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EX-21.1 - EXHIBIT 21.1 - Verso Corpexhibit2112312016.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K 
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2016
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
vrslogo.jpg

Verso Corporation
(Exact name of registrant as specified in its charter)

Delaware
 
001-34056
 
75-3217389
(State of Incorporation
or Organization)
 
(Commission File Number)
 
(IRS Employer
Identification Number)
 
 
 
 
 
 

 
6775 Lenox Center Court, Suite 400
Memphis, Tennessee 38115-4436
(Address, including zip code, of principal executive offices)
 
(901) 369-4100
(Registrants’ telephone number, including area code) 

Securities registered pursuant to section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
 
 
 
Class A common stock, $0.01 par value
 
New York Stock Exchange
 
Class B common stock, $0.01 par value
 
None
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
 
 
 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). þ Yes o No
 
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
 
 
 




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.
 
 
 
 
 
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
Smaller reporting company þ
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
 
 
 
 
 
 
As of June 30, 2016, the aggregate market value of the voting and non-voting common equity of Verso Corporation held by non-affiliates, computed by reference to the price at which the common equity was last sold on the last business day of the most recently completed second fiscal quarter, was approximately $899,626. For purposes of this calculation, only those shares held by directors, executive officers and holders of 10% or more of the voting securities of Verso Corporation have been excluded as held by affiliates. Such exclusion should not be deemed a determination or an admission by the Registrant or any such person that such individuals or entities are or were, in fact, affiliates of Verso Corporation.
 
As of February 28, 2017, Verso Corporation had 33,429,799 shares of Class A common stock, par value $0.01 per share, and 960,844 shares of Class B common stock, par value $0.01 per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
The information required by Part III is incorporated by reference from portions of the definitive proxy statement of Verso Corporation to be filed within 120 days after December 31, 2016, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the 2017 annual meeting of stockholders of Verso Corporation.





Verso Corporation
Form 10-K
December 31, 2016

TABLE OF CONTENTS
 
PART I
 
 
Page
 
 
 
 
 
 
PART II
 
 
 
 
 
 
PART III
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 





Forward-Looking Statements
 
In this annual report, all statements that are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act.”  Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “intend,” and other similar expressions.  They include, for example, statements relating to our business and operating outlook; assessment of market conditions; and the growth potential of the industry in which we operate. Forward-looking statements are based on currently available business, economic, financial, and other information and reflect management’s current beliefs, expectations, and views with respect to future developments and their potential effects on us.  Actual results could vary materially depending on risks and uncertainties that may affect us and our business.  The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the impact of our bankruptcy filings and the related Chapter 11 bankruptcy process on our business, financial condition or results of operations; intense competition in the paper manufacturing industry; changes in the costs of raw materials and purchased energy; developments in alternative media, which are expected to adversely affect the demand for some of our key products, and the effectiveness of our responses to these developments; rising postal costs; any additional closure and other restructuring costs; negative publicity, even if unjustified; any failure to comply with environmental or other laws or regulations, even if inadvertent; legal proceedings or disputes; any labor disputes; and the potential risks and uncertainties described in Part I, Item 1A, “Risk Factors,” as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent annual reports on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement made in this annual report to reflect subsequent events or circumstances or actual outcomes.
 
Market and Industry Information
 
Market data and other statistical information used throughout this annual report are based on independent industry publications, government publications, reports by market research firms, or other published independent sources. Some data are also based on our good-faith estimates which are derived from our review of internal surveys, as well as the independent sources listed above.  Although we believe these sources are reliable, we have not independently verified the information.  Industry prices for coated paper provided in this annual report are, unless otherwise expressly noted, derived from RISI, Inc. data.  “North American” data included in this annual report that has been derived from RISI, Inc. only includes data from the United States and Canada.  Any reference to (a) grade No. 3, grade No. 4 and grade No. 5 coated paper relates to 60 lb. basis weight, 50 lb. basis weight and 34 lb. basis weight, respectively, (b) lightweight coated groundwood paper refers to groundwood paper grades that are a 36 lb. basis weight or less, and (c) ultra-lightweight coated groundwood paper refers to groundwood paper grades that are a 30 lb. basis weight or less.  The RISI, Inc. data included in this annual report has been derived from the following RISI, Inc. publications: RISI World Graphic Paper Forecast, February 2017 and RISI Paper Trader: A Monthly Monitor of the North American Graphic Paper Market, December 2016.

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PART I
 
Item 1.  Business
 
In this report, the term “Verso” refers to Verso Corporation, which is the ultimate parent entity and the issuer of Class A common stock listed on the New York Stock Exchange.  Prior to the Internal Reorganization (as defined below under “-History”), Verso was the sole member of Verso Paper Finance Holdings One LLC, which was the sole member of Verso Paper Finance Holdings LLC, which was the sole member of Verso Paper Holdings LLC.  As used in this report, the term “Verso Finance” refers to Verso Paper Finance Holdings LLC; the term “Verso Holdings” refers to Verso Paper Holdings LLC; the term “NewPage” refers to NewPage Holdings Inc., which was an indirect, wholly owned subsidiary of Verso; the term “NewPage Corp” refers to NewPage Corporation, which was an indirect, wholly owned subsidiary of NewPage; and the term for any such entity includes its direct and indirect subsidiaries when referring to the entity’s consolidated financial condition or results.  Each of Verso Finance, Verso Holdings, NewPage and NewPage Corp were either merged into other subsidiaries of Verso, converted into limited liability corporations, and/or renamed in the Internal Reorganization and do not exist on and after the Internal Reorganization.  Unless otherwise noted, references to “the Company,” “we,” “us,” and “our” refer to Verso. 
 
Overview
 
We are the leading North American producer of coated papers, which are used primarily in commercial print, magazines, catalogs, high-end advertising brochures and annual reports, among other media and marketing publications.  We produce a wide range of products, ranging from coated freesheet and coated groundwood, to specialty papers, to inkjet and digital paper, supercalendered papers, and uncoated freesheet.  We also produce and sell market kraft pulp, which is used to manufacture printing and writing paper grades and tissue products.
 
We operate fourteen paper machines at seven mills located in Maine, Maryland, Michigan, Minnesota, and Wisconsin, as of December 31, 2016.  The mills have an aggregate annual production capacity of approximately 3,155,000 tons of paper, including coated papers and specialty papers, and 290,000 tons of kraft pulp.
 
We sell and market our products to approximately 300 customers which comprise approximately 1,700 end-user accounts.  We have long-standing relationships with many leading magazine and catalog publishers, commercial printers, specialty retail merchandisers, and paper merchants.  Our relationships with our ten largest coated paper customers average more than 20 years.  We reach our end-users through several distribution channels, including direct sales, commercial printers, paper merchants, and brokers.

History

We began operations on August 1, 2006, when we acquired the assets and certain liabilities comprising the business of the Coated and Supercalendered Papers Division of International Paper. We were formed for the purpose of consummating the acquisition from International Paper. We completed our initial public offering of common stock on the New York Stock Exchange in May 2008. On January 7, 2015, we acquired NewPage Holdings, Inc., also a paper manufacturer, in a merger transaction.  The NewPage acquisition provided us with assets in a complementary geographic area, a broader portfolio of products, and strategic flexibility to reduce operating costs.  For more information on the NewPage acquisition, see Note 5 to our Audited Consolidated Financial Statements included elsewhere in this report.

On January 26, 2016, Verso and substantially all of its direct and indirect subsidiaries, or the “Debtors,” filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, or the “Bankruptcy Code,” in the United States Bankruptcy Court for the District of Delaware, or the “Bankruptcy Court.” The chapter 11 cases, or the “Chapter 11 Cases,” were consolidated for procedural purposes only and administered jointly under the caption “In re: Verso Corporation, et al., Case No. 16-10163.” On June 23, 2016, the Bankruptcy Court entered an order confirming the Debtors’ First Modified Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated as of June 20, 2016, or the “Plan.” On July 15, 2016, or the “Effective Date,” the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 Cases.  As a result of the Plan, among other things, all of our common stock issued and outstanding immediately prior to the Effective Date was cancelled and our creditors existing immediately prior to the Effective Date received all of our newly issued common stock in exchange for the cancellation of all of our pre-petition indebtedness. 

In accordance with the provisions of Financial Accounting Standards Board, or “FASB,” Accounting Standards Codification, or “ASC” 852, Reorganizations, the Debtors adopted fresh-start accounting upon emergence from the Chapter 11 Cases and became a new entity for financial reporting purposes as of July 15, 2016. Accordingly, the consolidated financial statements for

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the reporting entity subsequent to emergence from the Chapter 11 Cases, or the “Successor,” are not comparable to the consolidated financial statements for the reporting entity prior to emergence from the Chapter 11 Cases, or the “Predecessor.” For more information on the Chapter 11 Cases, including a detail of liabilities subject to compromise and reorganization items, net see Note 2 to our Consolidated Financial Statements included elsewhere in this report.

In December 2016, Verso Corporation completed a consolidation and reorganization of its subsidiaries, or the “Internal Reorganization.” The Internal Reorganization involved several separate, but related, actions consisting of mergers between subsidiaries to reduce their numbers, the conversion of corporate subsidiaries to limited liability companies, the re-domestication of subsidiaries under Delaware law to provide for a uniform and enlightened regulatory framework, the formation of new holding companies to create separate “branches” for Verso’s paper-making and energy operations, and name changes of subsidiaries to more appropriately reflect the nature of their assets and operations. Management believes that the Internal Reorganization will afford greater efficiency and reduced costs in the administration of its subsidiaries.

Verso Corporation was incorporated in 2006 in the state of Delaware.  Our principal executive offices are located at 6775 Lenox Center Court, Suite 400, Memphis, Tennessee 38115-4436.  Our telephone number is (901) 369-4100.  Our website address is www.versoco.com.  Information on or accessible through our website is not considered part of this annual report.

Industry
 
Based on 2016 sales, the size of the global coated paper industry is estimated to be approximately $33 billion, or 39 million tons of coated paper shipments, including approximately $5 billion, or 6 million tons of coated paper shipments, in North America.  Coated paper is used primarily in media and marketing applications, including catalogs, magazines, and commercial printing applications, which include high-end advertising brochures, annual reports, and direct mail advertising.  Demand is generally driven by North American advertising and print media trends, which in turn have historically been correlated with growth in Gross Domestic Product, or “GDP.” The coated paper industry has been facing a decline in demand. See “Item 1A. Risk Factors - Risks Relating to Our Business - The paper industry has been facing a long-term structural decline and our profitability has been adversely impacted by such decline.”

In North America, coated papers are classified by brightness and fall into five grades, labeled No. 1 to No. 5, with No. 1 having the highest brightness level and No. 5 having the lowest brightness level.  Papers graded No. 1, No. 2, and No. 3 are typically coated freesheet grades. No. 4 and No. 5 papers are predominantly groundwood containing grades.  Coated groundwood grades are the preferred grades for catalogs and magazines, while coated freesheet is more commonly used in commercial print applications.

Within the paper industry, specialty papers are products which are given unique characteristic in their manufacture, converting or processing and that have properties suitable for special purposes, or custom engineered applications.  Specialty papers have unique functional properties, are usually produced in relatively small quantities for a specific product, function or end-use requirement.  Commercial and development activities rely largely on defining the unique characteristics of a product, in contrast with those of other producers.  We have focused on the following markets within the specialty papers arena:  label and converting, flexible packaging, and technical papers.  Based on our market research, we estimate the demand for specialty papers in all markets to be between 11 and 14 million tons globally.

Products
 
We manufacture printing papers, coated groundwood paper, a wide range of specialty papers, and supercalendered paper.  These paper grades are differentiated primarily by their respective brightness, weight, print quality, functionality, bulk, opacity, and strength.  We also produce and sell Northern Bleached Hardwood Kraft, or “NBHK,” pulp.  
 
As a result of our scale and technological capabilities, we are able to offer our customers a broad product offering, from ultra-lightweight coated groundwood to heavyweight coated freesheet.  Our customers have the opportunity to sole-source all of their coated paper needs from us while optimizing their choice of paper products.  As our customers’ preferences change, they can switch paper grades to meet their desired balance between cost and performance attributes while maintaining their relationship with us.
 
Printing papers.  Printing papers includes primarily coated freesheet paper and uncoated printing papers. Coated freesheet paper is made from bleached kraft pulp, which is produced using a chemical process to break apart wood fibers and dissolve impurities such as lignin.  The use of kraft pulp results in a bright, heavier-weight paper with excellent print qualities, which is well-suited for high-end commercial applications and premium magazines.  Coated freesheet contains primarily kraft pulp, with

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less than 10% mechanical pulp in its composition. Revenue from our printing paper sales represented approximately 57%, 56%, and 32% of our total revenues for fiscal years 2016, 2015, and 2014, respectively.

Coated groundwood paper.  Coated groundwood paper includes a fiber component produced through a mechanical pulping process.  The use of such fiber results in a bulkier and more opaque paper that is better suited for applications where lighter weights and/or higher stiffness are required, such as catalogs and magazines.  In addition to mechanical pulp, coated groundwood paper typically includes a kraft pulp component to improve brightness and print quality. Revenue from our coated groundwood paper sales represented approximately 12%, 14%, and 40% of our total revenues for fiscal years 2016, 2015, and 2014, respectively.
 
Specialty paper.  We offer customized product solutions for strategic accounts by producing paper grades with customer-specified weight, brightness and pulp mix characteristics, providing customers with cost benefits and/or brand differentiation. Our specialty papers portfolio focuses on functionality, printability, and innovative solutions to provide over 180 specialty paper grades from 15 lb. papers to 12 pt. board for use in an array of end use applications including label and converting, flexible packing, and technical papers. End uses range from beverage container labels, to oil and grease resistant food containers, to pressure sensitive labels and thermal printing papers. Revenue from our specialty paper sales represented approximately 21%, 19%, and 15% of our total revenues for fiscal years 2016, 2015, and 2014, respectively.

Supercalendered paper.  Supercalendered paper consists of groundwood fibers and a very high filler content but it does not receive a separate surface coating. Instead, the paper is passed through a supercalendering process in which alternating steel and filled rolls “iron” the paper, giving it a gloss and smoothness that makes it resemble coated paper. Supercalendered papers are primarily used for retail inserts, due to their relatively low price point. Revenue from our supercalendered paper sales represented approximately 6% and 5% of our total revenues for fiscal years 2016 and 2015, respectively. We did not have supercalendered paper sales in 2014.

Pulp.  We produce and sell NBHK pulp.  NBHK pulp is produced through the chemical kraft process using hardwoods. Hardwoods typically have shorter length fibers than softwoods and are used in a variety of end use applications.  Kraft describes pulp produced using a chemical process, whereby wood chips are combined with chemicals and steam to separate the wood fibers.  The fibers are then washed and pressure screened to remove the chemicals and lignin which originally held the fibers together.  Finally, the pulp is bleached to the necessary whiteness and brightness.  Kraft pulp is used in applications where brighter and whiter paper is required. We also offer de-inked pulp to help meet specific customer requirements. Revenue from our pulp sales represented approximately 4%, 6%, and 13% of our total revenues for fiscal years 2016, 2015, and 2014, respectively.
 
Manufacturing
 
We operate fourteen paper machines at seven mills located in Maine, Maryland, Michigan, Minnesota, and Wisconsin.  We believe our coated paper mills are among the most efficient and lowest cost coated paper mills in North America based on the cash cost of delivery to Chicago, Illinois.  We attribute our manufacturing efficiency, in part, to the significant historical investments made in our mills, our R-GAP manufacturing benchmarking and our cost improvement program. Our mills have a combined annual production capacity of 3,155,000 tons of paper, including coated papers and specialty papers, and 290,000 tons of kraft pulp.  Our facilities are strategically located within close proximity to major publication printing customers, which affords us the ability to more quickly and cost-effectively deliver our products.  The facilities also benefit from convenient and cost-effective access to northern softwood fiber, which is required for the production of lightweight and ultra-lightweight coated papers.


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The following table provides key information about our mills:
Mill/Location
Product/Paper Grades
Paper
Machines
 
Annual Production
Capacity
(in tons)
Duluth, Minnesota
Supercalendered paper
1
 
270,000

 
Escanaba, Michigan
Coated, specialty and uncoated paper
3
 
760,000

 
Jay (Androscoggin), Maine
Coated, specialty and uncoated paper
3 (1 Idled)
 
450,000

 
Luke, Maryland
Coated paper
2
 
500,000

 
Quinnesec, Michigan
Coated Freesheet
1
 
425,000

 
 
Pulp
 
 
290,000

 
Stevens Point, Wisconsin
Specialty paper
2
 
190,000

 
Wickliffe, Kentucky (Closed)
Coated, specialty and uncoated paper
1 (Closed)
 
285,000

*
Wisconsin Rapids, Wisconsin
Coated paper
2
 
560,000

 
 * Wickliffe annual production capacity is not included in our total paper production capacity.

The basic raw material of the papermaking process is wood pulp.  The first stage of papermaking involves converting wood logs to pulp through either a mechanical or chemical process.  Before logs can be processed into pulp, they are passed through a debarking drum to remove the bark.  Once separated, the bark is burned as fuel in bark boilers.  The wood logs are composed of small cellulose fibers which are bound together by a glue-like substance called lignin.  The cellulose fibers are then separated from each other through either a mechanical or a kraft pulping process.
 
After the pulping phase, the fiber furnish is run onto the forming fabric of the paper machine.  On the forming fabric, the fibers become interlaced, forming a mat of paper, and much of the water is extracted.  The paper web then goes through a pressing and drying process to extract the remaining water.  After drying, the web receives a uniform layer of coating that makes the paper smooth and provides uniform ink absorption.  After coating, the paper goes through a calendering process that provides a smooth finish by ironing the sheet between multiple soft nips that consist of alternating hard (steel) and soft (cotton or synthetic) rolls.  At the dry end, the paper is wound onto spools to form a machine reel and then rewound and split into smaller rolls on a winder.  Finally, the paper is wrapped, labeled, and shipped.
 
Catalog and magazine publishers with longer print runs tend to purchase paper in roll form for use in web printing, a process of printing from a reel of paper as opposed to individual sheets of paper, in order to minimize costs.  In contrast, commercial printers typically buy large quantities of sheeted paper in order to satisfy the short-run printing requirements of their customers.  For this reason, we have pursued a deliberate strategy of configuring our manufacturing facilities to produce all web-based papers which are shipped in roll form and have developed relationships with third-party converters to address any sheeted paper needs of our key customers.
 
We utilize a manufacturing excellence program, called R-GAP, to take advantage of the financial opportunities that exist between the current or historical performance of our mills and the best performance possible given usual and normal constraints (i.e., configuration, geographical, and capital constraints).  Our continuous improvement process is designed to lower our cost position and enhance operating efficiency through reduced consumption of energy and material inputs, reduced spending on indirect costs, and improved productivity.  The program utilizes benchmarking data to identify improvement initiatives and establish performance targets.  Detailed action plans are used to monitor the execution of these initiatives and calculate the amount saved.  We also use multi-variable testing, lean manufacturing, center of excellence teams, source-of-loss initiatives, and best practice sharing to constantly improve our manufacturing processes and products. Since 2001, the Quinnesec mill, has been recognized in the Michigan Occupational Safety and Health Administration’s Voluntary Protection Program as a Star facility. The Michigan Voluntary Protection Program Star award is the state’s highest recognition for workplace safety programs and performance. Each year we develop and implement new efforts to continue our safety improvement and also share our successes through the mentoring aspects of this important program. 

Raw Materials and Suppliers
 
Our key cost inputs in the papermaking process are wood fiber, chemicals, and energy.
 
Wood Fiber.  We source our wood fiber from a broad group of timberland and sawmill owners located in our regions. Our costs to purchase wood are affected directly by market costs of wood in our regional markets and indirectly by the effect of higher fuel costs on logging and transportation of timber to our facilities.  While we have in place fiber supply agreements that ensure a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.
 

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Chemicals.  Chemicals utilized in the manufacturing of coated papers include latex, clay, starch, calcium carbonate, caustic soda, sodium chlorate, and titanium dioxide.  We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs. Occasionally imbalances in supply and demand create volatility in prices for certain chemicals.
 
Energy.  In 2016, we produced approximately 54% of our energy needs for our paper mills from sources such as waste wood, waste water, hydroelectric facilities, liquid biomass from our pulping process, and internal energy cogeneration facilities.  Our external energy purchases vary across each of our mills and include fuel oil, natural gas, coal, and electricity.  Our overall energy expenditures are mitigated by our internal energy production capacity and ability to switch between certain energy sources. We also consider the use of derivative contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices.
 
Sales, Marketing, and Distribution
 
We reach our end-users through several sales channels.  These include selling directly to end-users, through brokers, merchants, and printers.  We sell and market products to approximately 300 customers, which comprise approximately 1,700 end-user accounts.
 
Sales to End-Users.  In 2016, we sold approximately 32% of our paper products directly to end-users, most of which are catalog and magazine publishers.  These customers are typically large, sophisticated buyers who have the scale, resources, and expertise to procure paper directly from manufacturers.  Customers for our pulp products are mostly other paper manufacturers.
 
Sales to Brokers and Merchants.  Our largest indirect paper sales by volume are through brokers and merchants who resell the paper to end-users.  In 2016, our total sales to brokers and merchants represented approximately 48% of our total sales. Brokers typically act as an intermediary between paper manufacturers and smaller end-users who do not have the scale or resources to cost effectively procure paper directly from manufacturers.  The majority of the paper sold to brokers is resold to catalog publishers.  We work closely with brokers to achieve share targets in the catalog, magazine, and insert end-user segments through collaborative selling.
 
Merchants are similar to brokers in that they act as an intermediary between the manufacturer and the end-user. However, merchants generally take physical delivery of the product and keep inventory on hand.  Merchants tend to deal with smaller end-users that lack the scale to warrant direct delivery from the manufacturer.  Coated freesheet comprises the majority of our sales to merchants.  In most cases, because they are relatively small, the ultimate end-users of paper sold through merchants are generally regional or local catalog or magazine publishers.

Sales to Printers.  In 2016, our total sales to printers represented approximately 20% of our total sales.  The majority of our sales were to the two largest publication printers in the United States.  Printers also effectively act as an intermediary between manufacturers and end-users in that they directly source paper for printing/converting and then resell it to their customers as a finished product.
 
The majority of our products are delivered directly from our manufacturing facilities to the printer, regardless of the sales channel.  In order to serve the grade No. 3 coated freesheet market, we maintain a network of distribution centers located in the West, Midwest, South, and Northeast close to our customer base to provide quick delivery.  The majority of our pulp products are delivered to our customers’ paper mills.
 
Our sales force is organized around our sales channels.  We maintain an active dialogue with all of our major customers and track product performance and demand across grades.  We have a team of sales representatives and marketing professionals organized into three major sales groups that correspond with our sales channels: direct sales support; support to brokers and merchants; and printer support.
 
Many of our customers provide us with forecasts of their paper needs, which allows us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency.  Generally, our sales agreements do not extend beyond the calendar year.  Typically, our sales agreements provide for semiannual price adjustments based on market price movements.
 
Seasonality
 
We are exposed to fluctuations in quarterly net sales volumes and expenses due to seasonal factors.  These seasonal factors are common in the coated paper industry.  Our third quarter is generally our strongest quarter for volume and revenue, reflecting an

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increase in printing related to end-of-year magazines, increased end-of-year direct mailings, and holiday season catalogs.  Our working capital and accounts receivable generally peak in the third quarter, while inventory generally peaks in the second quarter in anticipation of the third quarter season.  We expect our seasonality trends to continue for the foreseeable future.

Customers
 
We participate in the printing papers, specialty papers, and pulp markets and have developed long-standing relationships with many premier customers in these areas. Our relationships with our ten largest customers average more than 20 years.  Our largest customer, Veritiv Corporation, accounted for approximately 20% of our net sales in 2016.  Our key customers in the printing papers arena include Condé Nast Publications, Central National-Gottesman, Quad/Graphics, Inc., RR Donnelley & Sons Company, Veritiv, and Clifford Paper, Inc. Verso’s key customers in the specialty papers market include Avery Dennison, Fort Dearborn, UPM Raflatac and American Packaging Corporation.

Research and Development
 
The primary function of our research and development efforts is to work with customers in developing and modifying products to accommodate their evolving needs and to identify cost-saving opportunities within our operations. Over the past several years, examples of our research and development efforts include innovative and performance-driven products for the flexible packaging, label, and specialty printing markets.
 
Intellectual Property
 
We have several patents and patent applications in the United States and various foreign countries.  These patents and patent applications generally relate to various paper manufacturing methods and equipment which may become commercially viable in the future.  We also have trademarks for our name, Verso®, as well as for our products such as Sterling®, Futura®, Anthem Plus®, Productolith®, Influence®, Liberty® and Voyager®.  In addition to the intellectual property that we own, we license a significant portion of the intellectual property used in our business on a perpetual, royalty-free, non-exclusive basis from International Paper.

Competition

Our business is highly competitive.  A significant number of North American competitors produce coated papers, and several overseas manufacturers, principally from Europe, export to North America.  We compete based on a number of factors, including:
 
price; 
product availability;
product quality;
breadth of product offerings;
timeliness of product delivery; and
customer service.

Foreign competition in North America is affected by the exchange rate of the U.S. dollar relative to other currencies, especially the euro, market prices in North America and other markets, worldwide supply and demand, and the cost of ocean-going freight.
 
While our product offering is broad in terms of grades produced (from coated and uncoated Graphical grades, including web and sheeted products, to highly technical Specialty grades), our largest offering is in the Coated Freesheet category, with about two thirds in web form and one third in sheets.  This strategy is driven primarily by our alignment with the commercial print market, with a secondary focus on catalogs and magazines for our Coated Freesheet grades.  Our Specialty grades have each year become a larger portion of our overall shipments, and that growth is expected to continue.  As of December 31, 2016, our principal competitors include Resolute Forest Products, UPM-Kymmene Corporation, Catalyst Paper Corp. and Sappi Limited, all of which have North American operations.  UPM and Sappi are headquartered overseas and also have overseas manufacturing facilities. Catalyst is headquartered in Canada.

Employees
As of December 31, 2016, we had approximately 4,500 employees. Approximately 70% of our hourly workforce is represented by 16 local branches of the following unions: the United Steel, Paper and Forestry, Rubber, Manufacturing,

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Energy, Allied Industrial and Services Workers International Union; the International Brotherhood of Electrical Workers; the Teamsters, Chauffeurs, Warehousemen and Helpers; the International Association of Machinists and Aerospace Workers; the Office & Professional Employees’ International Union; and the United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry. All represented employees were covered by the Master Labor Agreement 2012–2016, dated as of December 21, 2012, covering wages and benefits; certain represented mills also had local agreements covering general work rules, until the expiration of the Master Labor Agreement in December of 2016. The parties continue to have a dialogue toward reaching a new agreement. In the interim, each of the represented sites has local agreements which govern wages and benefits, along with terms and conditions of employment on the local level. In the event the Master Labor Agreement is not renegotiated, management will bargain site by site as local agreements reach their respective expiration dates. We have not experienced any work stoppages during the past several years, and believe that we have a good relationship with our employees.
 
Environmental and Other Governmental Regulations
 
We are subject to a wide range of federal, state, regional, and local general and industry-specific environmental, health and safety laws and regulations, including the Federal Water Pollution Control Act of 1972, or “Clean Water Act,” the federal Clean Air Act, the federal Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or “CERCLA,” the federal Occupational Safety and Health Act, and analogous state and local laws.  Our operations also are subject to a regional regime designed to address climate change, the Regional Greenhouse Gas Initiative in the northeastern United States, and in the future we may be subject to additional federal, state, regional, local, or supranational legislation related to climate change and greenhouse gas controls.  Among our activities subject to environmental regulation are the emissions of air pollutants, discharges of wastewater and stormwater, operation of dams, storage, treatment, and disposal of materials and waste, and remediation of soil, surface water and ground water contamination.  Many environmental laws and regulations provide for substantial fines or penalties and criminal sanctions for any failure to comply.  In addition, failure to comply with these laws and regulations could result in the interruption of our operations and, in some cases, facility shutdowns.

Certain of these environmental laws, such as CERCLA and analogous state laws, provide for strict liability, and under certain circumstances joint and several liability, for investigation and remediation of the release of hazardous substances into the environment, including soil and groundwater.  These laws may apply to properties presently or formerly owned or operated by or presently or formerly under the charge, management or control of an entity or its predecessors, as well as to conditions at properties at which waste attributable to an entity or its predecessors was disposed.  Under these environmental laws, a current or previous owner or operator of real property or a party formerly or previously in charge, management or control of real property, and parties that generate or transport hazardous substances that are disposed of at real property, may be held liable for the cost to investigate or clean up that real property and for related damages to natural resources.  We handle and dispose of wastes arising from our mill operations, including disposal at on-site landfills.  We are required to maintain financial assurance (in the form of letters of credit and other similar instruments) for the expected cost of landfill closure and post-closure care.  We may be subject to liability, including liability for investigation and cleanup costs, if contamination is discovered at one of our current or former paper mills or another location where we have disposed of, or arranged for the disposal of, wastes.  We could be subject to potentially significant fines, penalties, criminal sanctions, plant shutdowns, or interruptions in operations for any failure to comply with applicable environmental, health and safety laws, regulations, and permits.
 
Compliance with environmental laws and regulations is a significant factor in our business.  We have made, and will continue to make, significant expenditures to comply with these requirements and our permits.  We incurred environmental capital expenditures of $4 million in 2016, $3 million in 2015, and zero in 2014, and we anticipate that environmental compliance will continue to require increased capital expenditures and operating expenses over time as environmental laws, regulations, or interpretations thereof, change or the nature of our operations requires us to make significant additional capital expenditures.
 
Permits are required for the operation of our mills and related facilities.  The permits are subject to renewal, modification, and revocation.  We and others have the right to challenge our permit conditions through administrative and legal appeals and review processes.  Governmental authorities have the power to enforce compliance with the permits, and violators are subject to civil and criminal penalties, including fines, injunctions or both.  Other parties also may have the right to pursue legal actions to enforce compliance with the permits.

Available Information
 
Our website is located at www.versoco.com.  We make available free of charge through this website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished to the Securities and Exchange Commission, or “SEC,” pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.

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Item 1A.  Risk Factors
Our business is subject to various risks.  Set forth below are certain of the more important risks that we face and that could cause our actual results to differ materially from our historical results.  Our business also could be affected by other risks that are presently unknown to us or that we currently believe are immaterial to our business.
Risks Relating to our Business
Our recent emergence from bankruptcy may have an adverse impact on our operations going forward.
We emerged from bankruptcy on July 15, 2016. The full extent to which our bankruptcy will impact our business operations, reputation and relationships with our customers, employees, regulators and suppliers may not be known for some time. For example, we may experience a loss of confidence from our current and prospective suppliers, impacting our ability to timely obtain supplies at competitive prices, and we may have increased difficulty in retaining key personnel or recruiting additional qualified personnel. Any of these impacts on our business operations and relationships could have a material adverse effect on our financial condition and results of operations.

A new board of directors was appointed upon our emergence from our Chapter 11 Cases on July 15, 2016, our former Chairman and Chief Executive Officer retired on August 31, 2016, and a new President and Chief Executive Officer began on February 1, 2017. The transition to a new board of directors and new Chairman and Chief Executive Officer will be critical to our success.

Pursuant to our emergence from the Chapter 11 Cases, a new board of directors was appointed on the Effective Date. Half of our six new directors have not previously served on our board of directors and are expanding their knowledge of our operations and strategic plans. On August 31, 2016, Mr. Paterson retired as the Chairman of the Board and Chief Executive Officer of Verso. On January 12, 2017, Verso and B. Christopher DiSantis entered into an employment agreement, which resulted in Mr. DiSantis’ appointment as the Company’s President and Chief Executive Officer and a director effective February 1, 2017. The ability of our new directors and the new Chief Executive Officer to quickly expand their knowledge of our business plans, operations and strategies and our technologies will be critical to their ability to make informed decisions about our strategy and operations, particularly given the competitive environment in which our businesses operate and the need to quickly adjust to technological trends and advancements. If our board of directors and Chief Executive Officer are not sufficiently informed to make such decisions, our ability to compete effectively and profitably could be adversely affected.

Our financial condition and results of operations for periods after our emergence from bankruptcy on July 15, 2016 are not comparable to the financial condition and results of operations for periods prior to July 15, 2016.

On July 15, 2016, the Effective Date of our Plan, we adopted fresh-start reporting as a result of the reorganization as prescribed in accordance with generally accepted accounting principles in the United States of America and the provisions of FASB, ASC 852, Reorganizations. As required by fresh-start reporting, our assets and liabilities were recorded at fair value by allocating the reorganization value determined in connection with the plan of reorganization. Accordingly, our financial condition and results of operations from and after the Effective Date of our plan of reorganization are not comparable, in various material respects, to the financial condition and results of operations prior to the Effective Date of our Plan.

Developments in alternative media adversely affect the demand for our products.

Trends in advertising, electronic data transmission and storage, and the internet have had and likely will continue to have adverse effects on traditional print media, including the use of and demand for our products and those of our customers. Our magazine and catalog publishing customers may increasingly use (both for content and advertising), and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, particularly the internet, instead of paper made by us. As the use of these alternative media grows, the demand for our paper products likely will decline.

The paper industry has been facing a long-term structural decline and our profitability has been adversely impacted by such decline.

The coated paper industry faces a long-term, structural decline. From 2013 to 2016, demand for printing and writing paper in the United States fell by roughly 12%. U.S. demand for coated freesheet has declined 5% from 2013 to 2016. Similarly, U.S. demand for coated groundwood has declined 23% from 2013 to 2016. The demand for coated paper is expected to continue to steadily decline in the future, with market volumes in 2017 projected to be 3% below 2016 levels.

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Fluctuations in supply and demand for our products could materially adversely affect our business, financial condition and results of operations. The paper industry is a commodity market to a significant extent and is subject to cyclical market pressures. For example, from 2010 to 2014, prior to the acquisition of NewPage, we experienced a year-over-year average revenue decline of approximately 4.9% partly due to prolonged decline in demand for coated paper.
North American demand for coated paper products also tends to decline during a weak U.S. economy. Accordingly, general economic conditions and demand for magazines and catalogs may have a material adverse impact on the demand for our products, which may result in a material adverse effect on our business, financial condition and results of operations. Foreign overcapacity also could result in an increase in the supply of paper products available in the North American market. An increased supply of paper available in North America could put downward pressure on prices and/or cause us to lose sales to competitors, either of which could have a material adverse effect on our business, financial condition and results of operations.
The industry in which we operate is highly competitive.

The industry in which we operate is highly competitive. Competition is based largely on price. We compete with foreign producers, some of which are lower cost producers than we are or are subsidized by certain foreign governments. We also face competition from numerous North American coated paper manufacturers. Some of our competitors have advantages over us, including lower raw material and labor costs and are subject to fewer environmental and governmental regulations.
Furthermore, some of these competitors have greater financial and other resources than we do or may be better positioned than we are to compete for certain opportunities. There is no assurance that we will be able to continue to compete effectively in the markets we serve.
Competition could cause us to lower our prices or lose sales to competitors, either of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, the following factors will affect our ability to compete:
product availability;
the quality of our products;
our breadth of product offerings;
our ability to maintain mill efficiencies and to achieve high operating rates;
manufacturing costs per ton;
customer service and our ability to distribute our products on time; and
the availability and/or cost of wood fiber, market pulp, chemicals, energy and other raw materials and labor.

Rising postal costs could weaken demand for our paper products.

A significant portion of paper is used in periodicals, magazines, catalogs, fliers and other promotional mailings. Many of these materials are distributed through the mail. Future increases in the cost of postage could reduce the frequency of mailings, reduce the number of pages in magazine and advertising materials, and/or cause advertisers, catalog and magazine publishers to use alternate methods to distribute their materials. Any of the foregoing could decrease the demand for our products, which could have a material adverse effect on our business, financial condition, and results of operations.

We depend on a small number of customers for a significant portion of our business. Furthermore, we may have credit exposure to these customers through extension of trade credits.

Our largest customer, Veritiv Corporation accounted for approximately 20% of our net sales in 2016.  In 2016, our ten largest customers (including Veritiv Corporation) accounted for approximately 52% of our net sales.  The loss of, or reduction in orders from, any of these customers or other customers could have a material adverse effect on our business, financial condition, and results of operations, as could significant customer disputes regarding shipments, price, quality, or other matters.
Furthermore, we extend trade credit to certain of these customers to facilitate the purchase of our products and we rely on these customers’ creditworthiness and ability to obtain credit from lenders. Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of these significant customers could have a material adverse effect on our business, financial condition and results of operations, due to a reduction in purchases, a longer collection cycle or an inability to collect accounts receivable.



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We have limited ability to control the pricing of our products or pass through increases in our costs to our customers. Decreases in demand and prices, or increases in costs, for printing and writing paper could have a material adverse effect on our business, financial condition, and results of operations.

Our earnings are sensitive to price changes in coated paper.  Fluctuations in paper prices (and coated paper prices in particular) historically have had a direct effect on our net income (loss) and EBITDA for several reasons:
Market prices for paper products are a function of supply and demand, factors over which we have limited control.  We therefore have limited ability to control the pricing of our products.  Market prices of grade No. 3, 60 lb. basis weight paper, which is an industry benchmark for coated freesheet paper pricing, have fluctuated since 2000 from a high of $1,100 per ton to a low of $705 per ton.  In addition, market prices of grade No. 5, 34 lb. basis weight paper, which is an industry benchmark for coated groundwood paper pricing, have fluctuated between a high of $1,120 per ton to a low of $795 per ton over the same period.  Prices are expected to remain low in 2017.  Because market conditions determine the price for our paper products, the price for our products could fall below our cash production costs.
Market prices for paper products typically are not directly affected by raw material costs or other costs of sales, and consequently we have limited ability to pass through increases in these raw materials and/or other sales costs to our customers absent increases in the market price.  Thus, even though our costs may increase, we may not have the ability to increase the prices for our products, or the prices for our products may decline.
The manufacturing of coated paper is highly capital-intensive and a large portion of our operating costs are fixed.  Additionally, paper machines are large, complex machines that operate more efficiently when operated continuously.  Consequently, both we and our competitors typically continue to run our machines whenever marginal sales exceed the marginal costs, adversely impacting prices at times of lower demand.
Therefore, our ability to achieve acceptable margins is principally dependent on (a) our cost structure, (b) changes in the prices of raw materials, electricity, energy and fuel, which will represent a large component of our operating costs and will fluctuate based upon factors beyond our control and (c) general conditions in the paper market including the demand for paper products, the amount of foreign imports, the amount spent on advertising, the circulation of magazines and catalogs, the use of electronic readers and other devices, and postal rates. Any one or more of these economic conditions could affect our sales and operating costs and could have a material adverse effect on our business, financial condition, and results of operations.

We are involved in continuous manufacturing processes with a high degree of fixed costs.  Any interruption in the operations of our manufacturing facilities may affect our operating performance.

We run our paper machines on a nearly continuous basis for maximum efficiency. Any downtime at any of our paper mills, including as a result of or in connection with planned maintenance and capital expenditure projects, results in unabsorbed fixed costs that could negatively affect our results of operations for the period in which we experience the downtime. Due to the extreme operating conditions inherent in some of our manufacturing processes, we may incur unplanned business interruptions from time to time and, as a result, we may not generate sufficient cash flow to satisfy our operational needs. In addition, the geographic areas where our production is located and where we conduct our business may be affected by natural disasters, including snow storms, forest fires, and flooding. Such natural disasters could cause our mills to stop running, which could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, during periods of weak demand for paper products, such as the current market, or periods of rising costs, we have experienced and may in the future experience market-related downtime, which could have a material adverse effect on our financial condition and results of operations.
We may be required to record significant closure costs and long-lived asset impairment or accelerated depreciation charges.

We have responded to changing market dynamics by optimizing assets and streamlining our production. For example, in November 2016 we announced plans to temporarily idle the No. 3 paper machine at our Androscoggin Mill in Jay, Maine. If demand for our products continues to decline, or if the pace of decline accelerates, it may be necessary to curtail production even further, or permanently shut down certain machines and facilities. In addition to the potential loss of production, curtailments and shutdowns could result in asset impairments or accelerated depreciation and cash closure costs for the affected facilities, including restructuring charges and exit or disposal costs, which could negatively impact our cash flows and materially affect our results of operations and financial condition.

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Losses related to the impairment of long-lived assets to be held and used are recognized when circumstances, such as continuing losses or demand declines in certain businesses, indicate the carrying value of an asset group may not be recoverable. When indicators that the carrying value of an asset group may not be recoverable are triggered, we evaluate the carrying value of the asset group in relation to its estimated undiscounted future cash flows. If the carrying value of an asset group is greater than the estimated undiscounted future cash flows to be generated by the asset group, an impairment charge is recognized based on the excess of the asset group’s carrying value over its fair value. If it is determined that the carrying value of an asset group is recoverable, we review and adjust, as necessary, the estimated useful lives of the assets in the group. If there were to be a triggering event, it is possible that we could record non-cash long-lived asset impairment or accelerated depreciation charges in future periods, which would be recorded as operating expenses and would directly and negatively impact our reported results of operations.
If we are unable to obtain energy or raw materials, including petroleum-based chemicals at favorable prices, or at all, it could have a material adverse effect on our business, financial condition and results of operations.

We purchase substantial amounts of energy, wood fiber, market pulp, chemicals and other raw materials from third parties. We may experience shortages of energy supplies or raw materials or be forced to seek alternative sources of supply. If we are forced to seek alternative sources of supply, we may not be able to do so on terms as favorable as our current terms or at all. The prices for energy and many of our raw materials, especially petroleum-based chemicals, have recently been volatile and are expected to remain volatile for the foreseeable future. Chemical suppliers that use petroleum-based products in the manufacture of their chemicals may, due to a supply shortage and cost increase, ration the amount of chemicals available to us and/or we may not be able to obtain the chemicals we need to operate our business at favorable prices, if at all. In addition, certain specialty chemicals that we currently purchase are available only from a small number of suppliers. If any of these suppliers were to cease operations or cease doing business with us in the future, we may be unable to obtain such chemicals at favorable prices, if at all.

The supply of energy or raw materials may be adversely affected by, among other things, natural disasters or an outbreak or escalation of hostilities between the United States and any foreign power, and, in particular, events in the Middle East or weather events such as hurricanes could result in a real or perceived shortage of oil or natural gas, which could result in an increase in energy or chemical prices. In addition, wood fiber is a commodity and prices historically have been cyclical. The primary source for wood fiber is timber. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in Canada and the United States. In addition, future domestic or foreign legislation, litigation advanced by aboriginal groups, litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest biodiversity, and the response to and prevention of wildfires and campaigns or other measures by environmental activists also could affect timber supplies. The availability of harvested timber may further be limited by factors such as fire and fire prevention, insect infestation, disease, ice and wind storms, droughts, floods, and other natural and man-made causes. Additionally, due to increased fuel costs, suppliers, distributors and freight carriers have charged fuel surcharges, which have increased our costs. Any significant shortage or significant increase in our energy or raw material costs in circumstances where we cannot raise the price of our products due to market conditions could have a material adverse effect on our business, financial condition, and results of operations.
Any disruption in the supply of energy or raw materials also could affect our ability to meet customer demand in a timely manner and could harm our reputation. We are expected to have limited ability to pass through increases in our costs to our customers absent increases in market prices for our products, material increases in the cost of our raw materials could have a material adverse effect on our business, financial condition and results of operations. Furthermore, we may be required to post letters of credit or other financial assurance obligations with certain of our energy and other suppliers, which could limit our financial flexibility.

We may not realize certain projected synergies, productivity enhancements or improvements in costs, which could result in lower profitability for our business.

As part of our business strategy, we identify opportunities to improve profitability by reducing costs and enhancing productivity.  For example, through our continuous process improvement program, we have implemented focused programs to optimize material and energy sourcing and usage, reduce repair costs and control overhead.  We will continue to utilize the process improvement program to drive cost reductions and operating improvements in our mill system, and have targeted additional profitability enhancements in the next twelve months.  Our strategy assumes that increases in productivity through our continuous process improvement program, including through a more efficient manufacturing process or engineering design enhancements, will result in economies of scale, and global competitive sourcing of our materials will reduce our raw material and other costs.  Any synergies, cost savings or productivity enhancements that we expect to realize from such efforts may differ materially from our estimates.  In addition, any synergies, cost savings or productivity enhancements that we realize may

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be offset, in whole or in part, by reductions in pricing or volume, or through increases in other expenses, including raw material, energy or personnel.  We cannot assure you that these initiatives will be completed as anticipated or that the benefits we expect will be achieved on a timely basis or at all.

Currency fluctuations may adversely affect our competitive position and selling prices.

We compete with producers from around the world, particularly in North America. In addition to the impact of product supply and demand, changes in the relative strength or weakness of international currencies, particularly the U.S. dollar, can also affect international trade flows in certain products. A stronger U.S. dollar, as has been recently experienced, may attract imports, thereby increasing product supply and possibly creating downward pressure on prices. Conversely, a weaker U.S. dollar might encourage U.S. exports, thereby decreasing product supply and possibly creating upward pressure on prices.
Our business may suffer if we do not retain our senior management and other key personnel.

We are highly dependent on the continuing efforts of our senior management team and other key personnel. The loss of services of members of our senior management team and other key personnel could adversely affect our business until suitable replacements can be found. There may be a limited number of persons with the requisite skills to serve in these positions and we may be unable to locate or employ qualified personnel on acceptable terms. In addition, our future success requires us to continue to attract and retain competent personnel. Any failure to attract and retain key personnel could have a material adverse effect on our business and require the incurrence of substantial additional costs to recruit replacement personnel.
Work stoppages and slowdowns and legal action by our unionized employees may have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2016, approximately 70% of our hourly workforce were represented by 16 local branches of the following unions: the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Services Workers International Union; the International Brotherhood of Electrical Workers; the Teamsters, Chauffeurs, Warehousemen and Helpers; the International Association of Machinists and Aerospace Workers; the Office & Professional Employees’ International Union; and the United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry. All represented employees were covered by the Master Labor Agreement 2012-2016, dated as of December 21, 2012, covering wages benefits; certain represented mills also have local agreements covering general work rules, until the expiration of the Master Labor Agreement in December of 2016. The parties continue to have a dialogue toward reaching a new agreement. In the interim, each of the represented sites has local agreements which govern wages and benefits, along with terms and conditions of employment on the local level. In the event the Master Labor Agreement is not renegotiated, management will bargain site by site as local agreements reach their respective expiration dates. We may become subject to material cost increases as a result of action taken by the labor unions. This could increase expenses in absolute terms and/or as a percentage of net sales. In addition, although we believe we have a good relationship with our employees, work stoppages or other labor disturbances may occur in the future. Any of these factors could negatively affect our business, financial condition and results of operations.
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations and could compromise our information and the information of our customers and suppliers, exposing us to liability which would cause our business and reputation to suffer.

In the ordinary course of business, we rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information and to manage or support a variety of business processes and activities, including supply chain, manufacturing, distribution, invoicing, and collection of payments from customers. We use information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the propriety business information of our customers and suppliers, as well as personally identifiable information of our employees, in data centers and on information technology networks. The secure operation of these information technology networks and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and disaster recovery plans, our information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information,

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disrupt operations, and damage our reputation, which could adversely affect our business, financial condition and results of operations.

We depend on third parties for certain transportation services.

We rely primarily on third parties for transportation of our products to our customers and transportation of our raw materials to us, in particular, by truck and train. If any third-party transportation provider fails to deliver our products in a timely manner, we may be unable to sell them at full value. Similarly, if any transportation provider fails to deliver raw materials to us in a timely manner, we may be unable to manufacture our products on a timely basis. Shipments of products and raw materials may be delayed due to weather conditions, strikes or other events. Any failure of a third-party transportation provider to deliver raw materials or products in a timely manner could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our business, financial condition, and results of operations. In addition, our ability to deliver our products on a timely basis could be adversely affected by the lack of adequate availability of transportation services, especially rail capacity, whether because of work stoppages or otherwise. Furthermore, we may experience increases in the cost of our transportation services as a result of rising fuel costs and surcharges (primarily in diesel fuel). If we are not able to pass these increased costs through to our customers, they could have a material adverse effect on our business, financial condition, and results of operations.
We are subject to various environmental, health and safety laws and regulations that could impose substantial costs or other liabilities upon us and may have a material adverse effect on our business, financial condition, and results of operations.
We are subject to a wide range of federal, state, regional, and local general and industry-specific environmental, health and safety laws and regulations, including those relating to air emissions (including greenhouse gases and hazardous air pollutants), wastewater discharges, solid and hazardous waste management and disposal, site remediation and natural resources. Compliance with these laws and regulations, and permits issued thereunder, is a significant factor in our business and may be subject to the same or even increased scrutiny and enforcement actions by regulators. We have made, and will continue to make, significant expenditures to comply with these requirements and permits, which may impose increasingly more stringent standards over time as they are renewed or modified by the applicable governmental authorities. In addition, we handle and dispose of waste arising from our mill operations and operate a number of on-site landfills to handle that waste. We are required to maintain financial assurance (in the form of letters of credit and other similar instruments) for the projected cost of closure and post-closure care for these landfill operations. We could be subject to potentially significant fines, penalties, criminal sanctions, plant shutdowns, or interruptions in operations for any failure to comply with applicable environmental, health and safety laws, regulations and permits. Moreover, under certain environmental laws, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of at real property, may be held liable for the full cost to investigate or clean up such real property and for related damages to natural resources. We may be subject to liability, including liability for investigation and cleanup costs, if contamination is discovered at one of our current or former paper mills, other properties or other locations where we have disposed of, or arranged for the disposal of, waste.
A 2007 decision of the U.S. Supreme Court held that greenhouse gases are subject to regulation under the Clean Air Act. The Environmental Protection Agency, or “EPA,” has subsequently issued regulations applicable to us that require monitoring of greenhouse gas emissions. The EPA has also issued regulations that require certain new and modified air emissions sources to control their greenhouse gas emissions, which may have a material effect on our operations. The United States Congress has in the past, and may in the future, consider legislation which would also regulate greenhouse gas emissions. It is possible that we could become subject to federal, state, regional, local, or supranational legislation related to climate change, greenhouse gas emissions, cap-and-trade or other emissions.
On January 31, 2013, the EPA published its “National Emissions Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial and Institutional Boilers and Process Heaters.” The standards, which are technology-based standards that require the use of Maximum Achievable Control Technology or “MACT” for major sources to comply and are collectively referred to as the “Boiler MACT” rule, govern emissions of air toxics from boilers and process heaters at industrial facilities. Certain of our boilers are subject to the new standards, and we may be required to limit our emissions and/or install additional pollution controls.
Litigation could be costly and harmful to our business.

We are involved from time to time, and may currently be involved in, claims and legal proceedings relating to contractual, employment, environmental, intellectual property and other matters incidental to the conduct of our business. Although we do not believe that any currently pending claims or legal proceedings are likely to result in an unfavorable outcome that would

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have a material adverse effect on our financial condition or results of operations, we may become involved in such claims and legal proceedings that could result in unfavorable outcomes and could have a material adverse effect on our financial condition and results of operations.

We could pursue acquisitions, divestitures and other strategic transactions, the success of which could have a material adverse effect on our business, financial condition and results of operations.
In the past, we have pursued acquisitions to complement or expand our business, divestitures and other strategic transactions. Such future transactions are part of our general strategic objectives and may occur. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses with our existing business and services. Future acquisitions could result in potentially dilutive issuances of equity securities and the incurrence of debt and contingent liabilities, amortization expenses and substantial goodwill. The negotiation of any transaction, its completion, and subsequent integration of any business acquired may be complex and time consuming, involve significant costs and may result in a distraction of management’s attention from on going business operations. We may be affected materially and adversely if we are unable to successfully integrate businesses that we acquire. Similarly, we may divest portions of our business, which may also have material and adverse effects.
Adverse developments in general business and economic conditions could have an adverse effect on the demand for our products, our financial condition and results of operations.

General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, and consumer confidence, all of which impact demand for our products. In addition, volatility in the capital and credit markets, which impacts interest and the availability of credit, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, legislation, regulations and monetary, tax and trade policy, among other things. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could significantly impact our business and the industry in which we compete.

We have a significant amount of debt outstanding and may incur additional debt in the future, which may adversely affect our financial condition and future financial results.

Our total indebtedness, at par, was $323 million as of December 31, 2016, and we had $157 million of additional borrowing availability under our Exit Credit Facilities. Our ability to make scheduled payments of the principal and interest or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive.

It is also possible that we may incur additional indebtedness in the future in the ordinary course of business. If new debt is added to current debt levels, the risks described above could intensify. In addition, our high level of debt could have additional significant consequences, which include, but are not limited to, the following:

limiting our ability to obtain additional financing in the future for working capital, capital expenditures, or other general corporate purposes;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes;
limiting our ability to refinance our indebtedness with acceptable terms;
placing us at a competitive advantage to competitors carrying less debt; and
making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressure

We may be unable to maintain compliance with the financial maintenance or other covenants in our Exit Credit Facilities, which could result in an event of default under the credit agreement governing the Exit Credit Facilities that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

Under the Exit ABL Facility, Verso Holdings is required to maintain a minimum fixed charge coverage ratio when the excess availability under such facility is less than the greater of (a) 10% of the lesser of (i) the borrowing base at such time and (ii) the aggregate amount of revolving facility commitments at such time or (b) $30 million. In addition, under the Exit Term Loan Facility, Verso Holdings is required to maintain a maximum total net leverage ratio as further described in the Exit Term Loan

16



Facility. The Exit Credit Facilities also contain certain covenants which, among other things, and subject to certain exceptions, restrict Verso Holdings’ and certain of its subsidiaries’ ability to incur additional debt or liens, pay dividends, repurchase equity interests, prepay other indebtedness, sell, transfer, lease or dispose of assets, and make investments in or merge with another company.

If Verso Holdings were to violate any of the covenants under the Exit ABL Facility or the Exit Term Loan Facility and were unable to obtain a waiver, it would be considered a default after the expiration of any applicable grace period. If Verso Holdings were in default under any Exit Credit Facility, then the lenders thereunder may exercise remedies under such Credit Facility in accordance with the terms thereof, including declaring all outstanding borrowings immediately due and payable. In addition, if Verso Holdings were in default under the Exit ABL Facility, no additional borrowings under the ABL Facility would be available until the default was waived or cured. This could adversely affect our operations and our ability to satisfy our obligations as they come due.

Restrictive covenants in the agreements governing our Exit Credit Facilities may restrict our ability to pursue our business strategies.

The Exit Credit Facilities limit our ability, among other things, to:

incur additional indebtedness
incur liens;
enter into sale and lease back transactions;
make investments;
make capital expenditures;
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;
pay dividends or make other distributions or repurchase or redeem our stock;
enter into transactions with our affiliates;
engage or enter into any new lines of business;
prepay, redeem, or repurchase certain of our indebtedness; and
amend or modify certain provisions of our, and our subsidiaries’, organizational documents.

The Exit Credit Facilities also require us to comply with certain financial maintenance covenants as discussed above.

A breach of any of these restrictive covenants could result in a default under the instruments governing our Exit Credit Facilities. If a default occurs, the holders of these instruments may elect to declare all borrowings thereunder outstanding, together with accrued interest and other fees, to be immediately due and payable. The lenders under the Credit Facilities would also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay our indebtedness when due or declared due, the lenders thereunder will also have the right to proceed against the collateral pledged to them to secure the indebtedness. If such indebtedness were to be accelerated, our assets may not be sufficient to repay in full our secured indebtedness.

Risks Relating to Verso’s Common Stock
Our stock price may be volatile and stockholders may be unable to sell shares at or above the price at which they purchased them.

Since our emergence from bankruptcy on July 15, 2016, our stock price for our Class A Common Stock ranged from $4.37 per share to $13.60 per share. The market price of our Class A Common Stock may continue to be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our Class A Common Stock may fluctuate and cause significant price variations to occur. Volatility in the market price of our Class A Common Stock may prevent you from being able to sell your shares at or above the price you paid for your shares of Class A Common Stock. The market price for our Class A Common Stock could fluctuate significantly for various reasons, including:

our operating and financial performance and prospects
our quarterly or annual earnings or those of other companies in our industry
conditions that impact demand for our paper products
the public’s reaction to our press releases, other public announcements and filings with the SEC
changes in earnings estimates or recommendations by securities analysts who track our common stock
market and industry perception of our success, or lack thereof, in pursuing our growth strategy
strategic actions by us or our competitors, such as acquisitions or restructurings

17



changes in government regulations
arrival and departure of key personnel
changes in our capital structure
sales of common stock by us or members of our management team; and
changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events

The exercise of all or any number of outstanding Plan Warrants or the issuance of stock-based awards may dilute your holding of shares of our Class A Common Stock.

As of the date of filing this annual report on Form 10-K, we have outstanding (i) Plan Warrants to purchase 1,810,035 shares of our Class A Common Stock, and (ii) 290,538 restricted stock units. In addition, we have as of the date of this annual report on Form 10-K, 3,620,067 shares of Class A Common Stock reserved for future issuance under our Verso Corporation Performance Incentive Plan. The exercise of equity awards, including any stock options that we may grant in the future, and Plan Warrants, and the sale of shares of our Class A Common Stock underlying any such options or the Plan Warrants, could have an adverse effect on the market for our Class A Common Stock, including the price that an investor could obtain for their shares. Investors may experience dilution in the net tangible book value of their investment upon the exercise of the Plan Warrants and any stock options that may be granted or issued pursuant to the Verso Corporation Performance Incentive Plan in the future.

Our Amended and Restated Bylaws, our Amended and Restated Certificate of Incorporation and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of our Amended and Restated Bylaws and Amended and Restated Certificate of Incorporation, which became effective on the Effective Date, and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

not providing for cumulative voting in the election of directors;
requiring at least a supermajority vote of our stockholders to amend our Amended and Restated Bylaws or certain
provisions of our Amended and Restated Certificate of Incorporation;
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings;
prohibiting stockholder action by written consent; and
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders

Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our Class A Common Stock. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our Class A Common Stock. They could also deter potential acquirers of our company, thereby potentially reducing the likelihood that our stockholders could receive a premium for their Class A Common Stock in an acquisition.

Our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our Amended and Restated Certificate of Incorporation provides that, unless we consent in writing to alternative forums, the Court of Chancery of the State of Delaware will be the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us by our directors, officers, or stockholders, (iii) any action asserting a claim against us arising under the Delaware General Corporation Law or to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. We may consent in writing to alternative forums. By becoming a stockholder in Verso, you will be deemed to have notice of and have consented to these provisions of our Amended and Restated Certificate of Incorporation. This choice of forum provision in our Amended and Restated Certificate of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.


18



We currently do not plan to pay dividends on our Class A Common Stock and, consequentially, your only opportunity to achieve a return on your investment is if the price of our Class A Common Stock appreciates.

We do not anticipate paying any cash dividends on our Class A Common Stock for the foreseeable future. Any decision to pay dividends on our Class A Common Stock in the future will be at the discretion of our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business condition, covenants under any applicable contractual arrangements, including our indebtedness.









19



Item 1B.  Unresolved Staff Comments
 
Not applicable.
 
Item 2.  Properties
 
We operate fourteen paper machines at seven mills located in Maine, Maryland, Michigan, Minnesota and Wisconsin with a total annual paper production capacity of approximately 3.2 million tons.

Our material facilities as of December 31, 2016, are shown in the following table:
Location
Use
Owned/Leased
Memphis, Tennessee
corporate office
leased
Miamisburg, Ohio
corporate office
 leased
Jay (Androscoggin), Maine
paper mill/kraft pulp mill
owned
Duluth, Minnesota
paper mill
 owned
Escanaba, Michigan
paper mill
 owned
Luke, Maryland
paper mill, warehouse and converting
 owned
Quinnesec, Michigan
paper mill/kraft pulp mill
owned
Stevens Point, Wisconsin
paper mill
 owned
Wickliffe, Kentucky
paper mill
 owned
Wisconsin Rapids, Wisconsin
paper mill, warehouse and converting
 owned
 
Item 3.  Legal Proceedings
 
We are involved from time to time in legal proceedings incidental to the conduct of our business. We do not believe that any liability that may result from these proceedings will have a material adverse effect on our consolidated financial statements (also see Note 18 to our Consolidated Financial Statements included elsewhere in this report.)

Item 4.  Mine Safety Disclosures
 
Not applicable.
 



20



PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
In connection with the Company’s reorganization and emergence from bankruptcy, all shares of common stock outstanding prior to emergence were cancelled on July 15, 2016. On July 15, 2016, the Company’s new Class A common stock was listed on the New York Stock Exchange, or the “NYSE,” under the symbol “VRS,” and began trading on July 18, 2016.

The following table sets forth the high and low sales prices per share of our new Class A common stock, as reported by the NYSE, since July 18, 2016:
Price per share:
High
 
Low
2016
 
 
 
Third quarter (starting July 18, 2016)
$
13.60

 
$
5.55

Fourth quarter
7.51

 
4.37

 

Holders
 
As of February 28, 2017, there were 111 stockholders of record of our Class A common stock and 26 stockholders of record of our Class B common stock.
 
Dividends
 
We have not declared or paid any cash dividends on shares of our common stock during the years ended December 31, 2016 and 2015.  Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors may deem relevant.  Our ability to pay dividends on our common stock is limited by the covenants in our Exit Credit Facilities, and may be further restricted by the terms of any of our future debt or preferred securities. See “Item 7. Management’s Discussion & Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Exit Credit Facilities” for a summary of our Exit Credit Facilities.
 
Issuer Repurchases of Equity Securities

There were no shares of restricted stock repurchased to meet participants’ tax withholding obligations during the fourth quarter of 2016.

Item 6.  Selected Financial Data
 
The following table presents our selected historical financial data as of and for the years ended December 31, 2012 (Predecessor) through 2015 (Predecessor), for the period from January 1, 2016 to July 14, 2016 (Predecessor) and for the period from July 15, 2016 to December 31, 2016 (Successor).  The following information is only a summary which has been derived from the Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and their related notes, and the other financial information, included elsewhere in this annual report. Historical results are not indicative of future results.
 

21



 
Predecessor
 
 
Successor
 
 
 
 
 
 
 
 
 
January 1, 2016
 
 
July 15, 2016
 
 
 
 
 
 
 
 
 
Through
 
 
Through
 
Year Ended December 31,
 
July 14,
 
 
December 31,
(Dollars in millions except per share amounts)
2012
 
2013
 
2014
 
2015
 
2016
 
 
2016
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,475

 
$
1,389

 
$
1,297

 
$
3,122

 
$
1,417

 
 
$
1,224

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 
 
Cost of products sold - (exclusive of depreciation, amortization, and depletion)
1,273

 
1,179

 
1,176

 
2,727

 
1,249

 
 
1,098

Depreciation, amortization, and depletion
118

 
105

 
91

 
308

 
100

 
 
93

Selling, general, and administrative expenses
74

 
74

 
70

 
187

 
95

 
 
49

Restructuring charges
103

 
1

 
135

 
54

 
151

 
 
11

Other operating (income) loss(1)
(61
)
 
(4
)
 

 
1

 
(57
)
 
 
8

Operating (loss) income
(32
)
 
34

 
(175
)
 
(155
)
 
(121
)
 
 
(35
)
Interest expense
135

 
138

 
142

 
270

 
39

 
 
17

Other loss, net(2)
8

 
8

 
39

 

 

 
 

Loss before reorganization items, net
(175
)
 
(112
)
 
(356
)
 
(425
)
 
(160
)
 
 
(52
)
Reorganization items, net(3)

 

 

 

 
(1,338
)
 
 

(Loss) income before income taxes
(175
)
 
(112
)
 
(356
)
 
(425
)
 
1,178

 
 
(52
)
Income tax (benefit) expense
(1
)
 
(1
)
 
(3
)
 
(3
)
 

 
 
(20
)
Net (loss) income
$
(174
)
 
$
(111
)
 
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
Per Share Data:
 

 
 

 
 

 
 

 
 

 
 
 

(Loss) earnings per share:
 

 
 

 
 

 
 

 
 

 
 
 

Basic
$
(3.29
)
 
$
(2.09
)
 
$
(6.62
)
 
$
(5.19
)
 
$
14.39

 
 
$
(0.93
)
Diluted
(3.29
)
 
(2.09
)
 
(6.62
)
 
(5.19
)
 
14.39

 
 
(0.93
)
Weighted average common shares outstanding (in thousands):
 

 
 

 
 

 
 

 
 
 
 
 

Basic
52,850

 
53,124

 
53,293

 
81,295

 
81,847

 
 
34,391

Diluted
52,850

 
53,124

 
53,293

 
81,295

 
81,847

 
 
34,391

Statement of Cash Flows Data:
 

 
 

 
 
 
 
 
 
 
 
 

Cash provided by (used in) operating activities
$
12

 
$
(27
)
 
$
(58
)
 
$
(266
)
 
$
25

 
 
$
17

Cash (used in) provided by investing activities
(7
)
 
(14
)
 
(25
)
 
111

 
29

 
 
(38
)
Cash (used in) provided by financing activities
(38
)
 
(9
)
 
78

 
153

 
(11
)
 
 
(20
)
Other Financial and Operating Data:
 

 
 

 
 

 
 

 
 
 
 
 

EBITDA(4)
$
78

 
$
131

 
$
(123
)
 
$
153

 
$
1,317

 
 
$
58

Capital expenditures
(60
)
 
(41
)
 
(42
)
 
(64
)
 
(31
)
 
 
(42
)
Total tons sold (in thousands)(5)
1,799

 
1,690

 
1,624

 
3,647

 
1,676

 
 
1,473

Balance Sheet Data:
 

 
 

 
 

 
 

 
 
 
 
 

Working capital(6)
$
110

 
$
63

 
$
5

 
$
371

 
$
463

 
 
$
412

Property, plant and equipment, net
793

 
743

 
531

 
1,857

 
1,180

 
 
1,132

Total assets 
1,175

 
1,070

 
855

 
2,710

 
2,006

 
 
1,855

Total debt
1,223

 
1,220

 
1,304

 
2,879

 
310

 
 
293

Total (deficit) equity
(322
)
 
(417
)
 
(784
)
 
(1,183
)
 
675

 
 
770


(1)
Other operating income in 2012 (Predecessor) reflected insurance proceeds in excess of costs and property damages incurred, as we reached a final settlement agreement with our insurance provider for property and business losses resulting from the fire and explosion at the former Sartell mill. Other operating income for the period from January 1, 2016 to July 14, 2016 (Predecessor) primarily reflected the gain on sale of hydroelectric facilities in January 2016. Other operating

22



expense for the period from July 15, 2016 to December 31, 2016 (Successor) primarily reflected on-going costs incurred for professional fees paid for bankruptcy related services such as legal and consulting.
(2)
Other loss, net in 2014 (Predecessor) reflected costs incurred in connection with the NewPage acquisition. Other loss, net in 2013 (Predecessor) and 2012 (Predecessor) reflected costs related to debt refinancing.
(3)
Reorganization items, net, in 2016 (Predecessor) represented expenses and income directly associated with the Predecessor’s bankruptcy filing on the Petition Date. This amount represents primarily a gain on settlement of liabilities subject to compromise of $1,992 million offset by a loss of $651 due to the revaluation of our assets and liabilities as part of the application of fresh-start accounting as of the Effective Date (see Note 2).
(4)
EBITDA consists of earnings before interest, taxes, depreciation/depletion, and amortization. Our use of EBITDA is further discussed in the “Reconciliation of Net Income (Loss) to Adjusted EBITDA” section of Item 7 herein. The following table reconciles net (loss) income to EBITDA for the periods presented:
 
 
Predecessor
 
 
Successor
 
 
 
 
 
 
 
 
 
January 1, 2016
 
 
July 15, 2016
 
 
 
 
 
 
 
 
 
Through
 
 
Through
 
Year Ended December 31,
 
July 14,
 
 
December 31,
(Dollars in millions)
2012
 
2013
 
2014
 
2015
 
2016
 
 
2016
Reconciliation of net (loss) income to EBITDA:
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(174
)
 
$
(111
)
 
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
Income tax (benefit) expense
(1
)
 
(1
)
 
(3
)
 
(3
)
 

 
 
(20
)
Interest expense, net
135

 
138

 
142

 
270

 
39

 
 
17

Depreciation, amortization, and depletion
118

 
105

 
91

 
308

 
100

 
 
93

EBITDA
$
78

 
$
131

 
$
(123
)
 
$
153

 
$
1,317

 
 
$
58


(5)
See discussion of metric in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 herein.
(6)
Working capital is defined as current assets net of current liabilities, excluding the current portion of long-term debt.





23



Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are the leading North American producer of coated papers, which are used primarily in commercial print, magazines, catalogs, high-end advertising brochures and annual reports, among other media and marketing publications. We produce a wide range of products, ranging from coated freesheet and coated groundwood, to specialty papers, to inkjet and digital paper, supercalendered papers, and uncoated freesheet.  We also produce and sell market kraft pulp, which is used to manufacture printing and writing paper grades and tissue products.
 
We operate seven mills located in Maine, Maryland, Michigan, Minnesota, and Wisconsin with a total annual paper production capacity of approximately 3,155,000 tons of paper.

Background

Emergence from Chapter 11

On January 26, 2016, or the “Petition Date,” we and substantially all of our direct and indirect subsidiaries, collectively, the “Debtors,” filed voluntary petitions for relief, or the “Chapter 11 Filings,” under Chapter 11 of Title 11 of the United States Code, or the “Bankruptcy Code,” in the United States Bankruptcy Court for the District of Delaware, the “Bankruptcy Court.” The Chapter 11 Filings constituted an event of default and automatic acceleration under the agreements governing all of our debt (excluding the $23 million loan from Verso Finance Holdings to Chase NMTC Verso Investment Fund). The chapter 11 cases, or the “Chapter 11 Cases,” were consolidated for procedural purposes only and administered jointly under the caption “In re: Verso Corporation, et al., Case No. 16-10163.” During the pendency of the Chapter 11 Cases, we continued to manage our properties and operate our businesses as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
In connection with the Chapter 11 Cases, Verso Finance, Verso Holdings and certain of its subsidiaries entered into the Verso DIP Facility for an aggregate principal amount of up to $100 million, and NewPage Corp and certain of its subsidiaries entered into the NewPage DIP ABL Facility for an aggregate principal amount of up to $325 million and the NewPage Term Loan DIP Facility for an aggregate principal amount of $350 million (see Note 9). The NewPage DIP Term Loan Facility consisted of $175 million of new money term loans and $175 million of roll up loans refinancing loans outstanding under the existing term loan facility of NewPage Corp outstanding on the Petition Date. The Verso DIP Facility, NewPage DIP ABL Facility and NewPage DIP Term Loan Facility are collectively referred to as the “DIP Facilities”.
On March 26, 2016, the Debtors filed a proposed joint plan of reorganization, (as amended, the “Plan,”) with the Bankruptcy Court together with a disclosure statement in respect of the Plan. The Plan set forth, among other things, the treatment of claims against and equity interests in the Debtors. On June 23, 2016, the Bankruptcy Court entered an order, or the “Confirmation Order,” confirming the Plan. On July 15, 2016, or the “Effective Date,” the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 Cases.
On the Effective Date, by operation of the Plan, among other things:
Verso issued 33,366,784 shares of its new Class A common stock, par value $0.01 per share, or “Class A Common Stock,” 1,023,859 shares of its new Class B common stock, par value $0.01 per share, or “Class B Common Stock,” and warrants to purchase up to an aggregate of 1,810,035 shares of Class A Common Stock, or “Plan Warrants,” in exchange for the elimination of $2.6 billion of the Debtor’s outstanding indebtedness (principal and accrued interest);
The satisfaction in full of general unsecured claims in aggregate settlement totaling $3 million in cash (except with respect to general unsecured claims against Debtors that have only de minimis assets, which received no distributions under the Plan);
All shares of Verso’s common stock issued and outstanding immediately prior to the Effective Date were cancelled and discharged;
The shared services agreement between Verso, NewPage and NewPage Corp was terminated;
The prior employee incentive plans and other employment agreements were terminated and any awards issued under them were no longer honored, and a new performance incentive plan was adopted by Verso;

24



Termination of the Management and Transaction Fee Agreement dated as of August 1, 2006 among Verso Paper LLC, Verso Paper Investments LP, Apollo Management V, L.P., and Apollo Management VI, L.P., and all rights and remedies thereunder were terminated, extinguished, waived and released; and
Employee retirement contracts and collective bargaining agreements will be honored by the Company upon emergence.
Pursuant to the Plan, on the Effective Date, the Company entered into a $375 million asset-based revolving credit facility or the “Exit ABL Facility, and a senior secured term loan agreement or the “Exit Term Loan Facility” that provides for term loan commitments of $220 million or collectively the “Exit Credit Facilities.” Further, Verso Holdings borrowed $340 million under the Exit Credit Facilities on the Effective Date, with available loan proceeds of approximately $318 million, consisting of (i) the borrowing of $120 million under the Exit ABL Facility and (ii) the borrowing of $198 million ($220 million net of Original Issue Discount) under the Exit Term Loan Facility. The proceeds of the borrowings on the Effective Date under the Credit Facilities were used (i) to repay outstanding indebtedness under the DIP Facilities, (ii) to pay outstanding allowed administrative expenses and allowed claims in accordance with the Plan, and (iii) to pay fees, costs and expenses related to and contemplated by the Exit Credit Facilities and emergence by Verso and its subsidiaries from the Chapter 11 Cases. As of December 31, 2016, the outstanding balance of the Exit ABL Facility is $112 million, with $78 million in letters of credit issued, and $157 million available for future borrowings.
Financial Reporting Under Reorganization
See Note 2 of our Consolidating Financial Statements for further discussion of financial reporting implications related to our Chapter 11 Cases, and emergence therefrom, including a detail of liabilities subject to compromise, reorganization items, net, and assets and liabilities recorded at fair value as of the fresh-start reporting date or Effective Date.
Capacity Reductions
On August 20, 2015, we announced plans to make production capacity reductions by idling the No. 1 pulp dryer and No. 2 paper machine at our mill in Androscoggin, Maine. On November 1, 2016, we announced plans to further reduce production capacity by temporarily idling the No. 3 paper machine at our Androscoggin, Maine facility.

On April 5, 2016, we announced that we will permanently close our paper mill located in Wickliffe, Kentucky, which has been idle since November 2015. The decision to close the mill resulted in restructuring charges of approximately $160 million for the year ended December 31, 2016. The associated Property, plant, and equipment were written down to salvage value resulting in a non-cash restructuring charge of $127 million.
NewPage Acquisition
On January 7, 2015, we completed the acquisition of NewPage and its subsidiaries through a merger of one of our wholly owned subsidiaries with and into NewPage, or the “NewPage acquisition.” At the time of the NewPage acquisition, NewPage and its subsidiaries were the largest coated paper producer in the United States and operated eight paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota and Wisconsin, while we operated three mills located in Maine and Michigan.

Presentation of Predecessor and Successor

We adopted fresh-start reporting as of the Effective Date. As a result of the application of fresh-start reporting, our financial statements for periods prior to the Effective Date are not comparable to those for periods subsequent to the Effective Date. References in this report to “Successor” refer to the Company on or after the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. Operating results for the Successor and Predecessor periods are not necessarily indicative of the results to be expected for a full fiscal year. References such as the “Company,” “we,” “our” and “us” refer to Verso Corporation and its consolidated subsidiaries, whether Predecessor and/or Successor, as appropriate.

Management’s discussion and analysis of financial condition and results of operations compares the year ended December 31, 2016 to the year ended December 31, 2015. Presentation of the combined financial information of the Predecessor and Successor for the year ended December 31, 2016 is not in accordance with generally accepted accounting principles in the United States of America, or “GAAP.” However, we believe that for purposes of discussion and analysis in this annual report, the combined financial results are useful for management and investors to assess the Company’s ongoing financial and operational performance and trends.

25



Selected Factors Affecting Operating Results
 
Net Sales
 
Our sales, which we report net of rebates, allowances, and discounts, are a function of the number of tons of paper that we sell and the price at which we sell our paper.  Paper prices historically have been a function of macro-economic factors which influence supply and demand.  Price has historically been substantially more variable than volume and can change significantly over relatively short time periods.

We are primarily focused on serving the following end-user segments: general commercial print, catalogs and magazines. Coated paper demand is primarily driven by advertising and print media usage. Advertising spending and magazine and catalog circulation generally tend to correlate with gross domestic product in the United States, as they rise with a strong economy and contract with a weak economy, which impacts media spend which further impacts magazine and catalog subscriptions.

Many of our customers provide us with forecasts of their paper needs, which allows us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency. Generally, our sales agreements do not extend beyond the calendar year, and they typically provide for quarterly price adjustments based on market price movements.

We reach our end-users through several distribution channels, including commercial printers, paper merchants, brokers, converters, and direct sales to end-users. We sell and market our products to approximately 300 customers which comprise approximately 1,700 end-user accounts.  In 2016, our largest customer, Veritiv Corporation, accounted for approximately 20% of our net sales.
 
Cost of Products Sold

We are subject to changes in our cost of sales caused by movements in underlying commodity prices. The principal components of our cost of sales are chemicals, wood, energy, labor, and maintenance.  Costs for commodities, including chemicals, wood, and energy, are the most variable component of our cost of sales because their prices can fluctuate substantially, sometimes within a relatively short period of time.  In addition, our aggregate commodity purchases fluctuate based on the volume of paper that we produce.
 
Chemicals.  Chemicals utilized in the manufacturing of coated papers include latex, clay, starch, calcium carbonate, caustic soda, sodium chlorate, and titanium dioxide. We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs. We expect imbalances in supply and demand to periodically create volatility in prices for certain chemicals.
 
Wood.  Our costs to purchase wood are affected directly by market costs of wood in our regional markets and indirectly by the effect of higher fuel costs on logging and transportation of timber to our facilities.  While we have in place fiber supply agreements that ensure a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.

Energy.  We produce approximately 54% of our energy needs for our paper mills from sources such as waste wood, waste water, hydroelectric facilities, liquid biomass from our pulping process, and internal energy cogeneration facilities.  Our external energy purchases vary across each of our mills and include fuel oil, natural gas, coal and electricity. Our overall energy expenditures are mitigated by our internal energy production capacity and ability to switch between certain energy sources. We also utilize derivative contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices.
 
Labor.  Labor costs include wages, salary, and benefit expenses attributable to our mill personnel.  Mill employees at a non-managerial level are compensated on an hourly basis.  Management employees at our mills are compensated on a salaried basis.  Wages, salary, and benefit expenses included in cost of sales do not vary significantly over the short term.  In addition, we have not experienced significant labor shortages.
 
Maintenance.  Maintenance expense includes day-to-day maintenance, equipment repairs, and larger maintenance projects, such as paper machine shutdowns for periodic maintenance.  Day-to-day maintenance expenses have not varied significantly from year-to-year.  Larger maintenance projects and equipment expenses can produce year-to-year fluctuations in our maintenance expenses.  In conjunction with our periodic maintenance shutdowns, we have incidental incremental costs that are

26



primarily comprised of unabsorbed fixed costs from lower production volumes and other incremental costs for purchased materials and energy that would otherwise be produced as part of the normal operation of our mills.
 
Depreciation, Amortization, and Depletion.  Depreciation, amortization, and depletion expense represents the periodic charge to earnings through which the cost of tangible assets, intangible assets, and natural resources are recognized over the asset’s life.  Capital investments can increase our asset bases and produce year-to-year fluctuations in expense.
 
Selling, General, and Administrative Expenses
 
The principal components of our selling, general, and administrative expenses are wages, salaries, and benefits for our office personnel at our headquarters and our sales force, travel and entertainment expenses, advertising expenses, expenses relating to certain information technology systems, and research and development expenses.
 
Critical Accounting Policies
 
Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.  Our Consolidated Financial Statements are prepared in conformity with GAAP and follow general practices within the industry in which we operate.  The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates.  Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.

Management believes the following critical accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments.  These judgments about critical accounting estimates are based on information available to us as of the date of the financial statements.  

Accounting standards whose application may have a significant effect on the reported results of operations and financial position, and that can require judgments by management that affect their application, include the following: Financial Accounting Standards Board, or “FASB,” Accounting Standards Codification, or “ASC,” Topic 450, Contingencies, ASC Topic 360, Property, Plant, and Equipment, ASC Topic 350, Intangibles – Goodwill and Other, ASC Topic 715, Compensation – Retirement Benefits, and ASC Topic 805, Business Combinations.

Impairment of long-lived assets.  Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated undiscounted future cash flows generated by their use.

Management believes that the accounting estimates associated with determining fair value as part of an impairment analysis are critical accounting estimates because estimates and assumptions are made about our future performance and cash flows.  The estimated fair value is generally determined on the basis of discounted future cash flows.  We also consider a market-based approach and a combination of both.  While management uses the best information available to estimate future performance and cash flows, future adjustments to management’s projections may be necessary if economic conditions differ substantially from the assumptions used in making the estimates.

On April 5, 2016, Verso announced that it would permanently close its paper mill located in Wickliffe, Kentucky, which had been idle since November 2015. The decision to close the mill resulted in restructuring charges of approximately $160 million for the year ended December 31, 2016. The associated Property, plant, and equipment were written down to salvage value resulting in a non-cash restructuring charge of $127 million.

In the third quarter of 2016, management concluded that actual operating results were lower than those projected in our plan of reorganization. Such circumstance constituted a triggering event requiring management to conduct a Step 1 impairment test. Based on the results of the Step 1 impairment test, we concluded that the undiscounted estimated future cash flows associated with the remaining long-lived assets exceeded their carrying value and no impairment was recorded.

In the third quarter of 2015, we also announced plans to make production capacity reductions at our Androscoggin and Wickliffe mills. As a result, we recognized $58 million of accelerated depreciation which is included in Depreciation, amortization and depletion in our accompanying Consolidated Statements of Operations for the year ended December 31, 2015. Given the capacity reductions, we conducted a Step 1 impairment test as of the announcement date and concluded that the

27



undiscounted estimated future cash flows associated with the remaining long-lived assets exceeded their carrying value and no impairment was recorded.

Intangible assets primarily consist of trademarks, customer-related intangible assets and patents obtained through business acquisitions.  The Predecessor identified the following trademarks as intangible assets with an indefinite life: Influence®, Liberty®, and Advocate® and assessed indefinite-lived intangible assets in accordance with ASC 350, Intangibles - Goodwill and Other, at least annually for impairment or more frequently when events occurred or circumstances changed between annual tests that would have more likely than not reduced the fair value of the reporting unit below its carrying amount.

Trademarks of the Predecessor were evaluated by comparing their fair value to their carrying values.  During 2015, we completed our annual impairment test of indefinite lived intangibles and determined that there was no impairment as the fair value of intangibles exceeded their carrying value at December 31, 2015. In 2014, we determined that sufficient indicators of a potential impairment of our trademarks existed and we performed an interim analysis of our trademarks for impairment. As a result of our analysis, we determined that the carrying value of our trademarks exceeded their fair value, which was determined using a level 3 fair value measurement. This fair value determination was made using the income approach, which required us to estimate unobservable factors such as a royalty rate and discount rate and identify relevant projected revenue. We recognized an impairment charge of $6 million based on a projected reduction of revenues driven primarily by a decline in U.S. demand. The trademark impairment charges are included in Cost of products sold in our Consolidated Statement of Operations for the year ended December 31, 2014.

Pension and other postretirement benefit obligations. We have offered various pension and other postemployment and retirement benefits to certain employees.  The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions, including the expected long-term rate of return on plan assets, discount rates, increases in future medical cost, and mortality rates.  The table below shows assumptions used by us for the periods shown:
 
Predecessor
 
 
Successor
 
Year Ended
 
Year Ended
 
January 1, 2016
 
 
July 15, 2016
 
December 31,
 
December 31,
 
Through
 
 
Through
 
2014
 
2015
 
July 14, 2016
 
 
December 31, 2016
Weighted average assumptions used to determine benefit obligations as of end of period:
 
 
 
 
 
 
 
 
Discount rate
3.83
%
 
4.17
%
 
3.43
%
 
 
3.99
%
Weighted average assumptions used to determine net periodic pension cost for the period:
 

 
 
 
 
 
 
 
Discount rate
4.75
%
 
3.98
%
 
4.17
%
 
 
3.43
%
Expected long-term return on plan assets
6.50
%
 
7.05
%
 
6.75
%
 
 
6.75
%
We determine these actuarial assumptions, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. The discount rate is generally based on the yield of high-quality corporate fixed-income investments.
Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. The following table highlights the sensitivity of our pension obligations and 2017 net periodic pension (income) expense to changes in these assumptions, assuming all other assumptions remain constant.
 
 
Impact on 2017 Net Periodic
 
Impact on Pension
Change in Assumption
 
Pension (Income) Expense
 
Benefit Obligation
0.25 percentage point decrease in discount rate
 
Decrease $2 million
 
Increase $57 million
0.25 percentage point increase in discount rate
 
Decrease $3 million
 
Decrease $55 million
0.25 percentage point decrease in expected rate of return on assets
 
Increase $3 million
 
 
0.25 percentage point increase in expected rate of return on assets
 
Decrease $3 million
 
 



28



Contingent liabilities. A liability is contingent if the outcome or amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event.  We estimate our contingent liabilities based on management’s estimates about the probability of outcomes and their ability to estimate the range of exposure.  Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated.  In addition, it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain.

The assessment of contingent liabilities, including legal contingencies, asset retirement obligations and environmental costs and obligations, involves the use of critical estimates, assumptions, and judgments.  Management’s estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures.  However, there can be no assurance that future events will not differ from management’s assessments.

NewPage Acquisition. We accounted for the NewPage Acquisition in accordance with GAAP by recognizing and measuring the total consideration transferred to and the assets acquired and liabilities assumed at their estimated fair values. The allocation of the purchase price to the fair values of assets acquired and liabilities assumed in the NewPage acquisition included necessary adjustments to reflect the estimated fair values of NewPage’s assets and liabilities at the completion of the NewPage acquisition. The valuations reflected herein consist of appraisals, discounted cash flow analyses, or other appropriate valuation techniques to determine the fair value of the assets acquired and liabilities assumed.
Fresh Start Accounting. Upon the our emergence from the Chapter 11 Cases, we adopted fresh start accounting in accordance with the provisions of ASC 852, Reorganizations, which resulted in us becoming a new entity for financial reporting purposes. Upon adoption of fresh start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheet. The effects of the Plan and the application of fresh start accounting were reflected in our consolidated financial statements as of July 14, 2016 and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items for the period January 1, to July 14, 2016 (Predecessor).
As a result, our consolidated balance sheets and consolidated statement of operations subsequent to the Effective Date are not comparable to our consolidated balance sheets and statements of operations prior to the Effective Date. Our consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented after July 14, 2016 and dates on or prior to July 14, 2016. Our financial results for future periods following the application of fresh start accounting will be different from historical trends and the differences may be material.

Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 3 of Notes to Consolidated Financial Statements, which is incorporated by reference in response to this item.

Financial Overview

In 2016, net sales decreased $481 million, or 15%, compared to 2015, which was primarily driven by a 14% decrease in total sales volume and a 2% reduction in price per ton. The decrease in volume and pricing were driven by general softening of demand for coated papers, our capacity reductions at our Androscoggin mill and the closure of the Wickliffe mill. In 2015, net sales increased 141%, or $1,825 million, as sales volume increased 125% compared to 2014, which was driven primarily by the NewPage acquisition offset by the sale of the Bucksport mill, an increase in offshore imports, and a decline in U.S. demand for coated papers. Our gross margin was 11% in 2016 compared to 13% in 2015, attributable mainly to a 14% decrease in sales volume in 2016.

During the period from January 1, 2016 through July 14, 2016 (predecessor), Verso reported a net income of $1,178 million, or $14.39 per diluted share, and an operating loss of $121 million. During the period from July 15, 2016 to December 31, 2016 (successor), Verso reported net loss of $32 million, or $0.93 per diluted share, and operating loss of $35 million.  Impacting the results for 2016 were Verso’s Chapter 11 Cases along with several restructuring events. In 2015, Verso reported a net loss of $422 million, or $5.19 per diluted share, and operating loss of $155 million.  Impacting the results for 2015 were the significant restructuring costs associated with the closure of our Bucksport mill and costs incurred in connection with the NewPage acquisition.


29



Results of Operations 

The following tables set forth the historical results of operations of Verso for the periods indicated below.  The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto included elsewhere in this annual report.
 
Predecessor
 
 
Successor
 
 
 
Year Ended
 
Year Ended
 
January 1, 2016
 
 
July 15, 2016
 
 
 
December 31,
 
December 31,
 
Through
 
 
Through
 
12 Month
(Dollars in millions)
2014
 
2015
 
July 14, 2016
 
 
December 31, 2016

$ Change
Net sales
$
1,297

 
$
3,122

 
$
1,417

 
 
$
1,224

 
$
(481
)
Costs and expenses:
 

 
 

 
 

 
 
 
 
 
Cost of products sold (exclusive of depreciation, amortization and depletion)
1,176

 
2,727

 
1,249

 
 
1,098

 
(380
)
Depreciation, amortization and depletion
91

 
308

 
100

 
 
93

 
(115
)
Selling, general and administrative expenses
70

 
187

 
95

 
 
49

 
(43
)
Restructuring charges
135

 
54

 
151

 
 
11

 
108

Other operating expense (income)

 
1

 
(57
)
 
 
8

 
(50
)
Operating (loss) income
(175
)
 
(155
)
 
(121
)
 
 
(35
)
 
(1
)
Interest expense
142

 
270

 
39

 
 
17

 
(214
)
Other loss, net
39

 

 

 
 

 

Loss before reorganization items, net
(356
)
 
(425
)
 
(160
)
 
 
(52
)
 
213

Reorganization items, net

 

 
(1,338
)
 
 

 
(1,338
)
(Loss) income before income taxes
(356
)
 
(425
)
 
1,178

 
 
(52
)
 
1,551

Income tax benefit
(3
)
 
(3
)
 

 
 
(20
)
 
(17
)
Net (loss) income
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
 
1,568


2016 Compared to 2015

Net Sales. Net sales for the year ended December 31, 2016 decreased by approximately $481 million or 15% compared to the prior year. This decrease was attributable to a 14% decrease in total sales volume, from 3.6 million tons in 2015 to 3.1 million tons in 2016, and a 2% reduction in price from $856 per ton in 2015 to $839 per ton in 2016. The decrease in sales volume resulted in a $395 million decrease in revenue, while the reduced pricing resulted in an additional $86 million decrease in revenue. The decrease in volume and pricing were driven by general softening of demand for coated papers, our capacity reductions at our Androscoggin mill and the closure of the Wickliffe mill.

Cost of sales.  Cost of products sold, excluding depreciation, amortization, and depletion expenses, decreased $380 million, or 14%, in the year ended December 31, 2016, compared to the year ended December 31, 2015. Our gross margin, excluding depreciation, amortization, and depletion expenses, was 11.1% for the year ended December 31, 2016, compared to 12.7% for the year ended December 31, 2015, reflecting an incremental decrease of $101 million in gross margin. Gross margin was negatively impacted by the decrease in sales volume, work-in-process and inventory fair value adjustments associated with fresh-start accounting of $41 million, as well as by the effects of two accounting policy changes adopted in conjunction with fresh-start reporting.

Depreciation, amortization, and depletion. Depreciation, amortization, and depletion expenses decreased $115 million, or 37% from the prior year primarily attributable to the reduction in the fair value of our property, plant and equipment as a result of the adoption of fresh-start accounting.

Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2016 decreased $43 million, or 23%, compared to the prior period attributable to a change in accounting policy adopted in connection with fresh-start accounting. As described in Cost of products sold above, approximately $11 million of certain centralized costs related to manufacturing overhead previously recorded to Selling, general, and administrative expenses of the Predecessor are now recorded to Cost of products sold of the Successor. This decrease in Selling, general and administrative

30



expenses for the year ended December 31, 2016 is partially offset by a $3 million increase related to the recognition of previously unrecognized stock compensation costs as all outstanding stock compensation of the Predecessor were cancelled upon emergence from the Chapter 11 Cases. As a percentage of sales, Selling, general and administrative was 5% for the year ended December 31, 2016 and 6% for the year ended December 31, 2015, respectively.

Restructuring charges.  Restructuring charges for the year ended December 31, 2016 increased $108 million, or 200%, from the prior year. Restructuring charges for the year ended December 31, 2016 were primarily attributable to non-cash fixed asset write-down charges of $127 million and $15 million of severance and benefit costs related primarily to the production capacity reductions and permanent closure of our Wickliffe mill. Restructuring charges for the year ended December 31, 2015, consisted primarily of $16 million of severance and benefit costs related primarily to the production capacity reductions at our Androscoggin and Wickliffe mills, $16 million of severance and benefit costs related to efforts to integrate the legacy Verso and NewPage operations, and $12 million of expenses related to the sale of the Bucksport mill.

Other operating (income) expense.  Other operating expense for the year ended December 31, 2016 increased $50 million, primarily attributable to the on-going costs incurred for professional fees paid for legal, consulting, and other bankruptcy related costs and service, partially offset by the sale of hydroelectric facilities in January 2016. There were no similar income, costs or charges during the year ended December 31, 2015.

Interest expense.  Interest expense for the year ended December 31, 2016 decreased $214 million, or 79%, compared to the prior year ended December 31, 2015, primarily due to the fact that we ceased recording interest expense as of January 26, 2016 on outstanding pre-petition debt classified as liabilities subject to compromise, or “LSTC.” Such interest on pre-petition debt was stayed by the Bankruptcy Court effective on the Petition Date. During the pendency of the bankruptcy, the Predecessor incurred interest expense on the DIP Facilities. During the period from the Effective Date through December 31, 2016, the Successor incurred interest expense on the outstanding balance of the Exit Credit Facilities.

Reorganization items, net. Reorganization items, net, which represent expenses and income directly associated with the Predecessor’s bankruptcy filing on January 26, 2016, resulted in a net gain of $1,338 million for the period from January 1, 2016 through July 14, 2016 (predecessor). This amount represents a gain on settlement of LSTC and the DIP Facilities of $1,992 million offset by a loss of $651 million due to the revaluation of our assets and liabilities as part of the application of fresh-start accounting as of the Effective Date. Additionally we recognized a gain of $81 million associated with the write-off of unamortized deferred financing costs related to pre-Petition Date debt. We also incurred $52 million of professional fees paid for legal, consulting, and other bankruptcy related costs and services.

Income Tax Benefit. Income tax benefit increased $17 million, or 567%, compared to the prior year ended December 31, 2015 for purposes of allocating the income tax benefit among the different components of income (for example continuing operations or other comprehensive income). When more than one component is present, it may be required to allocate income tax expense to one component and income tax benefit to another. In 2016, Verso allocated approximately $20 million of tax expense to other comprehensive income and recognizing a $20 million tax benefit in continuing operations.

2015 Compared to 2014

Net Sales. Net sales for the year ended December 31, 2015 increased 141% to $3,122 million from $1,297 million in the year ended December 31, 2014, which was driven primarily by the NewPage acquisition. Our sales increase was primarily driven by a 125% increase in total sales volume, from 1,624 thousand tons in 2014 to 3,647 thousand tons in 2015. The increase in volume, which was primarily due to the addition of sales resulting from NewPage acquisition, resulted in $1,675 million of additional revenue. The revenue increase associated with the increased volume was augmented by the impact of pricing and product mix improvements of $150 million, as the average sales price per ton increased from $798 to $856, for all of our products in the year ended December 31, 2015, compared to the year ended December 31, 2014. While we recognized pricing improvements in our paper segment, pricing resulted in a decrease in revenue for our pulp segment. When compared to 2014, sales, as adjusted to include the impact of the NewPage acquisition and the sale of the Bucksport mill, declined, on a year-over-year basis, reflecting an increase in offshore imports and a decline in U.S. demand for coated papers.

Cost of sales. Cost of products sold, excluding depreciation, amortization, and depletion expenses, increased $1,551 million, or 132%, in the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to incremental costs as a result of the NewPage acquisition. Our gross margin, excluding depreciation, amortization, and depletion expenses, was 12.6% for the year ended December 31, 2015, compared to 9.3% for the year ended December 31, 2014, reflecting an incremental $274 million in gross margin, with $151 million attributable to volume increases and $123 million attributable to higher margin per ton as a result of different mix of paper products from NewPage. Depreciation, amortization, and depletion expenses increased $217 million, or 238%, also primarily due to incremental costs as a result of the NewPage acquisition along

31



with the accelerated depreciation recognized as part of the shutdown of a pulp dryer and paper machine at the Androscoggin mill.

Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2015 increased $117 million, or 167%, from the prior year, primarily due to incremental expenses as a result of the NewPage acquisition. As a percentage of sales, selling, general and administrative expenses were 6% for the year ended December 31, 2015 and 5% for the year ended December 31, 2014, respectively. This increase was primarily attributable to transaction and integration costs related to the NewPage acquisition of $25 million during the year ended December 31, 2015, which are included in Selling, general and administrative expenses. Selling, general and administrative expenses are allocated to the paper and pulp segments based on relative sales volume.

Restructuring charges. Restructuring charges for the year ended December 31, 2015 were $54 million, compared to $135 million for the year ended December 31, 2014. In 2015, restructuring charges consisted primarily of $16 million of severance and benefit costs related primarily to the production capacity reductions at our Androscoggin and Wickliffe mills, $16 million of severance and benefit costs related to efforts to integrate the legacy Verso and NewPage operations, and $12 million of expenses related to the sale of the Bucksport mill. Restructuring charges of approximately $46 million and $8 million were attributable to the paper segment and the pulp segment, respectively, for the year ended December 31, 2015.

Interest expense. Verso’s interest expense for the year ended December 31, 2015 was $270 million, compared to $142 million for the year ended December 31, 2014. The change in interest expense year-over-year reflects the additional debt issued in connection with the NewPage acquisition.

Reconciliation of Net Income (Loss) to Adjusted EBITDA
 
EBITDA consists of earnings before interest, taxes, depreciation, and amortization.  Adjusted EBITDA reflects adjustments to EBITDA to eliminate the impact of certain items that we do not consider to be indicative of our performance.  We use EBITDA and Adjusted EBITDA as a way of evaluating our performance relative to that of our peers and to assess compliance with our credit facilities. We believe that Adjusted EBITDA is an operating performance measure commonly used in our industry that provides investors and analysts with a measure of ongoing operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets among otherwise comparable companies.

We believe that the supplemental adjustments applied in calculating Adjusted EBITDA are reasonable and appropriate to provide additional information to investors.  

Because EBITDA and Adjusted EBITDA are not measurements determined in accordance with GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. You should consider our EBITDA and Adjusted EBITDA in addition to, and not as a substitute for, or superior to, our operating or net (loss) income or cash flows from operating activities, which are determined in accordance with GAAP.


32



The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented:

 
 
Predecessor
 
 
Successor
 
 
 
 
 
 
January 1, 2016
 
 
July 15, 2016
 
 
 
 
 
 
Through
 
 
Through
 
 
Year Ended December 31,
 
July 14,
 
 
December 31,
(Dollars in millions)
2014
 
2015
 
2016
 
 
2016
Reconciliation of net (loss) income to Adjusted EBITDA:
 
 
 
 
 
 
 
 
Net (loss) income
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
Income tax (benefit) expense
(3
)
 
(3
)
 

 
 
(20
)
Interest expense, net
142

 
270

 
39

 
 
17

Depreciation, amortization, and depletion
91

 
308

 
100

 
 
93

EBITDA
$
(123
)
 
$
153

 
$
1,317

 
 
$
58

Adjustments to EBITDA:


 
 
 
 
 
 
 
 
Reorganization items, net (1)

 

 
(1,338
)
 
 

 
Restructuring charges (2)
141

 
59

 
151

 
 
11

 
Fresh-start accounting adjustments (3)

 

 
3

 
 
46

 
Losses (gains) on disposal of assets (4)

 
6

 
(57
)
 
 
2

 
Pre- and post-reorganization costs (5)

 
10

 
6

 
 
8

 
NewPage acquisition and integration-related costs/charges (6)
39

 
36

 

 
 

 
Other items, net (7)
27

 
5

 
13

 
 
8

Adjusted EBITDA
$
84

 
$
269

 
$
95

 
 
$
133

(1) Net gains associated with the Chapter 11 Cases.
(2) For 2016, charges are primarily associated with the closure of the Wickliffe mill, of which $137 million is non-cash. For 2015, charges represent severance and employee-related costs and other restructuring charges associated with the NewPage acquisition, the closure of the Bucksport mill and the capacity reductions at the Androscoggin and Wickliffe mills. For 2014, charges represent primarily the closure of the Bucksport mill.
(3) Non-cash charges related to the one-time impacts of adopting fresh-start accounting.
(4) Realized losses (gains) on the sale of assets, which are primarily attributable to the sale of hydroelectric facilities in January 2016.
(5) Costs incurred in connection with advisory and legal services related to planning for and emerging from the Chapter 11 Cases.
(6) Professional fees and other charges and integration costs incurred in connection with the NewPage acquisition, including one-time impacts of purchase accounting.
(7) Amortization of non-cash incentive compensation, unrealized losses (gains) on energy-related derivative contracts, and miscellaneous other non-recurring adjustments.

Seasonality
 
We are exposed to fluctuations in quarterly net sales volumes and expenses due to seasonal factors.  These seasonal factors are common in the coated paper industry.  Our third quarter is generally our strongest quarter for volume and revenue, reflecting an increase in printing related to end-of-year magazines, increased end-of-year direct mailings, and holiday season catalogs.  Our working capital and accounts receivable generally peak in the third quarter, while inventory generally peaks in the second quarter in anticipation of the third quarter season.  We expect our seasonality trends to continue for the foreseeable future.

Liquidity and Capital Resources

Our historical negative cash flows from operations caused an inability to support our significant interest payments and debt maturities and a need to refinance and/or extend the maturities of our outstanding debt. On January 26, 2016, Verso and substantially all of its direct and indirect subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Filings constituted an event of default and automatic acceleration under the agreements governing all of our debt (excluding the $23 million loan from Verso Finance Holdings to Chase NMTC Verso Investment Fund).

33



As described in Note 2, Verso emerged from its Chapter 11 Cases on July 15, 2016. Pursuant to the Plan, on July 15, 2016, we entered into a $375 million Exit ABL Facility and a $220 million Exit Term Loan Facility. We borrowed $340 million under the Exit Credit Facilities on July 15, 2016, with available loan proceeds of approximately $318 million, consisting of $120 million of borrowings under the asset-based revolving credit facility and $198 million ($220 million net of Original Issue Discount) of borrowings under the term loan agreement. On July 15, 2016, we paid in full amounts outstanding under our DIP Facilities with proceeds from the Exit Credit Facilities. As of December 31, 2016, the outstanding balance of the Exit ABL Facility is $112 million, with $78 million in letters of credit issued, and $157 million available for future borrowings.
Our cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized in the following table.
 
Predecessor
 
 
Successor
 
Year Ended
 
Year Ended
 
January 1, 2016
 
 
July 15, 2016
 
December 31,
 
December 31,
 
Through
 
 
Through
(Dollars in millions)
2014
 
2015
 
July 14, 2016
 
 
December 31, 2016
Net cash (used in) provided by:
 
 
 
 
 
 
 
 
Operating activities
$
(58
)
 
$
(266
)
 
$
25

 
 
$
17

Investing activities
(25
)
 
111

 
29

 
 
(38
)
Financing activities
78

 
153

 
(11
)
 
 
(20
)
Net change in cash and cash equivalents
(5
)
 
(2
)
 
43

 
 
(41
)
 
Operating activities. For the period from July 15 through December 31, 2016 (Successor), our net cash provided by operating activities of $17 million reflects a net loss of $32 million, adjusted noncash postretirement gain of $25 million, deferred taxes of $20 million, and offset by noncash depreciation, amortization, and accretion of $96 million and cash provided by changes in working capital of $19 million.  For the period from January 1, 2016 through July 14, 2016 (Predecessor), Verso’s net cash provided by operating activities of $25 million reflects a net income of $1,178 million adjusted for noncash reorganization items and fresh-start accounting adjustments of $1,390 million, noncash restructuring charges of $137 million, noncash depreciation, amortization, and accretion and asset impairment charges of $101 million and cash provided by changes in working capital of $39 million.  

Verso’s net cash used in operating activities of $266 million in 2015 reflected a net loss of $422 million offset for noncash depreciation, amortization, depletion, and accretion and asset impairment charges totaling $330 million and noncash restructuring charges of $7 million, and a decrease in cash used by changes in working capital of $108 million.  In 2014, Verso’s net cash used in operating activities of $58 million reflected a net loss of $353 million adjusted for noncash depreciation, amortization, depletion, and accretion and asset impairment totaling $209 million and an increase in cash used by changes in working capital of $82 million, which was primarily due to an increase in accrued liabilities.

Investing activities.  For the period from July 2016 through December 31, 2016 (Successor), Verso’s net cash used in investing activities of $38 million consisted primarily of $42 million for capital expenditures. For the period from January 1, 2016 through July 14, 2016 (Predecessor), Verso’s net cash provided by investing activities of $29 million consisted primarily of $63 million of proceeds from the sale of certain hydroelectric generation facilities and related assets, partially offset by $31 million of capital expenditures.

In 2015, Verso’s net cash provided by investing activities of $111 million reflected cash acquired in the NewPage acquisition of $128 million as well as proceeds from sale of assets of $51 million including the sale of the Bucksport mill, partially offset by capital expenditures of $64 million. This compares to net cash used in investing activities of $25 million in 2014, which reflected $42 million in capital expenditures, partially offset by other investing cash inflows of $15 million, primarily consisting of a deposit received from the buyer of the Bucksport mill.

Financing activities. In the period from July 15 to December 31, 2016 (Successor), net cash used in financing activities of $20 million resulted primarily from net payments of $8 million on the Exit ABL Facility and $9 million on other long-term debt. In the period from January 1 to July 14, 2016 (Predecessor), net cash used in financing activities of $11 million resulted primarily from net payments on pre-petition revolving credit facilities of $299 million, $30 million of debt issuance costs, partially offset by proceeds from the Exit ABL Facility of $120 million and proceeds net of original issue discount of the Exit Term Loan Facility of $198 million.

During the year ended December 31, 2015, net cash provided by financing activities was $153 million, and resulted primarily from net borrowings on our pre-petition revolving credit facilities. During the year ended December 31, 2014, Verso’s net cash

34



provided by financing activities of $78 million consisted primarily from net borrowings on our revolving credit facilities partially offset by payments on the Second Priority Senior Secured Floating Rates Notes which matured in August 2014.

DIP Financing. In connection with the Chapter 11 Cases, Verso Finance, Verso Holdings and certain of its subsidiaries entered into the Verso DIP Facility in an aggregate principal amount of up to $100 million, and NewPage Corp and certain of its subsidiaries entered into the NewPage DIP ABL Facility in an aggregate principal amount of up to $325 million and the NewPage DIP Term Loan Facility in an aggregate principal amount of $350 million. The NewPage DIP Term Loan Facility consisted of $175 million of new money term loans and $175 million of “rolled up” loans refinancing loans outstanding under the existing term loan facility of NewPage Corp outstanding on the Petition Date (i.e., such loans were deemed to become loans under the NewPage DIP Term Loan Facility). On January 28, 2016, up to $550 million in loans under the DIP Facilities became available for borrowing following the entry of an order by the Bankruptcy Court approving the DIP Facilities on an interim basis on January 27, 2016. The Bankruptcy Court entered orders approving the DIP Facilities on a final basis on March 2, 2016. The issuers and guarantors of the Verso DIP Facility did not guarantee the obligations under the NewPage DIP Facilities, and the borrower and the guarantors under the NewPage DIP Facilities did not guarantee the obligations under the Verso DIP Facility. The DIP Facilities matured on July 15, 2016 in connection with our emergence from our Chapter 11 Cases and were repaid in full using proceeds from the Exit Credit Facilities entered into on the Effective Date.

Exit Credit Facilities. On the Effective Date, pursuant to the terms of Plan, Verso Holdings entered into a $375 million Exit ABL Facility and an Exit Term Loan Facility that provides for term loan commitments of $220 million with loan proceeds of $198 million after the deduction of the original issue discount of $22 million.
  
Verso Holdings borrowed $340 million under the Exit Credit Facilities on the Effective Date, with available loan proceeds of approximately $318 million, consisting of (i) the borrowing of $120 million under the Exit ABL Facility and (ii) the net borrowing of $198 million ($220 million par value less $22 million of original issue discount) under the Exit Term Loan Facility. The proceeds of the borrowings on the Effective Date under the Exit Credit Facilities were used (i) to repay outstanding indebtedness under the debtor-in-possession financing credit agreements, (ii) to pay outstanding allowed administrative expenses and allowed claims in accordance with the Plan, and (iii) to pay fees, costs and expenses related to and contemplated by the Exit Credit Facilities and emergence by Verso and its subsidiaries from bankruptcy. The proceeds of the borrowings under the Exit ABL Facility after the Effective Date will be used for working capital and general corporate purposes, including permitted acquisitions.

The Exit ABL Facility will mature on July 14, 2021. The outstanding borrowings under the Exit ABL Facility bear interest at a per annum rate equal to, at the option of Verso Holdings, either (i) a customary London interbank offered rate, or “LIBOR,” plus an applicable margin ranging from 1.25% to 2.00% or (ii) a customary base rate plus an applicable margin ranging from 0.25% to 1.00%, determined based upon the average excess availability under the Exit ABL Facility. Verso Holdings is also required to pay a commitment fee for the unused portion of the Exit ABL Facility, which ranges from 0.25% to 0.375% per annum, based upon the average revolver usage under the Exit ABL Facility. Verso Holdings has the right to prepay loans under the Exit ABL Facility at any time without a prepayment penalty, other than customary “breakage” costs with respect to eurocurrency loans. As of December 31, 2016, the outstanding balance of the Exit ABL Facility is $112 million, with $78 million in letters of credit issued, and $157 million available for future borrowings.

The Exit Term Loan Facility will mature on October 14, 2021. The outstanding borrowings under the Exit Term Loan Facility bear interest at a rate equal to, at the option of Verso Holdings, either (i) LIBOR (subject to a floor of 1%) plus 11% or (ii) a customary base rate plus 10%. With respect to LIBOR denominated loans under the Exit Credit Facilities, Verso Holdings may elect an interest period of one, two, three or six months or such other period subject to the terms of the Exit Credit Facilities. The term loans provided under the Exit Term Loan Facility are subject to quarterly principal amortization payments in an amount equal to the greater of (a) 2.00% of the initial principal amount of the term loans or (b) the excess cash flow in respect of such quarter as further described under the Exit Term Loan Facility; however, if the liquidity, as defined in the Exit Term Loan Facility, of Verso Holdings is less than $75 million at any time during the 90-day period following the due date of such quarterly amortization payment or excess cash flow payment date, then the portion of such amortization amount that results in such liquidity being less than $75 million will not be payable by Verso Holdings, as further described in the Exit Term Loan Facility. Per the described quarterly principal amortization, installments due are $4 million (subject to increase depending on excess cash flow) for each quarter ending in 2016 through 2021 with the remaining balance due on October 14, 2021. Any voluntary prepayment by Verso Holdings of the term loans under the Exit Term Loan Facility will be subject to customary “breakage” costs with respect to eurocurrency loans and a 2% call premium until July 14, 2018, and a 1% call premium after July 15, 2018, but before July 14, 2020, and thereafter no call premium will apply to any voluntary prepayment of term loans. Such call premium may also apply to certain repricing amendments of the Exit Term Loan Facility as further described therein.

35



All obligations under the Exit Credit Facilities are unconditionally guaranteed by Verso Finance, and certain of the subsidiaries of Verso Holdings and are secured by liens on certain assets of Verso Finance and liens on substantially all of the assets of Verso Holdings and the other guarantor subsidiaries. The security interest with respect to the Exit ABL Facility consists of a first-priority lien on the current assets of Verso Holdings and the guarantor subsidiaries, including accounts receivables, inventory, deposit accounts, securities accounts and commodities accounts, and a second-priority lien on all other collateral. The security interest with respect to the Exit Term Loan Facility, consists of a first-priority lien on all other collateral and second-priority lien on collateral securing the Exit ABL Facility.
The Exit ABL Facility contains financial covenants requiring us, among other things, to maintain a minimum fixed charge coverage ratio in certain circumstances and a maximum total net leverage ratio. The Exit Credit Facilities also contain restrictions, among other things and subject to certain exceptions, on our ability to incur debt or liens, pay dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets, and make investments in or merge with another company.

If Verso Holdings were to violate any of the covenants under the Exit ABL Facility or the Exit Term Loan Facility and were unable to obtain a waiver, it would be considered a default after the expiration of any applicable grace period. If Verso Holdings were in default under any Exit Credit Facility, then the lenders thereunder may exercise remedies under such Exit Credit Facility in accordance with the terms thereof. In addition, if Verso Holdings were in default under the Exit ABL Facility, no additional borrowings under the Exit ABL Facility would be available until the default was waived or cured. The Exit Credit Facilities provide for customary events of default, including a cross-event of default provision in respect of any other existing debt instrument having an aggregate principal amount that exceeds $25 million.
As of December 31, 2016, we were in compliance with the covenants in our Exit Credit Facilities.

Effect of Inflation
While inflationary increases in certain input costs, such as for energy, wood fiber, and chemicals, have an impact on our operating results, changes in general inflation have had minimal impact on our operating results in the last three years.  Sales prices and volumes are more strongly influenced by supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors.  We cannot assure you, however, that we will not be affected by general inflation in the future.  

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to market risk from fluctuations in our paper prices, interest rates, energy prices, and commodity prices for our inputs.
 
Paper Prices

Our sales, which we report net of rebates, allowances, and discounts, are a function of the number of tons of paper that we sell and the price at which we sell our paper.  Paper prices historically have been a function of macroeconomic factors that influence supply and demand.  Price has historically been substantially more variable than volume and can change significantly over relatively short time periods. Prices are also subject to volatility due to fluctuations in foreign exchange rates of the U.S. dollar relative to other currencies, especially the Euro, which can lead to lower average sales price realization.

We are primarily focused on serving the following end-user segments: general commercial print, catalogs and magazines. Coated paper demand is primarily driven by advertising and print media usage.  Advertising spending and magazine and catalog circulation tend to correlate with gross domestic product, or “GDP,” in the United States, as they rise with a strong economy and contract with a weak economy, which impacts media spend which further impacts magazine and catalog subscriptions.

Many of our customers provide us with forecasts of their paper needs, which allows us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency.  Generally, our sales agreements do not extend beyond the calendar year, and they typically provide for semiannual price adjustments based on market price movements.

We reach our end-users through several channels, including printers, brokers, paper merchants, and direct sales to end-users.  We sell and market our products to approximately 300 customers. During 2016, our largest customer, Veritiv Corporation, accounted for approximately 20% of our total net sales.

36




Interest Rates

Since December 31, 2015, we and substantially all of our direct and indirect subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. In connection with our Chapter 11 Cases, we entered into the DIP Facilities, which accrued interest at a variable rate. Upon the Effective Date, we entered into the Exit Credit Facilities. Borrowings under the Exit Credit Facilities accrue interest at a variable rate.

Our Exit ABL Facility and Exit Term Loan Facility each bear interest at a variable rate based on LIBOR or a customary base rate, in each case plus an applicable margin. Our Exit Term Loan Facility had a LIBOR floor of 1%. Assuming the principal amount outstanding under the Exit ABL Facility remains unchanged as of December 31, 2016, and the Exit Term Loan Facility interest remains at or above the LIBOR floor, a 100 basis point increase in quoted interest rates on our outstanding floating-rate debt as of December 31, 2016, would have increased annual interest expense by approximately $3 million.  While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

Commodity Prices

We are subject to changes in our cost of sales caused by movements underlying commodity prices.  The principal components of our cost of sales are chemicals, wood, energy, labor, maintenance, and depreciation, amortization, and depletion.  Costs for commodities, including chemicals, wood and energy, are the most variable component of our cost of sales because their prices can fluctuate substantially, sometimes within a relatively short period of time.  In addition, our aggregate commodity purchases fluctuate based on the volume of paper that we produce.

Wood Fiber.  We source our wood fiber from a broad group of timberland and sawmill owners located in our regions. Our costs to purchase wood are affected directly by market costs of wood in our regional markets and indirectly by the effect of higher fuel costs on logging and transportation of timber to our facilities.  While we have in place fiber supply agreements that ensure a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.

Chemicals.  Chemicals utilized in the manufacturing of coated papers include latex, clay, starch, calcium carbonate, caustic soda, sodium chlorate, and titanium dioxide.  We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs. Occasionally imbalances in supply and demand create volatility in prices for certain chemicals.

Energy.  In 2016, we produced approximately 54% of our energy needs for our paper mills from sources such as waste wood, waste water, hydroelectric facilities, liquid biomass from our pulping process, and internal energy cogeneration facilities.  Our external energy purchases vary across each of our mills and include fuel oil, natural gas, coal, and electricity.  Our overall energy expenditures are mitigated by our internal energy production capacity and ability to switch between certain energy sources. We also consider the use of derivative contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices.
 
Off-Balance Sheet Arrangements
 
None.

37



Item 8. Financial Statements and Supplementary Data

Verso Corporation
Consolidated Financial Statements


Index to Financial Statements
 


38



MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of Verso Corporation‘s internal control over financial reporting as of December 31, 2016, based upon the guidelines established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Verso Corporation‘s internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Based on the results of our evaluation, our management concluded that Verso Corporation‘s internal control over financial reporting was effective as of December 31, 2016. We reviewed the results of management’s assessment with our Audit Committee.


39



REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors and Stockholders of Verso Corporation:

We have audited the accompanying consolidated balance sheets of Verso Corporation and its subsidiaries (the "Company") as of December 31, 2016 (Successor Company balance sheet) and 2015 (Predecessor Company balance sheet), and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the period July 15, 2016 through December 31, 2016 (Successor Company operations) and the period January 1, 2016 through July 14, 2016, and for each of the two years in the period ended December 31, 2015 (Predecessor Company operations). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, on June 23, 2016, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective on July 15, 2016. Accordingly, the accompanying financial statements have been prepared in conformity with Accounting Standards Codification 852, Reorganizations, for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 2 to the financial statements.

In our opinion, the Successor Company consolidated financial statements present fairly, in all material respects, the financial position of Verso Corporation and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the period July 15, 2016 through December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company consolidated financial statements referred to above present fairly, in all material respects, the financial position of the predecessor to Verso Corporation and its subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the period January 1, 2016 through July 14, 2016, and for each of the two years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Memphis, Tennessee
March 17, 2017







40



VERSO CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
Predecessor
 
 
Successor
 
December 31,
 
 
December 31,
(Dollars in millions)
2015
 
 
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
4

 
 
$
6

Accounts receivable, net
226

 
 
194

Inventories, net
484

 
 
445

Assets held for sale
5

 
 

Prepaid expenses and other assets
32

 
 
20

Total current assets
751

 
 
665

Property, plant, and equipment, net
1,857

 
 
1,132

Intangibles and other assets, net
102

 
 
58

Total assets
$
2,710

 
 
$
1,855

LIABILITIES AND EQUITY
 

 
 
 

Current liabilities:
 

 
 
 

Accounts payable
$
113

 
 
$
105

Accrued liabilities
267

 
 
148

Current maturities of long-term debt
2,879

 
 
28

Total current liabilities
3,259

 
 
281

Long-term debt

 
 
265

Pension benefit obligation
528

 
 
491

Other liabilities
106

 
 
48

Total liabilities
3,893

 
 
1,085

Commitments and contingencies (Note 18)

 
 

Equity:
 

 
 
 

Predecessor preferred stock -- par value $0.01 (20,000,000 shares authorized, no shares issued)

 
 

Successor preferred stock -- par value $0.01 (50,000,000 shares authorized, no shares issued)

 
 

Predecessor common stock -- par value $0.01 (250,000,000 shares authorized with 82,115,543 shares issued and 81,874,254 outstanding on December 31, 2015)
1

 
 

Successor common stock -- par value $0.01 (210,000,000 Class A shares authorized with 33,366,784 shares issued and outstanding on December 31, 2016; 40,000,000 Class B shares authorized with 1,023,859 shares issued and outstanding on December 31, 2016)

 
 

Treasury stock -- at cost (241,289 shares on December 31, 2015 and no shares on December 31, 2016)
(1
)
 
 

Predecessor Paid-in-capital
321

 
 

Successor Paid-in-capital (including Warrants of $10 million)

 
 
675

Retained deficit
(1,402
)
 
 
(32
)
Accumulated other comprehensive (loss) income
(102
)
 
 
127

Total (deficit) equity
(1,183
)
 
 
770

Total liabilities and equity
$
2,710

 
 
$
1,855

 
 
 
 
 
See notes to Consolidated Financial Statements.
 
 
 
 


41



VERSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
Successor
 
Year Ended
 
Year Ended
 
January 1, 2016
 
 
July 15, 2016
 
December 31,
 
December 31,
 
Through
 
 
Through
(Dollars in millions, except per share amounts)
2014
 
2015
 
July 14, 2016
 
 
December 31, 2016
Net sales
$
1,297

 
$
3,122

 
$
1,417

 
 
$
1,224

Costs and expenses:
 

 
 

 
 

 
 
 
Cost of products sold (exclusive of depreciation, amortization and depletion)
1,176

 
2,727

 
1,249

 
 
1,098

Depreciation, amortization and depletion
91

 
308

 
100

 
 
93

Selling, general and administrative expenses
70

 
187

 
95

 
 
49

Restructuring charges
135

 
54

 
151

 
 
11

Other operating expense (income)

 
1

 
(57
)
 
 
8

Operating (loss) income
(175
)
 
(155
)
 
(121
)
 
 
(35
)
Interest expense
142

 
270

 
39

 
 
17

Other loss, net
39

 

 

 
 

Loss before reorganization items, net
(356
)
 
(425
)
 
(160
)
 
 
(52
)
Reorganization items, net

 

 
(1,338
)
 
 

(Loss) income before income taxes
(356
)
 
(425
)
 
1,178

 
 
(52
)
Income tax benefit
(3
)
 
(3
)
 

 
 
(20
)
Net (loss) income
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
(Loss) Earnings per common share:
 

 
 

 
 
 
 
 
Basic
$
(6.62
)
 
$
(5.19
)
 
$
14.39

 
 
$
(0.93
)
Diluted
(6.62
)
 
(5.19
)
 
14.39

 
 
(0.93
)
Weighted average common shares outstanding (in thousands):
 

 
 

 
 
 
 
 

Basic
53,293

 
81,295

 
81,847

 
 
34,391

Diluted
53,293

 
81,295

 
81,847

 
 
34,391

 
 
 
 
 
 
 
 
 
See notes to Consolidated Financial Statements.
 

42



VERSO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
Successor
 
Year Ended
 
Year Ended
 
January 1, 2016
 
 
July 15, 2016
 
December 31,
 
December 31,
 
Through
 
 
Through
(Dollars in millions)
2014
 
2015
 
July 14, 2016
 
 
December 31, 2016
Net (loss) income
$
(353
)
 
$
(422
)
 
$
1,178

 
 
$
(32
)
Other comprehensive (loss) income:
 

 
 

 
 
 
 
 

Defined benefit pension plan:
 

 
 

 
 
 
 
 

Pension liability adjustment, net
(17
)
 
(78
)