First Quarter Snapshot
Selected production, sales and exchange rate data for the three months ended
March 31, 2009 and 2008 is as follows:

                                                    Three Months Ended March 31,
                                                      2009                2008
  Pulp Production ('000 ADMTs)                          345.6                 360.9
  Scheduled Production Downtime ('000 ADMTs)                -                   1.5
  Pulp Sales ('000 ADMTs)                               336.7                 348.2
  Pulp Revenues (in millions)                    €      129.0          €      179.1
  NBSK pulp list prices in Europe ($/ADMT)       $        585          $        880
  NBSK pulp list prices in Europe (€/ADMT)       €        449          €        586
  Average pulp sales realizations (€/ADMT)(1)    €        377          €        510

  Energy Production ('000 MWh)                          356.3                 364.9
  Energy Sales ('000 MWh)                               112.2                 114.1
  Energy Revenue (in millions)                   €       10.6          €        7.7
  Average energy sales realizations (€/MWh)      €         94          €         68

  Average Spot Currency Exchange Rates(2)
  € / $                                                0.7675                0.6666
  C$ / $                                               1.2453                1.0042
  C$ / €                                               1.6217                1.5057

(1) List price less discounts and commissions.

(2) Average Bank of Canada noon spot rates over the reporting period.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Pulp revenues for the three months ended March 31, 2009 decreased by approximately 28.0% to €129.0 million from €179.1 million in the comparative quarter of 2008 primarily due to the ongoing global economic crisis and its effect on world pulp markets. Revenues from the sale of excess energy increased by approximately 36.6% in the first quarter to €10.6 million from €7.7 million in the same quarter last year due to the higher biomass energy tariffs now in effect under Germany's Renewable Energy Resources Act.
Pulp sales volume decreased to 336,659 ADMTs in the current quarter compared to 348,176 ADMTs in the comparative period of 2008 primarily due to weaker demand and the effect of credit restrictions on certain of our customers. In the first quarter of 2009, average pulp sales realizations decreased by approximately 26.1% and 13.5% to €377 per ADMT from €510 per ADMT in the same period last year and €436 per ADMT in the fourth quarter of 2008, respectively.
Pulp prices decreased in the first quarter of 2009 as a result of the global recession. List prices for NBSK pulp in Europe were approximately €449 ($585) per ADMT in the current quarter compared to approximately €586 ($880) in the first quarter of 2008 and €456 ($635) at the end of 2008. Partially offsetting the declines in pulp prices has been the stronger U.S. dollar versus the Euro and the Canadian dollar. A stronger U.S. dollar is beneficial to us because, although NBSK pulp is primarily quoted in U.S. dollars, our production costs are principally incurred in Euros and Canadian dollars.
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Pulp production decreased to 345,620 ADMTs in the current quarter from 360,881 ADMTs in the same period of 2008 primarily due to seven days of unscheduled production downtime at our Celgar mill as a result of a temporary railway shutdown due to weather conditions. We took no scheduled maintenance downtime at our mills in the first three months of 2009, compared to one day in the same period last year.
Costs and expenses in the first quarter of 2009 decreased to €152.0 million from €168.2 million in the comparative quarter of 2008.
In the first three months of 2009, operating depreciation and amortization decreased slightly to €13.4 million from €14.1 million in the comparative quarter of 2008.
As a result of continuing weak NBSK markets in the current quarter, we recorded additional non-cash provisions of €3.4 million and €1.2 million against our finished goods and fiber inventories, respectively.
During the first quarter of 2009 certain U.S. pulp producers took advantage of an excise tax credit under the U.S. Internal Revenue Code intended to subsidize companies that sell or use alternative fuel mixtures. The manner in which this alternative fuel tax credit has been applied by U.S. pulp producers is viewed by many as contrary to the legislation's intent and acts as a subsidy to the U.S. pulp industry. As a result, the tax credit has the potential to significantly lower the operating costs of otherwise unprofitable producers and complaints have been brought by a number of non-U.S. producers and their respective governments on the basis that the credit provides an uncompetitive advantage to U.S. pulp producers. While the tax credit does not impact us directly, it has the potential of deferring increases in pulp prices that might otherwise be implemented.
On average, and including the effect of the non-cash inventory provision on our fiber inventories, our fiber costs decreased by approximately 10.4% in the first quarter of 2009 from the same period in 2008 due to lower demand. We currently expect fiber prices to level off in the near term due to the effect of the ongoing sawmilling curtailments and harvesting reductions.
We recorded €0.6 million from the sale of emission allowances for the three months ended March 31, 2009, compared to €nil in the comparative quarter of 2008.
For the first quarter of 2009, we recorded an operating loss of €12.4 million compared to operating income of €18.6 million in the comparative quarter of 2008, primarily due to lower price realizations and sales volume resulting from deteriorating market conditions.
Interest expense in the first quarter of 2009 decreased very marginally to €16.5 million from €16.6 million in the comparative quarter of 2008. In the first three months of 2009 we recorded a loss of €3.2 million on the final disposition of certain investments previously owned by our Stendal mill. Such investments were held in an independently-managed fund created for purposes of investing the debt service reserve account funds under the mill's project loan facility.
Our Stendal mill recorded an unrealized loss of €15.0 million on our interest rate derivatives during the first quarter of 2009 compared to an unrealized loss of €7.9 million in the same period last year in large part due to the significant decrease in European interest rates.
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A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In the first quarter of 2009, we recorded an unrealized loss of €4.4 million on our foreign currency denominated debt compared to an unrealized gain of €6.0 million in the same period of 2008. In the first quarter of 2009, the noncontrolling shareholder's interest in the Stendal mill's loss for the period was €9.3 million, compared to €3.2 million in the same quarter last year.
We reported a net loss attributable to common shareholders for the first quarter of 2009 of €39.4 million, or €1.08 per basic and diluted share, which included an aggregate unrealized non-cash loss of €19.4 million of Stendal's interest rate derivates and foreign exchange losses on our debt. In the first quarter of 2008, we reported net income attributable to common shareholders of €2.9 million, or €0.08 per basic and diluted share.
Operating EBITDA in the first quarter of 2009 was €1.1 million compared to €32.8 million in the three months ended March 31, 2008 and an Operating EBITDA loss of €7.5 million in the fourth quarter of 2008. EBITDA in the current quarter includes non-cash inventory provisions of €4.6 million. Operating EBITDA is defined as operating income (loss) 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, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America
("GAAP"), and should not be considered as an alternative to net income (loss)
attributable to common shareholders or income from operations as a measure of operational 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) non-controlling 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) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental operational 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 interim consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA
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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 operational performance and relying primarily on our GAAP financial statements.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the periods indicated:

                                                             Three Months Ended
                                                                  March 31,
                                                              2009          2008
                                                               (in thousands)
   Net income (loss) attributable to common shareholders   €  (39,350 )   €  2,869
   Net loss attributable to noncontrolling interest            (9,261 )     (3,183 )
   Income taxes (benefits)                                     (2,982 )        828
   Interest expense                                            16,549       16,620
   Investment (income) loss                                     3,202         (310 )
   Unrealized foreign exchange loss (gain) on debt              4,416       (6,031 )
   Derivative instruments                                      15,013        7,850

   Operating income (loss)                                    (12,413 )     18,643
   Add: Depreciation and amortization                          13,467       14,192

   Operating EBITDA                                        €    1,054     € 32,835

Liquidity and Capital Resources
The following table is a summary of selected financial information for the
periods indicated:

                                                 As at           As at
                                               March 31,      December 31,
                                                 2009             2008
                                                     (in thousands)
             Financial Position
             Cash and cash equivalents       €    41,236      €    42,452
             Cash, restricted                      3,531           13,000
             Working capital                     109,961          154,374
             Property, plant and equipment       879,300          881,704
             Total assets                      1,113,541        1,151,600
             Long-term liabilities               926,561          914,970
             Total equity                         78,385          132,103

Sources and Uses of Funds
Our principal sources of funds are cash flows from operations, cash on hand, the revolving working capital loan facility for our Celgar mill, or "Celgar Loan Facility", and the revolving working capital loan facility for our Rosenthal mill, or "Rosenthal Loan Facility". Our principal uses of funds consist of operating and capital expenditures, payments of principal and interest on the project loan facility relating to our Stendal mill, or "Stendal Loan Facility", and interest payments on our outstanding senior notes and convertible notes. As at March 31, 2009, our cash and cash equivalents were €41.2 million, compared to €42.5 million at the end of 2008. We also had €3.5 million of restricted cash in the debt service reserve account under the Stendal Loan Facility and approximately €31.5 million in available undrawn lines of credit. In the first quarter of 2009, we completed an amendment to the Stendal Loan Facility which has increased Stendal's liquidity by deferring approximately €164.0 million of principal payments until maturity on September 30, 2017. The deferred amount includes approximately
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€20.0 million, €26.0 million and €21.0 million of scheduled principal payments in 2009, 2010 and 2011, respectively. As part of the amendment we made a capital contribution of €10.0 million to Stendal in the first quarter of 2009. In the current quarter we also extended the maturity of the Celgar Loan Facility from May 2009 to May 2010 and are currently seeking to extend the maturity of the Rosenthal Loan Facility which is set to mature in February 2010. The Stendal Loan Facility is provided by a syndicate of eleven financial institutions and the Celgar Loan Facility and Rosenthal Loan Facility are each provided by one financial institution. We have not to date experienced any reductions in credit availability with respect to these loan facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected.
In the first quarter of 2009, we continued our efforts to obtain term financing for the "green" energy project at our Celgar mill and are in continuing negotiations with lenders with respect to such financing. While we expect to finalize such financing in the second quarter of 2009, given the current market environment there can be no assurance that we will be able to do so or on terms favorable to us. In the first three months of 2009, capital expenditures related to the Celgar energy project were €4.4 million and we expect project costs to be approximately €24.7 million in the remainder of 2009. Debt
As at March 31, 2009, the amount outstanding under the Stendal Loan Facility was €522.8 million. We also had approximately C$22.0 million outstanding under the C$40.0 million Celgar Loan Facility and had drawn approximately €10.0 million under the Rosenthal Loan Facility.
Additionally, we have $310.0 million (€233.8 million) in principal amount of our 9.25% 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. 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 (€50.7 million) in principal amount of our 8.5% convertible senior subordinated notes which mature in October 2010 for which we pay interest semi-annually on April 15 and October 15 of each year at the rate of 8.5%. The convertible notes also are not subject to any financial maintenance covenants.
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 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 Stendal Loan Facility also contains a permitted leverage ratio of total debt to EBITDA which is effective beginning December 31, 2009. This ratio is set to decline over time from
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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 by way of a capital contribution or subordinated loan in the amount necessary to cure such deficiency.
Under the Rosenthal Loan Facility, the ratio of net debt to EBITDA must not exceed 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 Loan 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 March 31, 2009, 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.
Operating activities in the first three months of 2009 provided cash of €0.8 million, compared to providing cash of €3.6 million in the same period last year. A decrease in receivables provided cash of €20.4 million in the first quarter of 2009, compared to an increase in receivables using cash of €3.8 million in the first quarter of 2008. A decrease in inventories before non-cash provisions provided cash of €6.1 million in the current quarter, compared to a decrease in inventories that provided cash of €0.7 million in the first quarter of 2008. A decrease in accounts payable and accrued expenses used cash of €6.8 million in the first three months of 2009, compared to a decrease in accounts payable and accrued expenses using cash of €11.4 million in the first three months of 2008.
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.
Cash Flows from Investing Activities. Investing activities in the first quarter of 2009 provided cash of €2.0 million, compared to using cash of €2.0 million in the same period of 2008. Capital expenditures in the current quarter used cash of €7.7 million compared to €3.0 million in the first quarter of 2008 and were primarily related to the energy project and woodroom upgrades at the Celgar mill.
Cash Flows from Financing Activities. In the first quarter of 2009, financing activities used cash of €4.5 million, compared to using cash of €17.5 million in the first quarter of 2008.
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Capital Resources
Other than commitments totaling approximately €13.1 million relating to the Celgar mill energy project, we have no material commitments to acquire assets or operating businesses. In the first quarter of 2009 we continued our efforts to obtain term financing for the "green" energy project at our Celgar mill and are in continuing negotiations with lenders with respect to such financing. While we currently expect to finalize such financing in the second quarter of 2009, given the current market environment there can be no assurance that we will be able to do so or on terms favorable to us.
With the recent global financial crisis and recessionary global economic conditions, 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, 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. 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 the Celgar Loan Facility and the Rosenthal Loan Facility, will be adequate to meet our liquidity needs in the next 12 months.
Contractual Obligations and Commitments
There were no material changes outside the ordinary course to any of our contractual obligations during the first three months of 2009. 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
(loss) and impact on shareholders' equity on the balance sheet but do not affect our net earnings. In the three months ended March 31, 2009, accumulated other comprehensive loss increased by €5.1 million which was primarily due to the foreign exchange translation. Based upon the exchange rate at March 31, 2009, the U.S. dollar has increased by approximately 19.2% in value against the Euro since March 31, 2008. See "Quantitative and Qualitative Disclosures about Market Risk".
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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 Management's 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.
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 12 of our interim consolidated financial statements included herein.
Restricted Group Results - Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Pulp revenues for the Restricted Group for the three months ended March 31, 2009 decreased by approximately 25.8% to €75.0 million from €101.1 million in the comparative period of 2008. Revenues from the sale of excess energy were €4.0 in the current quarter compared to €3.5 million in the same period last year due to the higher biomass energy tariffs now in effect under Germany's Renewable Energy Resources Act.
Pulp prices decreased in the first quarter of 2009 as a result of the global recession. List prices for NBSK pulp in Europe were approximately €449 ($585) per ADMT in the first quarter of 2009 and approximately €586 ($880) in the same period of 2008 and €456 ($635) at the end of 2008. Partially offsetting the declines in pulp prices has been the stronger U.S. dollar versus the Euro and the Canadian dollar. A stronger U.S. dollar is beneficial to us because, although NBSK pulp is primarily quoted in U.S. dollars, our production costs are principally incurred in Euros and Canadian dollars.
Pulp sales volume of the Restricted Group decreased to 193,791 ADMTs in the first quarter of 2009 from 198,670 ADMTs in the comparative period of 2008 due . . .