UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010
8540 Gander Creek Drive
Miamisburg, Ohio 45342
877.855.7243
Commission File Number | Registrant | IRS Employer Identification Number | State of Incorporation | |||
| 001-32956 | NEWPAGE HOLDING CORPORATION | 05-0616158 | Delaware | |||
| 333-125952 | NEWPAGE CORPORATION | 05-0616156 | Delaware |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| NewPage Holding Corporation | Yes x | No ¨ | ||||||
| NewPage Corporation | Yes x | No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
NewPage Holding Corporation | Yes ¨ | No ¨ | ||||||
NewPage Corporation | Yes ¨ | No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| NewPage Holding Corporation | Large accelerated filer ¨ | Accelerated filer | ¨ | |||||||
| Non-accelerated filer x | Smaller reporting company | ¨ | ||||||||
| NewPage Corporation | Large accelerated filer ¨ | Accelerated filer | ¨ | |||||||
| Non-accelerated filer x | Smaller reporting company | ¨ | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
NewPage Holding Corporation | Yes ¨ | No x | ||||||
NewPage Corporation | Yes ¨ | No x |
There were 10 Common Shares, $0.01 per share par value, of NewPage Holding Corporation and 100 Common Shares, $0.01 per share par value, of NewPage Corporation outstanding as of August 1, 2010.
This Form 10-Q is a combined quarterly report being filed separately by two registrants: NewPage Holding Corporation and NewPage Corporation. NewPage Corporation meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
References to “NewPage Holding” refer to NewPage Holding Corporation, a Delaware corporation; references to “NewPage” refer to NewPage Corporation, a Delaware corporation and a wholly-owned subsidiary of NewPage Holding. References to “NewPage Group” refer to NewPage Group Inc., a Delaware corporation and the direct parent of NewPage Holding. Unless the context provides otherwise, references to “we,” “us” and “our” refer to NewPage Holding and its subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of NewPage Holding’s wholly-owned subsidiary, NewPage, except for activity related to NewPage Holding’s debt and equity and income tax effects. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “plans,” “estimates,” “anticipates,” “believes,” “expects,” “intends” and similar expressions. Although we believe that these forward-looking statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected or assumed in our forward-looking statements. These factors, risks and uncertainties include, among others, the following:
| • | our substantial level of indebtedness |
| • | changes in the supply of, demand for, or prices of our products |
| • | general economic and business conditions in the United States and Canada and elsewhere |
| • | the ability of our customers to continue as a going concern, including our ability to collect accounts receivable according to customary business terms |
| • | the activities of competitors, including those that may be engaged in unfair trade practices |
| • | changes in significant operating expenses, including raw material and energy costs |
| • | changes in currency exchange rates |
| • | changes in the availability of capital |
| • | changes in the regulatory environment, including requirements for enhanced environmental compliance |
| • | the other factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 |
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason, except as required by law.
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| Page | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: | |||
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 | 3 | |||
| 4 | ||||
Consolidated Statements of Equity (Deficit) for the first half ended June 30, 2010 and 2009 | 6 | |||
Condensed Consolidated Statements of Cash Flows for the first half ended June 30, 2010 and 2009 | 8 | |||
| 9 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
Item 3. | 30 | |||
Item 4T. | 30 | |||
PART II | OTHER INFORMATION | |||
Item 1. | 31 | |||
Item 6. | 31 | |||
| 33 | ||||
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
JUNE 30, 2010 AND DECEMBER 31, 2009
Dollars in millions, except per share amounts
| NewPage Holding | NewPage | |||||||||||||||
| June 30, 2010 | Dec. 31, 2009 | June 30, 2010 | Dec. 31, 2009 | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 7 | $ | 5 | $ | 7 | $ | 5 | ||||||||
Accounts receivable, net | 296 | 296 | 296 | 296 | ||||||||||||
Inventories (Note 3) | 552 | 602 | 552 | 602 | ||||||||||||
Other current assets | 30 | 23 | 30 | 23 | ||||||||||||
Total current assets | 885 | 926 | 885 | 926 | ||||||||||||
Property, plant and equipment, net of accumulated depreciation of $1,032 as of June 30, 2010 and $905 as of December 31, 2009 | 2,847 | 2,965 | 2,847 | 2,965 | ||||||||||||
Other assets | 118 | 115 | 117 | 114 | ||||||||||||
TOTAL ASSETS | $ | 3,850 | $ | 4,006 | $ | 3,849 | $ | 4,005 | ||||||||
LIABILITIES AND EQUITY (DEFICIT) | ||||||||||||||||
Accounts payable | $ | 240 | $ | 230 | $ | 240 | $ | 230 | ||||||||
Other current liabilities | 248 | 238 | 248 | 238 | ||||||||||||
Total current liabilities | 488 | 468 | 488 | 468 | ||||||||||||
Long-term debt (Note 5) | 3,402 | 3,231 | 3,192 | 3,030 | ||||||||||||
Other long-term obligations | 482 | 493 | 482 | 493 | ||||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||||
EQUITY (DEFICIT) | ||||||||||||||||
Common stock, NewPage Holding—10 shares authorized issued and outstanding, $0.01 per share par value; NewPage—100 shares authorized, issued and outstanding, $0.01 per share par value | — | — | — | — | ||||||||||||
Additional paid-in capital | 705 | 685 | 811 | 791 | ||||||||||||
Accumulated deficit | (964 | ) | (606 | ) | (871 | ) | (522 | ) | ||||||||
Accumulated other comprehensive loss | (263 | ) | (265 | ) | (253 | ) | (255 | ) | ||||||||
Total equity (deficit) | (522 | ) | (186 | ) | (313 | ) | 14 | |||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 3,850 | $ | 4,006 | $ | 3,849 | $ | 4,005 | ||||||||
See notes to condensed consolidated financial statements.
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NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SECOND QUARTER AND FIRST HALF ENDED JUNE 30, 2010 AND 2009
Dollars in millions
| NewPage Holding | ||||||||||||||||
| Second Quarter Ended June 30, | First Half Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales | $ | 890 | $ | 736 | $ | 1,707 | $ | 1,458 | ||||||||
Cost of sales | 913 | 756 | 1,762 | 1,476 | ||||||||||||
Selling, general and administrative expenses | 58 | 49 | 107 | 95 | ||||||||||||
Interest expense (including non-cash interest expense of $16, $11, $32 and $23) | 97 | 72 | 198 | 144 | ||||||||||||
Other (income) expense, net (Note 8) | — | (125 | ) | (3 | ) | (125 | ) | |||||||||
Income (loss) before income taxes | (178 | ) | (16 | ) | (357 | ) | (132 | ) | ||||||||
Income tax (benefit) | 1 | (7 | ) | 1 | (10 | ) | ||||||||||
Net income (loss) | (179 | ) | (9 | ) | (358 | ) | (122 | ) | ||||||||
Net income (loss)—noncontrolling interests | — | 2 | — | 3 | ||||||||||||
Net income (loss) attributable to the company | $ | (179 | ) | $ | (11 | ) | $ | (358 | ) | $ | (125 | ) | ||||
See notes to condensed consolidated financial statements.
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NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SECOND QUARTER AND FIRST HALF ENDED JUNE 30, 2010 AND 2009
Dollars in millions
| NewPage | ||||||||||||||||
| Second Quarter Ended June 30, | First Half Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales | $ | 890 | $ | 736 | $ | 1,707 | $ | 1,458 | ||||||||
Cost of sales | 913 | 756 | 1,762 | 1,476 | ||||||||||||
Selling, general and administrative expenses | 58 | 49 | 107 | 95 | ||||||||||||
Interest expense (including non-cash interest expense of $11, $6, $23 and $13) | 92 | 67 | 189 | 134 | ||||||||||||
Other (income) expense, net (Note 8) | — | (125 | ) | (3 | ) | (125 | ) | |||||||||
Income (loss) before income taxes | (173 | ) | (11 | ) | (348 | ) | (122 | ) | ||||||||
Income tax (benefit) | 1 | (7 | ) | 1 | (10 | ) | ||||||||||
Net income (loss) | (174 | ) | (4 | ) | (349 | ) | (112 | ) | ||||||||
Net income (loss)—noncontrolling interests | — | 2 | — | 3 | ||||||||||||
Net income (loss) attributable to the company | $ | (174 | ) | $ | (6 | ) | $ | (349 | ) | $ | (115 | ) | ||||
See notes to condensed consolidated financial statements.
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NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (unaudited)
FIRST HALF ENDED JUNE 30, 2010
Dollars in millions
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive Income | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||
Balance at December 31, 2009 | 10 | $ | — | $ | 685 | $ | (606 | ) | $ | (265 | ) | $ | (186 | ) | ||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | (358 | ) | (358 | ) | ||||||||||||||||
Amortization of net actuarial loss on defined benefit plans | 1 | 1 | ||||||||||||||||||
Cash-flow hedges: | ||||||||||||||||||||
Change in unrealized gains (losses), net of tax benefit of $1 | (1 | ) | (1 | ) | ||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $1 | 1 | 1 | ||||||||||||||||||
Foreign currency translation adjustment | 1 | 1 | ||||||||||||||||||
Comprehensive income (loss) | $ | (356 | ) | |||||||||||||||||
Equity awards (Note 6) | 20 | 20 | ||||||||||||||||||
Balance at June 30, 2010 | 10 | $ | — | $ | 705 | $ | (964 | ) | $ | (263 | ) | $ | (522 | ) | ||||||
FIRST HALF ENDED JUNE 30, 2009
Dollars in millions
| Equity Attributable to the Company | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive Income | Total Attributable to the | Noncontrolling | |||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Company | Interests | Total | |||||||||||||||||||||
Balance at December 31, 2008 | 10 | $ | — | $ | 661 | $ | (283 | ) | $ | (402 | ) | $ | (24 | ) | $ | 26 | $ | 2 | ||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | (125 | ) | (125 | ) | 3 | (122 | ) | |||||||||||||||||||||
Amortization of net actuarial loss on defined benefit plans, net of tax of $5 | 5 | 5 | 5 | |||||||||||||||||||||||||
Cash-flow hedges: | ||||||||||||||||||||||||||||
Change in unrealized gains (losses), net of tax benefit of $1 | (3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $7 | 11 | 11 | 11 | |||||||||||||||||||||||||
Foreign currency translation adjustment | 6 | 6 | 6 | |||||||||||||||||||||||||
Comprehensive income (loss) | $ | (106 | ) | $ | 3 | $ | (103 | ) | ||||||||||||||||||||
Equity awards (Note 6) | 6 | 6 | 6 | |||||||||||||||||||||||||
Loan to NewPage Group | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||
Balance at June 30, 2009 | 10 | $ | — | $ | 665 | $ | (408 | ) | $ | (383 | ) | $ | (126 | ) | $ | 29 | $ | (97 | ) | |||||||||
See notes to condensed consolidated financial statements.
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NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (unaudited)
FIRST HALF ENDED JUNE 30, 2010
Dollars in millions
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive Income | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Total | |||||||||||||||
Balance at December 31, 2009 | 100 | $ | — | $ | 791 | $ | (522 | ) | $ | (255 | ) | $ | 14 | |||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | (349 | ) | (349 | ) | ||||||||||||||||
Amortization of net actuarial loss on defined benefit plans | 1 | 1 | ||||||||||||||||||
Cash-flow hedges: | ||||||||||||||||||||
Change in unrealized gains (losses), net of tax benefit of $1 | (1 | ) | (1 | ) | ||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $1 | 1 | 1 | ||||||||||||||||||
Foreign currency translation adjustment | 1 | 1 | ||||||||||||||||||
Comprehensive income (loss) | $ | (347 | ) | |||||||||||||||||
Equity awards (Note 6) | 20 | 20 | ||||||||||||||||||
Balance at June 30, 2010 | 100 | $ | — | $ | 811 | $ | (871 | ) | $ | (253 | ) | $ | (313 | ) | ||||||
FIRST HALF ENDED JUNE 30, 2009
Dollars in millions
| Equity Attributable to the Company | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive Income | Total Attributable to the | Noncontrolling | |||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Company | Interests | Total | |||||||||||||||||||||
Balance at December 31, 2008 | 100 | $ | — | $ | 767 | $ | (214 | ) | $ | (396 | ) | $ | 157 | $ | 26 | $ | 183 | |||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | (115 | ) | (115 | ) | 3 | (112 | ) | |||||||||||||||||||||
Amortization of net actuarial loss on defined benefit plans, net of tax of $5 | 5 | 5 | 5 | |||||||||||||||||||||||||
Cash-flow hedges: | ||||||||||||||||||||||||||||
Change in unrealized gains (losses), net of tax benefit of $1 | (3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||
Reclassification adjustment to net income (loss), net of tax of $7 | 11 | 11 | 11 | |||||||||||||||||||||||||
Foreign currency translation adjustment | 6 | 6 | 6 | |||||||||||||||||||||||||
Comprehensive income (loss) | $ | (96 | ) | $ | 3 | $ | (93 | ) | ||||||||||||||||||||
Equity awards (Note 6) | 6 | 6 | 6 | |||||||||||||||||||||||||
Loans to parent companies | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||
Balance at June 30, 2009 | 100 | $ | — | $ | 771 | $ | (329 | ) | $ | (377 | ) | $ | 65 | $ | 29 | $ | 94 | |||||||||||
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FIRST HALF ENDED JUNE 30, 2010 AND 2009
Dollars in millions
| NewPage Holding | NewPage | |||||||||||||||
| First Half Ended June 30, 2010 | First Half Ended June 30, 2009 | First Half Ended June 30, 2010 | First Half Ended June 30, 2009 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income (loss) | $ | (358 | ) | $ | (122 | ) | $ | (349 | ) | $ | (112 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | ||||||||||||||||
Depreciation and amortization | 135 | 139 | 135 | 139 | ||||||||||||
Non-cash interest expense | 32 | 23 | 23 | 13 | ||||||||||||
(Gain) loss on disposal and impairment of assets | 8 | 4 | 8 | 4 | ||||||||||||
Deferred income taxes | — | (11 | ) | — | (11 | ) | ||||||||||
Non-cash U.S. pension (income) expense | 17 | 25 | 17 | 25 | ||||||||||||
Equity award expense (Note 6) | 19 | 6 | 19 | 6 | ||||||||||||
Change in operating assets and liabilities | 20 | (98 | ) | 20 | (98 | ) | ||||||||||
Net cash provided by (used for) operating activities | (127 | ) | (34 | ) | (127 | ) | (34 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (31 | ) | (31 | ) | (31 | ) | (31 | ) | ||||||||
Proceeds from sales of assets | 12 | 22 | 12 | 22 | ||||||||||||
Other investing activities | (1 | ) | — | (1 | ) | — | ||||||||||
Net cash provided by (used for) investing activities | (20 | ) | (9 | ) | (20 | ) | (9 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from issuance of long-term debt | 67 | — | 67 | — | ||||||||||||
Payment of financing costs | (4 | ) | — | (4 | ) | — | ||||||||||
Loans to parent companies | — | (2 | ) | — | (2 | ) | ||||||||||
Repayments of long-term debt | — | (24 | ) | — | (24 | ) | ||||||||||
Borrowings on revolving credit facility | 442 | 587 | 442 | 587 | ||||||||||||
Payments on revolving credit facility | (358 | ) | (513 | ) | (358 | ) | (513 | ) | ||||||||
Net cash provided by (used for) financing activities | 147 | 48 | 147 | 48 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 2 | (2 | ) | 2 | (2 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 2 | 3 | 2 | 3 | ||||||||||||
Cash and cash equivalents at beginning of period | 5 | 3 | 5 | 3 | ||||||||||||
Cash and cash equivalents at end of period | $ | 7 | $ | 6 | $ | 7 | $ | 6 | ||||||||
SUPPLEMENTAL INFORMATION | ||||||||||||||||
Cash paid for interest | $ | 179 | $ | 121 | $ | 179 | $ | 121 | ||||||||
See notes to condensed consolidated financial statements.
8
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
NEWPAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dollars in millions, except per share amounts
| 1. | BASIS OF PRESENTATION |
NewPage Holding Corporation (“NewPage Holding”) is a holding company that owns all of the outstanding capital stock of NewPage Corporation. NewPage Corporation and its subsidiaries are engaged in manufacturing, marketing and distributing printing papers used primarily for commercial printing, magazines, catalogs, textbooks and labels. Our products include coated, uncoated, supercalendered, newsprint and specialty papers and market pulp. Our products are manufactured at multiple mills in the United States and one mill in Canada and are supported by multiple distribution and converting locations. We operate within one operating segment. The condensed consolidated financial statements include the accounts of NewPage Holding and all entities it controls. All intercompany transactions and balances have been eliminated.
Unless the context provides otherwise, the terms “we,” “our” and “us” refer to NewPage Holding and its consolidated subsidiaries, including NewPage Corporation, a separate public-reporting company. Unless otherwise noted, “NewPage” refers to NewPage Corporation and its consolidated subsidiaries. Other than NewPage Holding’s debt obligation and related financing costs, interest expense and income tax effects, all other assets, liabilities, income, expenses, and cash flows presented for all periods represent those of its wholly-owned subsidiary, NewPage. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
These interim condensed consolidated financial statements have not been audited. However, in the opinion of management, these financial statements include all normal recurring adjustments necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with U.S. GAAP have been condensed or omitted. The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the annual financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.
| 2. | FINANCIAL INSTRUMENTS |
Derivative Financial Instruments
We periodically use derivative financial instruments as part of our overall strategy to manage exposure to market risks associated with foreign currency exchange rate and natural gas price fluctuations. We do not hold or issue derivative financial instruments for trading purposes. We regularly monitor the credit-worthiness of the counterparties to our derivative instruments in order to manage our credit risk exposures under these agreements. Our risk of loss in the event of nonperformance by any counterparty under derivative financial instrument agreements is not considered material by management. These derivative instruments are measured at fair value and are classified as other assets or other long-term obligations on our balance sheets depending on the fair value of the instrument.
If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash-flow hedge, the effective portion of the change in the fair value of the derivative is recorded in
9
accumulated other comprehensive income (loss) and is recognized in the consolidated statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash-flow hedges and financial instruments not designated as hedges are recognized in earnings.
Prior to our debt refinancing in September 2009, we utilized interest rate swaps to manage our exposure to market risks from interest rate fluctuations. After our debt refinancing, we no longer have sufficient variable-rate debt exposure for our outstanding interest rate swaps to qualify for hedge accounting treatment and record the fair value of the interest rate swaps as other current liabilities with changes in fair value recognized as an adjustment to interest expense. We recognized in interest expense a (gain) loss of $(1) and $3 for the second quarter and first half ended June 30, 2010, for interest rate swaps that did not qualify for hedge accounting.
Interest Rates
As of June 30, 2010 and December 31, 2009, we had outstanding interest rate swaps totaling $750 and $900 for which we receive amounts based on LIBOR and pay amounts based on a fixed rate. These swaps expire from December 2010 through December 2012. As of June 30, 2010 and December 31, 2009, we also had outstanding a $200 interest rate swap that expires in December 2012 with an offsetting exposure for which we receive amounts based on a fixed rate and pay amounts based on LIBOR. During the first quarter of 2010, we locked in the floating rate components of the remaining interest rate swaps and subsequently settled the remaining liability in the third quarter of 2010. We measure the fair values of our interest rate swaps using observable interest-rate yield curves for comparable assets and liabilities at commonly quoted intervals. We paid cash of $6 and $8 on our interest rate agreements for the second quarter ended June 30, 2010 and 2009 and we paid cash of $13 and $16 on our interest rate agreements for the first half ended June 30, 2010 and 2009.
Natural Gas
In order to hedge the future cost of natural gas consumed at our mills, we engage in financial hedging of future gas purchase prices, designated as cash flow hedges. We hedge with financial instruments that are priced based on New York Mercantile Exchange (“NYMEX”) natural gas futures contracts. We do not hedge basis (the effect of varying delivery points or locations) or transportation costs (the cost to transport the gas from the delivery point to a company location) under these transactions. As of June 30, 2010 and December 31, 2009, we were party to natural gas futures contracts for notional amounts aggregating 1,420,000 and 2,130,000 MMBTUs, which expire through October 2011. We measure the fair values of our natural gas contracts based on natural gas futures contracts priced on the NYMEX.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2010 and December 31, 2009, the fair values and carrying amounts of our financial assets and liabilities measured on a recurring basis are as follows:
Significant other observable inputs (Level 2) | June 30, 2010 | Dec. 31, 2009 | ||||||
Qualifying as hedges— | ||||||||
Other long-term liabilities—natural gas contracts | $ | (2 | ) | $ | (2 | ) | ||
Not qualifying as hedges— | ||||||||
Other current liabilities: | ||||||||
Interest rate swap agreements | $ | (29 | ) | $ | (35 | ) | ||
Interest rate swap agreements | 8 | 4 | ||||||
The amount of gain (loss) on cash flow hedges recognized in accumulated other comprehensive income (loss) (“AOCI”) and the amount reclassified to income (loss) during the second quarter and first half ended June 30, 2010 and 2009 are as follows:
Derivative Type | Amount of gain (loss) recognized in OCI | Location of gain (loss) reclassified from AOCI to income (loss) | Amount of gain (loss) reclassified from AOCI to income (loss) | |||||||
Second Quarter Ended June 30, 2010 | ||||||||||
Natural gas contracts | $ | — | Cost of sales | $ | (1 | ) | ||||
First Half Ended June 30, 2010 | ||||||||||
Natural gas contracts | $ | (2 | ) | Cost of sales | $ | (2 | ) | |||
Second Quarter Ended June 30, 2009 | ||||||||||
Interest rate swap agreements | $ | 1 | Interest expense | $ | (9 | ) | ||||
Natural gas contracts | — | Cost of sales | (1 | ) | ||||||
First Half Ended June 30, 2009 | ||||||||||
Interest rate swap agreements | $ | (1 | ) | Interest expense | $ | (16 | ) | |||
Natural gas contracts | (3 | ) | Cost of sales | (2 | ) | |||||
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Assets and Liabilities Not Carried at Fair Value
The fair value of long-term debt is based upon quoted market prices for the same or similar issues or on the current interest rates available to us for debt of similar terms and maturities. At June 30, 2010 and December 31, 2009, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value. Details of our long-term debt are as follows:
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Fair Value | Carrying Amount | Fair Value | Carrying Amount | |||||||||||||
Long-term debt: | ||||||||||||||||
NewPage Holding | $ | (2,362 | ) | $ | (3,251 | ) | $ | (2,686 | ) | $ | (3,083 | ) | ||||
NewPage | (2,330 | ) | (3,041 | ) | (2,624 | ) | (2,882 | ) | ||||||||
| 3. | INVENTORIES |
Inventories as of June 30, 2010 and December 31, 2009 consist of:
| June 30, 2010 | Dec. 31, 2009 | |||||
Finished and in-process goods | $ | 329 | $ | 376 | ||
Raw materials | 85 | 86 | ||||
Stores and supplies | 138 | 140 | ||||
| $ | 552 | $ | 602 | |||
If inventories had been valued at current costs, they would have been valued at $530 and $607 at June 30, 2010 and December 31, 2009.
| 4. | ACCOUNTS PAYABLE |
Accounts payable as of June 30, 2010 and December 31, 2009 includes $24 and $13 of outstanding checks in excess of cash.
| 5. | LONG-TERM DEBT |
The balances of long-term debt as of June 30, 2010 and December 31, 2009 are as follows:
| June 30, 2010 | Dec. 31, 2009 | |||||
NewPage: | ||||||
Revolving credit facility | $ | 136 | $ | 52 | ||
11.375% first-lien senior secured notes (face amount $1,770 and $1,700) | 1,676 | 1,601 | ||||
Floating rate second-lien senior secured notes (LIBOR plus 6.25%) | 225 | 225 | ||||
10% second-lien senior secured notes (face amount $806) | 805 | 805 | ||||
12% senior subordinated notes (face amount $200) | 199 | 199 | ||||
Capital lease | 151 | 148 | ||||
Subtotal | 3,192 | 3,030 | ||||
NewPage Holding— | ||||||
Senior unsecured NewPage Holding PIK Notes (face amount $215 and $207; LIBOR plus 7.00%) | 210 | 201 | ||||
Long-term debt | $ | 3,402 | $ | 3,231 | ||
In February 2010, we issued an additional $70 in aggregate principal amount of 11.375% senior secured notes due 2014 (the “Additional First-Lien Notes”) in a private placement. The Additional First-Lien Notes have substantially the same terms as the existing first-lien senior secured notes.
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| 6. | EQUITY |
Included in selling, general and administrative expenses is equity award expense of $11 and $3 for the second quarter ended June 30, 2010 and 2009 and $19 and $6 for the first half ended June 30, 2010 and 2009. In February 2010, the compensation committee amended the outstanding stock option awards of employees and directors to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009. Included in the amount of equity award expense for the second quarter and first half ended June 30, 2010 is $1 and $7 to reflect the effects of the modification and the vesting of the prior-year unearned performance-based options. Also included in the amount of equity award expense for the second quarter and first half ended June 30, 2010 is $4 of remaining unamortized grant-date fair value relating to the accelerated vesting of stock options previously awarded to certain former executive officers. In accordance with their stock option agreements, upon their separation all of their outstanding stock options became vested. In the unlikely event these individuals choose to exercise their options, they have 90 days in which to purchase their shares.
The following table summarizes activity in the plan:
Shares of NewPage Group issuable under stock options, in thousands | Options | Weighted- average exercise price | ||||
Outstanding at December 31, 2009 | 5,070 | $ | 20.47 | |||
Granted | 2,391 | 4.33 | ||||
Forfeited or expired | (1,898 | ) | 19.63 | |||
Outstanding at June 30, 2010 | 5,563 | 1.96 | ||||
Exercisable at June 30, 2010 | 3,960 | 2.00 | ||||
The outstanding options and the exercisable options at June 30, 2010 have a weighted-average remaining contractual life of 5 years.
We utilize a Black-Scholes pricing model to determine the fair value of options granted. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors (term of option). We estimate the expected term of options granted by incorporating the contractual term of the options and employees’ expected exercise behaviors. We estimate the volatility of NewPage Group’s common stock by considering volatility of appropriate peer companies and adjusting for factors unique to our stock, including the effect of debt leverage.
Assumptions used to determine the fair value of option grants are as follows:
| First Half Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
Weighted-average fair value of options granted | $ | 2.68 | $ | 3.06 | ||||
Weighted-average assumptions used for grants: | ||||||||
Expected volatility | 90 | % | 90 | % | ||||
Risk-free interest rate | 2.0 | % | 2.0 | % | ||||
Expected life of option (in years) | 4 | 5 | ||||||
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| 7. | RETIREMENT AND OTHER POSTRETIREMENT BENEFITS |
A summary of the components of net periodic costs for the second quarter and first half ended June 30, 2010 and 2009 is as follows:
Pension Plans
| U.S. Plans | Canadian Plans | |||||||||||||||
| Second Quarter Ended June 30, | Second Quarter Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost | $ | 6 | $ | 6 | $ | 1 | $ | 1 | ||||||||
Interest cost | 16 | 16 | 5 | 5 | ||||||||||||
Expected return on plan assets | (17 | ) | (14 | ) | (5 | ) | (4 | ) | ||||||||
Amortization of net loss | 3 | 5 | — | — | ||||||||||||
Net periodic cost | $ | 8 | $ | 13 | $ | 1 | $ | 2 | ||||||||
| U.S. Plans | Canadian Plans | |||||||||||||||
| First Half Ended June 30, | First Half Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost | $ | 12 | $ | 11 | $ | 2 | $ | 1 | ||||||||
Interest cost | 32 | 32 | 10 | 9 | ||||||||||||
Expected return on plan assets | (33 | ) | (28 | ) | (10 | ) | (7 | ) | ||||||||
Amortization of net loss | 6 | 10 | 1 | — | ||||||||||||
Net periodic cost | $ | 17 | $ | 25 | $ | 3 | $ | 3 | ||||||||
Other Postretirement Plans
| U.S. Plans | Canadian Plans | |||||||||||||
| Second Quarter Ended June 30, | Second Quarter Ended June 30, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||
Service cost | $ | 1 | $ | 1 | $ | 1 | $ | — | ||||||
Interest cost | 1 | 3 | — | 1 | ||||||||||
Amortization of net prior service cost (credit) | (3 | ) | (1 | ) | — | — | ||||||||
Net periodic cost (income) | $ | (1 | ) | $ | 3 | $ | 1 | $ | 1 | |||||
| U.S. Plans | Canadian Plans | |||||||||||||
| First Half Ended June 30, | First Half Ended June 30, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||
Service cost | $ | 1 | $ | 1 | $ | 1 | $ | — | ||||||
Interest cost | 3 | 6 | — | 1 | ||||||||||
Amortization of net prior service cost (credit) | (6 | ) | (1 | ) | — | — | ||||||||
Net periodic cost (income) | $ | (2 | ) | $ | 6 | $ | 1 | $ | 1 | |||||
| 8. | OTHER (INCOME) EXPENSE |
During the first half ended June 30, 2010, we recognized $11 of net loss on disposal and impairment of assets in other (income) expense. In addition, during the first half ended June 30, 2010, we recognized $(13) of (income) for alternative fuel mixture tax credits, as income recognition criteria was met. We recognized $(120) of (income) during the second quarter and first half ended June 30, 2009 for alternative fuel mixture tax credits.
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| 9. | INCOME TAXES |
For the second quarter and first half ended June 30, 2010 and 2009, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits. For the second quarter and first half ended June 30, 2009, we allocated $7 and $11 of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations.
| 10. | RESTRUCTURING |
During 2008, we announced actions being taken to integrate NewPage operations and the former Stora Enso North America facilities and services. The restructuring actions included the permanent closure of six paper machines and two mills affecting approximately 980 employees, the permanent closure of a converting facility affecting approximately 160 employees and the reduction of personnel in other areas, including sales, finance and other support functions, affecting approximately 200 employees. Most of the affected employees had separated from the company by December 31, 2008 with the remainder separating in 2009 and 2010. We expect remaining closure-related activities to be completed in 2010.
The activity in the accrued restructuring liability relating to these actions for the first half ended June 30, 2010 and 2009 was as follows:
| Closure Costs | Employee Costs | |||||||
First Half ended June 30, 2010 | ||||||||
Balance accrued at December 31, 2009 | $ | 4 | $ | 3 | ||||
Payments | (4 | ) | (2 | ) | ||||
Balance accrued at June 30, 2010 | $ | — | $ | 1 | ||||
First Half ended June 30, 2009 | ||||||||
Balance accrued at December 31, 2008 | $ | 14 | $ | 19 | ||||
Adjustments | — | (1 | ) | |||||
Payments | (4 | ) | (11 | ) | ||||
Balance accrued at June 30, 2009 | $ | 10 | $ | 7 | ||||
| 11. | DISPOSITION OF ASSETS |
In April 2010, NewPage Port Hawkesbury Corp. (“NPPH”), an indirect wholly-owned subsidiary of NewPage, announced that it entered into an agreement with Nova Scotia Power Inc. (“NSPI”) to sell certain assets, including a boiler at the Port Hawkesbury, Nova Scotia mill, for a cash sales price of Canadian $80. We expect to close on the transaction in the fourth quarter of 2010, which is subject to customary conditions, including the receipt of regulatory approvals. In addition, NSPI and NPPH have entered into an engineering, procurement and construction agreement for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately Canadian $93. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for NSPI.
15
In February 2010, Consolidated Water Power Company (“CWPCo”), an indirect wholly-owned subsidiary of NewPage, announced that it signed an agreement with Wisconsin Rapids Water Works Lighting Commission to sell the CWPCo utility transmission and distribution assets (“CWPCo Utility”). The purchase price will be equal to the net book value of the assets at the time of closing, which is subject to regulatory approvals. In March 2010, CWPCo announced that it entered into a nonbinding letter of intent to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70. The closing of the transaction is subject to completion of the CWPCO Utility sale, execution of a sales agreement with Great Lakes Utilities and regulatory approval, and is not expected to close in 2010. We continue to hold and operate the assets in the normal course of our operations.
In March 2009, NewPage Wisconsin System Inc. (“NPWSI”), an indirect wholly-owned subsidiary of NewPage, completed the sale of a hydroelectric generating facility located in Niagara, Wisconsin to Northbrook Wisconsin, LLC for a net cash sales price of $22. Included in cost of sales for the first half ended June 30, 2009 is a loss on the sale of $3.
| 12. | COMMITMENTS AND CONTINGENCIES |
Claims have been made against us for the costs of environmental remediation measures taken or to be taken. Reserves for these liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. We are involved in various other litigation and administrative proceedings arising in the normal course of business. Although the ultimate outcome of these matters cannot be predicted with certainty, we do not believe that the currently expected outcome of any matter, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on our financial condition, results of operations or liquidity.
| 13. | SUPPLEMENTAL CONSOLIDATING INFORMATION |
NewPage has issued $1,770 face amount of 11.375% senior secured notes due May 2014, $225 face amount of floating rate senior secured notes due May 2012, $806 face amount of 10% senior secured notes due May 2012 and $200 face amount of 12% senior subordinated notes due May 2013 (collectively, the “Notes”). The Notes are jointly and severally guaranteed on a full and unconditional basis by NewPage’s 100%-owned subsidiaries, except Consolidated Water Power Company, our non-guarantor subsidiary.
The following condensed consolidating financial statements have been prepared from financial information on the same basis of accounting as the consolidated financial statements. Investments in our subsidiaries are accounted for under the equity method. Certain adjustments totaling $12 have been made that decrease the net losses of the parent and guarantor subsidiaries columns in the supplemental consolidating statement of operations for the first half ended June 30, 2009, to correct the classification of certain expenses in the period ended March 31, 2009. This adjustment is not considered material to the periods to which it relates.
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2010
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidation/ Eliminations | Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Cash and cash equivalents | $ | 2 | $ | (1 | ) | $ | 6 | $ | — | $ | 7 | ||||||||
Accounts receivable | 234 | 61 | 1 | — | 296 | ||||||||||||||
Inventories | 262 | 290 | — | — | 552 | ||||||||||||||
Other current assets | 21 | 8 | 1 | — | 30 | ||||||||||||||
Total current assets | 519 | 358 | 8 | — | 885 | ||||||||||||||
Intercompany receivables | 1,278 | 415 | 123 | (1,816 | ) | — | |||||||||||||
Property, plant and equipment, net | 30 | 2,762 | 55 | — | 2,847 | ||||||||||||||
Investment in subsidiaries | 1,773 | 65 | — | (1,838 | ) | — | |||||||||||||
Other assets | 109 | 7 | 1 | — | 117 | ||||||||||||||
TOTAL ASSETS | $ | 3,709 | $ | 3,607 | $ | 187 | $ | (3,654 | ) | $ | 3,849 | ||||||||
LIABILITIES AND EQUITY (DEFICIT) | |||||||||||||||||||
Accounts payable | $ | 56 | $ | 184 | $ | — | $ | — | $ | 240 | |||||||||
Other current liabilities | 120 | 122 | 6 | — | 248 | ||||||||||||||
Total current liabilities | 176 | 306 | 6 | — | 488 | ||||||||||||||
Intercompany payables | 415 | 1,295 | 106 | (1,816 | ) | — | |||||||||||||
Long-term debt | 3,041 | 151 | — | — | 3,192 | ||||||||||||||
Other long-term liabilities | 390 | 82 | 10 | — | 482 | ||||||||||||||
Equity (deficit) | (313 | ) | 1,773 | 65 | (1,838 | ) | (313 | ) | |||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 3,709 | $ | 3,607 | $ | 187 | $ | (3,654 | ) | $ | 3,849 | ||||||||
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidation/ Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 1 | $ | — | $ | 4 | $ | — | $ | 5 | ||||||
Accounts receivable | 230 | 65 | 1 | — | 296 | |||||||||||
Inventories | 293 | 309 | — | — | 602 | |||||||||||
Other current assets | 15 | 7 | 1 | — | 23 | |||||||||||
Total current assets | 539 | 381 | 6 | — | 926 | |||||||||||
Intercompany receivables | 1,262 | 274 | 85 | (1,621 | ) | — | ||||||||||
Property, plant and equipment, net | 41 | 2,867 | 57 | — | 2,965 | |||||||||||
Investment in subsidiaries | 1,783 | 66 | — | (1,849 | ) | — | ||||||||||
Other assets | 110 | 3 | 1 | — | 114 | |||||||||||
TOTAL ASSETS | $ | 3,735 | $ | 3,591 | $ | 149 | $ | (3,470 | ) | $ | 4,005 | |||||
LIABILITIES AND EQUITY | ||||||||||||||||
Accounts payable | $ | 54 | $ | 176 | $ | — | $ | — | $ | 230 | ||||||
Other current liabilities | 117 | 116 | 5 | — | 238 | |||||||||||
Total current liabilities | 171 | 292 | 5 | — | 468 | |||||||||||
Intercompany payables | 274 | 1,279 | 68 | (1,621 | ) | — | ||||||||||
Long-term debt | 2,882 | 148 | — | — | 3,030 | |||||||||||
Other long-term liabilities | 394 | 89 | 10 | — | 493 | |||||||||||
Equity | 14 | 1,783 | 66 | (1,849 | ) | 14 | ||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 3,735 | $ | 3,591 | $ | 149 | $ | (3,470 | ) | $ | 4,005 | |||||
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NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2010
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidation/ Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 801 | $ | 818 | $ | 22 | $ | (751 | ) | $ | 890 | ||||||||
Cost of sales | 816 | 827 | 21 | (751 | ) | 913 | |||||||||||||
Selling, general and administrative expenses | 57 | 1 | — | — | 58 | ||||||||||||||
Equity in (earnings) loss of subsidiaries | 12 | (1 | ) | — | (11 | ) | — | ||||||||||||
Interest expense | 89 | 3 | — | — | 92 | ||||||||||||||
Other (income) expense, net | 1 | (1 | ) | — | — | — | |||||||||||||
Income (loss) before income taxes | (174 | ) | (11 | ) | 1 | 11 | (173 | ) | |||||||||||
Income tax (benefit) | — | 1 | — | — | 1 | ||||||||||||||
Net income (loss) | $ | (174 | ) | $ | (12 | ) | $ | 1 | $ | 11 | $ | (174 | ) | ||||||
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FIRST HALF ENDED JUNE 30, 2010
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidation/ Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 1,533 | $ | 1,576 | $ | 43 | $ | (1,445 | ) | $ | 1,707 | ||||||||
Cost of sales | 1,568 | 1,597 | 42 | (1,445 | ) | 1,762 | |||||||||||||
Selling, general and administrative expenses | 106 | 1 | — | — | 107 | ||||||||||||||
Equity in (earnings) loss of subsidiaries | 39 | (1 | ) | — | (38 | ) | — | ||||||||||||
Interest expense | 182 | 7 | — | — | 189 | ||||||||||||||
Other (income) expense, net | (13 | ) | 10 | — | — | (3 | ) | ||||||||||||
Income (loss) before income taxes | (349 | ) | (38 | ) | 1 | 38 | (348 | ) | |||||||||||
Income tax (benefit) | — | 1 | — | — | 1 | ||||||||||||||
Net income (loss) | $ | (349 | ) | $ | (39 | ) | $ | 1 | $ | 38 | $ | (349 | ) | ||||||
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NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2009
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiary | Consolidation/ Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 562 | $ | 716 | $ | 20 | $ | (562 | ) | $ | 736 | |||||||
Cost of sales | 595 | 705 | 20 | (564 | ) | 756 | ||||||||||||
Selling, general and administrative expenses | 44 | 5 | — | — | 49 | |||||||||||||
Equity in (earnings) loss of subsidiaries | (1 | ) | — | — | 1 | — | ||||||||||||
Interest expense | 64 | 3 | — | — | 67 | |||||||||||||
Other (income) expense, net | (127 | ) | 2 | — | — | (125 | ) | |||||||||||
Income (loss) before income taxes | (13 | ) | 1 | — | 1 | (11 | ) | |||||||||||
Income tax (benefit) | (7 | ) | — | — | — | (7 | ) | |||||||||||
Net income (loss) | (6 | ) | 1 | — | 1 | (4 | ) | |||||||||||
Net income (loss)—noncontrolling interests | — | — | — | 2 | 2 | |||||||||||||
Net income (loss) attributable to the company | $ | (6 | ) | $ | 1 | $ | — | $ | (1 | ) | $ | (6 | ) | |||||
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FIRST HALF ENDED JUNE 30, 2009
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiary | Consolidation/ Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 1,072 | $ | 1,454 | $ | 41 | $ | (1,109 | ) | $ | 1,458 | |||||||
Cost of sales | 1,111 | 1,436 | 41 | (1,112 | ) | 1,476 | ||||||||||||
Selling, general and administrative expenses | 87 | 8 | — | — | 95 | |||||||||||||
Equity in (earnings) loss of subsidiaries | (4 | ) | — | — | 4 | — | ||||||||||||
Interest expense | 129 | 5 | — | — | 134 | |||||||||||||
Other (income) expense, net | (126 | ) | 1 | — | — | (125 | ) | |||||||||||
Income (loss) before income taxes | (125 | ) | 4 | — | (1 | ) | (122 | ) | ||||||||||
Income tax (benefit) | (10 | ) | — | — | — | (10 | ) | |||||||||||
Net income (loss) | (115 | ) | 4 | — | (1 | ) | (112 | ) | ||||||||||
Net income (loss)—noncontrolling interests | — | — | — | 3 | 3 | |||||||||||||
Net income (loss) attributable to the company | $ | (115 | ) | $ | 4 | $ | — | $ | (4 | ) | $ | (115 | ) | |||||
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST HALF ENDED JUNE 30, 2010
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidation/ Eliminations | Consolidated | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITES | ||||||||||||||||||
Net cash provided by (used for) operating activities | $ | (143 | ) | $ | 14 | $ | 2 | $ | — | $ | (127 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||
Capital expenditures | (3 | ) | (28 | ) | — | — | (31 | ) | ||||||||||
Proceeds from sales of assets | — | 12 | — | — | 12 | |||||||||||||
Other investing activities | — | (1 | ) | — | — | (1 | ) | |||||||||||
Net cash provided by (used for) investing activities | (3 | ) | (17 | ) | — | — | (20 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||
Proceeds from issuance of long-term debt | 67 | — | — | — | 67 | |||||||||||||
Payment of financing costs | (4 | ) | — | — | — | (4 | ) | |||||||||||
Borrowings on revolving credit facility | 442 | — | — | — | 442 | |||||||||||||
Payments on revolving credit facility | (358 | ) | — | — | — | (358 | ) | |||||||||||
Net cash provided by (used for) financing activities | 147 | — | — | — | 147 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalent | — | 2 | — | — | 2 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 1 | (1 | ) | 2 | — | 2 | ||||||||||||
Cash and cash equivalents at beginning of period | 1 | — | 4 | — | 5 | |||||||||||||
Cash and cash equivalents at end of period | $ | 2 | $ | (1 | ) | $ | 6 | $ | — | $ | 7 | |||||||
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NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FIRST HALF ENDED JUNE 30, 2009
| NewPage Corporation | Guarantor Subsidiaries | Non- Guarantor Subsidiary | Consolidation/ Eliminations | Consolidated | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITES | ||||||||||||||||||
Net cash provided by (used for) operating activities | $ | (45 | ) | $ | 8 | $ | — | $ | 3 | $ | (34 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||
Capital expenditures | (3 | ) | (28 | ) | — | — | (31 | ) | ||||||||||
Proceeds from sales of assets | — | 22 | — | — | 22 | |||||||||||||
Net cash provided by (used for) investing activities | (3 | ) | (6 | ) | — | — | (9 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||
Loans to parent companies | (2 | ) | — | — | — | (2 | ) | |||||||||||
Repayments on long-term debt | (24 | ) | — | — | — | (24 | ) | |||||||||||
Borrowings on revolving credit facility | 587 | — | — | — | 587 | |||||||||||||
Payments on revolving credit facility | (513 | ) | — | — | — | (513 | ) | |||||||||||
Net cash provided by (used for) financing activities | 48 | — | — | — | 48 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalent | — | (2 | ) | — | — | (2 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | — | — | — | 3 | 3 | |||||||||||||
Cash and cash equivalents at beginning of period | 1 | — | 2 | — | 3 | |||||||||||||
Cash and cash equivalents at end of period | $ | 1 | $ | — | $ | 2 | $ | 3 | $ | 6 | ||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Company Background
We believe that we are the largest coated paper manufacturer in North America based on production capacity. Coated paper is used primarily in media and marketing applications, such as high-end advertising brochures, direct mail advertising, coated labels, magazines, magazine covers and inserts, catalogs and textbooks. We operate 20 paper machines at ten paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and Nova Scotia, Canada.
Trends in Our Business
North American printing paper demand is primarily driven by advertising and print media usage. In particular, the demand for certain grades of coated paper is affected by spending on catalog and promotional materials by retailers and spending on magazine advertising, which affects the number of printed pages in magazines. During the first half of 2010, North American printing paper demand increased compared to the first half of 2009, as a result of decreased advertising spending and magazine and catalog circulation during the first half of 2009 largely attributable to general economic factors and inventory reductions by customers. As a result of the higher demand, our market-related downtime in the first half of 2010 declined to 39,000 tons compared to 310,000 tons of market-related downtime in the first half of 2009. We will consider the need for additional market-related downtime from time to time based on market conditions.
The available supply of coated paper in North America was lower during the first half of 2010 compared to the first half of 2009, primarily as a result of North American capacity closures and reductions in inventory levels at both paper mills and printers.
North American prices for coated paper products historically have been determined by North American supply and demand, rather than directly by raw material costs or other costs of sales. Thus we may have limited ability to increase prices in response to increases in our costs. As a result of the recently announced price increases, which will primarily take effect starting in the third quarter of 2010, we believe average prices for coated paper will increase during the second half of 2010 compared to the first half of 2010.
In September 2009, NewPage, along with two other U.S. paper producers and the United Steelworkers Union, filed antidumping and countervailing duty petitions with the U.S. Department of Commerce and the U.S. International Trade Commission alleging that manufacturers of certain coated paper in China and Indonesia are dumping their products in the United States and that these manufacturers have been subsidized by their governments in violation of U.S. trade laws. The U.S. International Trade Commission determined by unanimous vote in November 2009 that there is a reasonable indication that the U.S. industry is being materially injured by unfairly traded Chinese and Indonesian imports. The Department of Commerce announced its preliminary countervailing duty determinations in March 2010 and its preliminary dumping determinations in April 2010. We expect that final determinations in the cases will be completed by November 2010. No assurance can be given that final determinations will be made, that final duties will be imposed or as to the amount of any final duties that may be imposed.
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Additional First-Lien Notes Issuance
In February 2010, we issued an additional $70 million in aggregate principal amount of 11.375% senior secured notes due 2014 (the “Additional First-Lien Notes”) in a private placement. The Additional First-Lien Notes have substantially the same terms as the existing $1.7 billion 11.375% first-lien senior secured notes.
Results of Operations
The following tables set forth our historical results of operations for the second quarter and first half ended June 30, 2010. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto included in this Quarterly Report. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of NewPage Holding’s wholly-owned subsidiary, NewPage, except for NewPage Holding’s debt and equity activity and income tax effects. Unless otherwise noted, the information provided pertains to both NewPage Holding and NewPage.
Second Quarter 2010 Compared to Second Quarter 2009
| NewPage Holding | ||||||||||||||
| Second Quarter Ended June 30, | ||||||||||||||
| 2010 | 2009 | |||||||||||||
| (in millions) | $ | % | $ | % | ||||||||||
Net sales | 890 | 100.0 | 736 | 100.0 | ||||||||||
Cost of sales | 913 | 102.7 | 756 | 102.7 | ||||||||||
Selling, general and administrative expenses | 58 | 6.5 | 49 | 6.7 | ||||||||||
Interest expense | 97 | 10.8 | 72 | 9.7 | ||||||||||
Other (income) expense, net | — | — | (125 | ) | (17.0 | ) | ||||||||
Income (loss) before income taxes | (178 | ) | (20.0 | ) | (16 | ) | (2.1 | ) | ||||||
Income tax (benefit) | 1 | 0.1 | (7 | ) | (0.9 | ) | ||||||||
Net income (loss) | (179 | ) | (20.1 | ) | (9 | ) | (1.2 | ) | ||||||
Net income (loss)—noncontrolling interests | — | — | 2 | 0.2 | ||||||||||
Net income (loss) attributable to the company | (179 | ) | (20.1 | ) | (11 | ) | (1.4 | ) | ||||||
Supplemental Information | ||||||||||||||
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) | $ | 10 | $ | 149 | ||||||||||
Net sales for the second quarter of 2010 were $890 million compared to $736 million for the second quarter of 2009, an increase of $154 million or 21%. Net sales were affected primarily by higher sales volume of core paper ($184 million) and other non-core paper, partially offset by lower average core paper prices ($84 million) in the second quarter of 2010 compared to the second quarter of 2009. Core volume is principally coated freesheet, coated groundwood and supercalendered paper products sold in North America. Average core paper prices decreased to $852 per ton in the second quarter of 2010 compared to $928 per ton in the second quarter of 2009. Core paper sales volume increased to 868,000 tons in the second quarter of 2010 compared to 689,000 tons in the second quarter of 2009 as a result of decreased advertising spending and magazine and catalog circulation during the second quarter of 2009 largely attributable to general economic factors and inventory reductions by customers. We took 161,000 tons of market-related downtime in the second quarter of 2009. We did not take any market-related downtime during the second quarter of 2010. We will consider the need for additional downtime from time to time based on market conditions.
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Cost of sales for the second quarter of 2010 was $913 million compared to $756 million for the second quarter of 2009, an increase of $157 million, or 21%. The increase was primarily a result of higher core paper sales volume ($138 million), higher volumes of other non-core paper and cost inflation, partially offset by lower levels of market-related downtime. During the second quarter of 2010, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $4 million for employee-related costs in cost of sales. Gross margin (loss) for the second quarter of 2010 was (2.7)%, unchanged from the second quarter of 2009. Maintenance expense at our mills increased to $86 million in the second quarter of 2010 from $74 million in the second quarter of 2009, as a result of higher costs for scheduled annual maintenance shutdowns.
Selling, general and administrative expenses increased to $58 million for the second quarter of 2010 from $49 million for the second quarter of 2009, primarily as a result of $8 million higher non-cash stock compensation expense and $6 million in employee-related costs, primarily associated with certain former executive officers, partially offset by lower pension expense and lower integration costs. As a percentage of net sales, selling, general and administrative expenses decreased in the second quarter of 2010 to 6.5% from 6.7% in the second quarter of 2009.
Interest expense for the second quarter of 2010 was $97 million compared to $72 million for the second quarter of 2009. Interest expense for NewPage for the second quarter of 2010 was $92 million compared to $67 million for the second quarter of 2009. The increases resulted primarily from higher interest rates on outstanding debt. Because of the debt refinancing in September 2009 and the Additional First-Lien Notes in February 2010, we expect an increase in interest expense over prior year periods because the First-Lien Notes have a higher interest rate than the term loan that was repaid.
Other (income) expense was zero for the second quarter of 2010 and $(125) million for the second quarter of 2009. The amount recognized in the second quarter of 2009 was primarily the result of $120 million of income recognized for alternative fuel mixture tax credits.
Income tax expense (benefit) for the second quarter of 2010 and 2009 was $1 million and $(7) million. For the second quarter of 2010 and 2009, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits. For the second quarter ended June 30, 2010 and 2009, we allocated zero and $7 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations.
Net income (loss) attributable to NewPage Holding was $(179) million in the second quarter of 2010 compared to $(11) million in the second quarter of 2009. Net income (loss) attributable to NewPage was $(174) million in the second quarter of 2010 compared to $(6) million in the second quarter of 2009. The decreases were primarily a result of lower average sales prices, higher interest expense and lower other income recognized for the alternative fuel mixture tax credits.
Adjusted EBITDA was $10 million for the second quarter of 2010 compared to $149 million for the second quarter of 2009. See “Reconciliation of Net Income (Loss) Attributable to the Company to Adjusted EBITDA” for further information on the use of EBITDA and Adjusted EBITDA as a measurement tool.
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First Half 2010 Compared to First Half 2009
| NewPage Holding | ||||||||||||||
| First Half Ended June 30, | ||||||||||||||
| 2010 | 2009 | |||||||||||||
| (in millions) | $ | % | $ | % | ||||||||||
Net sales | 1,707 | 100.0 | 1,458 | 100.0 | ||||||||||
Cost of sales | 1,762 | 103.2 | 1,476 | 101.2 | ||||||||||
Selling, general and administrative expenses | 107 | 6.3 | 95 | 6.6 | ||||||||||
Interest expense | 198 | 11.6 | 144 | 9.8 | ||||||||||
Other (income) expense, net | (3 | ) | (0.2 | ) | (125 | ) | (8.6 | ) | ||||||
Income (loss) before income taxes | (357 | ) | (20.9 | ) | (132 | ) | (9.0 | ) | ||||||
Income tax (benefit) | 1 | 0.1 | (10 | ) | (0.6 | ) | ||||||||
Net income (loss) | (358 | ) | (21.0 | ) | (122 | ) | (8.4 | ) | ||||||
Net income (loss)—noncontrolling interests | — | — | 3 | 0.2 | ||||||||||
Net income (loss) attributable to the company | (358 | ) | (21.0 | ) | (125 | ) | (8.6 | ) | ||||||
Supplemental Information | ||||||||||||||
Adjusted EBITDA | $ | 25 | $ | 204 | ||||||||||
Net sales for the first half of 2010 were $1,707 million compared to $1,458 million for the first half of 2009, an increase of $249 million, or 17%. Net sales were affected primarily by higher sales volume of core paper ($321 million) and other non-core paper, partially offset by lower average core paper prices ($185 million) in the first half of 2010 compared to the first half of 2009. Average core paper prices decreased to $855 per ton in the first half of 2010 compared to $946 per ton in the first half of 2009. Core paper sales volume increased to 1,660,000 tons in the first half of 2010 compared to 1,357,000 tons in the first half of 2009 as a result of decreased advertising spending and magazine and catalog circulation during the first half of 2009 largely attributable to general economic factors and inventory reductions by customers. We took 39,000 tons of market-related downtime in the first half of 2010 compared to 310,000 tons of market-related downtime in the first half of 2009.
Cost of sales for the first half of 2010 was $1,762 million compared to $1,476 million for the first half of 2009, an increase of $286 million, or 19%. The increase was primarily a result of higher core paper sales volume ($236 million) and higher volumes of other non-core paper, partially offset by lower levels of market-related downtime. During the second quarter of 2010, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $4 million for employee-related costs in cost of sales. Gross margin (loss) for the first half of 2010 was (3.2)% compared to (1.2)% for the first half of 2009 primarily as a result of lower average core paper sales prices ($185 million). Maintenance expense at our mills increased to $157 million in the first half of 2010 from $142 million in the first half of 2009, as a result of higher costs for scheduled annual maintenance shutdowns.
Selling, general and administrative expenses increased to $107 million for the first half of 2010 from $95 million for the first half of 2009, primarily as a result of $13 million higher non-cash stock compensation expense and $6 million in employee-related costs, primarily associated with certain former executive officers, partially offset by lower pension expense and lower integration costs. As a percentage of net sales, selling, general and administrative expenses decreased in the first half of 2010 to 6.3% from 6.6% in the first half of 2009.
Interest expense for the first half of 2010 was $198 million compared to $144 million for the first half of 2009. Interest expense for NewPage for the first half of 2010 was $189 million compared to $134 million for the first half of 2009. The increases resulted primarily from higher interest rates on outstanding debt.
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Other (income) expense was $(3) million for the first half of 2010 and $(125) million for the first half of 2009. The amount recognized in the first half of 2010 includes $11 million of net loss on disposal and impairment of assets, offset by $(13) million of (income) recognized for alternative fuel mixture tax credits as income recognition criteria was met. The amount recognized in the first half of 2009 was primarily the result of $120 million of income recognized for alternative fuel mixture tax credits.
Income tax expense (benefit) for the first half of 2010 and 2009 was $1 million and $(10) million. For the first half of 2010 and 2009, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits. For the first half ended June 30, 2010 and 2009, we allocated zero and $11 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations.
Net income (loss) attributable to NewPage Holding was $(358) million in the first half of 2010 compared to $(125) million in the first half of 2009. Net income (loss) attributable to NewPage was $(349) million in the first half of 2010 compared to $(115) million in the first half of 2009. The decreases were primarily a result of lower average sales prices, higher interest expense and lower other income recognized for the alternative fuel mixture tax credits.
Adjusted EBITDA was $25 million for the first half of 2010 compared to $204 million for the first half of 2009. See “Reconciliation of Net Income (Loss) Attributable to the Company to Adjusted EBITDA” for further information on the use of EBITDA and Adjusted EBITDA as a measurement tool.
Reconciliation of Net Income (Loss) Attributable to the Company to Adjusted EBITDA
EBITDA is defined as net income (loss) attributable to the company before interest expense, income taxes, depreciation and amortization. EBITDA and Adjusted EBITDA are not measures of our performance under GAAP, are not intended to represent net income (loss) attributable to the company, and should not be used as an alternative to net income (loss) attributable to the company as an indicator of performance. EBITDA and Adjusted EBITDA are shown because they are a basis upon which our management assesses performance and are primary components of certain covenants under our revolving credit facility. In addition, our management believes EBITDA and Adjusted EBITDA are useful to investors because they and similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. The use of EBITDA and Adjusted EBITDA instead of net income (loss) attributable to the company has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| • | EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments |
| • | EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs |
| • | EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements |
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| • | our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business.
The following table presents a reconciliation of net income (loss) attributable to the company to EBITDA and Adjusted EBITDA:
| NewPage Holding | ||||||||||||||||
| Second Quarter | First Half | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| (in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net income (loss) attributable to the company | $ | (179 | ) | $ | (11 | ) | $ | (358 | ) | $ | (125 | ) | ||||
Interest expense | 97 | 72 | 198 | 144 | ||||||||||||
Income taxes (benefit) | 1 | (7 | ) | 1 | (10 | ) | ||||||||||
Depreciation and amortization | 67 | 69 | 135 | 139 | ||||||||||||
EBITDA | (14 | ) | 123 | (24 | ) | 148 | ||||||||||
Equity awards | 11 | 3 | 19 | 6 | ||||||||||||
(Gain) loss on disposal and impairment of assets | 2 | — | 8 | 4 | ||||||||||||
Non-cash U.S. pension expense | 8 | 13 | 17 | 25 | ||||||||||||
Integration and related severance costs | 2 | 10 | 4 | 21 | ||||||||||||
Other | 1 | — | 1 | — | ||||||||||||
Adjusted EBITDA | $ | 10 | $ | 149 | $ | 25 | $ | 204 | ||||||||
Liquidity and Capital Resources
Available Liquidity
As of June 30, 2010, our principal sources of liquidity include cash generated from operating activities and availability under our revolving credit facility. The amount of borrowings and letters of credit available to NewPage pursuant to the revolving credit facility is limited to the lesser of $500 million or an amount determined pursuant to a borrowing base ($392 million as of June 30, 2010).
As of June 30, 2010, we had $113 million available for borrowing in excess of the $50 million required minimum, after reduction for $93 million in letters of credit and $136 million in outstanding borrowings under the revolving credit facility. We have not experienced, and do not currently anticipate that we will experience, any limitations in our ability to access funds available under our revolving credit facility. In an effort to manage credit risk exposures under our debt and derivative instruments, we regularly monitor the credit-worthiness of the counterparties to these agreements. We believe our cash flow from operations, proceeds from the sale of nonstrategic assets, available borrowings under our revolving credit facility and cash and cash equivalents will be adequate to meet our liquidity needs for the next twelve months. However, given the uncertainty of the current economic environment, we cannot assure you that our business will generate sufficient cash flows from operations, that we will be able to complete the sale of nonstrategic assets or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to fund our liquidity needs.
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Aggregate indebtedness as of June 30, 2010 totaled $3,503 million, which includes $3,288 million at NewPage. We expect an increase in interest expense over prior year periods because the First-Lien Notes have a higher interest rate than the term loan that was repaid. Beginning in 2012, our debt service requirements will substantially increase as a result of scheduled payments of our indebtedness. We anticipate that we will seek to refinance our indebtedness prior to that time or retire portions of indebtedness with issuances of equity securities, proceeds from the sale of assets or cash generated from operations. Our ability to operate our business, service our debt requirements and reduce our total debt will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control, as well as continued access to the capital markets as may be necessary to refinance our existing indebtedness.
Cash Flows
Cash provided by (used for) operating activities was $(127) million during the first half of 2010 compared to $(34) million during the first half of 2009, which was primarily the result of the expiration of the alternative fuel mixture credit at the end of 2009, for which we received cash payments of $112 million during the first half of 2009 and higher cash interest requirements in 2010, partially offset by improvements in working capital. Investing activities in the first half of 2010 include spending of $31 million for capital expenditures and the receipt of $12 million of proceeds from the sales of assets. Financing activities in the first half of 2010 included the issuance of $70 million of additional First-Lien Notes (proceeds of $67 million) used to repay existing borrowings under the revolver and for general corporate purposes and $84 million of net borrowings under the revolving credit facility.
Capital Expenditures
Capital expenditures were $31 million for the first half ended June 30, 2010 and 2009.
Financial Discussion
During the second quarter of 2010, we took actions to reduce personnel as part of our cost reduction initiatives and recognized charges for employee-related costs of $4 million in cost of sales and $6 million in selling, general and administrative expenses. During the first half of 2010, we continued to achieve cost savings from production and operating efficiencies and other restructuring activities. We also continued evaluating ways to raise capital through the issuance and refinancing of debt and through the sale of nonstrategic assets.
In April 2010, NewPage Port Hawkesbury Corp. (“NPPH”), an indirect wholly-owned subsidiary of NewPage, announced that it entered into an agreement with Nova Scotia Power Inc. (“NSPI”) to sell certain assets, including a boiler at the Port Hawkesbury, Nova Scotia mill, for a cash sales price of Canadian $80 million. We expect to close on the transaction in the fourth quarter of 2010, which is subject to customary conditions, including the receipt of regulatory approvals. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately Canadian $93 million. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for NSPI.
In February 2010, Consolidated Water Power Company (“CWPCo”), an indirect wholly-owned subsidiary of NewPage, announced that it signed an agreement with Wisconsin Rapids Water Works Lighting Commission to sell the CWPCo utility transmission and distribution assets (“CWPCo Utility”). The purchase price will be equal to the net book value of the assets at the time of closing, which is subject
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to regulatory approvals. In March 2010, CWPCo announced that it entered into a nonbinding letter of intent to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70 million. The closing of the transaction is subject to completion of the CWPCO Utility sale, execution of a sales agreement with Great Lakes Utilities and regulatory approval, and is not expected to close in 2010. We continue to hold and operate the assets in the normal course of our operations.
We have various investments held by our defined-benefit pension plan trusts. The returns on these assets have generally matched the broader market. We are monitoring the effects of our underfunded pension plans on our minimum pension funding requirements and pension expense for future periods. We do not anticipate material increases in our minimum funding requirements during 2010.
The Environmental Protection Agency released a proposed rule on June 4, 2010, which provides for new Industrial Boiler Maximum Achievable Control Technology (MACT) standards to regulate emissions of hazardous air pollutants. The proposed rule would impose new emission limits for solid fuel-fired boilers and is expected to be finalized in 2011 with compliance expected by early 2014. As proposed, we could be required to make significant capital expenditures on emission control equipment at our mills to comply with the rule. In addition, our mills would likely incur increased operating expenses associated with compliance and operation of the new control equipment. We have not completed our evaluation of the full financial effect of the proposed MACT standards at this time. We will complete our evaluation following finalization of the rule and a review of our mills relative to the proposed new standards. We, along with others, expect to comment on the proposed rule and expect revisions and changes to the final form.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of June 30, 2010 and December 31, 2009, $576 million and $484 million of our debt consisted of borrowings with variable interest rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow or compliance with our debt covenants. The potential annual increase in interest expense resulting from a 100 basis point increase in quoted interest rates on our debt balances outstanding at June 30, 2010 and December 31, 2009, would be $6 million and $5 million.
ITEM 4T. CONTROLS AND PROCEDURES
We maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. In addition, a system of disclosure controls is maintained to ensure that information required to be disclosed is recorded, processed, summarized and reported in a timely manner to management responsible for the preparation and reporting of our financial information.
Management, with the participation of our chief executive officer and chief financial officer, assessed the disclosure control systems as being effective as they encompass material matters for the quarter ended June 30, 2010. To the best of our knowledge, there were no changes in the internal controls over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
In September 2009, NewPage, along with two other U.S. paper producers and the United Steelworkers Union, filed antidumping and countervailing duty petitions with the U.S. Department of Commerce and the U.S. International Trade Commission alleging that manufacturers of certain coated paper in China and Indonesia are dumping their products in the United States and that these manufacturers have been subsidized by their governments in violation of U.S. trade laws.
The U.S. International Trade Commission determined by unanimous vote in November 2009 that there is a reasonable indication that the U.S. industry is being materially injured by unfairly traded Chinese and Indonesian imports. The Department of Commerce announced its preliminary countervailing duty determinations in March 2010 and its preliminary dumping determinations in April 2010. We expect that final determinations in the cases will be completed by November 2010.
If the Department of Commerce makes a final determination that dumping or subsidies are present and the International Trade Commission determines that the domestic industry has been injured as a result, the Department of Commerce will impose final duties on the covered products imported from these countries in order to offset the effects of the dumping and subsidies. No assurance can be given that these determinations will be made, that final duties will be imposed or as to the amount of any final duties that may be imposed.
| ITEM 6. | EXHIBITS |
Exhibit Number | Description | |
| 10.1 | Separation Agreement dated as of June 11, 2010 by and among NewPage Corporation, NewPage Group Inc. and Mark A. Suwyn (incorporated by reference from Exhibit 10.25 to the Amendment No. 1 to the Registration Statement on Form S-4 (Reg. No. 333- 167205) of NewPage Corporation, filed on July 12, 2010) | |
| 10.2 | Separation Agreement dated as of June 11, 2010 by and among NewPage Corporation, NewPage Group Inc. and E. Thomas Curley (incorporated by reference from Exhibit 10.26 to the Amendment No. 1 to the Registration Statement on Form S-4 (Reg. No. 333- 167205) of NewPage Corporation, filed on July 12, 2010) | |
| 10.3 | Separation Agreement dated as of June 11, 2010 by and among NewPage Corporation, NewPage Group Inc. and Michael T. Edicola (incorporated by reference from Exhibit 10.27 to the Amendment No. 1 to the Registration Statement on Form S-4 (Reg. No. 333- 167205) of NewPage Corporation, filed on July 12, 2010) | |
| 10.4 | Employment Agreement dated as of July 1, 2010 between NewPage Corporation and Barry R. Nelson (incorporated by reference from Exhibit 10.28 to the Amendment No. 1 to the Registration Statement on Form S-4 (Reg. No. 333- 167205) of NewPage Corporation, filed on July 12, 2010) | |
| 10.5 | Separation Agreement dated as of July 2, 2010 by and among NewPage Corporation, NewPage Group Inc. and Michael L. Marziale (incorporated by reference from Exhibit 10.29 to the Amendment No. 1 to the Registration Statement on Form S-4 (Reg. No. 333- 167205) of NewPage Corporation, filed on July 12, 2010) | |
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| 10.6 | Engineering, procurement and engineering contract dated July 14, 2010 between NewPage Port Hawkesbury Corp. and Nova Scotia Power Inc. | |
| 31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, NewPage Holding Corporation and NewPage Corporation have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.
| NEWPAGE HOLDING CORPORATION | NEWPAGE CORPORATION | |||||||
| By: | /s/ David J. Prystash | By: | /s/ David J. Prystash | |||||
| David J. Prystash | David J. Prystash | |||||||
| Senior Vice President and Chief Financial Officer | Senior Vice President and Chief Financial Officer | |||||||
| (Principal Financial Officer) | (Principal Financial Officer) | |||||||
| Date: | August 5, 2010 | Date: | August 5, 2010 | |||||
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