect of the Buyer; Assets - There is no appropriation, expropriation or seizure of any of the material assets of the Buyer pending or threatened; No Conflict - Neither the signing of this EPA nor the carrying out of the Buyers obligations under this EPA shall constitute or cause a breach of, default under, or violation of, the Hydro and Power Authority Act (British Columbia), any permit, franchise, lease, license, approval or agreement to which the Buyer is a party, or any other covenant binding on the Buyer or affecting any of its properties; Binding Obligation - This EPA constitutes a valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms; and Authorization, Execution and Delivery - This EPA has been duly authorized, executed and delivered by the Buyer.

(c) (d)

(e) (f)

20. INDEMNITIES 20.1 Seller Indemnity The Seller and the General Partner shall indemnify, defend and hold harmless the Buyer and its Affiliates, and their respective directors, officers, employees, agents, representatives, successors and permitted assigns (the Buyer Indemnified Parties) from and against all claims, demands, actions, causes of action, suits, orders and proceedings made or brought against any of the Buyer Indemnified Parties: (a) (b) with respect to any emissions from the Sellers Plant; or for personal injury, including death, to third Persons and for damage to property of third Persons, to the extent caused or contributed to by the wilful act or omission or negligence of the Seller or the General Partner, any contractor or subcontractor or supplier to the Seller or the General Partner or any director, officer, employee or agent of the Seller or the General Partner or any other Person for whom the Seller or the General Partner is responsible at law where such wilful act or omission or negligence is in connection with the Project or the performance of, or the failure to perform, any of the Sellers obligations, or the exercise of any of the Sellers rights, under this EPA.

20.2 Buyer Indemnity The Buyer shall indemnify, defend and hold harmless the Seller and the General Partner and their Affiliates, and their respective directors, officers, employees, agents, representatives, successors and permitted assigns (the Seller Indemnified Parties) from and against all claims, demands, actions, causes of action, suits, orders and proceedings made or brought against any of the Seller Indemnified Parties for personal injury, including death, to third Persons and for damage to property of third Persons, to the extent caused or contributed to by the wilful act or omission or negligence of the Buyer, any contractor or subcontractor or supplier to the Buyer or any director, officer,

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employee or agent of the Buyer or any other person for whom the Buyer is responsible at law while the Buyer or any such Person is at the Sellers Plant. 20.3 Indemnification Conditions The right of a Party (Indemnitee) to be indemnified by the other Party (Indemnitor) under any indemnity contained in this EPA in respect of a claim by a third Person is subject to the conditions that: (a) the Indemnitee gives the Indemnitor prompt notice of such claim, the right to select and instruct counsel, and all reasonable cooperation and assistance, including the availability of documents and witnesses within the control of the Indemnitee, in the defence or settlement of the claim; and the Indemnitee does not compromise or settle the claim without the prior consent of the Indemnitor.

(b)

20.4 Third Party Beneficiary Conditions The Parties acknowledge that the Buyer holds the benefit of section 20.1 for itself, and on behalf of the Buyer Indemnified Parties, which are not party to this EPA, and the Seller holds the benefit of section 20.2 for itself, and on behalf of the Seller Indemnified Parties, which are not party to this EPA. The Parties further acknowledge that each of the Buyer Indemnified Parties and the Seller Indemnified Parties may enforce those sections respectively for their own benefit by action taken directly against the Seller or the Buyer respectively, and/or such actions may be taken by the Buyer or the Seller against the other for the benefit of their respective indemnified parties. 21. CONFIDENTIALITY 21.1 RFP Confidentiality Agreement The RFP Confidentiality Agreement continues in full force and effect, and section 2.5 thereof is amended to provide that the obligations of the Parties thereunder shall expire two years following the Effective Date. 21.2 Additional Confidentiality Obligation Without limiting the effect of the RFP Confidentiality Agreement, during the Term and for two years thereafter (i) the Buyer shall treat as confidential, and shall not disclose to any third Person, Seller Confidential Information, and (ii) the Seller shall treat as confidential, and shall not disclose to any third Person, Buyer Confidential Information, provided however that the foregoing obligations, and nothing in this EPA, prevents or restricts: (a) (b) (c) disclosures that are expressly authorized under any section of this EPA, or as otherwise set out in this EPA; disclosures that are necessary to enable either Party to fulfill its obligations under this EPA, including under section 3.3; in the case of the Buyer, disclosure of Seller Confidential Information: (i) (ii) to any ministers, deputy ministers or servants or employees of the Province of British Columbia; and to its directors, officers, employees and Affiliates, consultants and advisors;

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provided that each of the foregoing to whom Seller Confidential Information is disclosed is advised of the confidential nature thereof; (d) in the case of the Buyer, disclosure of Seller Confidential Information in any regulatory proceeding, whether in respect of this EPA or in respect of other matters, to the extent that the Buyer considers disclosure necessary or desirable to support its position in any such proceeding, provided that, to the extent reasonably practicable, the Buyer gives reasonable notice to the Seller before making the disclosure, and, to the extent requested by the Seller, requests the relevant tribunal to treat all or any part of the disclosure as confidential or to limit its further disclosure; in the case of the Buyer, disclosure to any Person or any Governmental Authority of any Seller Confidential Information with respect to: (i) the Sellers Plant that the Buyer is required to disclose to verify qualification of the output of the Sellers Plant as Clean or Renewable Electricity or to provide confirmation to any such Person or Governmental Authority that the output from the Sellers Plant qualifies as Clean or Renewable Electricity; or the Energy and/or the Sellers Plant that the Buyer is required to disclose to enable the Buyer to obtain or realize the full benefit to the Buyer of the Environmental Attributes, including sales of Environmental Attributes to third Persons;

(e)

(ii) (f)

in the case of the Seller, disclosure of the Buyer Confidential Information to its directors, officers, employees and Affiliates, consultants and advisors, provided that each of the foregoing to whom Buyer Confidential Information is disclosed is advised of the confidential nature thereof; without limiting the Buyers disclosure rights under subsection 21.2(d) above, disclosures required to be made by a Party by an order of a court or tribunal or under any law, regulatory requirement or requirement of any stock exchange that is binding upon it, provided that (i) to the extent reasonably practicable, the Party making such disclosure gives reasonable notice to the other Party before making the disclosure, and (ii) limits the disclosure to that required by the applicable order, law, or regulatory or stock exchange requirement; disclosures in any legal proceedings for the enforcement of this EPA or other agreement entered into by the Seller pursuant to the RFP process; or disclosures of the Seller Confidential Information or the Buyer Confidential Information, as the case may be, by written agreement or consent of both Parties.

(g)

(h) (i)

21.3 Freedom of Information and Protection of Privacy Act The Seller acknowledges that the Buyer is subject to the Freedom of Information and Protection of Privacy Act (British Columbia) and agrees that the Buyers non-disclosure obligations under this EPA are subject to the provisions of that legislation, as amended from time to time. 21.4 Exemption from Disclosure The Parties confirm that Seller Confidential Information constitutes commercial and financial information of the Seller, which has been supplied, or may be

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supplied, in confidence and the disclosure of which could reasonably be expected to harm significantly the competitive position and/or interfere significantly with the negotiating position of the Seller. Accordingly, the Parties confirm their intention that, subject to section 21.2, all Seller Confidential Information disclosed by the Seller to the Buyer shall be deemed to be confidential and exempt from disclosure to third Persons in accordance with section 21 of the Freedom of Information and Protection of Privacy Act (British Columbia), as amended from time to time. 22. GENERAL PROVISIONS 22.1 Independence The Parties are independent contractors and nothing in this EPA or its performance creates a partnership, joint venture or agency relationship between the Parties. 22.2 Enurement This EPA enures to the benefit of the Parties, their successors and their permitted assigns. 22.3 Notices Any notice, consent, waiver, declaration, request for approval or other request, statement or bill (a notice) that either Party may be required or may desire to give to the other Party under this EPA must be in writing addressed to the other Party at the address stated in subsection 22.3(c) or (d) and: (a) (b) may be delivered by hand or by a courier service during normal business hours on a Business Day, in which case the notice shall be deemed to have been delivered on that Business Day; notices, other than notices under section 3.4, 7.9 or any of Articles 12, 14, 15, 16 or 17, may be sent by email or fax during normal business hours on a Business Day, in which case provided that the Party delivering the notice obtains a confirmation of delivery, the notice shall be deemed to have been delivered on that Business Day; subject to subsection 22.3(e), the address of the Buyer for notices is as set out in Appendix 10; subject to subsection 22.3(e), the address of the Seller for notices is as set out in Appendix 10 and the Buyer may, but is not required to (except as otherwise provided in a Lender Consent Agreement, if any), provide a copy of any such notice to the Facility Lender; and either Party may change its address or fax number for notices under this EPA by notice to the other Party.

(c) (d) (e)

22.4 Entire Agreement and Amendment This EPA contains the entire agreement between the Parties with respect to the purchase and sale of Energy and all other matters addressed in this EPA, and supersedes all previous communications, understandings and agreements between the Parties with respect to the subject matter hereof including, without limitation, the RFP issued by the Buyer on 6 February 2008 and all Addenda, questions and answers and any other communications of any kind whatsoever by the Buyer in connection therewith or relating thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements express, implied or statutory between the Parties other than as expressly set out in this EPA. This EPA may not be amended, except by an agreement in writing signed by both Parties.

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22.5 No Waiver Other than in respect of the specific matter or circumstance for which a waiver is given, and except as otherwise specified in this EPA, no failure by a Party to enforce, or require a strict observance and performance of, any of the terms of this EPA shall constitute a waiver of those terms or affect or impair those terms or the right of a Party at any time to enforce those terms or to take advantage of any remedy that Party may have in respect of any other matter or circumstance. 22.6 Dispute Resolution If any dispute arises under or in relation to this EPA, that dispute shall be referred to and finally resolved by arbitration by a single arbitrator. The arbitration shall be administered by the British Columbia International Commercial Arbitration Centre (BCICAC) pursuant to its rules. The place of arbitration shall be Vancouver, British Columbia. If at the time a dispute arises the BCICAC does not exist, the dispute shall be finally settled by arbitration by a single arbitrator who, failing written agreement of the Parties, shall be appointed under the Commercial Arbitration Act (British Columbia) or under the International Commercial Arbitration Act (British Columbia), as applicable, and the arbitrator shall conduct the arbitration in accordance with such rules as the Parties may agree in writing, or failing agreement, such rules as may be determined or adopted by the arbitrator. The decision of the arbitrator shall be final and binding on the Parties. The arbitrator shall have, and the Parties shall execute and deliver all such documents, deeds and assurances as may be necessary to ensure that the arbitrator has, jurisdiction and power to make interim, partial or final awards ordering specific performance, injunctions and any other equitable remedy. The Parties are entitled to seek interim measures of protection, including relief by way of a mandatory injunction, from a court of competent jurisdiction pending commencement or completion of any arbitration. The Parties also may seek from a court of competent jurisdiction any equitable relief or remedy that the arbitrator does not have the jurisdiction to grant. All performance required under this EPA by the Parties and payments required under this EPA shall continue during the dispute resolution proceedings contemplated by this section 22.6, provided that this section may not be interpreted or applied to delay or restrict the exercise of any right to suspend performance under or terminate this EPA pursuant to the express terms hereof. Any payments or reimbursements required by an arbitration award shall be due as of the date determined in accordance with section 10.2 or, where section 10.2 is not applicable, as of the date determined in the award, and, without duplication with subsection 10.2(b), shall bear interest at an annual rate equal to the Prime Rate plus 3% compounded monthly, from the date such payment was due until the amount is paid. To the fullest extent permitted by law, the Parties shall maintain in confidence the fact that an arbitration has been commenced, all documents and information exchanged during the course of the arbitration proceeding, and the arbitrators award, provided that each of the Parties shall be entitled to disclose such matters to its own officers, directors, shareholders and employees, its professional advisors and other representatives, and may make such disclosures in the course of any Proceedings required to pursue any legal right arising out of or in connection with the arbitration and may make such disclosures as are required by law or for regulatory purposes. Nothing in this EPA precludes either Party from bringing a Proceeding in any jurisdiction to enforce an arbitration award or any judgment enforcing an arbitration award, nor shall the bringing of such Proceedings in any one or more jurisdictions preclude the bringing of enforcement Proceedings in any other jurisdiction. In connection with any court proceedings, each Party waives its respective rights to any jury trial. 22.7 Eligible Financial Contract/Forward Contract The Parties agree and intend that this EPA constitutes an eligible financial contract under the Bankruptcy and Insolvency Act (Canada) and the Companies Creditors Arrangement Act (Canada) and that this EPA and the transactions contemplated under this EPA constitute a forward contract within the meaning of section 556 of the United States Bankruptcy Code and that the Parties are forward contract merchants within the meaning of the United States Bankruptcy Code.

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22.8 Further Assurances Each Party shall, upon the reasonable request of the other Party, do, sign or cause to be done or signed all further acts, deeds, things, documents and assurances required for the performance of this EPA. 22.9 Severability Any provision of this EPA, which is illegal or unenforceable shall be ineffective to the extent of the illegality or unenforceability without invalidating the remaining provisions of this EPA. 22.10 Counterparts This EPA may be executed in counterparts, each of which is deemed to be an original document and all of which are deemed one and the same document. IN WITNESS WHEREOF each Party by its duly authorized representative(s) has signed this EPA as of the Effective Date. For ZELLSTOFF CELGAR LIMITED PARTNERSHIP by its general partner, Zellstoff Celgar Limited: /s/ David Gandossi Name: David M. Gandossi Title: Secretary January 27, 2009 Date For BRITISH COLUMBIA HYDRO AND POWER AUTHORITY: /s/ Robert Elton Name: Robert G. Elton Title: President and Chief Executive Officer January 27, 2009 Date

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APPENDIX 1 DEFINITIONS References in an Appendix to a section or subsection mean a section or subsection of this EPA, and not an Appendix, unless otherwise stated. The following words and expressions wherever used in this EPA have the following meaning: 1. Affiliate means, with respect to the Seller or the General Partner, any Person directly or indirectly Controlled by, Controlling, or under common Control with, the Seller or the General Partner and with respect to the Buyer, any Person directly or indirectly Controlled by the Buyer and, if at any time the Buyer is not Controlled, directly or indirectly, by the Province of British Columbia, shall include any Person directly or indirectly Controlling, or under common Control with, the Buyer. Annual Firm Energy Amount means, at any time, whether before or after COD, the aggregate of all Seasonally Firm Energy Amounts the Seller is required to deliver in any four consecutive complete Seasons after COD as set out in the Firm Energy Table. Annual GBL means the generator baseline for the Project in each year during the Term, and is * GWh/year. Annual Operating Plan means each plan delivered by the Seller to the Buyer under subsection 6.5(d) and all amendments to such plan in accordance with subsection 6.5(d). Authorized Planned Outage means a Planned Outage that is scheduled in accordance with Good Utility Practice, complies with the requirements of section 6.3 and includes only the duration of the Planned Outage set out in the notice of the Planned Outage delivered by the Seller under section 6.3. Auxiliary Fuel means any combustible fuel other than Forest-based Biomass. Auxiliary Fuel Annual Baseline has the meaning given in Appendix 3. Auxiliary Fuel Energy Overage has the meaning given in Appendix 3. Auxiliary Fuel Overage has the meaning given in Appendix 3.

2. 3. 4. 5.

6. 7. 8. 9.

10. Auxiliary Fuel Overage Credit has the meaning given in Appendix 3. 11. Avoidable Costs has the meaning given in Appendix 3. 12. Bankrupt or Insolvent means, with respect to a Person (which in the case of the Seller includes either or both of the Seller or the General Partner): (a) (b) the Person has started proceedings to be adjudicated a voluntary bankrupt or consented to the filing of a bankruptcy proceeding against it; or the Person has filed a petition or similar proceeding seeking reorganization, arrangement or similar relief under any bankruptcy or insolvency law; or Celgar Green Energy Appendix 1- 1

(c) (d) (e)

a receiver, liquidator, trustee or assignee in bankruptcy has been appointed for the Person or the Person has consented to the appointment of a receiver, liquidator, trustee or assignee in bankruptcy; or the Person has voluntarily suspended the transaction of its usual business; or a court has issued an order declaring the Person bankrupt or insolvent.

13. BCICAC has the meaning given in section 22.6. 14. BCUC means the British Columbia Utilities Commission or any successor thereto. 15. BCUC Acceptance has the meaning given in section 3.1. 16. Breaching Party has the meaning given in section 3.3. 17. Business Day means any calendar day which is not a Saturday, Sunday or other day recognized as a statutory holiday in British Columbia. 18. Buyer means British Columbia Hydro and Power Authority and its successors and permitted assigns. 19. Buyer Confidential Information means technical or commercial information disclosed by the Buyer to the Seller that the Buyer directs, and clearly marks, as confidential, including this EPA whether or not so directed and marked, but excluding information that (i) is or becomes in the public domain, other than as a result of a breach of this EPA by the Seller, or (ii) is known to the Seller before disclosure to it by the Buyer, or becomes known to the Seller, thereafter by way of disclosure to the Seller by any other person who is not under an obligation of confidentiality with respect thereto. 20. Buyer Indemnified Party has the meaning given in section 20.1. 21. Buyer Termination Event means any one of the following: (a) (b) (c) (d) (e) any one of the Seller or the General Partner is Bankrupt or Insolvent; a Letter of Credit Failure has occurred and the Seller has failed to cure that failure within 5 Business Days after the Letter of Credit Failure occurred; an amount due and payable by the Seller to the Buyer under this EPA remains unpaid for 15 days after its due date and such default has not been cured within 15 days after the Buyer has given notice of the default to the Seller; any one of the Seller or the General Partner is in material default of any of its covenants, representations, warranties or other obligations under the RFP Confidentiality Agreement; or any one of the Seller or the General Partner is in material default of any of its covenants, representations and warranties or other obligations under this EPA, other than as set out above, unless within 30 days after the date of notice by the Buyer to the Seller of the default, the Seller has cured the default or, if the default cannot be cured within that 30 day period, the Seller demonstrates to the reasonable satisfaction of the Buyer that the Celgar Green Energy Appendix 1- 2

Seller is working diligently and expeditiously to cure the default and the default is cured within a further reasonable period of time. A material default includes any of the following: (i) (ii) any Deliberate Breach by the Seller of its obligations under section 7.2; any failure by the Seller to comply with (I) subsection 4.1(a) or 6.2(a) in respect of subsection (e) or (f) of the Project Standards definition, (II) section 7.4, (III) section 8.4 or (IV) section 8.5, and

(iii) any purported assignment of this EPA without the consent of the Buyer if such consent is required under Article 17. A material default does not include any failure to deliver either the Seasonally Firm Energy Amount in respect of which the Seller has paid any LDs owing under section 13.2 or the Capacity Call Amount in respect of which the Seller has paid any LDs owing under section 13.3, other than a failure resulting from a Deliberate Breach. 22. Capacity Call has the meaning given in section 7.11. 23. Capacity Call Amount has the meaning given in subsection 7.11(b)(ii). 24. Capacity Call Notice has the meaning given in subsection 7.11(b). 25. Capacity Call Period has the meaning given in subsection 7.11(a)(i). 26. Clean or Renewable Electricity means electricity that meets the requirements for clean or renewable electricity set out in the guidelines issued by the British Columbia Ministry of Energy, Mines and Petroleum Resources in June 2008, including any amendments thereto from time to time. 27. COD or Commercial Operation Date means the time when the Sellers Plant achieves COD pursuant to section 5.2. 28. COD Certificate means a certificate in the form set out in Appendix 6, completed and accompanied by attachments reasonably satisfactory to the Buyer and signed by a senior officer of each of the General Partner and the Seller. 29. COD Delay LDs means the LDs specified in section 13.1. 30. Construction Insurance means all insurance customarily maintained by prudent owners in connection with the construction of a facility similar to the Incremental Sellers Plant, including course of construction insurance. 31. Contract Year means the full year period initially measured from COD to the first anniversary of COD, and to and from successive anniversaries thereafter until the termination or expiry of this EPA, provided that a Contract Year shall also mean the partial year following any such anniversary during which this EPA expires or is terminated. Celgar Green Energy Appendix 1- 3

32. Control of any Person means: (a) with respect to any corporation or other Person having voting shares or the equivalent, the ownership or power to vote, directly or indirectly, shares, or the equivalent, representing 50% or more of the power to vote in the election of directors, managers or persons performing similar functions; ownership of 50% or more of the equity or beneficial interest in that Person; or the ability to direct the business and affairs of any Person by acting as a general partner, manager or otherwise.

(b) (c)

33. CPI has the meaning given in Appendix 3. 34. Deliberate Breach means: (a) (b) (c) (d) any failure by the Seller to achieve COD by Guaranteed COD plus 365 days plus all Force Majeure Days (not exceeding 180 Force Majeure Days) resulting from any wilful or grossly negligent act or omission of the Seller; any breach of or default under any provision of this EPA by the Seller resulting from any wilful or grossly negligent act or omission by the Seller; a Buyer Termination Event constituting a repudiation of this EPA by the Seller; or any sale or transfer by the Seller of Energy to any Person, other than the Buyer, except where such sale or transfer is expressly permitted under this EPA.

35. Delivery Interruption Outage has the meaning given in subsection 7.8(a). 36. Development Costs means all costs reasonably incurred or committed by the Seller after the date of issuance of the RFP for the Project and all costs reasonably incurred, or that are reasonably likely to be incurred by the Seller, after taking reasonable mitigation measures, to terminate all contractual commitments with respect to the Project and to otherwise cease development of the Project, but excluding any lost profits, loss of opportunity costs or damages and all other special, incidental, indirect or consequential losses. 37. EcoLogoM Certification means certification pursuant to Environment Canadas Environmental ChoiceM program confirming that the Sellers Plant and all or part of the Energy complies with the certification criteria document Electricity Renewable Low-Impact, as amended from time to time and is therefore entitled to the EcoLogoM designation. 38. EFEP, or Escalated Firm Energy Price, has the meaning given in Appendix 3. 39. Effective Date means the date set out on page one hereof. 40. Eligible Energy means in any Season after COD, the total of (i) the amount of Metered Energy delivered by the Seller at the POI in that Season, and (ii) Energy that is deemed to be Eligible Energy in that Season pursuant to section 7.8, but subject to the following limitations: (a) if such total Energy is less than or equal to the Seasonal GBL applicable in that Season (the Applicable Seasonal GBL), Eligible Energy is zero; Celgar Green Energy Appendix 1- 4

(b) (c) (d)

if such total Energy is greater than the Applicable Seasonal GBL, but less than or equal to the Total Allowable Energy, then Eligible Energy is equal to such total Energy minus the Applicable Seasonal GBL; if such total Energy is greater than the Total Allowable Energy, then Eligible Energy is equal to the Total Allowable Energy minus the Applicable Seasonal GBL; and in the case of any Season which is not a complete Season, the Applicable Seasonal GBL and Seasonally Firm Energy Amount for the purposes of the foregoing calculations shall be prorated on a daily basis.

41. Energy means electric energy expressed in MWh generated by the Sellers Plant, excluding Station Service. 42. Energy Supply Contract means an energy supply contract under section 71 of the UCA. 43. Environmental Attributes means: (a) all attributes directly associated with, or that may be derived from, the Eligible Energy having decreased environmental impacts relative to energy generated by certain other generation facilities or technologies, including any existing or future credit, allowance, green tag, ticket, certificate or other green marketing attribute or proprietary or contractual right, whether or not tradeable; any credit, reduction right, off-set, allowance, allocated pollution right, certificate or other unit of any kind whatsoever, whether or not tradeable, and any other proprietary or contractual right, whether or not tradeable, resulting from, or otherwise related to the actual or assumed reduction, displacement or offset of emissions at any location other than the Sellers Plant as a result of the generation, purchase or sale of the Eligible Energy, but excluding one half of: (i) any divisible portion of; and (ii) the benefits or proceeds from any indivisible portion of, any of the foregoing that are demonstrated by the Seller to the Buyers satisfaction, acting reasonably, to directly result from or relate to incremental costs incurred by the Seller after COD, whether those costs are capital expenditures, operational expenses, or otherwise; On-Site Emission Reduction Rights related to the generation of Eligible Energy, which for clarity do not include attributes related to pulp mill process steam or black liquor process inputs, but excluding one half of: (i) any divisible portion of; and (ii) the benefits or proceeds from any indivisible portion of, any of the foregoing that are demonstrated by the Seller to the Buyers satisfaction, acting reasonably, to directly result from or relate to incremental costs incurred by the Seller after COD, whether those costs are capital expenditures, operational expenses, or otherwise; and all revenues, entitlements, benefits and other proceeds arising from or related to the foregoing, but for certainty not including: (i) benefits or proceeds from environmental incentive programs offered by Governmental Authorities that do not require a transfer of the attributes in subsections (a) to (c) above; or Celgar Green Energy Appendix 1- 5

(b)

(c)

(d)

(ii)

benefits or proceeds from social programs, including programs relating to northern or rural development, employment or skills training, or First Nations, that do not require a transfer of the attributes in subsections (a) to (c) above.

44. Environmental Certification means: (a) (b) EcoLogo M Certification; or any alternate certification the Buyer requires the Seller to obtain under section 8.5.

45. EPA means this Electricity Purchase Agreement, including all Appendices attached hereto, all as amended, supplemented or otherwise modified from time to time. 46. Estimated Interconnection Facilities Completion Date means the Transmission Authoritys most recent estimated date for completing the Interconnection Network Upgrades. 47. Exemption means a lawful exemption from the requirement under section 71 of the UCA that this EPA be filed thereunder as an Energy Supply Contract. 48. Facility Lender means any lender(s) providing any debt financing for the Project and any successors or assigns thereto. 49. Final Amount means an amount owing by either Party to the other Party pursuant to this EPA, including as a result of a breach of this EPA, where such amount is (i) undisputed by the Party owing such amount; or (ii) has been finally determined by an arbitration award pursuant to section 22.6 or by a court order and all rights of appeal in respect of such award or order have been exhausted or have expired. 50. Firm Energy means, in each Season after COD, all Eligible Energy in that Season not exceeding the Seasonally Firm Energy Amount for that Season, but excluding any Eligible Energy delivered after the start time and prior to the end time for an Authorized Planned Outage as set out in the notice with respect to the Authorized Planned Outage under section 6.3 and all such excluded Eligible Energy shall be considered Non-Firm Energy. 51. Firm Energy Table means the table in Appendix 2 that sets out the Seasonally Firm Energy Amount, or as revised under section 7.9. 52. Five-Year Anniversary has the meaning given in subsection 6.5(a). 53. Force Majeure means, subject to the exclusions in section 12.2, (i) in the case of Force Majeure invoked by the Buyer, any event or circumstance not within the control of the Buyer, or (ii) as to Force Majeure invoked by the Seller, any event or circumstance not within control of either the Seller or FortisBC, and, to the extent not within that Persons control, includes: (a) (b) acts of God, including wind, ice and other storms, lightning, floods, earthquakes, volcanic eruptions and landslides; strikes, lockouts and other industrial disturbances, provided that settlement of strikes, lockouts and other labour disturbances shall be wholly within the discretion of the Person involved; Celgar Green Energy Appendix 1- 6

(c) (d) (e) (f)

epidemics, war (whether or not declared), blockades, acts of public enemies, acts of sabotage, civil insurrection, riots and civil disobedience; acts or omissions of Governmental Authorities, including delays in regulatory process and orders of a regulatory authority or court of competent jurisdiction; explosions and fires; and notwithstanding subsection 12.2(f), an inability of the Seller to achieve COD solely as a result of a delay by the Transmission Authority in completion of Network Upgrades, if and to the extent such delay is not attributable to the Seller or the Sellers Plant; but does not include:

(g)

any refusal, failure or delay of any Governmental Authority in granting any Material Permit to the Seller, whether or not on terms and conditions that permit the Seller to perform its obligations under this EPA, except where such failure or delay is a result of an event described in subsection (a), (b), (c) or (e) above.

54. Force Majeure Days means the number of days the Seller is delayed in achieving COD as a result of Force Majeure invoked by the Seller in accordance with Article 12. 55. Forced Outage means a partial or total interruption in the delivery of, or ability to deliver, Energy that is not a result of an Authorized Planned Outage or a Force Majeure invoked in accordance with this EPA. 56. Forest-based Biomass means mill solid wood residues (hog fuel, sawdust, chips and/or chunks), pulp mill residues (hog fuel and black liquor), roadside and landing residues, and biomass derived from standing timber, without access to new timber harvesting tenure. 57. Fortis Interconnection Report means the report(s), if any, issued to the Seller by FortisBC related to the interconnection of the Project with the Fortis System. 58. Fortis System means the transmission, substation, protection, control and communication facilities owned and operated by FortisBC in British Columbia, and includes all additions and modifications thereto and repairs or replacements thereof. 59. FortisBC means FortisBC Inc., and its successors and assigns. 60. Fuel means Forest-based Biomass, and any Auxiliary Fuel, used to generate Energy at the Sellers Plant. 61. Fuel Plan means the Sellers five-year plan for the supply and consumption of Fuel, as specified in Appendix 5, and each subsequent plan approved by the Buyer in accordance with this EPA, provided that for any period after the expiry of the five-year plan and before the Buyers approval of a replacement plan, the Fuel Plan means a plan for the supply and consumption of Fuel applicable to the last year of the Sellers immediately preceding five-year plan. 62. GHG or Greenhouse Gas(es) means: (i) one or more of the following gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride; and (ii) any other gas that is identified as having significant global warming potential and is Celgar Green Energy Appendix 1- 7

added, at any time before the expiry of the Term, to Schedule 1 to the Canadian Environmental Protection Act, 1999, or to the Greenhouse Gas Reduction Targets Act (British Columbia), or to any other regulation(s) governing the emission of the gases noted in (i) from the Sellers Plant. 63. GJ means gigajoule. 64. Good Utility Practice means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry in the WECC region during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgement in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be acceptable practices, methods or acts generally accepted in the WECC region. 65. Governmental Authorities means any federal, provincial, local or foreign governments or any of their boards or agencies, or any regulatory authority, other than the Buyer and entities controlled by the Buyer. 66. GST means the goods and services tax imposed under the Excise Tax Act (Canada) as that Act may be amended or replaced from time to time. 67. Guaranteed COD means May 1, 2010, or as revised pursuant to section 5.8. 68. GWh means gigawatt-hour. 69. Hourly Eligible Energy means in any hour after COD, the total of (i) the amount of Metered Energy delivered by the Seller at the POI in that hour, and (ii) Energy that is deemed to be Eligible Energy in that hour pursuant to section 7.8, but subject to the following limitations: (a) (b) (c) if such total Energy is less than or equal to the Hourly GBL applicable in that Season (the Applicable Hourly GBL), Hourly Eligible Energy in that hour is zero; if such total Energy is greater than the Applicable Hourly GBL, but less than or equal to the Plant Capacity multiplied by one hour, then Hourly Eligible Energy in that hour is equal to such total Energy minus the Applicable Hourly GBL; and if such total Energy is greater than the Plant Capacity multiplied by one hour, then Hourly Eligible Energy is equal to the Plant Capacity multiplied by one hour minus the Applicable Hourly GBL.

70. Hourly Firm Energy Amount means for each hour after COD, the amount of Energy the Seller is required to deliver in the applicable Season as set out in the Firm Energy Table divided by the number of the hours in that Season. 71. Hourly GBL means the generator baseline for the Project in each hour during the Term, and for each hour is the amount determined by dividing the Seasonal GBL applicable to the Season in which that hour occurs by the number of hours in that Season. 72. Incremental Project Assets has the meaning given in subsection 16.5(d)(ii). Celgar Green Energy Appendix 1- 8

73. Incremental Sellers Plant has the meaning given in Appendix 4. 74. Indemnitee has the meaning given in section 20.3. 75. Indemnitor has the meaning given in section 20.3. 76. Interconnection Agreement means the agreement between the Seller and FortisBC relative to the Sellers Plant, as amended or replaced from time to time. 77. Interconnection Network Upgrades means those additions, modifications and upgrades to the Transmission System identified in the Seller Optional Study Report, and as further refined in subsequent optional studies, as determined by the Transmission Authority (for Transmission System impacts related to the interconnection of the Project). 78. Interconnection Security means a letter of credit in the form specified in section 14.4 in an amount equal to the costs that the Transmission Authority, as set out in the Seller Optional Study Report, estimates are required to design, construct and commission the Interconnection Network Upgrades, as such letter of credit is amended or replaced from time to time. 79. Laws means any and all statutes, laws (including common law), ordinances, rules, regulations, codes, orders, bylaws, policies, directions, standards, guidelines, protocols and other lawful requirements of any Governmental Authority in effect from time to time. 80. LDs means liquidated damages payable by the Seller to the Buyer under Article 13. 81. Lender Consent Agreement means an agreement referred to in section 17.3. 82. Letter of Credit Failure means: (a) (b) (c) (i) (ii) the Seller fails to renew or replace the Performance Security or Interconnection Security by no later than 30 days prior to the expiry thereof; the Seller fails to amend or replace the Performance Security or Interconnection Security as required under section 14.1 by no later than 30 days prior to the requirement to amend or replace such Performance Security or Interconnection Security arises; the issuer of the Performance Security or Interconnection Security: fails to maintain a credit rating of at least the minimum rating specified in subsection 14.4(a); fails to comply with or perform its obligations under the Performance Security or Interconnection Security; or

(iii) disaffirms, disclaims, repudiates, terminates, rejects, in whole or in part, or challenges the validity of, the Performance Security or Interconnection Security; or (d) the Performance Security or Interconnection Security ceases to be in full force and effect for purposes of this EPA, whether or not in accordance with its terms, prior to the date specified in Article 14 for return of the Performance Security or Interconnection Security, as applicable, to the Seller. Celgar Green Energy Appendix 1- 9

83. Line Losses means FortisBC transmission losses as determined from time to time in accordance with FortisBC Rate Schedule 109 for Large General Service Transmission. 84. Long Term Operating Plan means the plan referred to in subsection 6.5(c) as amended by the Seller from time to time. 85. Major Damage means damage having a reasonably estimated repair and/or restoration cost exceeding the present value, using the Present Value Rate effective as of the date on which the damage occurs, of the projected revenues under this EPA from the projected Energy deliveries from the Sellers Plant for the remainder of the Term, less a present value amount, using the aforesaid Present Value Rate, representing the projected operating and maintenance costs for the Sellers Plant, including Fuel costs. 86. Material Permits means the following if and as required for the Sellers Plant: (a) (b) (c) (d) (e) (f) (g) (h) (i) environmental assessment certificate; any forest license or other right to harvest timber; air emissions permit; any permit, license or approval required with respect to the discharge of any type of waste from the Sellers Plant; water license; zoning appropriate for the Sellers Plant; any subdivision approval required to create separate legal title to the site on which the Sellers Plant is or shall be located; any permits or approval required with respect to the storage of the Fuel at the Sellers Plant; and any lease, license of occupation, certificate of title, or similar agreement or instrument required with respect to the Sellers Plant, including all access roads to the Sellers Plant;

on terms and conditions that permit the Seller to comply with its obligations under this EPA. 87. Material Permits Expiry Date means the date that is 15 days after the Sellers right to terminate this EPA arises under subsection 16.2(a). 88. Metered Energy means Energy recorded by the Metering Equipment, less an amount equal to Line Losses. 89. Metering Equipment means the metering equipment described in section 9.1. 90. Mill means the Sellers pulp mill and other industrial facilities at which the Sellers Plant is located. 91. Mill Load means the electric energy consumed by the Mill. Celgar Green Energy Appendix 1- 10

92. 93. 94. 95. 96.

MW means megawatt. MWh means megawatt-hour. Network Upgrade Costs means the costs associated with the design, engineering, construction and commissioning of Network Upgrades. Network Upgrades means the Interconnection Network Upgrades and the Transmission Network Upgrades. Non-Firm Energy means in each Season after COD all Eligible Energy in that Season in excess of the Seasonally Firm Energy Amount for that Season, and all Eligible Energy deemed to be Non-Firm Energy pursuant to the definition of Firm Energy in this Appendix 1, expressed in MWh. OATT means the Transmission Authoritys Open Access Transmission Tariff, as filed with and accepted by the BCUC, as amended and refiled from time to time. Off-Peak Hours has the meaning given in Appendix 3. On-Peak Hours has the meaning given in Appendix 3.

97. 98. 99.

100. On-Site Emission Reduction Rights means any credit, reduction right, off-set, allowance, allocated pollution right, certificate or other unit of any kind whatsoever whether or not tradeable resulting from or otherwise related to the reduction, removal, or sequestration of emissions at or from the Sellers Plant. 101. Outage means: (a) (b) in the case of the Sellers Plant, a partial or total interruption in the delivery of, or ability to deliver, Energy; and in the case of the Fortis System or Transmission System, a partial or total interruption in the transmission of, or ability to transmit, Energy from the Sellers Plant.

102. Party means (i) the Buyer and its successors and permitted assigns; or (ii) the Seller and its successors and permitted assigns, and Parties means both the Buyer and the Seller and their respective successors and permitted assigns. 103. Peak Hours has the meaning given in Appendix 3. 104. Performance Security means a letter of credit in the form specified in section 14.4 in an amount at any particular time equal to: (a) (b) prior to the Material Permits Expiry Date, $2.50/MWh multiplied by the Annual Firm Energy Amount; from and after the Material Permit Expiry Date, and prior to the first anniversary of COD, $8.00/MWh multiplied by the Annual Firm Energy Amount; Celgar Green Energy Appendix 1- 11

(c) (d) (i)

from and after the first anniversary of COD, and prior to the first Performance Security Anniversary, $6.00/MWh (adjusted for CPI from January 1, 2008 to the first anniversary of COD) multiplied by the Annual Firm Energy Amount; and from and after each Performance Security Anniversary, and prior to the next occurring Performance Security Anniversary: if the average annual Firm Energy delivered in the five-year period immediately preceding the date that is 30 days prior to the most recent Performance Security Anniversary is less than 95% of the Annual Firm Energy Amount, $6.00/MWh (adjusted for CPI from January 1, 2008 to the just attained Performance Security Anniversary) multiplied by the Annual Firm Energy Amount; or if the average annual Firm Energy delivered in the five-year period immediately preceding the date that is 30 days prior to the most recent Performance Security Anniversary is at least 95% of the Annual Firm Energy Amount, $4.00/MWh (adjusted for CPI from January 1, 2008 to the just attained Performance Security Anniversary) multiplied by the Annual Firm Energy Amount;

(ii)

provided that for the purposes of this subsection (d), Firm Energy delivered to the Buyer in any period described in subsection (i) or (ii) above shall include: (iii) deemed Eligible Energy pursuant to section 7.8 that would have constituted Firm Energy if actually delivered to the Buyer in that period; and (iv) all other amounts of Firm Energy that could have been generated and delivered to the Buyer during that period but for (I) Force Majeure in respect of which either Party has invoked Force Majeure in accordance with section 12.1, (II) Authorized Planned Outages or (III) other events specified in this EPA that expressly excuse the Seller from its obligations to deliver Firm Energy to the Buyer, in each case calculated in the same manner as deemed Eligible Energy in section 7.8. 105. Performance Security Anniversary means the date that is 30 days after the fifth anniversary of the end of the first four complete Seasons after COD and the anniversary of such date that occurs at the end of each five year period thereafter. 106. Permits means permits, certificates, licences, and other approvals required for the design, construction, ownership, operation and maintenance of the Sellers Plant and the delivery of Eligible Energy at the POI, including all Material Permits. 107. Person means an individual, body corporate, firm, partnership, joint venture, trust, legal representative or other legal entity. 108. Planned Outage means an Outage for purposes of scheduled inspection, repair and/or maintenance in the Sellers Plant. 109. Plant Capacity means the electrical capacity of the Sellers Plant expressed in MW, determined as the nameplate capacity if expressed in MW, or as the nameplate capacity if expressed in MVA multiplied by a power factor of 0.95, as set out in Appendix 4, as amended in accordance with section 4.5 or 6.6. Celgar Green Energy Appendix 1- 12

110. POI or Point of Interconnection means the following interconnections, which are deemed for the purposes of this EPA to be a single point of interconnection between the Fortis System and the Transmission System: (a) (i) (ii) the Buyers Kootenay Canal Plant as follows: the point where the Buyer-owned 63 kV Line 60L225 interconnects with the 69 kV Line 13 at the first structure outside South Slocan substation fence (60L225 Line 13 interconnection); the point where the Buyer-owned 63 kV Line 60L227 interconnects with the FortisBC-owned 69 kV Line 12 at the first structure outside Kootenay Canal Plant G.S. switchyard fence (60L227 Line 12 interconnection); and

(iii) the point where the Buyer-owned 230 kV Line 2L288 interconnects with the FortisBC-owned 230 kV Line 79 at the first structure outside Kootenay Canal Plant G.S. switchyard fence (2L288 Line 79 interconnection); (b) (c) the point where the transmission line owned by Arrow Lakes Power Corporation (Line 2L289) interconnects with the Buyer-owned Selkirk substation; the point where the Teck Cominco Metals Ltd. (Teck)-owned 230 kV Line 71 (referred to by the Buyer as Line 2L277) from Tecks Waneta Plant enters into the Buyer-owned Nelway substation, and since the Buyer has authority from Teck to configure the path of Line 71 at the Nelway substation, such point at the Nelway substation is part of the POI regardless of how Line 71 is configured; and such other point of interconnection between the Transmission System and the Fortis System as may be agreed between the Buyer and FortisBC or as specified from time to time as the Kootenay Interconnection under the terms of the Canal Plant Agreement dated July 1, 2005 among the Buyer, FortisBC and others, and notified to the Seller.

(d)

111. PPT means Pacific Prevailing Time, being Pacific Daylight Time or Pacific Standard Time, as applicable. 112. Pre-COD Energy means the amount of Metered Energy delivered by the Seller at the POI in each hour before COD, including Test Energy, but excluding: (a) (b) (c) that portion of the Metered Energy delivered in any hour (a Delivery Hour) that is less than the amount equal to the Hourly GBL applicable to that hour; any portion of the Metered Energy that at any time exceeds the Plant Capacity multiplied by one hour; and that portion of the Metered Energy that is sold to third Persons in accordance with section 7.1.

113. Present Value Rate means the annual yield on a Government of Canada Bond having a maturity date that most closely matches the date on which the Term would have expired but for the termination of this EPA, plus 3%. Celgar Green Energy Appendix 1- 13

114. Prime Rate means the floating prime interest rate announced from time to time by the main branch of Bank of Montreal in Vancouver, British Columbia, or any successor thereto, expressed as an annual rate, as the reference rate it shall use to determine rates of interest payable on Canadian dollar commercial loans made in Canada. 115. Proceeding has the meaning given in section 1.5. 116. Project means the financing, design, engineering, procurement, construction and commissioning of the Incremental Sellers Plant, and the operation and maintenance of the Sellers Plant for the purpose of supplying Eligible Energy to the Buyer. 117. Project Assets means the Sellers Plant and all rights, property, assets, equipment, materials and contracts required to design, engineer, procure, construct, commission, operate and maintain the Sellers Plant, whether real or personal and whether tangible or intangible, including equipment and other warranties, Permits, supply and other contracts, the goodwill in and right to use the name by which the Sellers Plant is commonly known, the books, records and accounts with respect to the Sellers Plant, and all land tenure and land tenure agreements with respect to the Sellers Plant. 118. Project Standards mean: (a) (b) (c) (d) (e) (f) (g) (h) all applicable Laws; the terms and conditions of all Permits, including land tenure agreements, issued in connection with the Sellers Plant; Good Utility Practice; the Sellers Plant Description; the requirement that Energy, excluding Energy generated from Auxiliary Fuel, must qualify as Clean or Renewable Electricity; the requirement that Auxiliary Fuel, excluding Start-up Fuel and determined in GJ, used in any year must not exceed the Auxiliary Fuel Annual Baseline for that year; the terms and conditions of this EPA and the Interconnection Agreement; and the Code of Conduct Guidelines Applicable to BC Hydro Contracts in effect as of the date specified for submission of Proposals under the RFP.

119. Proposal means the Proposal submitted by the Seller pursuant to the RFP. 120. Proposal Documents means the Proposal and all documents and information provided by the Seller to the Buyer in connection with such Proposal, whether concurrently with or after the date of submission of the Proposal to the Buyer. 121. PST means British Columbia provincial social service or sales tax. 122. Records means all records and logs required to properly administer this EPA, including: (a) Energy generation records and operating logs; Celgar Green Energy Appendix 1- 14

(b) (c) (d) (e) (f) (g) (h) (i)

a log book of all Outages and other reductions in Energy output, specifying the date, time, duration and reasons for each Outage and each reduction in Energy output; meter readings, maintenance reports; invoice support records; documents concerning compliance with Permits and applicable Laws; records related to Development Costs; all information the Buyer requires to verify qualification of the output from the Sellers Plant as Clean or Renewable Electricity; and records of the total Energy generated in each Contract Year from each of Auxiliary Fuel, Start-up Fuel and Forest-based Biomass, and records of any Auxiliary Fuel Overage, Auxiliary Fuel Energy Overage and Auxiliary Fuel Overage Credit in any Contract Year; all consistent with Good Utility Practice.

123. RFP means the Bioenergy Call for Power Phase I Request for Proposals issued by the Buyer on 6 February 2008, together with all Addenda thereto, and all other documents and forms referenced therein as forming part of the RFP. 124. RFP Confidentiality Agreement means the confidentiality agreement entered into between the Seller and the Buyer as part of the RFP process, a copy of which is attached as Appendix 11 to this EPA. 125. Season means any one of the following four periods in any Contract Year or part thereof: (a) (b) (c) (d) Season 1 February 1 through April 30; Season 2 System Freshet Season May 1 through July 31; Season 3 August through October 31; and Season 4 November 1 through January 31;

126. Seasonal GBL means the generator baseline for the Project in each Season during the Term, and is the amount for each Season set out in the Seasonal GBL Table, which amount will be prorated in the case of a partial Season by the ratio equal to the number of days in such partial Season divided by the number of days in a complete Season. 127. Seasonal GBL Table means the table in Appendix 2 that sets out the Seasonal GBL, or as revised under section 7.10. 128. Seasonal Weighting Ratio has the meaning given in Appendix 3. 129. Seasonally Firm Energy Amount means in any Season after COD, the amount of Energy the Seller is required to deliver in that Season as set out in the Firm Energy Table, which amount will Celgar Green Energy Appendix 1- 15

be prorated in the case of a partial Season by the ratio equal to the number of days in such partial Season divided by the number of days in a complete Season. 130. Seller means the Party so identified on page one of this EPA, and its successors and permitted assigns. 131. Seller Confidential Information means technical or commercial information disclosed by the Seller to the Buyer that the Seller treats, and clearly marks, as confidential prior to its disclosure to the Buyer, but excluding: (a) (b) this EPA; and information that (i) is or becomes in the public domain, other than as a result of a breach of this EPA by the Buyer, or (ii) is known to the Buyer before disclosure to it by the Seller, or becomes known to the Buyer thereafter by way of disclosure to the Buyer by any other Person who is not under an obligation of confidentiality with respect thereto.

132. Seller Indemnified Party has the meaning given in section 20.2. 133. Seller Optional Study Report means the report titled Optional Study for Zelstoff Celgar Limited Partnership prepared by the Transmission Authority for the Buyer in respect of the Project describing the interconnection upgrade requirement on the Transmission System related to the Project and associated interconnection costs. 134. Seller Termination Event means: (a) (b) the Buyer is Bankrupt or Insolvent; except where an amount has been disputed in the manner specified in subsection 10.2, an amount due and payable by the Buyer to the Seller under this EPA remains unpaid for 15 days after its due date and such default has not been cured within 15 days after the Seller has given notice of the default to the Buyer; or the Buyer is in material default of any of its covenants, representations and warranties or other obligations under this EPA, other than as set out above, and such default has not been cured within 30 days after the Seller has given notice of the default to the Buyer or, if the default cannot be cured within that 30 day period, the Buyer fails to demonstrate to the reasonable satisfaction of the Seller that the Buyer is working diligently and expeditiously to cure the default or the default is not cured within a further reasonable period of time.

(c)

135. Sellers Plant means: (a) before COD, the electrical generators as described in Appendix 4 and in any applicable study data, and all of the Sellers facilities and equipment meeting the description on which the Seller Optional Study Report was based that support (i) the generation and transmission of electrical energy from such generators, and (ii) the delivery of Eligible Energy at the POI; after COD, the electrical generators as described in Appendix 4 and all of the Sellers facilities and equipment that support (i) the generation and transmission of electrical Celgar Green Energy Appendix 1- 16

(b)

energy from such generators, and (ii) the delivery of Eligible Energy at the POI, all as built; in each case as may be modified in accordance with this EPA. 136. Sellers Plant Description means the specifications in Appendix 4, as revised from time to time with the prior consent of the Buyer. 137. Start-up Fuel means that quantity of Auxiliary Fuel, expressed in GJ, that is used in a black start or cold start of generation facilities, from the time when Fuel is first combusted until the time when generation is stabilized. 138. Station Service means electrical energy required to service the Sellers Plant, including electrical energy required for fuel preparation. 139. Super-Peak Hours has the meaning given in Appendix 3. 140. Term has the meaning given in section 2.1. 141. Terminating Party has the meaning given in section 16.6. 142. Termination Payment means the amount payable by the Seller to the Buyer or the amount payable by the Buyer to the Seller pursuant to section 16.4 or 16.5, as the case may be. 143. Test Energy means Metered Energy delivered at the POI (i) during any successful test pursuant to subsection 5.2(b), and (ii) if COD is achieved at 24:00 PPT on the day on which such test is concluded, during the period after the test and before COD, but excluding: (a) (b) all Metered Energy that at any time exceeds the Plant Capacity multiplied by one hour; and that portion of Metered Energy delivered in any Season that is less than the Applicable Seasonal GBL, provided that in the case of any Season which is not a complete Season, the Applicable Seasonal GBL shall be prorated on a daily basis.

144. Time of Delivery Table has the meaning given in Appendix 3. 145. Tracking System has the meaning given in section 9.4. 146. Total Allowable Energy means in each Season, the product of the Plant Capacity and the number of hours in that Season. 147. Transmission Authority means the British Columbia Transmission Corporation or any successor thereto. 148. Transmission Network Upgrades means those additions, modifications and upgrades that are integrated with and support the Transmission System for the general benefit of all users of the Transmission System identified in the Network Integration Transmission Service study, initiated by the Buyer and as determined by the Transmission Authority. 149. Transmission System means the transmission, substation, protection, control and communication facilities (i) owned by the Buyer or by the Transmission Authority, and (ii) Celgar Green Energy Appendix 1- 17

operated by the Transmission Authority in British Columbia, and includes all additions and modifications thereto and repairs or replacements thereof. 150. Transmission System Outage means any Outage, suspension, constraint or curtailment in the operation of the Transmission System preventing or limiting physical deliveries of Eligible Energy at the POI. 151. UCA means the Utilities Commission Act (British Columbia). 152. WECC means the Western Electricity Coordinating Council or any successor organization of which the Buyer is a member. Celgar Green Energy Appendix 1- 18

APPENDIX 2 ENERGY PROFILE Part I Seasonally Firm Energy Profile The Seasonally Firm Energy Amounts are set forth in this Part I.
Seasonally Firm Energy (MWh)

Season 1 (February 1 to April 30) Season 2 System Freshet (May 1 to July 31) Season 3 (August 1 to October 31) Season 4 (November 1 to January 31) Part II Seasonal GBL Table The Seasonal GBL Table is as set out in this Part II.

* * * *

Seasonal GBL (MWh)

Season 1 (February 1 to April 30) Season 2 System Freshet (May 1 to July 31) Season 3 (August 1 to October 31) Season 4 (November 1 to January 31)

* * * *

Celgar Green Energy Appendix 2- 1

APPENDIX 3 ENERGY PRICE SEASONALLY FIRM 1. Definitions and Interpretation

1.1 Definitions - In this Appendix 3 or elsewhere in this EPA, the following words and phrases have the following meanings: (a) (b) (c) Auxiliary Fuel Annual Baseline means *GJ. Auxiliary Fuel Energy Overage means Eligible Energy generated in any Contract Year from any Auxiliary Fuel Overage for that Contract Year. Auxiliary Fuel Overage means that portion, if any, of Auxiliary Fuel, excluding Start-up Fuel, and determined in GJ per Contract Year, that is used in any Contract Year to generate Eligible Energy and that exceeds the Auxiliary Fuel Annual Baseline for that Contract Year. Auxiliary Fuel Overage Credit means, with respect to any Contract Year, the amount (in dollars) equal to: (i) (ii) the Auxiliary Fuel Energy Overage for that Contract Year, if any; multiplied by the EFEP for that Contract Year (or EFEPCY) calculated as follows: EFEPCY = {(P 1 * M) + [P2 * (12 M)]} / 12 where: P1 = EFEP in the period of the Contract Year preceding January 1 in that Contract Year; P2 = EFEP in the period of the Contract Year following January 1 in that Contract Year; M = the number of months or portion thereof of the Contract Year preceding January 1 in that Contract Year. (e) (i) Avoidable Costs means, where the Seller is deemed to have generated Eligible Energy in any month pursuant to section 7.8: the dollar amount equal to (A) the average heat rate applicable to the conversion of Fuel to Energy in that month (in GJ/MWh), multiplied by (B) the average unit cost of the Fuel in that month (in $/GJ), multiplied by (C) the amount of such deemed Eligible Energy; plus the dollar amount of any other costs the Seller avoided, or could have avoided through commercially reasonable efforts, as a result of not generating Eligible Energy equal to such deemed Eligible Energy. Celgar Green Energy Appendix 3- 1

(d)

(ii)

(f) (g) (h) (i)

CPI means the Consumer Price Index for British Columbia, All Items (Not Seasonally Adjusted) as published by Statistics Canada, adjusted or replaced in accordance with subsection 1.2(f) of this Appendix. EFEP, or Escalated Firm Energy Price, has the meaning given in section 3.1 of this Appendix. Interim Monthly Firm Energy Amount means either: in any month where the number of hours during which the Sellers Plant was subject to an Outage does not exceed 24, the lesser of (A) the Eligible Energy in that month, and (B) one-third of the Seasonally Firm Energy Amount for the Season in which the month occurs; or in any month where the number of hours during which the Sellers Plant was subject to an Outage exceeds 24, the lesser of (A) the Eligible Energy in that month, and (B) an amount equal to one-third of the Seasonally Firm Energy Amount for the Season in which the month occurs divided by the number of hours in that month multiplied by the number of hours in that month during which the Sellers Plant was not subject to an Outage.

(ii)

(i) (j) (k) (l) (i)

Interim Monthly Non-Firm Energy Amount means the total Eligible Energy in the month less the Interim Monthly Firm Energy Amount. Monthly Firm Energy Weighting Ratio means, in any month, the ratio of the Interim Monthly Firm Energy Amount to the total Eligible Energy in that month. NFEPA Table means the table set forth at Part II of Schedule A to this Appendix. NFEPB, or Option B Non-Firm Energy Price, means, in any month: for Non-Firm Energy delivered during Off-Peak Hours in that month, the lesser of: (A) the average Dow Jones Mid-C Daily Non-Firm Off-Peak Index for the month and converted to Canadian dollars using the monthly average Bank of Canada Daily noon rate for the month; and (B) (ii) US$250/MWh escalating at CPI from January 1, 2008;

for Non-Firm Energy delivered during Peak Hours in that month, the lesser of: (A) the average Dow Jones Mid-C Daily Non-Firm On-Peak Index for the month and converted to Canadian dollars using the monthly average Bank of Canada Daily noon rate for the month multiplied by the quotient of the Peak TDF (as defined in section 3.1 of this Appendix) for the month divided by the On-Peak TDF (as defined in section 3.1 of this Appendix) for the month; and (B) US$250/MWh escalating at CPI from January 1, 2008; Celgar Green Energy Appendix 3- 2

(iii) for Non-Firm Energy delivered during Super-Peak Hours in that month, the lesser of: (A) the average Dow Jones Mid-C Daily Non-Firm On-Peak Index for the month and converted to Canadian dollars using the monthly average Bank of Canada Daily noon rate for the month multiplied by the quotient of the Super-Peak TDF (as defined in section 3.1 of this Appendix) for the month divided by the On-Peak TDF (as defined in section 3.1 of this Appendix) for the month; and (B) US$250/MWh escalating at CPI from January 1, 2008;

provided that if, in any month, the applicable average Dow Jones Index is less than zero, the NFEPB in that month shall be deemed to be zero. (m) Off-Peak Hours means all hours other than Super-Peak Hours and Peak Hours. (n) (o) (p) (q) (r) On-Peak Hours means all Peak Hours and Super-Peak Hours. Peak Hours means the hours commencing at 06:00 PPT and ending at 16:00 PPT, and commencing at 20:00 PPT and ending at 22:00 PPT, Monday through Saturday inclusive, but excluding British Columbia statutory holidays. Seasonal Firm Energy Weighting Ratio means, in any Season, the ratio of the Seasonally Firm Energy Amount for that Season to the total Eligible Energy in the Season. Super-Peak Hours means the hours commencing at 16:00 PPT and ending at 20:00 PPT Monday through Saturday inclusive, but excluding British Columbia statutory holidays. Time of Delivery Table means the table set forth in Part I of Schedule A to this Appendix.

1.2 Interpretation - All payments shall be calculated applying the following principles: (a) (b) (c) (d) (e) (f) (i) all payment calculations shall be rounded to the nearest cent; all prices shall be expressed in $/MWh rounded to two decimal places; Eligible Energy shall be expressed in MWh rounded to two decimal places; any escalators or percentages shall be expressed as a percentage and shall be rounded to one decimal place (i.e., 0.0%); each of the average Dow Jones Mid-C Daily Non-Firm On-Peak Index and average Dow Jones Mid-C Daily Non-Firm Off-Peak Index shall be expressed in US$/MWh; and if Statistics Canada, or the then recognized statistical branch of the Canadian Government: computes, at any time after the Effective Date, the CPI on a basis different to that employed at the Effective Date, then the CPI shall be converted using the appropriate formula recommended by Statistics Canada, or the then recognized statistical branch of the Canadian Government; Celgar Green Energy Appendix 3- 3

(ii)

at any time ceases to publish or provide the CPI, then the provisions of section 1.9 shall apply;

(iii) has not published the CPI for a relevant period at the time the Seller is required to provide the Buyer with an invoice, the Seller shall prepare the invoice based on the CPI in effect at the time the invoice is issued and when the CPI for the relevant period is published, the Seller shall recalculate the invoice amounts in the next succeeding invoice and shall include a credit or debit, without interest, in the next succeeding invoice based on the results of the recalculation; or (iv) recalculates the CPI within 36 months after an invoice affected by that CPI calculation has been issued, then the Seller shall recalculate the invoice amounts for the relevant period in the next succeeding invoice and shall include a credit or debit, without interest, in the next succeeding invoice based on the results of the recalculation. 2. Pre-COD Energy

2.1 No price is payable by the Buyer for Energy, if any, delivered to the Buyer before COD, except as set out in section 2.2 of this Appendix. 2.2 The price payable by the Buyer for Test Energy in respect of which the Seller has not given a notice under section 7.1 is $50.00/MWh. If the Sellers Plant does not satisfy the requirements of section 5.2, no price is payable by the Buyer for any Energy generated during the test period specified in subsection 5.2(b). 3. Post-COD Energy

3.1 Firm Energy - The price payable by the Buyer, for each MWh of Firm Energy in each hour during any year N of the Term is the EFEPN (or Escalated Firm Energy Price for year N) multiplied by the applicable TDF, calculated as follows: EFEPN = EFEP0, adjusted pursuant to section 3.2 of this Appendix; where: EFEP0 = FEP + (CIS * ISA / $1,000,000) expressed in $/MWh; TDF (or Time of Delivery Factor) means, for each hour, the applicable % from the Time of Delivery Table in Part I of Schedule A to this Appendix, and provided further that: (a) (b) (c) Off-Peak TDF means the applicable % from the Time of Delivery Table for all Off-Peak Hours of the month; Peak TDF means the applicable % from the Time of Delivery Table for all Peak Hours of the month; Super-Peak TDF means the applicable % from the Time of Delivery Table for all Super-Peak Hours of the month; and Celgar Green Energy Appendix 3- 4

(d)

On-Peak TDF means the applicable % from the Time of Delivery Table for all On-Peak Hours of the month;

FEP (or Firm Energy Price) = */MWh; CIS (or Cost of Interconnection Security) =*/MWh; ISA (or Interconnection Security Amount) = (a) the amount of the cost estimate of Interconnection Network Upgrades that is set out in the Seller Optional Study Report, minus (b) the amount of all incremental costs incurred by the Buyer as a result of any change to the Sellers Plant, as described in section 4.5 and including any incremental Network Upgrade Costs. 3.2 CPI Adjustment for EFEP EFEP0 shall be adjusted effective as of January 1 in each year N after the Effective Date in accordance with the following applicable formula: EFEPN (or EFEP for year N) = EFEP0 * {[FEPP PRE * (CPIY / CPIJan 1, 2008 1)] + 1} * {[FEPP POST * (CPI Jan 1, N / CPIY 1)] + 1} where: Y = first day of the month in which the earlier of COD and Guaranteed COD occurs; N = all years after the year in which date Y occurs; FEPP PRE (or Firm Energy Price Percentage Pre-COD) = *, being the % of EFEP that is subject to escalation from January 1, 2008 to date Y; FEPP POST (or Firm Energy Price Percentage Post-COD) = *, being the % of the EFEP that is subject to escalation from date Y; CPIJan 1, N = CPI applicable on January 1 of year N; CPIY = CPI applicable on date Y. 3.3 Non-Firm Energy - The price payable by the Buyer, for each MWh of Non-Firm Energy in each hour of the month during any year of the Term shall be calculated as follows: (1 L) * [(NFEPPA * ENFEPA * TDF) + (NFEPPB * NFEPB)], expressed in $/MWh. where: L (or Losses) = *; NFEPP A (or Option A Non-Firm Energy Price Percentage) = *, being the % of Non-Firm Energy that is paid the NFEPA; ENFEPA (or Option A Escalated Non-Firm Energy Price) means, for each year of the Term, the NFEPA, as adjusted pursuant to section 3.4 of this Appendix; Celgar Green Energy Appendix 3- 5

NFEPA means the price from the NFEPA Table in Part II, Schedule A to this Appendix for the applicable year, expressed in $/MWh; TDF has the meaning given in section 3.1 of this Appendix; NFEPP B (or Option B Non-Firm Energy Price Percentage) = *, being the % of Non-Firm Energy that is paid the NFEPB; NFEPB has the meaning given in section 1.1 of this Appendix. 3.4 CPI Adjustment for NFEPA NFEPA shall be adjusted effective as of January 1 in each year after the Effective Date in accordance with the following applicable formula: (ENFEPA)N = (NFEP A)N * CPIJan 1, N / CPIJan 1, 2008 where: (NFEPA)N = NFEP A for year N from the NFEPA Table in Part II, Schedule A to this Appendix; N = all years after 2008;

CPI Jan 1, N = the CPI applicable on January 1 of year N. 3.5 Auxiliary Fuel Overage Credit - The Seller shall pay to the Buyer the Auxiliary Fuel Overage Credit arising in any Contract Year not later than the 15 th day of the second month following the end of such Contract Year. The Seller may satisfy any Auxiliary Fuel Overage Credit that arises in any Contract Year by showing such Auxiliary Fuel Overage Credit as a credit owing to the Buyer in the statement delivered to the Buyer pursuant to section 10.1 in the second month following the end of such Contract Year. 3.6 Avoidable Costs - There shall be deducted from the price payable for deemed Eligible Energy under section 7.8 in each month an amount equal to Avoidable Costs in respect of such deemed Eligible Energy. On each monthly statement delivered to the Buyer pursuant to section 10.1, which includes an amount for such deemed Eligible Energy, the Seller shall show as a credit owing to the Buyer the Avoidable Costs for the month to which that statement relates. 4. Interim Monthly Volume Allocation for Billing

4.1 Volume Allocation For the first two months of each Season the Seller shall prepare the monthly invoice described in section 10.1 in accordance with the following provisions: (a) the amount of Firm Energy in the Peak Hours, Super-Peak Hours, and Off-Peak Hours in each of the first two months of each Season will be calculated by multiplying the Monthly Firm Energy Weighting Ratio by the Eligible Energy in each time of delivery period in the month (Peak Hours, Super-Peak Hours and Off-Peak Hours). The amount of Non-Firm Energy in the Peak Hours, Super-Peak Hours, and Off-Peak Hours in each of the first two months of each Season is the total Eligible Energy in the month minus the amount of Firm Energy in that month determined in accordance with the immediately preceding sentence; Celgar Green Energy Appendix 3- 6

(b) (c)

the Buyer shall pay the amount determined in accordance with section 3.1 of this Appendix 3 for the Interim Monthly Firm Energy Amount in each of the first two months of each Season; and for the Interim Monthly Non-Firm Energy Amount in each of the first two months of each Season, the Buyer shall pay the amount that would be payable for that Energy pursuant to section 3.3 of this Appendix 3 if NFEPPA were equal to 100%.

4.2 Partial Seasons The interim monthly volume allocation and payment provisions set out in this Article 4 will apply only to full months during the Term. Energy deliveries during a partial month in the Term will not be calculated or paid for until the end of the applicable Season and will be included in the final statement for the Season prepared in accordance with Article 5 of this Appendix. 5. Seasonal Reconciliation

5.1 Following the end of the third month in each Season the Seller shall prepare an invoice for the Season in accordance with the provisions of section 10.1 and in accordance with the following: (a) The amount of Firm Energy in the Peak Hours, Super-Peak Hours, and Off-Peak Hours in each month of the Season will be calculated by applying the Seasonal Firm Energy Weighting Ratio to the Eligible Energy in each time of delivery period (Peak Hours, SuperPeak Hours, and Off-Peak Hours) in each month in that Season. The amount of Non-Firm Energy in the Peak Hours, Super-Peak Hours, and Off-Peak Hours in each month of each Season is the total Eligible Energy in the month minus the amount of Firm Energy in that month determined in accordance with the immediately preceding sentence; The price payable by the Buyer for each MWh of Firm Energy and Non-Firm Energy in each time of delivery period as determined in accordance with this Article 5 shall be as set out in Article 3 of this Appendix 3. The statement shall set out the total amount owing for the Eligible Energy in the Season calculated in accordance with subsections 5.1 (a), (b) and (d) of this Appendix 3 less the interim amounts paid by the Buyer for the previous two months of the Season calculated in accordance with section 4 of this Appendix 3. If the interim amounts paid by the Buyer for the previous two months of the Season exceed the final amount owing for the Eligible Energy in the Season calculated in accordance with this Article 5, the Seller shall refund the excess payments to the Buyer by the 30th day of the first month of the Season immediately following the Season in which the overpayments occurred. If the interim amounts paid by the Buyer for the previous two months of the Season are less than the final amount owing for the Eligible Energy in the Season calculated in accordance with this Article 5, the Buyer shall pay the Seller the difference in accordance with the provisions of section 10.2. The statement shall set out the amount of Eligible Energy to be purchased by the Buyer in the Season (Net Purchase Amount S) determined in accordance with the following formula: Net Purchase AmountS = Total Metered EnergyS [Seasonal GBL * (1 Line Losses] Celgar Green Energy Appendix 3- 7

(b) (c)

(d)

where: S = the applicable Season; and Total Metered Energy S = the total Metered Energy in the Season, as measured by the Metering Equipment. If the Net Purchase Amount S is negative, no amount is payable by the Buyer to the Seller. 6. No Further Payment 6.1 The amounts payable by the Buyer as specified in this Appendix 3 are the full and complete payment and consideration payable by the Buyer for all Eligible Energy under this EPA. Celgar Green Energy Appendix 3- 8

SCHEDULE A Tables Part I Time of Delivery Table The Time of Delivery Table is as set forth in this Part I. The On-Peak column represents a time-weighted average of Super-Peak TDF and Peak TDF.
Month Time of Delivery Factor (TDF) Super-Peak Peak Off-Peak On-Peak

January February March April May June July August September October November December Part II NFEPA Table

141% 124% 124% 104% 90% 87% 105% 110% 116% 127% 129% 142%

122% 113% 112% 95% 82% 81% 96% 101% 107% 112% 112% 120%

105% 101% 99% 85% 70% 69% 79% 86% 91% 93% 99% 104%

127% 116% 115% 97% 84% 83% 98% 103% 109% 116% 116% 126%

The NFEPA Table is as set out in this Part II. All amounts are expressed in $/MWh, and are to be escalated at CPI from January 1, 2008 in accordance with section 3.4 of Appendix 3.
Decade 0 1 2 3 NTH YEAR OF THE DECADE 4 5 6 7 8 9

200N 201N 202N 203N

n/a 43.5 59.1 66.6

n/a 40.2 59.2 67.6

n/a 43.0 59.5 68.6

n/a 45.4 60.2 69.3

n/a 48.5 60.3 70.0

n/a 48.5 61.7 70.7

n/a 45.6 62.6 71.4

n/a 47.8 63.8 72.1

49.6 49.7 64.6 72.8

49.9 53.6 65.6 73.6

Celgar Green Energy Appendix 3- 9

APPENDIX 4 SELLERS PLANT DESCRIPTION For clarity, the Sellers Plant includes or will include only the equipment and structures listed in sections 2 and 3 of this Appendix 4. 1. Location: The Sellers Plant is situated on a portion of the property located at: 1921 Arrow Lakes Drive, PO Box 1000, Castlegar, British Columbia, Canada, V1N 3H9. The approximate latitude and longitude of the site of the power house(s) forming part of the Sellers Plant is: 49.33 (4920) (latitude) and 117.72 (-11743) (longitude). 2. Principal Equipment: The Sellers Plant includes the following principal equipment:
Type of Equipment Description of Function/Location Key Technical Parameters

* * * *

* * * *

* * * *

3. Key Structures: The Sellers Plant includes the following key structures:
Structure Location Description of Structure

* *

* *

* *

4. Access Roads: Access to the site on which the Sellers Plant is located is via Mill Road which is owned by: Zellstoff Celgar Limited Partnership. Mill Road is connected to Arrow Lakes Drive, which is owned by the British Columbia Ministry of Transportation and Infrastructure. 5. Interconnection Facilities: As described in the Seller Optional Study Report dated June 2008. The POI (of the Transmission System/Fortis System) has the meaning given to it in Appendix 1 of the EPA; A description of the infrastructure between the Sellers Plant and the FortisBC point of Interconnection and a copy of the wheeling agreement between the Seller and FortisBC for delivery of energy to the POI. The point of Interconnection between the Seller and the Fortis System will be the FortisBC side of the load disconnect switch near the Celgar substation which is located near the Mill. The point of Interconnection with FortisBC and the Transmission System is the POI. Please see the Interconnection Study and FortisBC letter for further details; and Celgar Green Energy Appendix 4- 1

Description of metering facilities and configuration: A revenue quality metering installation at each of the generator breakers of the existing and the proposed new turbo-generators. There are two existing revenue quality metering installations at the 63 kV Point of Interconnection with the Fortis System, one owned by FortisBC and one owned by the Seller. The Buyer will consult with the Seller in order to verify that the installation is adequate and acquire the necessary access to remotely interrogate that metering installation. The Seller will pay for any improvements that may be required to achieve the desired functionality. Alternatively if the Buyer determines the Sellers metering installation to be inadequate the Buyer will coordinate and consult with FortisBC in order to assure that the installation is adequate and acquire the necessary access to remotely interrogate such metering installation. The Seller will facilitate such coordination and consultation, and pay for any improvements that may reasonably be required to achieve the desired functionality. Plant Capacity: *MW. Incremental Sellers Plant: A description of the alterations that the Seller is proposing to make to the Sellers Plant to enable the generation of Firm Energy (the Incremental Sellers Plant) is attached as Schedule 1 hereto. Site Layout: A depiction of the layout of the key facilities in the Sellers Plant is attached as Schedule 2 hereto. Seller Interconnection Reports: The data and assumptions set forth in the Seller Optional Study Report, the Fortis Interconnection Report and the Fortis BC letter are attached as Schedule 3 hereto.

6. 7. 8. 9.

10. Electricity Distribution and Generation System: A depiction of the electricity distribution and generation system at the Sellers Plant, including all metering points, is attached as Schedule 4 hereto. Celgar Green Energy Appendix 4- 2

SCHEDULE 1 Incremental Sellers Plant * Celgar Green Energy Appendix 4- 3

SCHEDULE 2 Site Layout * Celgar Green Energy Appendix 4- 4

SCHEDULE 3 Seller Interconnection Reports Data and Assumptions * Celgar Green Energy Appendix 4- 5

SCHEDULE 4 Electricity Distribution and Generation System * Celgar Green Energy Appendix 4- 6

APPENDIX 5 FUEL PLAN Fuel Plan No. 1 Part I Forest-based Biomass Volumes 1. Definitions - In this Appendix 5, the following words and phrases have the following meanings: (a) (b) (c) (d) (e) Category A means Forest-based Biomass that is comprised of mill solid wood residues (hog fuel, sawdust, chips and/or chunks) and pulp mill residues (hog fuel and black liquor); Category B means Forest-based Biomass that is comprised of roadside and landing residues; Category C means Forest-based Biomass that is comprised of biomass derived from standing timber; X indicates the approximate volume of the relevant category of Forest-based Biomass that is expected to be consumed in Energy generation up to the Annual GBL; and Y indicates the approximate volume of the relevant category of Forest-based Biomass that is expected to be consumed in Energy generation in excess of the Annual GBL.
Year X Category A (metric tonnes) Y X Category B (metric tonnes) Y X Category C (metric tonnes) Y

2010 2011 2012 2013 2014 2015 Part II Fuel Allocation

* * * * * *

* * * * * *

* * * * * *

* * * * * *

* * * * * *

* * * * * *

Year

Forest-based Biomass (GJs)

Auxiliary Fuel (GJs)

2010 2011 2012 2013 2014 2015

* * * * * *

* * * * * * Celgar Green Energy

Appendix 5- 1

APPENDIX 6 COD CERTIFICATE CELGAR GREEN ENERGY PROJECT TO: British Columbia Hydro and Power Authority (the Buyer) RE: Electricity Purchase Agreement (EPA) made as of , 2008 between the Buyer and Zellstoff Celgar Limited Partnership represented by its general partner, Zellstoff Celgar Limited (the Seller) for Celgar Green Energy Project I, [name of senior officer], in my capacity as [title of senior officer] of the Seller, and not in my personal capacity, certify on behalf of the Seller that: 1. Defined Terms Words and phrases having initial capitalized letters in this Certificate have the meanings given in the EPA. 2. COD Requirements The Seller has satisfied the requirements for COD as set out in section 5.2 of the EPA. Attached to this Certificate is all evidence required to demonstrate that the Seller has satisfied all such requirements. 3. No Material Default No event which constitutes a Buyer Termination Event under subsection (a) or (g) of the definition of Buyer Termination Event in Appendix 1 to the EPA has occurred. The Seller has obtained all Material Permits and is not in material default under any Material Permit (and all Material Permits are in full force and effect), any tenure agreement for the site on which the Sellers Plant is located or the Interconnection Agreement. Dated this day of , 2___.

[name of senior officer] [title of senior officer] [Note to Seller: Attach to the COD Certificate in tabbed format all documents and evidence required under section 5.2 of the EPA. Where documents have previously been provided to the Buyer, so indicate and attach a copy of the letter transmitting such documents to the Buyer.] Celgar Green Energy Appendix 6- 1

APPENDIX 7 SAMPLE FORM PERFORMANCE SECURITY / INTERCONNECTION SECURITY LETTER OF CREDIT \[Issuing Financial Institution Name & Address] Date of Issue: [Date] Irrevocable Standby Letter of Credit [Number] Applicant: [Seller Name and Address] Beneficiary: British Columbia Hydro and Power Authority

At the request and for the account of the Applicant, we hereby establish in favour of the Beneficiary our irrevocable standby Letter Of Credit No. ([Number]) (hereinafter called the Letter of Credit) for an amount not exceeding [Currency and Amount both in letters and numbers]. We, [Financial Institution Name and Address] hereby unconditionally and irrevocably undertake and bind ourselves, and our successors and assigns, to pay you immediately, the sum, which you claim upon receipt of the following documents: (1) your signed written demand specifying the amount claimed (not exceeding [Dollar Amount]), and certifying that such amount is due to you by the Applicant under the terms of an Electricity Purchase Agreement between you and the Applicant made as of [Date]; and (2) this original Letter of Credit must be presented with your demand for payment for endorsement purposes. Partial drawings are allowed. The amount of this Letter of Credit shall be automatically reduced by the amount of any drawing paid hereunder. This Letter of Credit takes effect from the date of issue set forth above, and shall remain valid until [Date]. However, it is a condition of this Letter of Credit that it shall be automatically extended without notice for a further one year period from the present or any future expiry date unless at least ninety (90) days prior to such expiry date we notify you in writing by courier or registered mail at your address above that we elect not to consider this Letter of Credit to be extended for any additional period. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce (Publication No. 500). This Letter of Credit is governed Celgar Green Energy Appendix 7- 1

by the laws applicable in the Province of British Columbia. The parties hereby irrevocably attorn to the non-exclusive jurisdiction of the courts of British Columbia. The number of this Letter of Credit must be quoted on all documents required hereby. Notwithstanding Article 18 of said publication, if this Letter of Credit expires during an interruption of business as described in Article 18, we agree to effect payment if this Letter of Credit is drawn within 15 days after resumption of normal business.

Authorized Signing Officer [Financial Institution Name]

Authorized Signing Officer [Financial Institution Name] Celgar Green Energy Appendix 7- 2

APPENDIX 8 SAMPLE FORM LENDER CONSENT AGREEMENT (See section 17.3) THIS AGREEMENT is made as of AMONG: BRITISH COLUMBIA HYDRO AND POWER AUTHORITY, a corporation continued under the Hydro and Power Authority Act, R.S.B.C. 1996, c. 212, having its head office at 333 Dunsmuir Street, Vancouver, British Columbia, V6B 5R3, (the Buyer) AND: [COMPANY], a company under the laws of (the Company) AND: [LENDER], a (the Lender). WHEREAS: A. The Buyer and the Company entered into an Electricity Purchase Agreement made as of time, the EPA); (as amended from time to under the laws of having an address at , having an address at _, ___, 20 ,

B. The Company has obtained certain credit facilities (the Credit) from the Lender for the purposes of financing the design and construction of the Incremental Sellers Plant, and the operation and maintenance of the Sellers Plant (as defined in the EPA); C. To secure the due payment of all principal, interest (including interest on overdue interest), premium (if any) and other amounts payable in respect of the Credit and the due performance of all other obligations of the Company under the Credit, the Company has granted certain security to and in favour of the Lender, including an assignment of the right, title and interest of the Company under the EPA and security on the Sellers Plant (collectively, the Lender Security); and D. The Lender has requested the Buyer to enter into this Agreement confirming certain matters. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and of the sum of $10 and other good and valuable consideration now paid by each of the Company and the Lender Celgar Green Energy Appendix 8- 1

to the Buyer (the receipt and sufficiency of which are hereby acknowledged by the Buyer), the parties covenant and agree that: 1. Additional Definitions: In this Agreement, including the recitals: (a) (b) Assumption Notice means a notice given by the Lender to the Buyer pursuant to subsection 6.1(a) of this Agreement; Default or Termination Notice means a notice given to the Company by the Buyer under the EPA that, with or without the lapse of time, entitles, or shall entitle, the Buyer to terminate the EPA, subject to rights, if any, of the Company to cure the default or other circumstance in respect of which the notice is given; Receiver means a receiver, manager or receiver-manager appointed or designated by, or on the initiative of, the Lender; and words and phrases defined in the EPA, and not otherwise defined herein, when used herein have the meanings given in the EPA.

(c) (d)

2. EPA Amendments: The Buyer and the Company acknowledge and agree that the EPA is in full force and effect, and that the EPA, as originally executed, has been amended only by the documents attached hereto as Schedule A. 3. Buyer Confirmations Concerning the EPA: The Buyer confirms to the Lender that: (a) (b) (c) (d) (e) the EPA has been duly authorized, executed and delivered by the Buyer; the Buyer has not received any notice of assignment by the Company of all or any part of their right, title and interest in and to the EPA, except to the Lender; the Buyer has not given any Default or Termination Notice; the Buyer is not aware of any default or other circumstance that would entitle the Buyer to give a Default or Termination Notice, provided however that the Buyer has not undertaken any investigation or due diligence in respect of this confirmation; and the Buyer shall not enter into any agreement with the Company to materially amend the EPA, or enter into any agreement with the Company to terminate the EPA, without giving the Lender not less than 30 days prior written notice.

4. Assignment of EPA to Lender: 4.1 Buyer Acknowledgement: The Buyer acknowledges receipt of notice of, and consents to, the assignment by the Company to the Lender of all the right, title and interest of the Company in and to the EPA made pursuant to and in accordance with the Lender Security. 4.2 Lender Acknowledgement: The Lender acknowledges that: (a) it has received a copy of the EPA; and Celgar Green Energy Appendix 8- 2

(b)

the assignment by the Company to the Lender of the EPA pursuant to the Lender Security is subject in all respects to the terms and conditions of the EPA and this Agreement.

4.3 Confidentiality: The Lender covenants and agrees with the Buyer to be bound by the provisions of Article 21 of the EPA regarding confidentiality, as if an original signatory thereto. 4.4 Company Representation: The Company represents and warrants to the Buyer that the Lender is the only person, other than the Buyer, to whom it has granted a security interest in the EPA or the Sellers Plant. 5. EPA Notices: The Buyer covenants and agrees with the Lender that, except as hereinafter otherwise permitted, the Buyer: (a) (b) shall give the Lender a copy of any Default or Termination Notice concurrently with, or promptly after, any such notice is given to the Company; shall not exercise any right it may have to terminate the EPA or any right pursuant to Article 15 of the EPA until the later of: (i) the date that is 45 days after the date on which the Buyer delivered to the Lender a copy of the Default or Termination Notice entitling the Buyer to terminate or exercise any right pursuant to Article 15 of the EPA; and (ii) the date on which the Buyer is entitled to terminate or exercise any right pursuant to Article 15 of the EPA; shall not, provided that there is no other Buyer Termination Event under the EPA, terminate the EPA based on the Bankruptcy or Insolvency of the Seller if the Lender is promptly and diligently prosecuting to completion enforcement proceedings under the Lender Security until 30 days after the expiry of any court ordered period restricting the termination of the EPA; and shall not exercise any right it may have under section 10.5 of the EPA to deduct any amounts owing by the Seller to the Buyer under the EPA from amounts owing by the Buyer to the Seller under the EPA until the date that is 15 days after the date the Buyer provides the Lender with a copy of the notice delivered by the Buyer to the Seller under section 10.5 of the EPA.

(c)

(d)

Nothing in this Agreement prevents or restricts: (i) the exercise by the Buyer of any other right or remedy that it may be entitled to exercise under or in relation to the EPA; or (ii) the right of the Lender to cure, or cause the cure of, any default of the Company under the EPA that would be curable by the Company, whether or not an Assumption Notice is given. 6. Realization by Lender: 6.1 Assumption Notice and/or Sale: If the Company has defaulted under the Credit or the Lender Security and the Lender has elected to take possession of the Sellers Plant, either by a Receiver or in any other way, pursuant to the Security, the Lender shall either: (a) (i) give the Buyer written notice (an Assumption Notice) stating that the Lender is assuming the EPA, whereupon: the Lender shall be entitled to all the rights and benefits, and shall have assumed, and shall perform and discharge, all the obligations and liabilities, of the Celgar Green Energy Appendix 8- 3

Company under the EPA, and the Lender shall be a party to, and bound by, the EPA as if an original signatory thereto in the place and stead of the Company; (ii) notwithstanding subparagraph (i), the Lender shall not be liable to the Buyer for defaults of the Company occurring before the Assumption Notice is given, except to the extent that such defaults continue thereafter; provided however that the Buyer may at any time before or after such notice is given exercise any rights of set-off in respect of any such prior default under or in relation to the EPA which the Buyer would otherwise be entitled to exercise; or

(b)

give written notice to the Buyer that the Lender wishes to cause the Company to assign all of the Companys right, title and interest in and to the EPA and the Sellers Plant to a third person or persons, subject however to the Company and the assignee complying with all provisions of the EPA relative to such assignment.

The Buyer agrees that if the Lender enters the Sellers Plant for the purpose of viewing or examining the state of repair, condition or operation thereof such shall not constitute taking possession thereof. 6.2 Lender Liability and Release: The Lender assumes no liability to the Buyer under the EPA unless and until the Lender gives an Assumption Notice. Thereafter, if the Lender completes an assignment to a third person or persons pursuant to and in accordance with the applicable provisions of the EPA, the Lender shall be released from all liability and obligations of the Company to the Buyer under the EPA accruing from and after completion of that assignment. 6.3 Company not Released: Nothing in this Agreement, and neither the giving of an Assumption Notice, nor any assignment pursuant to subsection 6.1(b) of this Agreement releases the Company from its obligations and liabilities to the Buyer under and in relation to the EPA. 6.4 Receiver Included: References in this section 6 to the Lender include a Receiver. 7. Notices: Any notice required or permitted to be given under this Agreement must be in writing and may be given by personal delivery, or by transmittal by facsimile, addressed to the respective parties as follows: (a) Buyer at: British Columbia Hydro and Power Authority

Attention: Facsimile No.: (b) [Company] at:

Attention: Facsimile No.:

Celgar Green Energy Appendix 8- 4

(c) [Lender] at:

Attention: Facsimile No.: Notices given by facsimile shall be deemed to be received on the Business Day next following the date of transmission. 8. Choice of Law: This Agreement is governed by British Columbia law, and the laws of Canada applicable therein. 9. Jurisdiction: Each party to this Agreement attorns irrevocably and unconditionally to the courts of the Province of British Columbia, and to courts to which appeals therefrom may be taken, in connection with any action, suit or proceeding commenced under or in relation to this Agreement. Notwithstanding the foregoing, the Lender acknowledges that upon an Assumption Notice being given, the Lender shall become party to, and bound by, the agreements to arbitrate contained in section 22.6 of the EPA. 10. Termination: This Agreement, and all rights and liabilities among the parties hereunder shall terminate upon the full and final discharge of all of the Lender Security. The Lender shall give the Buyer prompt notice of the full and final discharge of all of the Lender Security. 11. Amendment: This Agreement may be amended only by an instrument in writing signed by each of the parties hereto. 12. Enurement: This Agreement enures to the benefit of, and is binding upon, the parties hereto, and their respective successors and permitted assigns. 13. Counterparts: This Agreement may be executed by facsimile and in any number of counterparts, each of which is deemed an original, and all of which together constitute one and the same document. 14. Effective Date: This Agreement is not binding upon any party unless and until executed and delivered by all parties, whereupon this Agreement shall take effect as of the day first above written. IN WITNESS WHEREOF each of the parties have duly executed this Agreement as of the day and year first above written. BRITISH COLUMBIA HYDRO AND POWER AUTHORITY By: (Signature) Name: Title: Name: Title: Celgar Green Energy Appendix 8- 5 [COMPANY] By: (Signature)

[LENDER] By: (Signature) Name: Title:

Celgar Green Energy Appendix 8- 6

APPENDIX 9 SAMPLE FORM DEVELOPMENT PROGRESS REPORT BC Hydro Quarterly Development Report For the quarter ending: Project Name:
Tasks: 5% 25%

Report Number:
Percentage of Completion 50% Comments 75% 100%

Permitting: Air Permit Effluent Permit Refuse Permit Water Licence Zoning Approval Subdivision Approval Leave to Construct Other Permits Financing: Construction Project Equity Long Term Financing Project Design: Preliminary Final Interconnection: Studies (Please describe the status of each interconnection study) Construction Major Equipment: Ordering Delivery Installation Celgar Green Energy Appendix 9- 1

Tasks: 5% 25%

Percentage of Completion 50%

Comments 75% 100%

Construction: Road Powerhouse Other

Key Project Tasks: Original Estimate Current Estimate Actual

Permitting Complete Financing Complete Interconnection Agreement Signed Major Equipment Ordered Commence Construction Begin Commissioning COD Prepared by: Submitted by:

Celgar Green Energy Appendix 9- 2

APPENDIX 10 ADDRESSES FOR DELIVERY OF NOTICES Subject to subsection 22.3(e), the address for each of the Parties for notices is as follows: Buyer: BC Hydro All Notices (Except as set out below) To: Manager, Contract Management Address: 333 Dunsmuir Street, 10th floor Vancouver, B.C. V6B 5R3 Attention: Fax: 604-623-4335 Email: IPP.contract@bchydro.com Seller: Zellstoff Celgar Limited Partnership To: Address: Suite 2840, PO Box 11576 650 West Georgia Street Vancouver, B.C. V6B 4N8 Attention: Brian Merwin, Director of Strategic & Business Initiatives Fax: 604-684-1094 Email: bmerwin@mercerint.com Development Reports To: Manager, Contract Management Address: 333 Dunsmuir Street, 10th floor Vancouver, B.C. V6B 5R3 Fax: 604-623-4335 Email: IPP.contract@bchydro.com Planned Outages, Operating Plans, Notice of Outages, Energy Schedules To: IPP Operations Planning Engineer Address: 6911 Southpoint Drive, E15 Burnaby, B.C. V3N 4X8 Attention: Paul Cheng Fax: 604-528-8149 Email: paul.cheng@bchydro.com Copy to: Contract Management, as per all Notices address Celgar Green Energy Appendix 10- 1 To: Address: 1921 Arrow Lakes Drive P.O. Box 1000, Castlegar, BC V1N 3H9 Attention: Utilities Manager Fax: 250-365-5769 Email: colinn@celgar.com N/A

Buyer: BC Hydro Invoices and Statements To: IPP Invoicing Address: 333 Dunsmuir Street, 16th floor Vancouver, B.C. V6B 5R3 Fax: 604-623-4203 Email: IPP.invoicing@bchydro.com

Seller: Zellstoff Celgar Limited Partnership

To: Address: 1921 Arrow Lakes Drive P.O. Box 1000, Castlegar, BC V1N 3H9 Attention: Controller / Assistant Controller Fax: 250-365-4211 Email: lornea@celgar.com susanb@celgar.com

Performance Security and Interconnection Security To: Customer Care & Conservation, Finance & Business Services Address: 333 Dunsmuir Street 9th floor Vancouver, B.C. V6B 5R3 Attention: Alvin Tse Fax: 604-623-4224 Email: alvin.tse@bchydro.com Copy to: Contract Management, as per all Notices address Insurance To: Manager, Contract Management Address: 333 Dunsmuir Street, 10th floor Vancouver, B.C. V6B 5R3 Fax: 604-623-4335 Email: IPP.contract@bchydro.com To: Address: Suite 2840, PO Box 11576 650 West Georgia Street Vancouver, B.C. V6B 4N8 Attention: Controller Fax: 604-684-1094 Email: dure@mercerint.com A notice given in accordance with the foregoing provisions is deemed to have been given to the Seller and to each of its partners. Celgar Green Energy Appendix 10- 2 To: Address: Suite 2840, PO Box 11576 650 West Georgia Street Vancouver, B.C. V6B 4N8 Attention: Treasurer Fax: 604-684-1094 Email: gstannus@mercerint.com

APPENDIX 11 RFP CONFIDENTIALITY AGREEMENT Celgar Green Energy CONFIDENTIALITY AGREEMENT This Confidentiality Agreement (the Agreement) is made as of ___, 2008 [Note: Date to be completed by BC Hydro at time of signing by BC Hydro.] BY AND BETWEEN Zellstoff Celgar Limited Partnership, of P.O. Box 1000, Castlegar, BC, V1N 3H9 (Proponent) AND BRITISH COLUMBIA HYDRO AND POWER AUTHORITY, a British Columbia Crown Corporation, having an office at 333 Dunsmuir Street, Vancouver, British Columbia, V6B 5R3 (BC Hydro) (the foregoing may be referred to individually as a Party or collectively as the Parties) WHEREAS: A. BC Hydro has issued a Bioenergy Call for Power (Phase I) Request for Proposals dated February 6, 2008 (as may be amended from time to time) for the supply of electrical energy generated from Forest-based Biomass by Projects located in British Columbia (the RFP); B. C. D. The Proponent has registered under the RFP and intends to participate in the procurement process therein described (the RFP Process); The Proponent may submit to BC Hydro a Proposal, and further information relative thereto; and BC Hydro may conduct discussions, which may include negotiations, with the Proponent after receipt of Proposals.

NOW THEREFORE, in consideration of the Parties entering into this Agreement and the mutual promises and agreements contained in this Agreement, the Parties agree as follows: 1. 1.1 DEFINITIONS Definitions. Capitalized terms used but not defined herein shall have the meanings given in the RFP.

1.2 Confidential Information. Confidential Information means the Proponents Proposal that the Proponent submits to BC Hydro, or any pre-submission or post-submission information regarding the Proposal, the Project described therein, or related industrial facilities or businesses of the Proponent, whether or not designated expressly as confidential, that is disclosed or expressed, whether orally, in writing, electronically or by any other media, by the Proponent to BC Hydro during the course, or in

Issue April 22, 2008

furtherance, of the RFP Process, but excluding any executed and delivered EPA or related agreement, and also excluding information that: (a) (b) is or becomes in the public domain, other than as a result of a breach of this Agreement by BC Hydro; or is known to BC Hydro before disclosure to it by the Proponent, or becomes known to BC Hydro thereafter by way of disclosure to BC Hydro by any other person who is not under an obligation of confidentiality with respect thereto.

1.3 Discussions. Discussions means discussions, including negotiations, between BC Hydro and the Proponent occurring after submission of the Proponents Proposal and pertaining thereto until such discussions are terminated or an EPA, if any, between the Parties is fully executed and delivered. 2. CONFIDENTIALITY OBLIGATION

2.1 Confidentiality Obligation. BC Hydro shall treat as confidential, and shall not disclose to any third person, Confidential Information, and both Parties shall treat as confidential and shall not disclose to any third person, all or any part of the Discussions, provided however that the foregoing obligations, and nothing in this Agreement, prevents or restricts: (a) (b) disclosure of the fact that Discussions, if any, are occurring, or have occurred, and/or the fact that this Agreement exists and the general nature hereof; in the case of BC Hydro, disclosure of the Discussions and/or Confidential Information: (i) (ii) to any ministers, deputy ministers or servants or employees of the Province of British Columbia; and to its directors, officers, employees and subsidiaries, consultants and advisors;

provided that each of the foregoing to whom Discussions and/or Confidential Information is disclosed is advised of the confidential nature thereof; (c) in the case of BC Hydro, disclosure of Discussions and/or Confidential Information in any regulatory proceeding, whether in respect of an EPA entered into with the Proponent pursuant to the RFP Process or in respect of other matters, to the extent that BC Hydro considers disclosure necessary or desirable to support its position in any such proceeding, provided that, to the extent reasonably practicable, BC Hydro gives reasonable notice to the Proponent before making the disclosure, and, to the extent requested by the Proponent, requests the relevant tribunal to treat all or any part of the disclosure as confidential or to limit its further disclosure; in the case of BC Hydro, disclosure of: (i) (ii) the Proponents questions in the Q&A process under the RFP; and the Proponents participation in the RFP Process, or the location of any Project proposed by the Proponent;

(d)

Issue April 22, 2008

(e) (f)

in the case of the Proponent, disclosure of Discussions to its directors, officers, employees and Affiliates, consultants and advisors, provided that each of the foregoing to whom Discussions are disclosed is advised of the confidential nature thereof; without limiting BC Hydros disclosure rights under section 2.1(c) above, disclosures required to be made by BC Hydro or the Proponent by an order of a court or tribunal or under any law, regulatory requirement or requirement of any stock exchange that is binding upon it, provided that, (i) to the extent reasonably practicable, the Party making such disclosure gives reasonable notice to the other Party before making the disclosure, and (ii) limits the disclosure to that required by the applicable order, law, or regulatory or stock exchange requirement; disclosures in any legal proceedings for the enforcement of any agreement referenced in section 2.2; or disclosures of the Discussions and/or Confidential Information by agreement or consent of both Parties, including pursuant to the consents contained in the Registration Form.

(g) (h)

2.2 Disclosure of EPA. Disclosure of any executed EPA and/or other agreement(s) entered into with the Proponent pursuant to the RFP Process, or any summary thereof or information contained therein, will be governed by the EPA and/or other agreement(s), if any. 2.3 Freedom of Information and Protection of Privacy Act. The Proponent acknowledges that BC Hydro is subject to the British Columbia Freedom of Information and Protection of Privacy Act and associated regulations, and agrees that BC Hydros non-disclosure obligations under this Agreement are subject to the provisions of that legislation, as the same may be amended or replaced from time to time. 2.4 Liability Exclusion. In no event will either Party be liable to the other Party in connection with any breach of this Agreement for any indirect, incidental or consequential damages, including loss of profits. 2.5 Term. The obligations of the Parties under this section 2 expire upon the earlier of (i) full execution and delivery of an EPA, if any, entered into between the Parties pursuant to the RFP Process (whereupon matters of confidentiality shall be governed exclusively by any such agreement), and (ii) three years after the date hereof. 3. MISCELLANEOUS

3.1 Governing Law. This Agreement shall be interpreted, governed and construed under the laws of the Province of British Columbia and the laws of Canada applicable therein as if it were executed and to be performed wholly within the Province of British Columbia. 3.2 Equitable Relief. Each Party agrees that in the event of a breach of this Agreement, or to prevent a breach or contemplated breach, by that Party, the other Party shall be entitled to equitable relief, including injunction and specific performance, in addition to all other remedies available at law or equity. 3.3 Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes and cancels all prior agreements and communications relative to such subject matter.

Issue April 22, 2008

3.4 Amendments. This Agreement shall not be modified, except by a written agreement dated after the date of this Agreement and signed by both Parties. 3.5 Assignment. This Agreement may not be assigned by either Party without the prior written consent of the other Party.

3.6 Enurement. This Agreement shall be binding upon and enure to the benefit of the Parties and their respective successors and permitted assigns. 3.7 Execution In Counterpart. This Agreement may be executed in counterparts, and each counterpart shall for all purposes be an original, and all such counterparts shall together constitute one and the same Agreement. Execution by either Party of a facsimile copy of this Agreement will be deemed to constitute effective execution of this Agreement by that Party. 3.8 3.9 Effect. For greater certainty, this Agreement supersedes and replaces Sections 22.8 and 22.11 of the RFP. Relationship. Entering into this Agreement shall in no way be construed to: (a) (b) (c) preclude in any way either Party from pursuing any business opportunities; establish any relationship between BC Hydro and the Proponent with respect to such business opportunities; or establish any other relationship between BC Hydro and the Proponent with respect to the Project.

Issue April 22, 2008

IN WITNESS WHEREOF, the Parties have entered into this Agreement effective as of the date first above written. BRITISH COLUMBIA HYDRO AND POWER AUTHORITY By: Name: Title:

Zellstoff Celgar Limited

as General Partner for Zellstoff Celgar Limited Partnership Full legal name of Proponent

Signature Name: David M. Gandossi

Title: EVP, CFO & Secretary

Issue April 22, 2008

EXHIBIT 21 SUBSIDIARIES OF MERCER INTERNATIONAL INC.

Jurisdiction of Incorporation Shareholding at Year End Direct Indirect

Name of Subsidiary(1)

Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG Zellstoff Stendal GmbH Zellstoff Celgar Limited Zellstoff Celgar Limited Partnership
(1) All the subsidiaries are conducting business under their own names.

Germany Germany Canada Canada

100 % 100 %

100 % 70.6%

EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-121172) and in the Registration Statement on Form S-8 (No.333-116520) of our report relating to the consolidated financial statements of Mercer International Inc. and on the effectiveness of internal control over financial reporting dated March 2, 2009, appearing in this Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP Chartered Accountants March 2, 2009 Vancouver, Canada

EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-121172) and in the Registration Statement on Form S-8 (No.333-116520) of our report dated February 28, 2007, relating to the consolidated statements of operations, comprehensive income (loss), changes in shareholders equity and cash flows of Mercer International Inc. for the year ended December 31, 2006 (which report expresses an unqualified opinion on those financial statements and includes an explanatory paragraph relating to the Companys adoption of new accounting standards for share-based payments and pension and other postretirement benefits) appearing in this Annual Report on Form 10-K of Mercer International Inc. for the year ended December 31, 2008.

/s/ Deloitte & Touche LLP Independent Registered Chartered Accountants March 2, 2009 Vancouver, Canada

EXHIBIT 31.1 CERTIFICATION OF PERIODIC REPORT I, Jimmy S.H. Lee, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Mercer International Inc. (the Registrant); Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which this annual report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and Disclosed in this annual report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and

3.

4.

b)

c)

d)

5.

The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.

b)

Date: March 2, 2009

/s/ Jimmy S.H. Lee Jimmy S.H. Lee Chief Executive Officer

EXHIBIT 31.2 CERTIFICATION OF PERIODIC REPORT I, David M. Gandossi, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Mercer International Inc. (the Registrant); Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which this annual report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and Disclosed in this annual report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and

3.

4.

b)

c)

d)

5.

The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.

b)

Date: March 2, 2009

/s/ David M. Gandossi David M. Gandossi Chief Financial Officer

EXHIBIT 32.1 CERTIFICATION OF PERIODIC REPORT I, Jimmy S.H. Lee, Chief Executive Officer of Mercer International Inc. (the Company), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the period ended December 31, 2008 (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

(2)

Dated: March 2, 2009

/s/ JIMMY S.H. LEE Jimmy S.H. Lee Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Mercer International Inc. and will be retained by Mercer International Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2 CERTIFICATION OF PERIODIC REPORT I, David M. Gandossi, Chief Financial Officer of Mercer International Inc. (the Company), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the period ended December 31, 2008 (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

(2)

Dated: March 2, 2009

/s/ DAVID M. GANDOSSI David M. Gandossi Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Mercer International Inc. and will be retained by Mercer International Inc. and furnished to the Securities and Exchange Commission or its staff upon request.