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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
8540 Gander Creek Drive
Miamisburg, Ohio 45342
877.855.7243
Commission File Number |
Registrant | IRS Employer Identification Number |
State of Incorporation | |||
001-32956 | NEWPAGE HOLDING CORPORATION | 05-0616158 | Delaware | |||
333-125952 | NEWPAGE CORPORATION | 05-0616156 | Delaware |
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.
NewPage Holding Corporation | Yes x | No ¨ | ||||
NewPage Corporation | Yes x | No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
NewPage Holding Corporation | Yes x | No ¨ | ||||
NewPage Corporation | Yes x | No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
NewPage Holding Corporation | Large accelerated filer ¨ | Accelerated filer ¨ | ||
Non-accelerated filer x | Smaller reporting company ¨ | |||
NewPage Corporation | Large accelerated filer ¨ | Accelerated filer ¨ | ||
Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
NewPage Holding Corporation | Yes ¨ | No x | ||||
NewPage Corporation | Yes ¨ | No x |
There were 10 Common Shares, $0.01 per share par value, of NewPage Holding Corporation and 100 Common Shares, $0.01 per share par value, of NewPage Corporation outstanding as of August 1, 2011.
This Form 10-Q is a combined quarterly report being filed separately by two registrants: NewPage Holding Corporation and NewPage Corporation. NewPage Corporation meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
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References to NewPage Holding refer to NewPage Holding Corporation, a Delaware corporation; references to NewPage refer to NewPage Corporation, a Delaware corporation and a wholly-owned subsidiary of NewPage Holding. References to NewPage Group refer to NewPage Group Inc., a Delaware corporation and the direct parent of NewPage Holding. Unless the context provides otherwise, references to we, us and our refer to NewPage Holding and its subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of NewPage Holdings wholly-owned subsidiary, NewPage, except for activity related to NewPage Holdings debt and equity and income tax effects. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws. All statements other than statements of historical fact are forward-looking statements for purposes of federal and state securities laws. Forward-looking statements may include the words may, plans, estimates, anticipates, believes, expects, intends and similar expressions. Although we believe that these forward-looking statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected or assumed in our forward-looking statements. These factors, risks and uncertainties include, among others, the following:
| our substantial level of indebtedness |
| our ability to obtain additional financing or refinance our indebtedness may be limited |
| changes in the supply of, demand for, or prices of our products |
| general economic and business conditions in the United States and Canada and elsewhere |
| the ability of our customers to continue as a going concern, including our ability to collect accounts receivable according to customary business terms |
| the activities of competitors, including those that may be engaged in unfair trade practices |
| changes in significant operating expenses, including raw material and energy costs |
| changes in currency exchange rates |
| changes in the availability of capital |
| changes in the regulatory environment, including requirements for enhanced environmental compliance |
| the other factors described under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 |
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason, except as required by law.
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PART I |
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Item 1. |
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Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 |
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Consolidated Statements of Equity (Deficit) for the first half ended June 30, 2011 and 2010 |
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Condensed Consolidated Statements of Cash Flows for the first half ended June 30, 2011 and 2010 |
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Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II |
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Item 1. |
34 | |||||||||
Item 5. |
34 | |||||||||
Item 6. |
35 | |||||||||
36 |
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PART I | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
JUNE 30, 2011 AND DECEMBER 31, 2010
Dollars in millions, except per share amounts
NewPage Holding | NewPage | |||||||||||||||
June 30, | Dec. 31, | June 30, | Dec. 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
ASSETS |
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Cash and cash equivalents |
$ | 9 | $ | 8 | $ | 9 | $ | 8 | ||||||||
Accounts receivable, net |
247 | 292 | 247 | 292 | ||||||||||||
Inventories (Note 3) |
494 | 523 | 494 | 523 | ||||||||||||
Other current assets |
25 | 20 | 25 | 20 | ||||||||||||
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Total current assets |
775 | 843 | 775 | 843 | ||||||||||||
Property, plant and equipment, net of accumulated depreciation of $1,264 as of June 30, 2011 and $1,159 as of December 31, 2010 |
2,455 | 2,558 | 2,455 | 2,558 | ||||||||||||
Port Hawkesbury biomass project (Note 7) |
34 | 5 | 34 | 5 | ||||||||||||
Other assets |
99 | 106 | 98 | 105 | ||||||||||||
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TOTAL ASSETS |
$ | 3,363 | $ | 3,512 | $ | 3,362 | $ | 3,511 | ||||||||
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LIABILITIES AND EQUITY (DEFICIT) |
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Accounts payable |
$ | 226 | $ | 195 | $ | 226 | $ | 195 | ||||||||
Other current liabilities |
197 | 210 | 197 | 210 | ||||||||||||
Current maturities of long-term debt (Note 6) |
2,854 | | 2,854 | | ||||||||||||
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Total current liabilities |
3,277 | 405 | 3,277 | 405 | ||||||||||||
Long-term debt (Note 6) |
581 | 3,376 | 353 | 3,157 | ||||||||||||
Proceeds from NSPI for Port Hawkesbury biomass project (Note 7) |
95 | 80 | 95 | 80 | ||||||||||||
Other long-term obligations |
516 | 526 | 516 | 526 | ||||||||||||
Commitments and contingencies (Note 14) |
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EQUITY (DEFICIT) |
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Common stock, NewPage Holding10 shares authorized, issued and outstanding, $0.01 per share par value; NewPage100 shares authorized, issued and outstanding, $0.01 per share par value |
| | | | ||||||||||||
Additional paid-in capital |
706 | 707 | 812 | 813 | ||||||||||||
Accumulated deficit |
(1,509 | ) | (1,280 | ) | (1,398 | ) | (1,178 | ) | ||||||||
Accumulated other comprehensive loss |
(303 | ) | (302 | ) | (293 | ) | (292 | ) | ||||||||
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Total equity (deficit) |
(1,106 | ) | (875 | ) | (879 | ) | (657 | ) | ||||||||
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TOTAL LIABILITIES AND EQUITY (DEFICIT) |
$ | 3,363 | $ | 3,512 | $ | 3,362 | $ | 3,511 | ||||||||
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See notes to condensed consolidated financial statements.
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NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SECOND QUARTER AND FIRST HALF ENDED JUNE 30, 2011 AND 2010
Dollars in millions
NewPage Holding | ||||||||||||||||
Second Quarter | First Half | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 888 | $ | 890 | $ | 1,792 | $ | 1,707 | ||||||||
Cost of sales |
887 | 913 | 1,745 | 1,762 | ||||||||||||
Selling, general and administrative expenses |
36 | 58 | 76 | 107 | ||||||||||||
Interest expense (including non-cash interest expense of $18, $16, $35 and $32) |
100 | 97 | 200 | 198 | ||||||||||||
Other (income) expense, net (Note 10) |
1 | | (1 | ) | (3 | ) | ||||||||||
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Income (loss) before income taxes |
(136 | ) | (178 | ) | (228 | ) | (357 | ) | ||||||||
Income tax (benefit) |
| 1 | 1 | 1 | ||||||||||||
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Net income (loss) |
$ | (136 | ) | $ | (179 | ) | $ | (229 | ) | $ | (358 | ) | ||||
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See notes to condensed consolidated financial statements.
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NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SECOND QUARTER AND FIRST HALF ENDED JUNE 30, 2011 AND 2010
Dollars in millions
NewPage | ||||||||||||||||
Second Quarter | First Half | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 888 | $ | 890 | $ | 1,792 | $ | 1,707 | ||||||||
Cost of sales |
887 | 913 | 1,745 | 1,762 | ||||||||||||
Selling, general and administrative expenses |
36 | 58 | 76 | 107 | ||||||||||||
Interest expense (including non-cash interest expense of $14, $11, $26 and $23) |
96 | 92 | 191 | 189 | ||||||||||||
Other (income) expense, net (Note 10) |
1 | | (1 | ) | (3 | ) | ||||||||||
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Income (loss) before income taxes |
(132 | ) | (173 | ) | (219 | ) | (348 | ) | ||||||||
Income tax (benefit) |
| 1 | 1 | 1 | ||||||||||||
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Net income (loss) |
$ | (132 | ) | $ | (174 | ) | $ | (220 | ) | $ | (349 | ) | ||||
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See notes to condensed consolidated financial statements.
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NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (unaudited)
FIRST HALF ENDED JUNE 30, 2011
Dollars in millions
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive Income |
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Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||||||
Balance at December 31, 2010 |
10 | $ | | $ | 707 | $ | (1,280 | ) | $ | (302 | ) | $ | (875 | ) | ||||||||||
Comprehensive income (loss): |
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Net income (loss) |
(229 | ) | (229 | ) | ||||||||||||||||||||
Defined-benefit postretirement plans: |
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Amortization of net actuarial loss on defined benefit plans |
(1 | ) | (1 | ) | ||||||||||||||||||||
Cash-flow hedges: |
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Reclassification adjustment to net income (loss) |
1 | 1 | ||||||||||||||||||||||
Foreign currency translation adjustment |
(1 | ) | (1 | ) | ||||||||||||||||||||
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Comprehensive income (loss) |
$ | (230 | ) | |||||||||||||||||||||
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Equity awards (Note 8) |
(1 | ) | (1 | ) | ||||||||||||||||||||
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Balance at June 30, 2011 |
10 | $ | | $ | 706 | $ | (1,509 | ) | $ | (303 | ) | $ | (1,106 | ) | ||||||||||
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FIRST HALF ENDED JUNE 30, 2010
Dollars in millions
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive Income |
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Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||||||
Balance at December 31, 2009 |
10 | $ | | $ | 685 | $ | (606 | ) | $ | (265 | ) | $ | (186 | ) | ||||||||||
Comprehensive income (loss): |
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Net income (loss) |
(358 | ) | (358 | ) | ||||||||||||||||||||
Amortization of net actuarial loss on defined benefit plans |
1 | 1 | ||||||||||||||||||||||
Cash-flow hedges: |
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Change in unrealized gains (losses), net of tax benefits of $1 |
(1 | ) | (1 | ) | ||||||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $1 |
1 | 1 | ||||||||||||||||||||||
Foreign currency translation adjustments |
1 | 1 | ||||||||||||||||||||||
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Comprehensive income (loss) |
$ | (356 | ) | |||||||||||||||||||||
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Equity awards (Note 8) |
20 | 20 | ||||||||||||||||||||||
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Balance at June 30, 2010 |
10 | $ | | $ | 705 | $ | (964 | ) | $ | (263 | ) | $ | (522 | ) | ||||||||||
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See notes to condensed consolidated financial statements.
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NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (unaudited)
FIRST HALF ENDED JUNE 30, 2011
Dollars in millions
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive Income |
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Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||||||
Balance at December 31, 2010 |
100 | $ | | $ | 813 | $ | (1,178 | ) | $ | (292 | ) | $ | (657 | ) | ||||||||||
Comprehensive income (loss): |
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Net income (loss) |
(220 | ) | (220 | ) | ||||||||||||||||||||
Defined-benefit postretirement plans: |
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Amortization of net actuarial loss on defined benefit plans |
(1 | ) | (1 | ) | ||||||||||||||||||||
Cash-flow hedges: |
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Reclassification adjustment to net income (loss) |
1 | 1 | ||||||||||||||||||||||
Foreign currency translation adjustment |
(1 | ) | (1 | ) | ||||||||||||||||||||
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Comprehensive income (loss) |
$ | (221 | ) | |||||||||||||||||||||
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Equity awards (Note 8) |
(1 | ) | (1 | ) | ||||||||||||||||||||
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Balance at June 30, 2011 |
100 | $ | | $ | 812 | $ | (1,398 | ) | $ | (293 | ) | $ | (879 | ) | ||||||||||
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FIRST HALF ENDED JUNE 30, 2010
Dollars in millions
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive Income |
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Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||||||
Balance at December 31, 2009 |
100 | $ | | $ | 791 | $ | (522 | ) | $ | (255 | ) | $ | 14 | |||||||||||
Comprehensive income (loss): |
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Net income (loss) |
(349 | ) | (349 | ) | ||||||||||||||||||||
Amortization of net actuarial loss on defined benefit plans |
1 | 1 | ||||||||||||||||||||||
Cash-flow hedges: |
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Change in unrealized gains (losses), net of tax benefit of $1 |
(1 | ) | (1 | ) | ||||||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $1 |
1 | 1 | ||||||||||||||||||||||
Foreign currency translation adjustment |
1 | 1 | ||||||||||||||||||||||
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Comprehensive income (loss) |
$ | (347 | ) | |||||||||||||||||||||
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Equity awards (Note 8) |
20 | 20 | ||||||||||||||||||||||
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Balance at June 30, 2010 |
100 | $ | | $ | 811 | $ | (871 | ) | $ | (253 | ) | $ | (313 | ) | ||||||||||
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See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FIRST HALF ENDED JUNE 30, 2011 AND 2010
Dollars in millions
NewPage Holding | NewPage | |||||||||||||||
First Half | First Half | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
$ | (229 | ) | $ | (358 | ) | $ | (220 | ) | $ | (349 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
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Depreciation and amortization |
121 | 135 | 121 | 135 | ||||||||||||
Non-cash interest expense |
35 | 32 | 26 | 23 | ||||||||||||
(Gain) loss on disposal and impairment of assets |
5 | 8 | 5 | 8 | ||||||||||||
Non-cash U.S. pension expense |
11 | 17 | 11 | 17 | ||||||||||||
Equity award expense (Note 8) |
(1 | ) | 19 | (1 | ) | 19 | ||||||||||
Change in operating assets and liabilities |
56 | 20 | 56 | 20 | ||||||||||||
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Net cash provided by (used for) operating activities |
(2 | ) | (127 | ) | (2 | ) | (127 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
(33 | ) | (31 | ) | (33 | ) | (31 | ) | ||||||||
Proceeds from sales of assets |
11 | 12 | 11 | 12 | ||||||||||||
Expenditures for Port Hawkesbury biomass project (Note 7) |
(19 | ) | (1 | ) | (19 | ) | (1 | ) | ||||||||
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Net cash provided by (used for) investing activities |
(41 | ) | (20 | ) | (41 | ) | (20 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of long-term debt |
| 67 | | 67 | ||||||||||||
Payment of financing costs |
(1 | ) | (4 | ) | (1 | ) | (4 | ) | ||||||||
Borrowings on revolving credit facility |
582 | 442 | 582 | 442 | ||||||||||||
Payments on revolving credit facility |
(543 | ) | (358 | ) | (543 | ) | (358 | ) | ||||||||
Proceeds from NSPI for Port Hawkesbury biomass project (Note 7) |
5 | | 5 | | ||||||||||||
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Net cash provided by (used for) financing activities |
43 | 147 | 43 | 147 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
1 | 2 | 1 | 2 | ||||||||||||
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Net increase (decrease) in cash and cash equivalents |
1 | 2 | 1 | 2 | ||||||||||||
Cash and cash equivalents at beginning of period |
8 | 5 | 8 | 5 | ||||||||||||
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Cash and cash equivalents at end of period |
$ | 9 | $ | 7 | $ | 9 | $ | 7 | ||||||||
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SUPPLEMENTAL INFORMATION |
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Cash paid for interest |
$ | 170 | $ | 179 | $ | 170 | $ | 179 | ||||||||
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See notes to condensed consolidated financial statements.
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NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
NEWPAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dollars in millions, except per share amounts
1. | BASIS OF PRESENTATION |
NewPage Holding Corporation (NewPage Holding) is a holding company that owns all of the outstanding capital stock of NewPage Corporation. NewPage Corporation and its subsidiaries are engaged in manufacturing, marketing and distributing printing papers used primarily for commercial printing, magazines, catalogs, textbooks and labels. Our products include coated, uncoated, supercalendered, newsprint and specialty papers and market pulp. Our products are manufactured at multiple mills in the United States and one mill in Canada and are supported by multiple distribution and converting locations. We operate within one operating segment. The condensed consolidated financial statements include the accounts of NewPage Holding and all entities it controls. All intercompany transactions and balances have been eliminated.
Unless the context provides otherwise, the terms we, our and us refer to NewPage Holding and its consolidated subsidiaries, including NewPage Corporation, a separate public-reporting company. Unless otherwise noted, NewPage refers to NewPage Corporation and its consolidated subsidiaries. Other than NewPage Holdings debt obligation and related financing costs, interest expense and income tax effects, all other assets, liabilities, income, expenses, and cash flows presented for all periods represent those of its wholly-owned subsidiary, NewPage. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
These interim condensed consolidated financial statements have not been audited. However, in the opinion of management, these financial statements include all normal recurring adjustments necessary for a fair statement in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with U.S. GAAP have been condensed or omitted. The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the annual financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.
2. | FINANCIAL INSTRUMENTS |
Derivative Financial Instruments
We periodically use derivative financial instruments as part of our overall strategy to manage exposure to market risks associated with foreign currency exchange rate and natural gas price fluctuations. We do not hold or issue derivative financial instruments for trading purposes. We regularly monitor the credit-worthiness of the counterparties to our derivative instruments in order to manage our credit risk exposures under these agreements. Our risk of loss in the event of nonperformance by any counterparty under derivative financial instrument agreements is not considered material by management. These derivative instruments are measured at fair value and are classified as other assets or other long-term obligations on our balance sheets depending on the fair value of the instrument.
If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash-flow hedge, the effective portion of the change in the fair value of the derivative is recorded in
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accumulated other comprehensive income (loss) and is recognized in the consolidated statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash-flow hedges and financial instruments not designated as hedges are recognized in earnings.
Interest Rates
We measure the fair values of our interest rate swaps using observable interest-rate yield curves for comparable assets and liabilities at commonly quoted intervals. As of June 30, 2011 and December 31, 2010, we had no interest rate swaps outstanding. We recognized in interest expense a (gain) loss of $(1) and $3 for the second quarter and first half ended June 30, 2010, for interest rate swaps that did not qualify for hedge accounting. We paid cash of $6 and $13 on our interest rate agreements for the second quarter and first half ended June 30, 2010. Also, during the first quarter of 2010, we locked in the floating rate components of the remaining interest rate swaps and subsequently settled the remaining liability in the third quarter of 2010.
Natural Gas
In order to hedge the future cost of natural gas consumed at our mills, we engage in financial hedging of future gas purchase prices, designated as cash flow hedges. We hedge with financial instruments that are priced based on New York Mercantile Exchange natural gas futures contracts. We do not hedge basis (the effect of varying delivery points or locations) or transportation costs (the cost to transport the gas from the delivery point to a company location) under these transactions. As of June 30, 2011 and December 31, 2010, we were party to natural gas futures contracts for notional amounts aggregating 320,000 and 800,000 MMBTUs, which expire through October 2011. We measure the fair values of our natural gas contracts based on natural gas futures contracts priced on the New York Mercantile Exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2011 and December 31, 2010, the fair values and carrying amounts of our financial assets and liabilities measured on a recurring basis are as follows:
Significant other observable inputs (Level 2) | June 30, 2011 |
Dec. 31, 2010 |
||||||
Qualifying as hedges |
||||||||
Other long-term liabilitiesnatural gas contracts |
$ | (1 | ) | $ | (2 | ) |
The amount of gain (loss) on cash flow hedges recognized in accumulated other comprehensive income (loss) (AOCI) and the amount reclassified to income (loss) during the second quarter and first half ended June 30, 2011 and 2010 are as follows:
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Derivative Type | Amount of gain (loss) recognized in OCI |
Location of gain (loss) reclassified from AOCI to income (loss) |
Amount of gain (loss) reclassified from AOCI to income (loss) |
|||||||||
Second Quarter Ended June 30, 2011 |
||||||||||||
Natural gas contracts |
$ | | Cost of sales | $ | | |||||||
First Half Ended June 30, 2011 |
||||||||||||
Natural gas contracts |
| Cost of sales | (1 | ) | ||||||||
Second Quarter Ended June 30, 2010 |
||||||||||||
Natural gas contracts |
| Cost of sales | (1 | ) | ||||||||
First Half Ended June 30, 2010 |
||||||||||||
Natural gas contracts |
(2 | ) | Cost of sales | (2 | ) |
Assets and Liabilities Not Carried at Fair Value
The fair value of long-term debt is based upon quoted market prices for the same or similar issues or on the current interest rates available to us for debt of similar terms and maturities. At June 30, 2011 and December 31, 2010, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value. Details of our long-term debt are as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Fair Value |
Carrying Amount |
Fair Value |
Carrying Amount |
|||||||||||||
Long-term debt: |
||||||||||||||||
NewPage Holding |
$ | (2,125 | ) | $ | (3,282 | ) | $ | (2,456 | ) | $ | (3,224 | ) | ||||
NewPage |
(2,118 | ) | (3,054 | ) | (2,425 | ) | (3,005 | ) |
Other Fair Value Disclosures
See Note 4 for fair value information of assets held for sale recorded at fair value.
3. | INVENTORIES |
Inventories as of June 30, 2011 and December 31, 2010 consist of:
June 30, 2011 |
Dec. 31, 2010 |
|||||||
Finished and in-process goods |
$ | 288 | $ | 298 | ||||
Raw materials |
72 | 91 | ||||||
Stores and supplies |
134 | 134 | ||||||
|
|
|
|
|||||
$ | 494 | $ | 523 | |||||
|
|
|
|
If inventories had been valued at current costs, they would have been valued at $496 and $496 at June 30, 2011 and December 31, 2010.
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4. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment includes approximately $33 in net book value of assets held for sale as of June 30, 2011. The assets held for sale are classified as Level 3 for the use of inputs in determining fair value.
5. | ACCOUNTS PAYABLE |
Accounts payable as of June 30, 2011 and December 31, 2010 includes $36 and $31 of outstanding checks in excess of cash.
6. | LONG-TERM DEBT |
The balances of long-term debt as of June 30, 2011 and December 31, 2010 are as follows:
June 30, | Dec. 31, | |||||||
2011 | 2010 | |||||||
NewPage: |
||||||||
Revolving credit facility |
$ | 131 | $ | 92 | ||||
11.375% first-lien senior secured notes (face amount $1,770) |
1,692 | 1,684 | ||||||
Floating rate second-lien senior secured notes (LIBOR plus 6.25%) |
225 | 225 | ||||||
10% second-lien senior secured notes (face amount $806) |
806 | 805 | ||||||
12% senior subordinated notes (face amount $200) |
200 | 199 | ||||||
Capital lease |
153 | 152 | ||||||
|
|
|
|
|||||
Total long-term debt, including current portion |
3,207 | 3,157 | ||||||
Current portion of long-term debt |
2,854 | | ||||||
|
|
|
|
|||||
Subtotal |
353 | 3,157 | ||||||
NewPage Holding |
||||||||
Senior unsecured NewPage Holding PIK Notes (face amount $232 and $224; LIBOR plus 7.00%) |
228 | 219 | ||||||
|
|
|
|
|||||
Long-term debt |
$ | 581 | $ | 3,376 | ||||
|
|
|
|
In January 2011, we amended our revolving credit facility to extend its termination date. For those lenders who accepted this amendment (aggregating to $470), the revolving credit facility matures on December 21, 2012, unless we do not repay or refinance our floating rate and 10% second-lien senior secured notes (Second-Lien Notes) by December 2, 2011, in which case the revolving credit facility matures on March 1, 2012. For the remaining $30 of commitment, the revolving credit facility matures on October 3, 2011, rather than December 21, 2012, as a result of not refinancing our Second-Lien Notes by July 4, 2011.
The 11.375% senior secured first-lien notes (the First-Lien Notes) mature on the earlier of (i) December 31, 2014 or (ii) the date that is 31 days prior to the maturity date of the Second-Lien Notes, the senior subordinated notes, the NewPage Holding PIK notes or any refinancing thereof. The Second-Lien Notes mature on May 1, 2012. However, if we do not repay or refinance our Second-Lien Notes by January 31, 2012, the First-Lien Notes would mature on March 31, 2012. The senior subordinated notes mature on May 1, 2013. The NewPage Holding PIK Notes mature on November 1, 2013.
As of June 30, 2011, our current liabilities exceeded our current assets by $2,502. This deficit results from the classification of our First-Lien Notes, our Second-Lien Notes, and our revolving credit facility as current liabilities. Also, as of June 30, 2011, we have $48 in deferred financing costs, including $47 for
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NewPage, recorded in other assets. We have retained advisors to assist us in exploring various restructuring alternatives and are engaged in discussions with various stakeholders to address our ongoing capital needs. We cannot assure you that we will be able to refinance any of our indebtedness, or that we will be able to do so on commercially reasonable terms. If we are unable to refinance our debt or generate sufficient cash flow to service our obligations, we will be required to seek to restructure our existing debt or to voluntarily seek, or be forced to seek, protection under the Chapter 11 of the U.S. Bankruptcy Code and applicable Canadian laws. Any such actions would have a material adverse effect on our financial condition, the value of the outstanding debt and our ability to make required cash payments under our indebtedness.
7. | PORT HAWKESBURY BIOMASS PROJECT |
In November 2010, NewPage Port Hawkesbury Corp. (NPPH), an indirect wholly-owned subsidiary of NewPage, completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to Nova Scotia Power Inc. (NSPI) for a cash sales price of $79. The assets and proceeds of this sale will remain on our books until the completion of the construction phase (proceeds will be shown as a long-term liability).
In addition, NSPI and NPPH entered into a construction agreement for NPPH to construct for NSPI a biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93. All costs of construction up to C$93 will be paid or reimbursed by NSPI. All costs paid directly by NSPI will be excluded from our consolidated statement of cash flows. For the first half ended June 30, 2011, direct payments made by NSPI totaled $10. As part of the construction agreement, NPPH is subject to damages for failure to complete certain milestones on time, subject to limitations as provided in the agreement. In addition, NewPage issued a performance guarantee to NSPI, subject to a limitation of C$29, if NPPH defaults on the agreement. NewPage also issued a letter of credit of $10 to NSPI in November 2010 and an additional letter of credit of $5 in January 2011 in accordance with the terms of the construction agreement. All construction costs incurred, both directly and indirectly, will become other assets and all reimbursements and direct payments by NSPI will become long-term liabilities, pending completion of the construction. Upon completion of the construction phase, all the previously described assets and liabilities will be de-recognized from the balance sheet and recognized as (gain) loss on sale of assets in the statement of operations.
NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for and under the control of NSPI for an initial period of 25 years plus the period prior to completion of the turbine, with three automatic five-year renewal terms, unless notice of termination is given. In exchange for these services, NPPH will receive payment from NSPI based upon the amount of energy produced and NPPH will receive a portion of the steam generated from the utility plant for its needs. NPPH is subject to liquidated damages in the event that a minimum level of output is not achieved. In addition, NewPage issued a performance guarantee to NSPI, subject to a limitation of C$15, if NPPH defaults on the agreement.
8. | EQUITY |
Included in selling, general and administrative expenses for the second quarter and first half ended June 30, 2011 is equity award expense of $1 and an adjustment to equity award expense of $(2) associated with the forfeiture of unvested stock options during the second quarter of 2011. Included in selling, general and administrative expenses for the second quarter and first half ended June 30, 2010 is equity award expense of $11 and $19. In February 2010, the compensation committee amended the outstanding stock option awards of employees and directors to change the exercise price to $2.00 per share and to vest the unearned performance-based options for 2008 and 2009. Included in the amount of equity award expense
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for the second quarter and first half ended June 30, 2010 is $1 and $7 to reflect the effects of the modification on the vested time-based options and the vesting of the prior-year unearned performance-based options. Also included in the amount of equity award expense for the second quarter and first half ended June 30, 2010 is $4 of remaining unamortized grant-date fair value relating to the accelerated vesting of stock options previously awarded to certain former executive officers. In accordance with their stock option agreements, upon their separation all of their outstanding stock options became vested. None of these options were exercised by the executive officers.
The following table summarizes activity in the plan:
Shares of NewPage Group issuable under stock options, in thousands |
Options | Weighted- average exercise price |
||||||
Outstanding at December 31, 2010 |
3,250 | $ | 1.95 | |||||
Granted |
379 | 2.00 | ||||||
Forfeited or expired |
(888 | ) | 2.00 | |||||
|
|
|||||||
Outstanding at June 30, 2011 |
2,741 | 1.94 | ||||||
|
|
|||||||
Exercisable at June 30, 2011 |
1,632 | 2.00 | ||||||
|
|
The outstanding options and the exercisable options at June 30, 2011 have a weighted-average remaining contractual life of 6.7 years.
We utilize a Black-Scholes pricing model to determine the fair value of options granted. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors (term of option). We estimate the expected term of options granted by incorporating the contractual term of the options and employees expected exercise behaviors. We estimate the volatility of NewPage Groups common stock by considering volatility of appropriate peer companies and adjusting for factors unique to our stock, including the effect of debt leverage.
Assumptions used to determine the fair value of option grants are as follows:
First Half | ||||||||
Ended June 30, | ||||||||
2011 | 2010 | |||||||
Weighted-average fair value of options granted |
$ | 0.38 | $ | 2.68 | ||||
Weighted-average assumptions used for grants: |
||||||||
Expected volatility |
90 | % | 90 | % | ||||
Risk-free interest rate |
2.4 | % | 2.0 | % | ||||
Expected life of option (in years) |
5 | 4 |
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9. | RETIREMENT AND OTHER POSTRETIREMENT BENEFITS |
A summary of the components of net periodic costs for the second quarter and first half ended June 30, 2011 and 2010 is as follows:
Pension Plans
U.S. Plans | Canadian Plans | |||||||||||||||
Second Quarter Ended June 30, |
Second Quarter Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 4 | $ | 6 | $ | 1 | $ | 1 | ||||||||
Interest cost |
16 | 16 | 5 | 5 | ||||||||||||
Expected return on plan assets |
(18 | ) | (17 | ) | (6 | ) | (5 | ) | ||||||||
Amortization of net loss |
3 | 3 | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic cost |
$ | 5 | $ | 8 | $ | 1 | $ | 1 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Plans | Canadian Plans | |||||||||||||||
First Half Ended June 30, |
First Half Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 8 | $ | 12 | $ | 2 | $ | 2 | ||||||||
Interest cost |
32 | 32 | 10 | 10 | ||||||||||||
Expected return on plan assets |
(35 | ) | (33 | ) | (11 | ) | (10 | ) | ||||||||
Amortization of net loss |
6 | 6 | 2 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic cost |
$ | 11 | $ | 17 | $ | 3 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
Other Postretirement Plans
U.S. Plans | Canadian Plans | |||||||||||||||
Second Quarter Ended June 30, |
Second Quarter Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | | $ | 1 | $ | | $ | 1 | ||||||||
Interest cost |
2 | 1 | | | ||||||||||||
Amortization of net prior service cost (credit) |
(3 | ) | (3 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic cost (income) |
$ | (1 | ) | $ | (1 | ) | $ | | $ | 1 | ||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Plans | Canadian Plans | |||||||||||||||
First Half Ended June 30, |
First Half Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 1 | $ | 1 | $ | | $ | 1 | ||||||||
Interest cost |
3 | 3 | | | ||||||||||||
Amortization of net prior service cost (credit) |
(6 | ) | (6 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic cost (income) |
$ | (2 | ) | $ | (2 | ) | $ | | $ | 1 | ||||||
|
|
|
|
|
|
|
|
Workers at our Central Wisconsin, Escanaba, and Rumford mills ratified collective bargaining agreements with various unions during and subsequent to the first half of 2011. These collective bargaining agreements in the aggregate will result in a re-measurement of our U.S. Plans in the third
15
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quarter of 2011. The change in pension and other postretirement expense for 2011 is not expected to be material.
During the second quarter 2011, a supplemental retirement plan for certain Port Hawkesbury employees was fully funded with a cash contribution of $12, which resulted in a net pension asset of $4.
10. | OTHER (INCOME) EXPENSE |
Other (income) expense during the first half ended June 30, 2011 and 2010 was $(1) and $(3). The amount recognized in the first half of 2010 includes $11 of net loss on disposal and impairment of assets, offset by $(13) of (income) recognized for alternative fuel mixture tax credits.
11. | INCOME TAXES |
For the second quarter and first half ended June 30, 2011 and 2010, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits.
12. | RESTRUCTURING |
Whiting Mill Closure
In February 2011, we permanently closed our Whiting, Wisconsin mill. Approximately 360 employees at the facility were affected. We made the decision to close the facility in order to better align capacity with market demand. As a result of this action, including the evaluation of capacity needs, during the fourth quarter of 2010, we recorded asset impairment charges for the Whiting mill and the previously-closed Kimberly mill of $196 in other (income) expense and classified these assets as held for sale. During the first half of 2011, we recognized $5 of employee-related costs recorded in cost of sales. In addition, during the second quarter and first half of 2011, we recognized $1 and $3 in cost of sales for contract termination and other closure related costs and we expect to recognize additional charges in cost of sales of approximately $14 for contract termination and other closure related costs during 2011 and subsequent years as contract terms expire. The facility closure and related activities have been substantially completed during the first half of 2011. The severance and other closure cost require the outlay of cash while the asset impairment charge represents a non-cash charge.
The activity in the accrued restructuring liability relating to these actions for the first half ended June 30, 2011 was as follows:
Closure | Employee | |||||||
Costs | Costs | |||||||
Balance accrued at December 31, 2010 |
$ | | $ | 2 | ||||
Current charges |
3 | 5 | ||||||
Payments |
(3 | ) | (5 | ) | ||||
|
|
|
|
|||||
Balance accrued at June 30, 2011 |
$ | | $ | 2 | ||||
|
|
|
|
13. | DISPOSITION OF ASSETS |
In March 2011, Rumford Paper Company (Rumford), a wholly-owned subsidiary of NewPage, and Rumford Cogeneration Company Limited Partnership, a subsidiary of Rumford, both indirect subsidiaries of NewPage Holding, entered into an Asset Sale Agreement for the sale of Rumfords cogeneration
16
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energy assets to ReEnergy Rumford LLC (ReEnergy) for a sale price of $61, payable one-half in cash at closing and one-half in the form of a 10-year note receivable. The transaction also contemplates an ongoing contractual relationship between the parties, pursuant to which Rumford will supply biomass fuel to ReEnergy and ReEnergy will supply electricity and thermal energy to Rumford. The transaction is not expected to have a material effect on the operating costs of the Rumford mill. We plan to invest the net cash proceeds in our business or use the proceeds to repay indebtedness, or both, in accordance with the terms of our debt instruments. The transaction is subject to various conditions, including the receipt of regulatory approvals and the finalization of agreements outlined in term sheets. It is uncertain whether or when this transaction will close, as certain conditions to closing the transaction may not be satisfied. We are exploring options to address these conditions.
In February 2010, CWPCo announced that it signed an agreement with Wisconsin Rapids Water Works Lighting Commission to sell the CWPCo Utility, as amended. The purchase price will be equal to the net book value of the assets at the time of closing, subject to adjustment in the agreement. The transaction remains subject to regulatory approvals. It is uncertain whether or when this transaction will close, as certain conditions to closing the transaction may not be satisfied. We are exploring options to address these conditions. On November 1, 2010, CWPCo entered into an asset sale agreement to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70. The closing of the transaction is subject to completion of the CWPCo Utility sale and regulatory approval. We continue to hold and use the assets in the normal course of our operations.
14. | COMMITMENTS AND CONTINGENCIES |
In a notice dated January 25, 2011, staff at the Federal Energy Regulatory Commission, or FERC, reported that they had preliminarily determined that our subsidiary, Rumford Paper Company, or Rumford, violated FERC regulations in connection with Rumfords participation in ISO-New Englands Day Ahead Load Response Program from July 2007 through February 2008. Under the program, participants were paid to reduce their electrical load on the New England power grid from their baseline load levels. FERC asserts that Rumford improperly established and maintained an artificially high baseline, allowing it to receive increased payments under the program. Rumford cooperated with FERC throughout its investigation and has denied any wrongdoing.
Claims have been made against us for the costs of environmental remediation measures taken or to be taken. We are also involved in various other litigation and administrative proceedings arising in the normal course of business. Reserves for these liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. Although the ultimate outcome of these matters cannot be predicted with certainty, we do not believe that the currently expected outcome of any matter, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on our financial condition, results of operations or liquidity.
15. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income (ASU 2011-05). The amendments in this ASU require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for us as of January 1, 2012 and is to be applied on a retrospective basis. The adoption of this standard will only impact the presentation of our consolidated financial statements.
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In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04) . The amendments in this ASU clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and enhances disclosures about fair value measurements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for us as of January 1, 2012 and is to be applied on a prospective basis. The adoption of ASU 2011-04 is not expected to have a material effect on our consolidated financial position, results of operations and cash flows.
16. | SUPPLEMENTAL CONSOLIDATING INFORMATION |
NewPage has issued $1,770 face amount of First Lien Notes, $1,031 face amount of Second Lien Notes and $200 face amount of 12% senior subordinated notes. These notes are jointly and severally guaranteed on a full and unconditional basis by NewPages 100%-owned subsidiaries, except CWPCo and Rumford Cogeneration Company Limited Partnership, our non-guarantor subsidiaries.
The following condensed consolidating financial statements have been prepared from financial information on the same basis of accounting as the consolidated financial statements. Investments in our subsidiaries are accounted for under the equity method.
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2011
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 1 | $ | 8 | $ | | $ | 9 | ||||||||||
Accounts receivable |
191 | 55 | 1 | | 247 | |||||||||||||||
Inventories |
215 | 279 | | | 494 | |||||||||||||||
Other current assets |
16 | 8 | 1 | | 25 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
422 | 343 | 10 | | 775 | |||||||||||||||
Intercompany receivables |
1,276 | 631 | 192 | (2,099 | ) | | ||||||||||||||
Property, plant and equipment, net |
25 | 2,383 | 47 | | 2,455 | |||||||||||||||
Investment in subsidiaries |
1,554 | 60 | | (1,614 | ) | | ||||||||||||||
Port Hawkesbury biomass project |
| 34 | | | 34 | |||||||||||||||
Other assets |
86 | 11 | 1 | | 98 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
TOTAL ASSETS |
$ | 3,363 | $ | 3,462 | $ | 250 | $ | (3,713 | ) | $ | 3,362 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||||||||||||||
Accounts payable |
$ | 59 | $ | 167 | $ | | $ | | $ | 226 | ||||||||||
Other current liabilities |
90 | 103 | 4 | | 197 | |||||||||||||||
Current maturities of long-term debt |
2,854 | | | | 2,854 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
3,003 | 270 | 4 | | 3,277 | |||||||||||||||
Intercompany payables |
623 | 1,300 | 176 | (2,099 | ) | | ||||||||||||||
Long-term debt |
200 | 153 | | | 353 | |||||||||||||||
Proceeds from NSPI for Port Hawkesbury biomass project |
| 95 | | | 95 | |||||||||||||||
Other long-term liabilities |
416 | 90 | 10 | | 516 | |||||||||||||||
Equity (deficit) |
(879 | ) | 1,554 | 60 | (1,614 | ) | (879 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) |
$ | 3,363 | $ | 3,462 | $ | 250 | $ | (3,713 | ) | $ | 3,362 | |||||||||
|
|
|
|
|
|
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|
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1 | $ | | $ | 7 | $ | | $ | 8 | ||||||||||
Accounts receivable |
226 | 65 | 1 | | 292 | |||||||||||||||
Inventories |
218 | 305 | | | 523 | |||||||||||||||
Other current assets |
12 | 7 | 1 | | 20 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
457 | 377 | 9 | | 843 | |||||||||||||||
Intercompany receivables |
1,250 | 504 | 162 | (1,916 | ) | | ||||||||||||||
Property, plant and equipment, net |
26 | 2,485 | 47 | | 2,558 | |||||||||||||||
Port Hawkesbury biomass project |
| 5 | | | 5 | |||||||||||||||
Investment in subsidiaries |
1,554 | 57 | | (1,611 | ) | | ||||||||||||||
Other assets |
98 | 6 | 1 | | 105 | |||||||||||||||
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|
|
|
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|
|
|||||||||||
TOTAL ASSETS |
$ | 3,385 | $ | 3,434 | $ | 219 | $ | (3,527 | ) | $ | 3,511 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||||||||||||||
Accounts payable |
$ | 50 | $ | 144 | $ | 1 | $ | | $ | 195 | ||||||||||
Other current liabilities |
71 | 133 | 6 | | 210 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
121 | 277 | 7 | | 405 | |||||||||||||||
Intercompany payables |
504 | 1,267 | 145 | (1,916 | ) | | ||||||||||||||
Long-term debt |
3,005 | 152 | | | 3,157 | |||||||||||||||
Proceeds from NSPI for Port Hawkesbury biomass project |
| 80 | | | 80 | |||||||||||||||
Other long-term liabilities |
412 | 104 | 10 | | 526 | |||||||||||||||
Equity (Deficit) |
(657 | ) | 1,554 | 57 | (1,611 | ) | (657 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) |
$ | 3,385 | $ | 3,434 | $ | 219 | $ | (3,527 | ) | $ | 3,511 | |||||||||
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2011
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 778 | $ | 818 | $ | 16 | $ | (724 | ) | $ | 888 | |||||||||
Cost of sales |
772 | 823 | 16 | (724 | ) | 887 | ||||||||||||||
Selling, general and administrative expenses |
36 | | | | 36 | |||||||||||||||
Equity in (earnings) loss of subsidiaries |
10 | | | (10 | ) | | ||||||||||||||
Interest expense |
92 | 4 | | | 96 | |||||||||||||||
Other (income) expense, net |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(132 | ) | (10 | ) | | 10 | (132 | ) | ||||||||||||
Income tax (benefit) |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (132 | ) | $ | (10 | ) | $ | | $ | 10 | $ | (132 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FIRST HALF ENDED JUNE 30, 2011
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 1,576 | $ | 1,632 | $ | 35 | $ | (1,451 | ) | $ | 1,792 | |||||||||
Cost of sales |
1,537 | 1,625 | 34 | (1,451 | ) | 1,745 | ||||||||||||||
Selling, general and administrative expenses |
75 | 1 | | | 76 | |||||||||||||||
Equity in (earnings) loss of subsidiaries |
| (1 | ) | | 1 | | ||||||||||||||
Interest expense |
184 | 7 | | | 191 | |||||||||||||||
Other (income) expense, net |
| (1 | ) | | | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(220 | ) | 1 | 1 | (1 | ) | (219 | ) | ||||||||||||
Income tax (benefit) |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (220 | ) | $ | | $ | 1 | $ | (1 | ) | $ | (220 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2010
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 801 | $ | 818 | $ | 22 | $ | (751 | ) | $ | 890 | |||||||||
Cost of sales |
816 | 827 | 21 | (751 | ) | 913 | ||||||||||||||
Selling, general and administrative expenses |
57 | 1 | | | 58 | |||||||||||||||
Equity in (earnings) loss of subsidiaries |
12 | (1 | ) | | (11 | ) | | |||||||||||||
Interest expense |
89 | 3 | | | 92 | |||||||||||||||
Other (income) expense, net |
1 | (1 | ) | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(174 | ) | (11 | ) | 1 | 11 | (173 | ) | ||||||||||||
Income tax (benefit) |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (174 | ) | $ | (12 | ) | $ | 1 | $ | 11 | $ | (174 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FIRST HALF ENDED JUNE 30, 2010
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 1,533 | $ | 1,576 | $ | 43 | $ | (1,445 | ) | $ | 1,707 | |||||||||
Cost of sales |
1,568 | 1,597 | 42 | (1,445 | ) | 1,762 | ||||||||||||||
Selling, general and administrative expenses |
106 | 1 | | | 107 | |||||||||||||||
Equity in (earnings) loss of subsidiaries |
39 | (1 | ) | | (38 | ) | | |||||||||||||
Interest expense |
182 | 7 | | | 189 | |||||||||||||||
Other (income) expense, net |
(13 | ) | 10 | | | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(349 | ) | (38 | ) | 1 | 38 | (348 | ) | ||||||||||||
Income tax (benefit) |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (349 | ) | $ | (39 | ) | $ | 1 | $ | 38 | $ | (349 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST HALF ENDED JUNE 30, 2011
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||||||||||
Net cash provided by (used for) operating activities |
$ | (38 | ) | $ | 35 | $ | 1 | $ | | $ | (2 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
(1 | ) | (32 | ) | | | (33 | ) | ||||||||||||
Proceeds from sales of assets |
| 11 | | | 11 | |||||||||||||||
Expenditures for Port Hawkesbury biomass project |
| (19 | ) | | | (19 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used for) investing activities |
(1 | ) | (40 | ) | | | (41 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||||||||||
Payment of financing costs |
(1 | ) | | | | (1 | ) | |||||||||||||
Borrowings on revolving credit facility |
582 | | | | 582 | |||||||||||||||
Payments on revolving credit facility |
(543 | ) | | | | (543 | ) | |||||||||||||
Proceeds from NSPI for Port Hawkesbury biomass project |
| 5 | | | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used for) financing activities |
38 | 5 | | | 43 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalent |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
(1 | ) | 1 | 1 | | 1 | ||||||||||||||
Cash and cash equivalents at beginning of period |
1 | | 7 | | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 1 | $ | 8 | $ | | $ | 9 | ||||||||||
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST HALF ENDED JUNE 30, 2010
Non- | ||||||||||||||||||||
NewPage | Guarantor | Guarantor | Consolidation/ | |||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||||||||||
Net cash provided by (used for) operating activities |
$ | (143 | ) | $ | 14 | $ | 2 | $ | | $ | (127 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
(3 | ) | (28 | ) | | | (31 | ) | ||||||||||||
Proceeds from sales of assets |
| 12 | | | 12 | |||||||||||||||
Other investing activities |
| (1 | ) | | | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used for) investing activities |
(3 | ) | (17 | ) | | | (20 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||||||||||
Proceeds from issuance of long-term debt |
67 | | | | 67 | |||||||||||||||
Payment of financing costs |
(4 | ) | | | | (4 | ) | |||||||||||||
Borrowings on revolving credit facility |
442 | | | | 442 | |||||||||||||||
Payments on revolving credit facility |
(358 | ) | | | | (358 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used for) financing activities |
147 | | | | 147 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalent |
| 2 | | | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
1 | (1 | ) | 2 | | 2 | ||||||||||||||
Cash and cash equivalents at beginning of period |
1 | | 4 | | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | 2 | $ | (1 | ) | $ | 6 | $ | | $ | 7 | |||||||||
|
|
|
|
|
|
|
|
|
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24
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Company Background
We believe that we are the largest coated paper manufacturer in North America based on production capacity. Coated paper is used primarily in media and marketing applications, such as high-end advertising brochures, direct mail advertising, coated labels, magazines, magazine covers and inserts, catalogues and textbooks. We operate paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and Nova Scotia, Canada.
Trends in Our Business
North American coated paper demand is primarily driven by advertising and print media usage. In particular, the demand for certain grades of coated paper is affected by spending on catalogue and promotional materials by retailers and spending on magazine advertising, which affects the number of printed pages in magazines. During the first half of 2011, North American coated paper demand was lower compared to the first half of 2010. In February 2011, we realigned our capacity needs with the closure of our Whiting, Wisconsin mill and we did not take any market-related downtime in the first half of 2011. We took 39,000 tons of market-related downtime in the first half of 2010. We will consider the need for additional market-related downtime from time to time based on market conditions.
Coated paper production capacity in North America was lower during the first half of 2011 compared to the first half of 2010, primarily as a result of North American capacity closures, including the closure of our Whiting, Wisconsin mill in February 2011. We believe imports continue to affect the North American market, placing downward pressure on North American coated paper prices as a result of foreign overcapacity.
North American prices for coated paper products historically have been determined more by North American supply and demand than directly by raw material costs or other costs of sales. However, we believe that the announced capacity closures in coated papers and inflationary trends in producer input costs may put upward pressure on prices for our products. As a result, we expect average prices for coated paper in the second half of 2011 to be higher than the second half of 2010.
We experienced significant increases in our input costs during the first half of 2011 compared to the first half of 2010, due to higher prices for wood, chemicals and purchased pulp. In particular, costs of certain petroleum-based chemicals and transportation costs have increased during the first half of 2011 compared to the first half of 2010, principally as a result of increases in the price of crude oil. Because of the lag time between the change in oil prices and the change in costs of certain petroleum-based chemicals, we anticipate this trend will continue throughout 2011. Overall, we expect crude oil and energy costs to remain volatile for the foreseeable future.
Port Hawkesbury Biomass Project
On November 3, 2010, NewPage Port Hawkesbury Corp. (NPPH), an indirect wholly-owned subsidiary of NewPage, completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to Nova Scotia Power Inc. (NSPI) for a cash sales price of $79 million. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by
25
Table of Contents
December 31, 2012 for approximately C$93 million. All costs of construction up to C$93 million will be paid or reimbursed by NSPI. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for and under the control of NSPI for an initial period of 25 years plus the period prior to completion of the turbine, with three automatic five-year renewal terms, unless notice of termination is given. See Note 7 to the consolidated financial statements.
Whiting Mill Closure
During the first quarter of 2011, we permanently closed our Whiting, Wisconsin mill. Approximately 360 employees at the facility were affected. We made the decision to close the facility in order to better align capacity with market demand. As a result of this action, including the evaluation of capacity needs, during the fourth quarter of 2010, we recorded asset impairment charges for the Whiting mill and the previously-closed Kimberly mill of $196 million in other (income) expense and classified these assets as held for sale. During the first half of 2011, we recognized $5 million of employee-related costs recorded in cost of sales. In addition, during the second quarter and first half of 2011, we recognized $1 million and $3 million in cost of sales for contract termination and other closure related costs and we expect to recognize additional charges in cost of sales of approximately $14 million for contract termination and other closure related costs during 2011 and subsequent years as contract terms expire. The facility closure and related activities have been substantially completed during the first half of 2011. The severance and other closure cost require the outlay of cash while the asset impairment charge represents a non-cash charge.
Results of Operations
The following tables set forth our historical results of operations for the second quarter and first half ended June 30, 2011 and 2010. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto included in this Quarterly Report. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of NewPage Holdings wholly-owned subsidiary, NewPage, except for NewPage Holdings debt and equity activity and income tax effects. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
Second Quarter 2011 Compared to Second Quarter 2010
NewPage Holding | ||||||||||||||||
Second Quarter Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(in millions) | $ | % | $ | % | ||||||||||||
Net sales |
888 | 100.0 | 890 | 100.0 | ||||||||||||
Cost of sales |
887 | 99.9 | 913 | 102.7 | ||||||||||||
Selling, general and administrative expenses |
36 | 4.1 | 58 | 6.5 | ||||||||||||
Interest expense |
100 | 11.3 | 97 | 10.8 | ||||||||||||
Other (income) expense, net |
1 | 0.2 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(136 | ) | (15.5 | ) | (178 | ) | (20.0 | ) | ||||||||
Income tax (benefit) |
| | 1 | 0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(136 | ) | (15.5 | ) | (179 | ) | (20.1 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Supplemental Information |
||||||||||||||||
Adjusted EBITDA |
$ | 32 | $ | 10 | ||||||||||||
|
|
|
|
26
Table of Contents
Net sales for the second quarter of 2011 were $888 million compared to $890 million for the second quarter of 2010, a decrease of $2 million or less than 1%. The decrease was primarily the result of lower sales volume of core paper ($74 million), partially offset by higher average core paper prices ($50 million) and higher sales volume and average prices of other non-core paper in the second quarter of 2011 compared to the second quarter of 2010. Core volume is principally coated freesheet, coated groundwood and supercalendered paper products sold in North America. Average core paper prices increased to $925 per ton in the second quarter of 2011 compared to $852 per ton in the second quarter of 2010. Core paper sales volume decreased to 774,000 tons in the second quarter of 2011 compared to 868,000 tons in the second quarter of 2010. We did not take any market-related downtime during the second quarter of 2011 or 2010. We will consider the need for additional downtime from time to time based on market conditions.
Cost of sales for the second quarter of 2011 was $887 million compared to $913 million for the second quarter of 2010, a decrease of $26 million, or 3%. The decrease was primarily a result of lower core paper sales volume ($65 million), partially offset by inflation on input costs and increased maintenance expense, as a result of required planned major maintenance. In addition, during the second quarter of 2011, in connection with the closure of the Whiting mill, we recognized charges of $1 million for contractual termination and other closure related costs in cost of sales. During the second quarter of 2010, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $4 million for employee-related costs in cost of sales. Gross margin (loss) for the second quarter of 2011 was 0.1% compared to (2.7)% for the second quarter of 2010. This improvement was primarily driven by higher average core paper sale prices ($50 million), partially offset by inflation on input costs during second quarter of 2011 compared to the same period in 2010. Also, during the second quarter of 2011, we were unable to operate our Wickliffe mill for 21 days as a result of the Mississippi river flooding, which had a negative impact of approximately $7 million.
Maintenance expense at our mills totaled $91 million and $86 million in the second quarter of 2011 and 2010. We expect to incur higher maintenance expense during the third quarter of 2011 compared to the same period in 2010, as a result of required planned major maintenance.
Selling, general and administrative expenses decreased to $36 million for the second quarter of 2011 from $58 million for the second quarter of 2010, primarily as a result of $12 million lower non-cash stock compensation expense, benefits from cost reduction initiatives and lower pension expense partially offset by higher costs associated with the services of several advisors assisting us in exploring various restructuring alternatives. In addition, selling, general and administrative expenses for the second quarter of 2010, included $6 million in employee-related costs, primarily associated with certain former executive officers. As a percentage of net sales, selling, general and administrative expenses improved in the second quarter of 2011 to 4.1% from 6.5% in the second quarter of 2010.
Interest expense for the second quarter of 2011 was $100 million compared to $97 million for the second quarter of 2010. Interest expense for NewPage for the second quarter of 2011 was $96 million compared to $92 million for the second quarter of 2010.
Other (income) expense was $1 million for the second quarter of 2011 and zero for the second quarter of 2010.
Income tax expense (benefit) for the second quarter of 2011 and 2010 was zero and $1 million. For the second quarter of 2011 and 2010, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits.
27
Table of Contents
Net income (loss) was $(136) million in the second quarter of 2011 compared to $(179) million in the second quarter of 2010. Net income (loss) for NewPage was $(132) million in the second quarter of 2011 compared to $(174) million in the second quarter of 2010. The improvements were primarily the result of higher average paper prices and cost reductions partially offset by inflation on input costs.
Adjusted EBITDA was $32 million for the second quarter of 2011 compared to $10 million for the second quarter of 2010. See Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA for further information on the use of EBITDA and Adjusted EBITDA as measurement tools.
First Half 2011 Compared to First Half 2010
NewPage Holding | ||||||||||||||||
First Half Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(in millions) | $ | % | $ | % | ||||||||||||
Net sales |
1,792 | 100.0 | 1,707 | 100.0 | ||||||||||||
Cost of sales |
1,745 | 97.4 | 1,762 | 103.2 | ||||||||||||
Selling, general and administrative expenses |
76 | 4.3 | 107 | 6.3 | ||||||||||||
Interest expense |
200 | 11.2 | 198 | 11.6 | ||||||||||||
Other (income) expense, net |
(1 | ) | (0.1 | ) | (3 | ) | (0.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(228 | ) | (12.8 | ) | (357 | ) | (20.9 | ) | ||||||||
Income tax (benefit) |
1 | 0.1 | 1 | 0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(229 | ) | (12.9 | ) | (358 | ) | (21.0 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Supplemental Information |
||||||||||||||||
Adjusted EBITDA |
$ | 117 | $ | 25 | ||||||||||||
|
|
|
|
Net sales for the first half of 2011 were $1,792 million compared to $1,707 million for the first half of 2010, an increase of $85 million or 5%. The increase was primarily the result of higher average core paper prices ($92 million) and higher average other non-core paper prices, partially offset by lower sales volume of core paper ($39 million) in the first half of 2011 compared to the first half of 2010. Average core paper prices increased to $918 per ton in the first half of 2011 compared to $855 per ton in the first half of 2010. Core paper sales volume decreased to 1,603,000 tons in the first half of 2011 compared to 1,660,000 tons in the first half of 2010. In February 2011, we realigned our capacity needs with the closure of our Whiting, Wisconsin mill and we did not take any market-related downtime in the first half of 2011. We took 39,000 tons of market-related downtime in the first half of 2010.
Cost of sales for the first half of 2011 was $1,745 million compared to $1,762 million for the first half of 2010, a decrease of $17 million or 1%. The decrease was primarily the result of lower core paper sales volume ($38 million), partially offset by inflation on input costs and increased maintenance expense as a result of required planned major maintenance. In addition, during the first half of 2011, in connection with the closure of the Whiting mill, we recognized charges of $5 million for employee-related costs and $3 million for contractual termination and other closure related costs in cost of sales. During the second quarter of 2010, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $4 million for employee-related costs in cost of sales. Gross margin (loss) for the first half of 2011 was 2.6% compared to (3.2)% for the first half of 2010. This improvement was primarily driven by higher average core paper sales prices ($92 million) partially offset by inflation on input costs during the first half of 2011 compared to the same period in 2010. Also, during the second quarter of 2011, we were unable to operate our Wickliffe mill for 21 days as a result of the Mississippi river flooding, which had a negative impact of approximately $7 million.
28
Table of Contents
Maintenance expense at our mills totaled $163 million and $157 million in the first half of 2011 and 2010. We expect to incur higher maintenance expense during the second half of 2011 compared to the same periods in 2010, as a result of required planned major maintenance.
Selling, general and administrative expenses decreased to $76 million for the first half of 2011 from $107 million for the first half of 2010, primarily as a result of $20 million lower non-cash stock compensation expense, benefits from cost reduction initiatives and lower pension expense partially offset by higher costs associated with the services of several advisors assisting us in exploring various restructuring alternatives. In addition, selling, general and administrative expenses for the first half of 2010 included $6 million in employee-related costs primarily associated with certain former executive officers. As a percentage of net sales, selling, general and administrative expenses improved in the first half of 2011 to 4.3% from 6.3% in the first half of 2010.
Interest expense for the first half of 2011 was $200 million compared to $198 million for the first half of 2010. Interest expense for NewPage for the first half of 2011 was $191 million compared to $189 million for the first half of 2010.
Other (income) expense was $(1) million for the first half of 2011 and $(3) million for the first half of 2010. The amount recognized in the first half of 2010 includes $11 million of net loss on disposal and impairment of assets, offset by $(13) million of (income) recognized for alternative fuel mixture tax credits.
Income tax expense (benefit) for the first half of 2011 and 2010 was $1 million and $1 million. For the first half of 2011 and 2010, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits.
Net income (loss) was $(229) million in the first half of 2011 compared to $(358) million in the first half of 2010. Net income (loss) for NewPage was $(220) million in the first half of 2011 compared to $(349) million in the first half of 2010. The improvements were primarily the result of higher average paper prices and cost reductions partially offset by inflation on input costs.
Adjusted EBITDA was $117 million for the first half of 2011 compared to $25 million for the first half of 2010. See Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA for further information on the use of EBITDA and Adjusted EBITDA as measurement tools.
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA and Adjusted EBITDA are not measures of our performance under U.S. GAAP, are not intended to represent net income (loss), and should not be used as alternatives to net income (loss) as indicators of performance. EBITDA and Adjusted EBITDA are shown because they are bases upon which our management assesses performance and are primary components of certain covenants under our revolving credit facility. In addition, our management believes EBITDA and Adjusted EBITDA are useful to investors because they and similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. The use of EBITDA and Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
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| EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments |
| EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs |
| EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt |
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements |
| our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business.
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:
NewPage Holding | ||||||||||||||||
Second Quarter | First Half | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
(in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net income (loss) |
$ | (136 | ) | $ | (179 | ) | $ | (229 | ) | $ | (358 | ) | ||||
Interest expense |
100 | 97 | 200 | 198 | ||||||||||||
Income tax (benefit) |
| 1 | 1 | 1 | ||||||||||||
Depreciation and amortization |
59 | 67 | 121 | 135 | ||||||||||||
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EBITDA |
23 | (14 | ) | 93 | (24 | ) | ||||||||||
Equity awards |
(1 | ) | 11 | (1 | ) | 19 | ||||||||||
(Gain) loss on disposal and impairment of assets |
4 | 2 | 5 | 8 | ||||||||||||
Non-cash U.S. pension expense |
3 | 8 | 9 | 17 | ||||||||||||
Integration and related severance costs |
3 | 2 | 11 | 4 | ||||||||||||
Other |
| 1 | | 1 | ||||||||||||
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Adjusted EBITDA |
$ | 32 | $ | 10 | $ | 117 | $ | 25 | ||||||||
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Recently Issued Accounting Standards
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income (ASU 2011-05). The amendments in this ASU require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for us as of January 1, 2012 and is to be applied on a retrospective basis. The adoption of this standard will only impact the presentation of our consolidated financial statements.
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In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04) . The amendments in this ASU clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and enhances disclosures about fair value measurements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for us as of January 1, 2012 and is to be applied on a prospective basis. The adoption of ASU 2011-04 is not expected to have a material effect on our consolidated financial position, results of operations and cash flows.
Liquidity and Capital Resources
Available Liquidity
As of June 30, 2011, our principal sources of liquidity include cash generated from operating activities and availability under our revolving credit facility. The amount of borrowings and letters of credit available to NewPage pursuant to the revolving credit facility is limited to the lesser of $500 million or an amount determined by reference to a borrowing base ($409 million as of June 30, 2011). Under the revolving credit facility, $30 million of the $500 million commitment matures on October 3, 2011, rather than December 21, 2012, as a result of not refinancing our Second-Lien Notes by July 4, 2011. However, our borrowing base would have to exceed $470 million before this would affect availability under the revolving credit facility.
In January 2011, we amended our revolving credit facility to extend its termination date. For those lenders who accepted this amendment (aggregating to $470 million), the revolving credit facility matures on December 21, 2012, unless we do not repay or refinance our floating rate and 10% second-lien senior secured notes (Second-Lien Notes) by December 2, 2011, in which case the revolving credit facility matures on March 1, 2012. As of June 30, 2011, we had $127 million available for borrowing in excess of the $50 million required minimum, after reduction for $101 million in letters of credit and $131 million in outstanding borrowings under the revolving credit facility. During the first half of 2011, our average daily balance outstanding under our revolving credit facility was $85 million with a weighted-average interest rate of 4.4%.
The 11.375% senior secured first-lien notes (the First-Lien Notes) mature on the earlier of (i) December 31, 2014 or (ii) the date that is 31 days prior to the maturity date of the Second-Lien Notes, the senior subordinated notes, the NewPage Holding PIK notes or any refinancing thereof. The Second-Lien Notes mature on May 1, 2012. However, if we do not repay or refinance our Second-Lien Notes by January 31, 2012, the First-Lien Notes would mature on March 31, 2012. The senior subordinated notes mature on May 1, 2013. The NewPage Holding PIK Notes mature on November 1, 2013. Aggregate indebtedness as of June 30, 2011 totaled $3,517 million, which includes $3,285 million at NewPage.
As of June 30, 2011, our current liabilities exceeded our current assets by $2,502 million. This deficit results from the classification of our First-Lien Notes, our Second-Lien Notes, and our revolving credit facility as current liabilities. We have retained advisors to assist us in exploring various restructuring alternatives and are engaged in discussions with various stakeholders to address our ongoing capital needs. We cannot assure you that we will be able to refinance any of our indebtedness, or that we will be able to do so on commercially reasonable terms. If we are unable to refinance our debt or generate sufficient cash flow to service our obligations, we will be required to seek to restructure our existing debt or to voluntarily seek, or be forced to seek, protection under the Chapter 11 of the U.S. Bankruptcy Code and applicable Canadian laws. Any such actions would have a material adverse effect on our financial condition, the value of the outstanding debt and our ability to make required cash payments under our indebtedness.
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Cash Flows
Cash provided by (used for) operating activities was $(2) million during the first half of 2011 compared to $(127) million during the first half of 2010, primarily as a result of improvements in operations and working capital. Investing activities in first half of 2011 include $33 million for capital expenditures, $19 million of expenditures for the Port Hawkesbury biomass project and $11 million in proceeds from the sale of assets. Financing activities primarily consisted of borrowings and payments on the revolving credit facility and proceeds received for the Port Hawkesbury biomass project.
Capital Expenditures
Capital expenditures were $33 million and $31 million for the first half ended June 30, 2011 and 2010.
Financial Discussion
During the first quarter of 2011, we permanently closed our Whiting, Wisconsin mill. As a result of this action, during the fourth quarter of 2010, we recorded asset impairment charges for the Whiting mill and the previously-closed Kimberly mill of $196 million in other (income) expense and classified these assets as held for sale. During the first half of 2011, we recognized $5 million of employee-related costs recorded in cost of sales. In addition, during the second quarter and first half of 2011, we recognized $1 million and $3 million in cost of sales for contract termination and other closure related costs and we expect to recognize additional charges in cost of sales of approximately $14 million for contract termination and other closure related costs during 2011 and subsequent years as contract terms expire.
In March 2011, Rumford Paper Company (Rumford), a wholly-owned subsidiary of NewPage, and Rumford Cogeneration Company Limited Partnership, a subsidiary of Rumford, both indirect subsidiaries of NewPage Holding, entered into an Asset Sale Agreement for the sale of Rumfords cogeneration energy assets to ReEnergy Rumford LLC (ReEnergy) for a sale price of $61 million, payable one-half in cash at closing and one-half in the form of a 10-year note receivable. The transaction also contemplates an ongoing contractual relationship between the parties, pursuant to which Rumford will supply biomass fuel to ReEnergy and ReEnergy will supply electricity and thermal energy to Rumford. The transaction is not expected to have a material effect on the operating costs of the Rumford mill. We plan to invest the net cash proceeds in our business or use the proceeds to repay indebtedness, or both, in accordance with the terms of our debt instruments. The transaction is subject to various conditions, including the receipt of regulatory approvals and the finalization of agreements outlined in term sheets. It is uncertain whether or when this transaction will close, as certain conditions to closing the transaction may not be satisfied. We are exploring options to address these conditions.
On November 3, 2010, NPPH completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to NSPI for a cash sales price of $79 million. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93 million. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for NSPI. NPPH was required to post $10 million of letters of credit under these arrangements in 2010 and an additional $5 million in 2011. See Note 7 to the consolidated financial statements.
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In February 2010, CWPCo announced that it signed an agreement with Wisconsin Rapids Water Works Lighting Commission to sell the CWPCo Utility, as amended. The purchase price will be equal to the net book value of the assets at the time of closing, subject to adjustment in the agreement. The transaction remains subject to regulatory approvals. It is uncertain whether or when this transaction will close, as certain conditions to closing the transaction may not be satisfied. We are exploring options to address these conditions. On November 1, 2010, CWPCo entered into an asset sale agreement to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70 million. The closing of the transaction is subject to completion of the CWPCo Utility sale and regulatory approval. We continue to hold and use the assets in the normal course of our operations.
On March 21, 2011, U.S. Environmental Protection Agency (USEPA) finalized its Boiler MACT rule, which provides for Industrial Boiler Maximum Achievable Control Technology (MACT) standards to regulate emissions of hazardous air pollutants for industrial, commercial and institutional boilers and process heaters. Compliance with the final Boiler MACT rule is currently required no later than March 21, 2014. Our preliminary evaluation of the final Boiler MACT rule indicates significant capital expenditures for additional emission control equipment may be needed at our mills with solid fuel boilers to comply with the rule. In addition, our mills will incur increased operating expenses associated with compliance and operation of the new control equipment. USEPA has also announced they will be reconsidering portions of the Boiler MACT rule because the final rule differs from what was proposed. At this time it is not known what changes to the rule might occur as a result of the reconsideration process. We continue to follow the reconsideration process and will adjust our Boiler MACT compliance evaluation as needed for any changes to the compliance requirements.
We have various investments held by our defined-benefit pension plan trusts. The returns on these assets have generally matched the broader market. We are monitoring the effects of our underfunded pension plans on our minimum pension funding requirements and pension expense for future periods. We currently do not anticipate material increases in our minimum funding requirements during 2011.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
As of June 30, 2011 and December 31, 2010, $588 million and $541 million of our debt consisted of borrowings with variable interest rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow or compliance with our debt covenants. The potential annual increase in interest expense resulting from a 100 basis point increase in quoted interest rates on our debt balances outstanding at June 30, 2011 and December 31, 2010, would be $6 million and $5 million.
Foreign Currency Risk
Our Canadian subsidiary makes a portion of its purchases and sales in U.S. dollars. As a result, it is subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. Foreign currency exchange contracts may be used periodically to manage the variability in cash flows and revenues from the forecasted payment or receipt of currencies other than our functional currency, the U.S. dollar. As of June 30, 2011 and December 31, 2010, we had no foreign currency forward contracts outstanding.
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ITEM 4. | CONTROLS AND PROCEDURES |
We maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. In addition, a system of disclosure controls is maintained to ensure that information required to be disclosed is recorded, processed, summarized and reported in a timely manner to management responsible for the preparation and reporting of our financial information.
Management, with the participation of our chief executive officer and chief accounting officer, assessed the disclosure control systems as being effective as they encompass material matters for the quarter ended June 30, 2011. To the best of our knowledge, there were no changes in the internal controls over financial reporting that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS |
The United States Environmental Protection Agency, Region 5, or USEPA, conducted a Clean Air Act investigation at the Escanaba Paper Company mill from September 2009 through early October 2009. USEPA delivered draft findings of violations to Escanaba Paper Company in September 2010 (Finding of Violation EPA-5-10-MI-0). USEPA requested discussions concerning the allegations, which have resulted in the elimination of several of the allegations. In July 2011, USEPA and Escanaba Paper Company commenced discussions regarding fines and penalties concerning the remaining allegations.
In a notice dated January 25, 2011, staff at the Federal Energy Regulatory Commission, or FERC, reported that they had preliminarily determined that our subsidiary, Rumford Paper Company, or Rumford, violated FERC regulations in connection with Rumfords participation in ISO-New Englands Day Ahead Load Response Program from July 2007 through February 2008. Under the program, participants were paid to reduce their electrical load on the New England power grid from their baseline load levels. FERC asserts that Rumford improperly established and maintained an artificially high baseline, allowing it to receive increased payments under the program. Rumford cooperated with FERC throughout its investigation and has denied any wrongdoing.
In September 2009, NewPage, along with two other U.S. paper producers and the United Steelworkers Union, filed antidumping and countervailing duty petitions with the U.S. Department of Commerce and the U.S. International Trade Commission alleging that manufacturers of certain coated paper in China and Indonesia are dumping their products in the United States and that these manufacturers have been subsidized by their governments in violation of U.S. trade laws. Following affirmative final determinations by both the U.S. Department of Commerce and the U.S. International Trade Commission, the U.S. Department of Commerce imposed duties to offset the threat of dumping and government subsidies. Producers in China and Indonesia have appealed these determinations to the U.S. Court of International Trade. Pending a decision on the appeal, these duties will remain in effect for five years, subject to annual administrative reviews.
ITEM 5. | OTHER INFORMATION |
On August 12, 2011, NewPage and David J. Prystash agreed upon the terms of a settlement agreement regarding his employment agreement dated September 8, 2008, as amended, with NewPage. NewPage shall pay $600,000 in return for a full release from Mr. Prystash.
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ITEM 6. | EXHIBITS |
Exhibit Number |
Description | |
10.1 | Employment Agreement dated as of June 3, 2011 between NewPage Corporation and Jay A. Epstein | |
10.2 | Settlement Agreement dated as of August 12, 2011 between NewPage Corporation and David J. Prystash | |
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Accounting Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, NewPage Holding Corporation and NewPage Corporation have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.
NEWPAGE HOLDING CORPORATION | NEWPAGE CORPORATION | |||||||
By: | /s/ George F. Martin |
By: | /s/ George F. Martin | |||||
George F. Martin | George F. Martin | |||||||
President and Chief Executive Officer | President and Chief Executive Officer | |||||||
(Principal Executive Officer) | (Principal Executive Officer) | |||||||
Date: August 15, 2011 | Date: August 15, 2011 | |||||||
By: | /s/ Ronald J. Arling |
By: | /s/ Ronald J. Arling | |||||
Ronald J. Arling | Ronald J. Arling | |||||||
Controller and Chief Accounting Officer | Controller and Chief Accounting Officer | |||||||
(Principal Accounting Officer) | (Principal Accounting Officer) | |||||||
Date: August 15, 2011 | Date: August 15, 2011 |
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