ITEM 1. BUSINESS
General
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. For the year ended December 31, 2010, we had net sales of $3.6 billion.
We operate paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and Nova Scotia, Canada. These mills, along with our distribution centers, are strategically located near major print markets, such as New York, Chicago, Minneapolis and Atlanta. As of December 31, 2010, our mills have total annual production capacity of approximately 4.4 million short tons of paper, including approximately 3.1 million short tons of coated paper, approximately 1.1 million short tons of uncoated paper and approximately 200,000 short tons of specialty paper. On December 8, 2010, we announced a plan to permanently close the Whiting, Wisconsin paper mill, which includes two paper machines, by the end of February 2011. The Whiting mill has annual production capacity of approximately 250,000 short tons of coated paper.
We have long-standing relationships with many leading publishers, commercial printers, retailers and paper merchants. Our key customers include Condé Nast Publications, The McGraw-Hill Companies, Meredith Corporation, News America Group, Pearson Education, Rodale Inc. and Time Inc. in publishing; Quad/Graphics and R.R. Donnelley & Sons Company in commercial printing; Sears Holdings Corporation and Williams-Sonoma, Inc. in retailing; and paper merchants Lindenmeyr, a division of Central National-Gottesman Inc., Unisource Worldwide, Inc. and xpedx, a division of International Paper Company. Key customers for specialty paper products include Avery Dennison Corporation and Vacumet Corp.
On December 21, 2007, NewPage acquired all of the issued and outstanding common stock of SENA from SEO. We acquired SENA in order to enable us to remain competitive in the marketplace, serve our customers more efficiently and achieve synergies from the Acquisition. The Acquisition more than doubled our production capacity and broadened our product line. In connection with the Acquisition, SEO acquired approximately 20% of the equity in NewPage Group.
Organization
The following chart shows our organizational structure and ownership as of February 11, 2011. Except as indicated below, each entity in the chart owns 100% of the equity interests of the entity appearing immediately below it.
(1) Excludes common stock that may be issued upon exercise of options outstanding or that may be granted under the NewPage Group Equity Incentive Plan.
Industry Overview
The North American paper industry is cyclical and prices for paper, like other cyclical products, are largely affected by the relation of demand to available supply.
North American coated paper demand is primarily driven by advertising and print media usage. In particular, the demand for certain grades of coated paper is affected by spending on catalog and promotional materials by retailers and spending on magazine advertising, which affects the number of printed pages in magazines. Advertising spending and magazine and catalog circulation tend to rise when GDP in the United States is robust and typically decline in a sluggish economy. During 2010, North
American printing paper demand increased compared to 2009. This was a result of a recovery of advertising spending and magazine and catalog circulation during 2010 following a decline in 2009 attributable to weak economic factors and inventory reductions by customers. North American customers purchased approximately 10 million short tons of coated paper in 2010 compared with approximately 9 million short tons of coated paper in 2009.
In North America, coated paper supply is determined by both local production and imports, principally from Europe and Asia. Imports have become a structural part of the North American coated paper marketplace. The volume of coated paper imports from Europe and Asia is a function of worldwide supply and demand for coated paper, the exchange rate of the U.S. dollar relative to other currencies, especially the Euro, market prices in North America and other markets and the cost of ocean-going freight. From January 2008 through December 2010, mills and machines in North America with gross coated paper capacity of more than 2 million tons have been closed or aligned to produce other types of paper. In addition, the industry has also taken significant levels of market-related downtime and temporary shutdowns, especially during 2008 and 2009.
Products
Our portfolio of paper products includes coated freesheet, coated groundwood, supercalendered, newsprint and specialty papers. Specialty papers are primarily used in labels and packaging. We believe that we offer the broadest coated paper product selection of any North American paper manufacturer. We also sell uncoated paper and market pulp. Our brands are some of the most recognized brands in the industry. Substantially all of our 2010 sales were within North America and approximately 92% were within the United States. Our principal product is coated paper, which represented approximately 80% of our net sales for the year ended December 31, 2010.
Coated Paper
We believe that we are the largest coated paper manufacturer in North America based on production capacity. As of December 31, 2010, our mills have total annual production capacity of approximately 3.1 million short tons of coated paper. Coated paper is used primarily in media and marketing applications, including corporate annual reports, high-end advertising brochures, magazines, catalogs and direct mail advertising. Coated paper has a higher level of smoothness than uncoated paper. Increased smoothness is typically achieved by applying a clay-based coating on the surface of the paper and processing that paper under heat and pressure. As a result, coated paper achieves higher reprographic quality and printability.
Coated paper consists of both coated freesheet and coated groundwood, which generally differ in price and quality. The chemically-treated pulp used in freesheet applications produces brighter and smoother paper than the mechanical pulp used in groundwood papers. Coated freesheet papers comprised 58% of the coated paper we produced in 2010. We produce coated freesheet papers in No. 1, No. 2 and No. 3 grades for higher-end uses such as corporate annual reports and high-end advertising, as well as coated one-side paper (C1S), which is used primarily for label and specialty applications.
Coated groundwood papers, which represented 42% of the coated paper we produced in 2010, are typically lighter and less expensive than our coated freesheet products. We produce coated groundwood papers in No. 3, No. 4 and No. 5 grades for use in applications requiring lighter paper stock such as magazines, catalogs and inserts.
Each of the paper grades that we manufacture are produced in a variety of weights, sizes and finishes. The coating process changes the gloss, ink absorption qualities, texture and opacity of the paper to meet each
customer’s performance requirements. Most of the coated paper that we manufacture is shipped in rolls, with the rest cut into sheets.
Supercalendered Paper
Supercalendered paper is uncoated paper with pigment filler passed through a supercalendering process in which alternating steel and cotton-covered rolls “iron” the paper, giving it a gloss and smoothness similar to coated paper. Our supercalendered paper is primarily used for magazines, catalogs, advertisements, inserts and flyers. We produce supercalendered paper primarily in SC-A and SC-A+ grades.
Newsprint Paper
Newsprint paper is uncoated groundwood paper used primarily for printing daily newspapers and other publications. We are a niche supplier of newsprint paper serving the North American and select international markets in the publishing and printing industry for major end-uses such as inserts and fliers for retail customers.
Specialty Paper
Specialty paper consists of both coated and uncoated paper designed and produced to meet the specific packaging, printing and labeling needs of customers with diverse and specialized paper needs. Specialty papers consist of two primary product lines: technical papers and packaging papers.
Technical papers consist of face papers, thermal transfer, direct thermal base papers and release liners for use in self-adhesive labels.
Packaging papers are designed to protect, transport and identify a wide range of products. Flexible packaging papers are often used as part of a multilayer package construction, in combination with film, foil, extruded coatings, board and other materials. For example, flexible packaging papers are used in pouch, lidding, bag, product packaging and spiral can applications.
Other Products
We also produce uncoated paper and market pulp to enhance our manufacturing efficiency by filling unused capacity, such as when we have excess capacity on a paper machine but not on a coater. Uncoated paper typically is used for business forms and stationery, general printing paper and photocopy paper. We primarily sell uncoated paper to paper merchants, business forms manufacturers and converters.
Manufacturing
We operate paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and Nova Scotia, Canada. All of these paper mills are at least partially-integrated mills, meaning that they produce paper, pulp and energy. Most of the energy produced at these mills is for internal use. As of December 31, 2010, our mills have total annual production capacity of approximately 4.4 million short tons of paper, including approximately 3.1 million short tons of coated paper, approximately 1.1 million short tons of uncoated paper and approximately 200,000 short tons of specialty paper. With the exception of our Port Hawkesbury, Nova Scotia, mill, all of our long-lived assets are located within the United States. The following table lists the paper products produced at each of our mills, as well as each mill’s approximate annual paper capacity, as of December 31, 2010:
Mill Location
Products
Paper Capacity
(short tons/year)
Biron, Wisconsin
Coated paper
400,000
Duluth, Minnesota
Supercalendered paper
250,000
Escanaba, Michigan
Coated, specialty and uncoated paper
780,000
Luke, Maryland
Coated paper
510,000
Port Hawkesbury, Nova Scotia
Supercalendered paper and newsprint
600,000
Rumford, Maine
Coated paper
550,000
Stevens Point, Wisconsin
Specialty paper
180,000
Whiting, Wisconsin
Coated paper
250,000
Wickliffe, Kentucky
Coated, specialty and uncoated paper
290,000
Wisconsin Rapids, Wisconsin
Coated paper
560,000
On December 8, 2010, we announced a plan to permanently close the Whiting, Wisconsin paper mill, which includes two paper machines, by the end of February 2011.
Paper machines are large, complex systems that operate more efficiently when operated continuously. Paper machine production and yield decline when a machine is stopped for any reason. Therefore, we organize our manufacturing processes so that our paper machines and most of our paper coaters run almost continuously throughout the year. Some of our paper machines also offer the flexibility to change the type of paper produced on the machine, which allows easier matching of production schedules and seasonal and geographic demand swings.
The first step in the production of paper is to produce pulp from wood. Pulp for groundwood and supercalendered paper is produced using a mechanical or thermo-mechanical process. Pulp for freesheet paper is produced by placing wood chips that are mixed with various chemicals into digester “cooking” vessels. The pulp is then washed and bleached. To turn the pulp into paper, it is processed through a paper machine. Hardwood and softwood pulp is blended based on the desired paper characteristics.
To produce coated paper, uncoated paper is put through a coating process. Our mills have both on-machine coaters, which are integrated with the paper machines, and separate off-machine coaters. On-machine coaters generally are considered to be more efficient, while off-machine coaters generally are considered to have more flexibility. After the coating process is complete, the coated paper is slit and wound into rolls to be sold to customers. We also have converting facilities at which we convert some of these rolls into sheets.
Paper production is energy intensive. During 2010, we produced approximately 50% of our energy requirements by means of biomass-related fuels, which included black liquor, wood waste and bark. The energy we purchased from outside suppliers consisted of natural gas, fuel oil, steam, petroleum coke, tire-
derived fuel, coal and a portion of our electricity. The majority of our coal needs are purchased under long-term supply contracts, while the other purchased fuels are priced based on current market rates. We periodically enter into fixed-priced contracts or financial hedges for a portion of our estimated future natural gas requirements.
Our wholly-owned subsidiary, Consolidated Water Power Company, or CWPCo, provides energy to our mills in central Wisconsin. CWPCo has 33.3 megawatts of generating capacity on 39 generators located in five hydroelectric plants on the Wisconsin River. CWPCo is a regulated public utility and also provides electricity to a small number of residential, light commercial and light industrial customers. See Note 15 to the consolidated financial statements.
On November 3, 2010, NewPage Port Hawkesbury Corp. (“NPPH”), an indirect wholly-owned subsidiary of NewPage, completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to Nova Scotia Power Inc. (“NSPI”) for a cash sales price of $79 million. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93 million. All costs of construction up to C$93 million will be paid or reimbursed by NSPI. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for and under the control of NSPI for an initial period of 25 years plus the period prior to completion of the turbine, with three automatic five-year renewal terms, unless notice of termination is given. See Note 8 to the consolidated financial statements.
Raw Materials and Suppliers
Pulp and wood fiber are the primary raw materials used in making paper. Pulp is the generic term that describes the cellulose fiber derived from wood. These fibers may be separated by mechanical, thermo-mechanical or chemical processes. The processes we use at our mills to produce pulp for freesheet paper involve removing the lignin, which bind the wood fibers, to leave cellulose fibers. We use most of our pulp production internally to reduce the amount of pulp purchased from third parties. We sell our excess hardwood pulp, which we refer to as market pulp, to third parties in the United States and internationally.
The primary sources of wood fiber are timber and its byproducts, such as wood chips. We are a party to various fiber supply agreements to supply our mills with hardwood, softwood, aspen pulpwood and wood chips. These agreements require the counterparty to sell to the mills, and require the mills to purchase, a designated minimum number of tons of pulpwood and wood chips during the specified terms of the arrangement, which have various expiration dates from December 31, 2011 to December 31, 2053. The aggregate annual purchase requirement under these agreements is approximately 3 million tons in 2011, approximately 2 million tons per year from 2012 to 2015, approximately 1 million tons per year from 2016 to 2021 and approximately 300,000 tons per year from 2022 to 2026. In 2021, all of the agreements terminate with the exception of an agreement with respect to our Rumford, Maine, mill, which terminates in 2053. For all of the pulpwood agreements, we may purchase a substantial portion of any additional pulpwood harvested by the counterparty during each year. The prices to be paid under these agreements are determined by formulas based upon market prices in the relevant regions and are subject to periodic adjustments based on procedures stipulated in each agreement. The amount of timber we receive under these agreements has varied, and is expected to continue to vary, according to the price and supply of wood fiber for sale on the open market and the harvest levels the timberland owners deem appropriate in the management of the timberlands.
Our Port Hawkesbury, Nova Scotia mill manages approximately 1,500,000 acres of land licensed from the Province of Nova Scotia and 59,000 acres of land we own in Nova Scotia. All wood harvested from
the licensed lands must be used in our Port Hawkesbury mill unless otherwise agreed to by the Province of Nova Scotia. The license is for a 50 year period, renewable every 10 years, and currently expires in July 2051. The license may be terminated by the Province of Nova Scotia if the Port Hawkesbury mill is not operational for a continuous period of two years.
We seek to fulfill substantially all of our wood needs with timber that is harvested by professional loggers trained in certification programs that are designed to promote sustainable forestry. We do not accept wood from old growth forests, forests of exceptional conservation value or rainforests. We do not accept illegally harvested or stolen wood. We have formally notified our outside wood chip suppliers that we expect their wood supply will be produced by trained loggers in compliance with sustainable forestry principles. Our goal is to ensure that sustainable forestry-trained loggers are used to supply essentially all of the wood to our mills.
Chemicals used in the production of paper include latex and starch, which are used to affix coatings to paper; calcium carbonate, which brightens paper; titanium, which makes paper opaque; and other chemicals used to bleach or color paper. We purchase these chemicals from various suppliers. We believe that the loss of any one or any related group of chemical suppliers would not have a material adverse effect on our business, financial condition or results of operations.
Customers
We have long-standing relationships with many leading publishers, commercial printers, retailers and paper merchants. Our ten largest customers accounted for approximately half of our net sales for 2010. Our key customers include Condé Nast Publications, The McGraw-Hill Companies, Meredith Corporation, News America Group, Pearson Education, Rodale Inc. and Time Inc. in publishing; Quad/Graphics and R.R. Donnelley & Sons Company in commercial printing; Sears Holdings Corporation and Williams-Sonoma, Inc. in retailing; and paper merchants Lindenmeyr, a division of Central National-Gottesman Inc., Unisource Worldwide, Inc. and xpedx, a division of International Paper Company. Key customers for specialty paper products include Avery Dennison Corporation and Vacumet Corp.
During 2010, xpedx and Unisource accounted for 18% and 12% of net sales. No other customer accounted for more than 10% of our 2010 net sales.
Sales, Marketing and Distribution
We sell our paper products primarily in the United States and Canada, using three sales channels:
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direct sales, which consist of sales made directly to end-use customers, primarily large companies such as publishers, printers and retailers
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merchant sales, which consist of sales made to paper merchants and brokers, who in turn sell to end-use customers
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specialty sales, which consist of sales made to packaging and label manufacturers
Across the three channels of our sales network, sales professionals are compensated with a salary and bonus plan based on account profitability and individual assignments. As part of our customer service, we seek to provide value-added services to customers. For example, within the merchant channel, we work closely with customers to meet specifications and to utilize joint marketing efforts when appropriate.
We also emphasize technical support as part of our commitment to customers. We seek to enhance efficiency for customers by enabling them to interact with us online, including through order access, planning, customer data exchange and consumption estimation tools.
The locations of our paper mills and distribution centers also provide certain logistical advantages as a result of their close proximity to several major print markets, including New York, Chicago, Minneapolis and Atlanta, which affords us the ability to more quickly and cost-effectively deliver our products to those markets. We have two major distribution facilities located in Bedford, Pennsylvania and Sauk Village, Illinois. In total, we own one warehouse and lease space in approximately 50 warehouses. Paper merchants also provide warehouse and distribution systems to service the needs of commercial print customers. We use third parties to ship our products by truck and rail. In addition, we utilize integrated tracking systems that track all of our products through the distribution process. Customers can access order tracking information over the internet. Most of our products are delivered directly to printers or converters, regardless of sales channel.
Competition
The North American paper industry is highly competitive. We compete based on a number of factors, including price, product availability, quality, breadth of product offerings, customer service and distribution capabilities. When a coated paper manufacturer announces a price increase, it generally takes effect over time. Whether a price increase is successful depends on supply, demand and other competitive factors in the marketplace.
Our primary competitors for coated paper are AbitibiBowater Inc., Appleton Coated LLC, Sappi Limited, UPM-Kymmene Corporation and Verso Paper, Inc., as well as imports from Korea and Europe. Our primary competitors for supercalendered paper are AbitibiBowater Inc., Catalyst Paper Corporation and Irving Paper Ltd. Our primary competitors for newsprint are AbitibiBowater Inc. and Catalyst Paper Corporation.
The competition in the specialty paper category is diverse and highly fragmented, varying by product end use. Our primary competitors for specialty paper products are Boise Cascade LLC, Dunn Paper Inc., Fraser Papers Inc., International Paper Company, UPM-Kymmene Corporation and Wausau Paper Corp.
Some of our competitors have greater financial and other resources than we do or may be better positioned than we are to compete for certain opportunities. 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 were dumping their products in the United States and that these manufacturers had been subsidized by their governments in violation of U.S. trade laws. In September 2010, the U.S. Department of Commerce announced final antidumping and countervailing duty margins, and on October 22, 2010, the International Trade Commission determined by unanimous vote that imports of coated paper from China and Indonesia threaten material injury to U.S. producers and workers. The decision allows the U.S. Department of Commerce to impose duties to offset the threat of dumping and government subsidies. These duties will remain in effect for five years, subject to annual administrative reviews.
Information Technology Systems
We use integrated information technology systems that help us manage our product pricing, customer order processing, customer billing, raw material purchasing, inventory management, production controls
and shipping management, as well as our human resources management and financial management. Our information technology systems utilize principally third-party software.
Intellectual Property
In general, paper production does not rely on proprietary processes or formulas, except in highly specialized or custom grades. We hold foreign and domestic patents as a result of our research and product development efforts and also have the right to use certain other patents and inventions in connection with our business. We also own registered trademarks for some of our products. Although, in the aggregate, our patents and trademarks are important to our business, financial condition and results of operations, we believe that the loss of any one or any related group of intellectual property rights would not have a material adverse effect on our business, financial condition or results of operations.
Employees
As of December 31, 2010, we had approximately 7,300 employees. Approximately 70% of our employees were represented by labor unions, principally by the United Steelworkers; the International Brotherhood of Electrical Workers; the Communications, Energy and Paperworkers Union of Canada; the International Association of Machinists and Aerospace Workers; the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada; the Teamsters, Chauffeurs, Warehousemen and Helpers; and the Office & Professional Employees’ International Union.
We have 16 collective bargaining agreements, of which 13 have expired and are under negotiation. The mills with expired contracts are operating under the terms of the previous agreements and include our mills in Kentucky, Maine, Michigan, Wisconsin and Nova Scotia. The remaining collective bargaining agreements expire through January 2013.
We have not experienced any work stoppages or employee-related problems that had a material effect on our operations over the last five years. We consider our employee relations to be good. Our Port Hawkesbury, Nova Scotia, mill was closed from December 2005 until October 2006, before our ownership of the mill, due to a labor dispute.
Environmental and Other Governmental Regulations
Our operations are subject to federal, state, provincial and local environmental laws and regulations in the United States and Canada, such as the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA. Among the activities subject to environmental regulation are the emissions of air pollutants; discharges of wastewater and stormwater; generation, use, storage, treatment and disposal of, or exposure to, materials and waste; remediation of soil, surface water and ground water contamination; and liability for damages to natural resources. In addition, we are required to obtain and maintain environmental permits and approvals in connection with our operations. Many environmental laws and regulations provide for substantial fines or penalties and criminal sanctions for failure to comply with orders and directives requiring that certain measures or actions be taken to address environmental issues.
Certain of these environmental laws, such as CERCLA and analogous state and foreign laws, provide for strict liability, and under certain circumstances joint and several liability, for investigation and remediation of releases 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 wastes attributable to an entity or its predecessors were 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 by the operation of a number of landfills. We may be subject to liability, including liability for investigation and cleanup costs, if contamination is discovered at one of these mills, landfills, or at another location where we have disposed of, or arranged for the disposal of, waste. While we believe, based upon current information, that we are in substantial compliance with applicable environmental laws and regulations, we could be subject to potentially significant fines or penalties for failing to comply with environmental laws and regulations. MeadWestvaco Corporation and SEO have separately agreed to indemnify us for certain environmental liabilities related to the properties acquired from them, subject to certain limitations. We agreed to indemnify the purchaser of our carbonless paper business for certain environmental liabilities, subject to certain limitations.
Compliance with environmental laws and regulations is a significant factor in our business and may require significant capital or operating expenditures over time as environmental laws or regulations, or interpretation thereof, change or the nature of our operations require us to make significant additional expenditures. The U.S. Environmental Protection Agency (“EPA”) released a proposed rule in June 2010, which provides for new Industrial Boiler Maximum Achievable Control Technology (MACT) standards to regulate emissions of hazardous air pollutants. The rule as proposed would impose new emission limits for solid fuel-fired boilers. 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 will complete our evaluation following finalization of the rule and a review of our mills relative to the proposed new standards. The U.S. EPA is still evaluating responses to the proposed rules and has delayed the proposed effective date. In June 2010 the U.S. EPA also proposed a companion rule to the proposed Boiler MACT rule that defines materials combusted as either fuels or waste. A unit combusting materials defined to be waste will be classified as an incinerator and will be subject to U.S. Environmental Protection Agency rules addressing incinerators. Our units are currently not subject to the incinerator standards. If some of the materials currently being burned are determined to be waste, capital expenditures may be incurred for new control equipment or increased operating expenses may be incurred for replacing these materials with higher-cost fuels. This rule is expected to be finalized in conjunction with the finalization of the Boiler MACT rule. We, along with others, have commented on the proposed rules and expect revisions to the final forms. Final rules are expected to be available during the first quarter of 2011.
We expect the required capital expenditures would be incurred during 2012 and 2013 in advance of the potential 2014 compliance date. We did not incur any capital expenditures in 2010 to maintain compliance with applicable environmental laws and regulations or to meet new regulatory requirements. We expect to incur capital expenditures of approximately $3 million in 2011 in order to maintain compliance with current applicable environmental laws and regulations. We anticipate that environmental compliance will continue to require increased capital expenditures over time as environmental laws or regulations, or interpretations thereof, change or the nature of our operations require us to make significant additional capital expenditures.
Our operations also are subject to a variety of worker safety laws in the United States and Canada. The Occupational Safety and Health Act, U.S. Department of Labor Occupational Safety and Health Administration regulations and analogous state and provincial laws and regulations mandate general
requirements for safe workplaces for all employees. We believe that we are operating in material compliance with applicable employee health and safety laws.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available without charge on our website, www.newpagecorp.com, as soon as is reasonably practicable after they are filed electronically with the SEC. We will also provide a free copy of any of our filed documents upon written request to: General Counsel, NewPage Corporation, 8540 Gander Creek Drive, Miamisburg, Ohio 45342.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).
ITEM 1A.
ITEM 1A. RISK FACTORS
The risks discussed below, any of which could materially affect our business, financial condition or results of operations, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Our substantial level of indebtedness could adversely affect our business, financial condition or results of operations.
We have substantial indebtedness. As of December 31, 2010, we had $3,469 million of total indebtedness, of which $92 million consisted of borrowings under our revolving credit facility (excluding letters of credit), and we had up to $141 million available for borrowing under our revolving credit facility (after deducting for $105 million in outstanding letters of credit and not taking into account any borrowing base limitations). Total indebtedness for NewPage was $3,245 million at December 31, 2010. We may incur additional indebtedness subject to restrictions in our existing debt instruments. If additional debt is added to our and our subsidiaries’ current debt levels, the related risks that we now face could intensify.
The revolving credit facility for $470 million of the commitment matures upon the first to occur of (i) December 21, 2012 and (ii) the later of (a) March 1, 2012 and (b) the earliest date that is 61 days prior to the scheduled maturity date of the first-lien notes and the second-lien notes, and any refinancing thereof. If we do not repay or refinance our second-lien notes by December 2, 2011, the revolving credit facility for this portion of the commitment would mature on March 1, 2012. For the remaining $30 million of the commitment, the revolving credit facility matures upon the first to occur of (i) December 21, 2012 and (ii) the earliest date that is 181 days prior to the scheduled maturity date of the senior secured notes, senior subordinated notes, the NewPage Holding PIK notes, and any refinancing thereof. If we do not repay or refinance our second-lien notes by July 4, 2011, the revolving credit facility for this portion of the commitment would mature on October 2, 2011. The First-Lien Notes mature on the earlier of (i) December 31, 2014 or (ii) the date that is 31 days prior to the maturity date of the second-lien notes, the senior subordinated notes, the NewPage Holding PIK notes or any refinancing thereof. The Second-Lien Notes mature on May 1, 2012. The senior subordinated notes mature on May 1, 2013. The NewPage Holding PIK Notes mature on November 1, 2013.
Our substantial indebtedness could have important consequences, including the following:
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it may be more difficult for us to satisfy our obligations with respect to our outstanding indebtedness
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our ability to obtain additional financing for working capital, debt service requirements, general corporate or other purposes may be impaired
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we must use a substantial portion of our cash flow to pay interest and principal on our indebtedness, which reduces the funds available to us for other purposes
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we are more vulnerable to economic downturns and adverse industry conditions
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our ability to capitalize on business opportunities and to react to competitive pressures and changes in our industry as compared to our competitors may be compromised due to our high level of indebtedness
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our ability to refinance our indebtedness may be limited
In addition, we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all. If we were unable to make payments on or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:
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sales of assets
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reduction or delay of capital expenditures
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sales of equity
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negotiations with our lenders to restructure the applicable debt
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cash equity contributions from our controlling equity owner or others
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commencement of voluntary bankruptcy proceedings
Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.
A portion of our debt bears interest at variable rates. If market interest rates increase, it could adversely affect our cash flow, compliance with our debt covenants or the amount of our cash interest payments.
As of December 31, 2010, we had $541 million of indebtedness consisting of borrowings that bear interest at variable rates, representing 16% of our total indebtedness. Variable-rate indebtedness at NewPage was $317 million at December 31, 2010, representing 10% of its total indebtedness. If market interest rates increase, variable-rate debt will create higher debt service requirements, which would adversely affect our cash flow and compliance with our debt covenants. As of December 31, 2010, weighted average interest rates were 4.7% on borrowings under the revolving credit facility, 6.5% on the NewPage floating rate senior secured notes due 2012 and 7.4% on the NewPage Holding floating rate senior unsecured PIK Notes due 2013 (the “NewPage Holding PIK Notes”). Each one-eighth percentage-point change in LIBOR would result in a $0.3 million change in annual interest expense on the floating rate notes, a $0.3 million change in annual interest expense on the NewPage Holding PIK Notes and, assuming the entire revolving credit facility were drawn, a $0.6 million change in interest expense on the revolving credit facility, in each case, without taking into account any interest rate derivative agreements. While we may from time-to-time enter into agreements limiting our exposure to higher market interest rates, these agreements may not offer complete protection from this risk.
Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations.
Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, political, financial, competitive, legislative, regulatory and other factors that are beyond our control.
During 2010, we expended approximately $369 million to service our indebtedness as compared to approximately $305 million during 2009. For the year ended December 31, 2010, our interest expense was $393 million compared to $438 million for the year ended December 31, 2009, which included a loss on extinguishment of debt of $85 million and a reclassification adjustment of $48 million of unrealized losses on our interest rate swaps from accumulated other comprehensive income (loss). Interest expense for NewPage was $375 million for the year ended December 31, 2010 compared to $418 million for the year ended December 31, 2009. In addition, a substantial portion of our indebtedness matures in 2012. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our indebtedness or to fund our other liquidity needs, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, or that we will be able to refinance on commercially reasonable terms or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow or refinance our debt on favorable terms it could have a material adverse effect on our financial condition, the value of the outstanding debt and our ability to make any required cash payments under our indebtedness.
Our debt instruments impose significant operating and financial restrictions on us.
The indentures and other agreements governing our debt instruments impose significant operating and financial restrictions on us. These restrictions limit our ability to, among other things:
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incur additional indebtedness or guarantee obligations
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repay indebtedness prior to stated maturities
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pay dividends or make certain other restricted payments
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make investments or acquisitions
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create liens or other encumbrances
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transfer or sell certain assets or merge or consolidate with another entity
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engage in transactions with affiliates
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engage in certain business activities
In addition to the covenants listed above, our revolving credit facility, as amended, requires the maintenance of at least $50 million of borrowing availability at all times under the revolving credit facility and limits our ability to make capital expenditures. To the extent that NewPage’s unused borrowing availability under the revolving credit facility is below $50 million for 10 consecutive business days or $25 million for three consecutive business days, NewPage is required to comply with specified financial ratios and tests, including a minimum interest ratio and maximum senior and total leverage ratios and, subsequent to March 31, 2011, a fixed charge coverage ratio.
Our ability to comply with these covenants may be affected by events beyond our control, and an adverse development affecting our business could require us to seek waivers or amendments of covenants, alternative or additional sources of financing or reductions in expenditures. We cannot assure you that such waivers, amendments or alternative or additional financings could be obtained on acceptable terms or at all.
A breach of any of the covenants or restrictions contained in any of our existing or future financing agreements, including our inability to comply with the required financial covenants in our revolving credit facility, could result in an event of default under those agreements. Such a default could allow the lenders under our financing agreements, if the agreements so provide, to discontinue lending, to accelerate the related debt as well as any other debt to which a cross acceleration or cross default provision applies, and to declare all borrowings outstanding thereunder to be due and payable. In addition, the lenders could terminate any commitments they had made to supply us with further funds. If the lenders require immediate repayments, we will not be able to repay them, or the other holders of our debt, in full.
We cannot assure you that we will be in compliance with these covenants in the periods required or that we will be able to refinance the revolving credit facility in the event we cannot comply with the applicable covenants.
Lenders under our revolving credit facility may not fund their commitments.
Under the credit agreement governing our revolving credit facility, if a lender’s commitment is not honored, that portion of the lender’s commitment under the revolving credit facility will be unavailable to the extent that the lender’s commitment is not replaced by a new commitment from an alternate lender.
Lenders under our revolving credit facility are well-diversified. We currently anticipate that these lenders will participate in future requests for funding under our revolving credit facility. However, there can be no assurance that deterioration in the credit markets and overall economy will not affect the ability of our lenders to meet their funding commitments. Additionally, our lenders have the ability to transfer their commitments to other institutions, and the risk that committed funds may not be available under distressed market conditions could be exacerbated to the extent that consolidation of the commitments under our facilities or among its lenders were to occur.
Our controlling equity holder may take actions that conflict with interests of the debtholders.
A substantial portion of the voting power of our equity is held indirectly by affiliates of Cerberus. Accordingly, Cerberus indirectly controls the power to elect our directors and officers, to appoint new management and to approve all actions requiring the approval of the holders of our equity (subject to certain specified consent rights of SEO under the security holders agreement between NewPage Group and SEO), including adopting amendments to our constituent documents and approving mergers, acquisitions or sales of all or substantially all of our assets. The directors have the authority, subject to the terms of our debt, to issue additional indebtedness or equity, implement equity repurchase programs, declare dividends and make other such decisions about our equity.
In addition, the interests of our controlling equity holder could conflict with those of our debtholders if, for example, we encounter financial difficulties or are unable to pay our debts as they mature. Our controlling equity holder also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even though these transactions might involve risks to our debtholders.
Demand for printing and writing paper has declined due to general economic events and developments in alternative media. Further declines in demand could have a material adverse effect on our business, financial condition and results of operations.
General economic conditions have had an adverse effect on the demand for our products since the second half of 2008. North American printing and writing 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. Starting in the second half of 2008, advertising and print media usage declined due to general economic conditions, as advertisers reduced spending on print advertising and publications ceased operations. Although advertising and print media usage began to increase during the second half of 2010, they have not returned to prior levels. As a result of lower demand, sales prices began to decline during the fourth quarter of 2008 and throughout much of 2009, until becoming relatively stable during the fourth quarter of 2009. Sales prices began to increase in the second half of 2010 as a result of an increase in demand over 2009 levels and capacity closures. Any further declines in demand as a result of the general economic environment or developments in alternative media could have a material adverse effect on our business, financial condition and results of operations.
We have limited ability to pass through increases in our costs. Increases in our costs or decreases in our paper prices could adversely affect our business, financial condition and results of operations.
Our earnings are sensitive to changes in the prices of our paper products. 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:
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Market prices for paper products are a function of supply and demand, factors over which we have limited influence. We therefore have limited ability to control the pricing of our products. Market prices of grade No. 3 coated paper, 60 lb. weight, 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. Market prices of grade No. 4 coated paper, 50 lb. weight, which is an industry benchmark for coated groundwood paper pricing, and grade SC-A, 35 lb. weight, which is an industry benchmark for supercalendered paper pricing, have generally followed similar trends. Because market conditions determine the price for our paper products, the price for our products could fall below our production costs.
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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 our costs to our customers absent increases in the market price. Thus, even though our costs may increase, our customers may not accept price increases for our products, or the prices for our products may decline.
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Paper manufacturing is highly capital-intensive and a large portion of our and our competitors’ operating costs are fixed. Additionally, paper machines are large, complex systems that operate more efficiently when operated continuously. Consequently, we typically continue to run our machines whenever marginal revenue exceeds the marginal costs.
Our ability to achieve acceptable margins is, therefore, principally dependent on managing our cost structure and managing changes in raw materials prices, which represent a large component of our operating costs and fluctuate based upon factors beyond our control. If the prices of our products decline, or if our raw material costs increase, or both, it could have a material adverse effect on our business, financial condition and results of operations. For a further discussion of the variability of our paper prices
and our costs and expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Selected Factors That Affect Our Operating Results.”
Most of the raw material, labor and other cost of sales at our Port Hawkesbury, Nova Scotia, mill are denominated in Canadian dollars. North American sales prices for the products produced at Port Hawkesbury are determined primarily by the U.S. dollar price per ton charged by U.S. producers. The U.S. dollar’s weakness against the Canadian dollar has periodically impaired the ability of the Port Hawkesbury mill to profitably compete in the U.S. market.
The markets in which we operate are highly competitive and imports could materially adversely affect our business, financial condition and results of operations.
Our business is highly competitive. Competition is based largely on price. We compete with numerous North American paper manufacturers. We also face competition from foreign producers, some of which we believe are lower cost producers than us. Foreign overcapacity could result in an increase in the supply of paper products available in the North American market.
Our non-U.S. competitors may develop a competitive advantage over us and other U.S. producers if the U.S. dollar strengthens in comparison to the home currency of those competitors, if the home currency of those competitors (particularly in China) is maintained by their governments at a low value compared to the U.S. dollar, if those competitors receive governmental subsidies or incentives or if ocean shipping rates decrease. If any of these factors occur, imports may increase, which, in turn, would cause the supply of paper products available in the North American market to increase. An increased supply of paper 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:
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product availability
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the quality of our products
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our breadth of product offerings
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our ability to maintain plant efficiencies and high operating rates and thus lower our average manufacturing costs per ton
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our ability to provide customer service that meets customer requirements and our ability to distribute our products on time
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costs to comply with environmental laws and regulations
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our ability to produce products that meet customer requirements for the use of sustainable forestry principles, recycled content and environmentally friendly energy sources
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the availability or cost of chemicals, wood, energy and other raw materials and labor
Furthermore, some of our competitors have greater financial and other resources than we do or may be better positioned than we are to compete for certain opportunities.
We depend on a small number of customers for a significant portion of our business.
Our two largest customers, xpedx, a division of International Paper Company, and Unisource Worldwide, Inc. accounted for 18% and 12% of 2010 net sales. Our ten largest customers (including xpedx and Unisource) accounted for approximately 54% of 2010 net sales. The loss of, or significant 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 our customers to facilitate the purchase of our products and rely on their creditworthiness and ability to obtain credit from lenders. Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of our 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.
Rising postal costs could weaken demand for our paper products.
A significant portion of our paper is used in periodicals, catalogs, fliers and other promotional materials. 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 advertising materials or cause advertisers to use alternate methods to distribute their advertising materials. Any of the foregoing could decrease the demand for our products, which could materially adversely affect our business, financial condition and results of operations.
Developments in alternative media could adversely affect the demand for our products.
Trends in advertising, electronic data transmission and storage and the internet could have adverse effects on traditional print media, including our products and those of our customers, but neither the timing nor the extent of those trends can be predicted with certainty. Our magazine and catalog publishing customers may increasingly use, 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 alternatives grows, demand for our paper products could decline. In addition, electronic formats for textbooks could cause demand to decline for paper textbooks.
If we are unable to obtain raw materials, including petroleum-based chemicals, at favorable prices, or at all, it could adversely affect our business, financial condition and results of operations.
We have no significant timber holdings and purchase wood, chemicals and other raw materials from third parties. We may experience shortages of 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 many chemicals, especially petroleum-based chemicals, have had significant fluctuations over the past several years. Chemical prices have historically been and are expected to continue to be volatile. In addition, chemical suppliers that use petroleum-based products in the manufacture of their chemicals may, due to a supply shortage, ration the amount of chemicals available to us or we may not be able to obtain the chemicals we need at favorable prices, if at all. Chemical suppliers also may be adversely affected by, among other things, hurricanes and other natural disasters. Certain specialty chemicals that we purchase are available only from a small number of suppliers. We may experience additional cost pressures if merger and acquisition activity occurs among our major chemical suppliers. If any of our major chemical suppliers were to cease operations or cease doing business with us, we may be unable to obtain these chemicals at favorable prices, if at all.
In addition, wood prices are dictated largely by demand. 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 threatened or endangered species, the
promotion of forest biodiversity and the response to and prevention of catastrophic wildfires and campaigns or other measures by environmental activists could also affect timber supplies. Availability of harvested timber may further be limited by factors such as fire and fire prevention, insect infestation, disease, ice and wind storms, drought, floods and other natural and man-made causes, thereby reducing supply and increasing prices. We buy wood chips from lumber producers as a byproduct of their lumber production. Declines in their business conditions could affect the availability and price of wood chips.
Any disruption in the supply of chemicals, wood or other inputs could affect our ability to meet customer demand in a timely manner and could harm our reputation. As we 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.
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 seek to run our paper machines and pulp mills on a nearly continuous basis for maximum efficiency. Any unplanned plant downtime at any of our paper mills results in unabsorbed fixed costs that negatively affect our results of operations. 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, many of the geographic areas where our production is located and where we conduct our business may be affected by natural disasters, including snow storms, tornadoes, forest fires and flooding. These natural disasters could disrupt the operation of our mills, 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 or periods of rising costs, we may need to schedule market-related downtime, which could have a material adverse effect on our financial condition and results of operations. We took 39,000 tons of market-related downtime of coated paper during 2010 in response to lower customer demand and in an effort to manage our inventory levels of finished goods to match customer requirements.
Our operations require substantial ongoing capital expenditures, and we may not have adequate capital resources to fund all of our required capital expenditures.
Our business is capital intensive, and we incur capital expenditures on an ongoing basis to maintain our equipment and comply with environmental laws and regulations, as well as to enhance the efficiency of our operations. We expect to spend approximately $75 million in 2011 on capital expenditures. In addition, our revolving credit facility limits our ability to make capital expenditures. We anticipate that cash generated from operations will be sufficient to fund our operating needs and capital expenditures for the foreseeable future and that the revolving credit facility limitation will not impair our ability to make necessary investments in capital expenditures. However, if we require additional funds to fund our capital expenditures, we may not be able to obtain them on favorable terms, or at all. If we cannot maintain or upgrade our facilities and equipment as we require or to ensure environmental compliance, it could have a material adverse effect on our business, financial condition and results of operations.
Rising energy or chemical prices or supply shortages could adversely affect our business, financial condition and results of operations.
Although a significant portion of our energy requirements is satisfied by steam produced as a byproduct of our manufacturing process, we purchase natural gas, coal and electricity to run our mills. Overall, we expect crude oil and energy costs to remain volatile for the foreseeable future. In addition, energy suppliers and chemical suppliers that use petroleum-based products in the manufacture of their chemicals
may, due to supply shortages, ration the amount of energy or chemicals available to us and we may not be able to obtain the energy or chemicals we need to operate our business at acceptable prices or at all. Any significant energy or chemical shortage or significant increase in our energy or chemical 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Selected Factors That Affect Our Operating Results-Cost of Sales.” Furthermore, we are 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. Additionally, we have experienced some fuel surcharges (primarily diesel fuel) by suppliers, distributors and freight carriers. If suppliers, distributors or freight carriers impose or increase fuel surcharges, and we are not able to pass these costs through to our customers, they could have a material adverse effect on our business, financial condition and results of operations.
In addition, 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.
Litigation could be costly and harmful to our business.
We may be involved in various claims and legal actions that arise in the ordinary course of business, including claims and legal actions related to environmental laws and regulations. Any of these claims or legal actions could materially adversely affect our business, results of operations and financial condition.
See “Legal Proceedings” for further information concerning pending legal proceedings.
The failure of our information technology and other business support systems could have a material adverse effect on our business, financial condition and results of operations.
Our ability to effectively monitor and control our operations depends to a large extent on the proper functioning of our information technology and other business support systems. If our information technology and other business support systems were to fail it could have a material adverse effect on our business, financial condition and results of operations.
A large percentage of our employees are unionized. Wage increases or work stoppages by our unionized employees may have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2010, we had approximately 7,300 employees. Approximately 70% of our employees were represented by labor unions. We have 16 collective bargaining agreements, of which 13 have expired and are under negotiation. The mills with expired contracts are operating under the terms of the previous agreements and include our mills in Kentucky, Maine, Michigan, Wisconsin and Nova Scotia. There can be no assurance that we will be able to enter into new agreements on acceptable terms or at all. The remaining collective bargaining agreements expire through January 2013. Our Port Hawkesbury, Nova Scotia, mill was closed from December 2005 until October 2006, before our ownership of the mill, due to a labor dispute.
We may become subject to material cost increases or additional work rules imposed by agreements with labor unions. This could increase expenses in absolute terms and as a percentage of net sales. In addition, 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.
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 train and truck. If any of our third-party transportation providers fail to deliver our products in a timely manner, we may be unable to sell them at full value. Similarly, if any of our transportation providers fail 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, labor 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 affect 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. Additionally, we have experienced some fuel surcharges (primarily diesel fuel) by suppliers, distributors and freight carriers. If suppliers, distributors or freight carriers impose or increase fuel surcharges, and we are not able to pass these 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 regulations that could impose substantial costs upon us and may adversely affect our operating performance.
Our operations are subject to a wide range of federal, state, provincial and local general and industry-specific environmental, health and safety laws and regulations, including those relating to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. Compliance with these laws and regulations is a significant factor in our business and we may be subject to increased scrutiny and enforcement actions by regulators as a result of changes in federal or state administrations. We have made, and will continue to make, significant expenditures to comply with these requirements. Significant expenditures also could be required for compliance with any future laws or regulations relating to climate change, greenhouse gas emissions, cap-and-trade or other emissions. For example, in June 2010, the U.S. Environmental Protection Agency released a proposed rule which provides for new Industrial Boiler Maximum Achievable Control Technology standards to regulate emissions of hazardous air pollutants, which, if enacted as proposed, may require us to make significant capital expenditures at our mills in order to comply. In addition, we handle and dispose of wastes arising from our mill operations and operate a number of landfills to handle that waste. While we believe, based upon current information, that we are currently in substantial compliance with all applicable environmental laws and regulations, we could be subject to potentially significant fines, penalties or criminal sanctions for failure to comply. 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 cost to investigate or clean up that 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 paper mills or other locations where we have disposed of, or arranged for the disposal of, wastes. MeadWestvaco and SEO have separately agreed to indemnify us, subject to certain limitations, for certain environmental liabilities. There can be no assurance that MeadWestvaco or SEO will perform under any of their respective environmental indemnity obligations or that the indemnity will adequately cover us in the event of any environmental liabilities, which could have a material adverse effect on our financial condition and results of operations. Furthermore, we agreed to indemnify the purchaser of our carbonless paper business for certain environmental liabilities, subject to certain limitations. We also could be subject to claims brought pursuant to applicable laws, rules or regulations for property damage or personal injury resulting from the environmental impact of our operations, including claims due to human exposure to hazardous substances. Increasingly stringent environmental requirements, more aggressive enforcement actions or
policies, the discovery of unknown conditions or the bringing of future claims may cause our expenditures for environmental matters to increase, and we may incur material costs associated with these matters.
Some of our operations are subject to Canadian government regulation and we are subject to foreign currency risk.
Our business includes a mill in Port Hawkesbury, Nova Scotia, and management of woodlands in Canada. Our operations in Canada are subject to Canadian laws and regulations, as well as foreign currency risk. The value of the Canadian dollar versus the U.S. dollar has fluctuated dramatically over the last two years. A significantly weaker U.S. dollar makes imports to the United States of paper products made in our Port Hawkesbury, Nova Scotia, mill unprofitable. We cannot assure you we will be able to manage our Canadian operations profitably.
We have a history of net losses and we may not generate net income in the future.
We incurred a net loss in each of the five years ended December 31, 2010. As of December 31, 2010, our accumulated deficit was $1,280 million and NewPage’s accumulated deficit was $1,178 million. In addition, SENA incurred a net loss in the year ended December 31, 2006 and the nine months ended September 30, 2007. If we are unable to generate net income in satisfactory amounts or at all, this may adversely affect our business.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Miamisburg, Ohio. We own the mills where we produce our paper products and own the converting facilities where we convert rolls of paper to sheets. We believe that we have sufficient capacity at our manufacturing facilities to meet our production needs for the foreseeable future. In addition, we lease space or have third-party arrangements to utilize space in approximately 50 warehouse facilities. All of our owned facilities (except those owned by CWPCo) are pledged as collateral under our various debt agreements. The following table lists the purpose of each of our significant facilities, as well as whether the facility is owned or leased:
Location
Purpose
Owned or
Leased/Expiration
Miamisburg, Ohio
Corporate headquarters
Leased/2017
Biron, Wisconsin
Paper mill
Owned
Duluth, Minnesota
Paper mill
Owned
Escanaba, Michigan
Paper mill
Owned
Luke, Maryland
Paper mill
Owned
Luke, Maryland
Warehouse and converting
Owned
Port Hawkesbury, Nova Scotia
Paper mill
Owned
Rumford, Maine
Paper mill
Owned
Stevens Point, Wisconsin
Paper mill
Owned
Whiting, Wisconsin
Paper mill
Owned
Wickliffe, Kentucky
Paper mill
Owned
Wisconsin Rapids, Wisconsin
Paper mill, warehouse and converting
Owned
On December 8, 2010, we announced that we would shut down the Whiting, Wisconsin paper mill by the end of February 2011. For a further discussion of these plans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.”
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In April 2008, NewPage Wisconsin System Inc. (formerly Stora Enso North America Corp. and the successor by merger to Consolidated Papers, Inc.), along with several other defendants, was named as a defendant in Appleton Papers, Inc., et al. v. George A. Whiting Paper Co., et al (08-CV-00016-WCG) in the United States District Court for the Eastern District of Wisconsin, Green Bay Division. The plaintiffs sought to allocate among the defendants the cleanup costs and natural resource damages associated with the remediation of PCB contamination in the Lower Fox River and to require the defendants and the other responsible parties to pay for the upcoming remedial work and natural resource damages. The matter was dismissed in December 2009 following a motion for summary judgment by the defendants, but remains subject to appeal.
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.
In September 2010, the U.S. Department of Commerce announced final antidumping and countervailing duty margins, replacing the preliminary margins announced earlier in 2010. On October 22, 2010, the International Trade Commission determined by unanimous vote that imports of coated paper from China
and Indonesia threaten material injury to U.S. producers and workers. The decision will allow the U.S. Department of Commerce to impose duties to offset the threat of dumping and government subsidies. These duties will remain in effect for five years, subject to annual administrative reviews.
We are involved in various other litigation and administrative proceedings that arise in the ordinary 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.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 11, 2011, NewPage Group was the sole holder of record of the shares of NewPage Holding’s common stock and NewPage Holding was the sole holder of record of the shares of NewPage’s common stock. There is no established public trading market for the common stock of NewPage Holding or NewPage. We have never paid or declared a cash dividend on the common stock of NewPage Holding or NewPage. Our debt agreements restrict our ability and the ability of our subsidiaries to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary financial data of NewPage Holding for each of the five years in the period ended December 31, 2010.
(a) NewPage acquired SENA as of December 21, 2007. The statement of operations data includes the results of this acquisition from the date of acquisition.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our historical financial statements, including the related notes appearing elsewhere in this Form 10-K. Statements in the discussion and analysis regarding our expectations about the performance of our business and any forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
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 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 2010, North American printing paper demand increased compared to 2009. This was a result of a recovery of advertising spending and magazine and catalog circulation during 2010 following a decline in 2009 attributable to weak economic factors and inventory reductions by customers. As a result of the higher demand, our market-related downtime in 2010 declined to 39,000
tons, all of which occurred during the first quarter of 2010, from 515,000 tons of market-related downtime in 2009. We will consider the need for market-related downtime from time to time based on market conditions.
Coated paper production capacity in North America was lower during 2010 compared to 2009, primarily as a result of North American capacity closures. From January 2008 through December 2010, mills and machines in North America with gross coated paper capacity of more than 2 million tons have been closed or aligned to produce other types of paper.
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. As a result of announced price increases implemented during the second half of 2010, we expect average prices for coated paper to increase during the first half of 2011 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. In September 2010, the U.S. Department of Commerce announced final antidumping and countervailing duty margins, replacing the preliminary margins announced earlier this year. On October 22, 2010, the International Trade Commission determined by unanimous vote that imports of coated paper from China and Indonesia threaten material injury to U.S. producers and workers. The decision will allow the U.S. Department of Commerce to impose duties to offset the threat of dumping and government subsidies. These duties will remain in effect for five years, subject to annual administrative reviews. For further information concerning these proceedings, see “Legal Proceedings.”
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 the same terms as the existing $1.7 billion 11.375% first-lien senior secured notes.
Port Hawkesbury Biomass Project
On November 3, 2010, NewPage Port Hawkesbury Corp. (“NPPH”), an indirect wholly-owned subsidiary of NewPage, completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to Nova Scotia Power Inc. (“NSPI”) for a cash sales price of $79 million. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93 million. All costs of construction up to C$93 million will be paid or reimbursed by NSPI. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for and under the control of NSPI for an initial period of 25 years plus the period prior to completion of the turbine, with three automatic five-year renewal terms, unless notice of termination is given. See Note 8 to the consolidated financial statements.
Whiting Mill Closure
During the fourth quarter of 2010, we announced a plan to permanently close the Whiting, Wisconsin mill and both paper machines by the end of February 2011. Approximately 360 employees at the facility will be affected. The decision to close the facility was made in order to better align capacity with market
demand. As a result of these actions, including the evaluation of capacity needs, during the fourth quarter of 2010 we recorded asset impairment charges for the Whiting and Kimberly mills of $196 million in other (income) expense and have classified these assets as held for sale. In addition, during the fourth quarter of 2010, we recognized $2 million of employee-related costs recorded in cost of sales. We expect to recognize an additional charge of approximately $6 million in cost of sales during the first quarter of 2011 for employee-related costs and we expect to recognize additional charges in cost of sales of approximately $10 million to $15 million for contract termination and other closure related costs, primarily during 2011. The facility closure and related activities are expected to be substantially completed during the first half of 2011. The severance and other closure cost require the outlay of cash while the asset impairment charge represents a non-cash charge. We expect no material effect on future earnings or cash flows as a result of the Whiting mill closure.
Selected Factors That Affect Our Operating Results
Net Sales
Our net sales are a function of the amount of paper that we sell and the price at which we sell it. Demand for printing paper is cyclical, which results in changes in both volume and price. Paper prices historically have been a function of macroeconomic factors, such as the strength of the United States economy and import levels, that are largely out of our control. Price has historically been more variable than volume and can change substantially over relatively short time periods. Coated freesheet paper is typically purchased by customers on an as-needed basis, and generally is not bought under contracts that provide for fixed prices or minimum volume commitments. Coated groundwood and supercalendered paper are typically sold to customers under contracts that provide for fixed prices and minimum volume commitments. We use substantially all of our pulp production internally and sell some excess production to external customers.
Our earnings are sensitive to price changes for our principal products, with price changes in coated paper having the greatest effect. Fluctuations in paper prices historically have had a direct effect on our results for several reasons:
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Market prices for paper products are a function of supply and demand, factors over which we have limited influence.
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Market prices for paper products typically are not directly affected by raw material costs or other costs of sales, and consequently there is limited ability to pass through increases in costs to customers absent increases in the market price.
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The manufacturing of paper is highly capital-intensive and a large portion of operating costs is fixed. Additionally, paper machines are large, complex systems that operate more efficiently when operated continuously. Consequently, we typically continue to run our machines whenever marginal revenue exceeds the marginal costs.
See “Overview-Trends in our Business” for a discussion of factors that have historically affected pricing and are expected to continue to affect our pricing.
Cost of Sales
The principal components of our cost of sales are chemicals, fiber, energy, labor, maintenance and depreciation and amortization. Costs for commodities, including chemicals, wood and energy, are the most variable component of cost of sales because the prices of many of the commodities that we use can fluctuate substantially, sometimes within a relatively short period of time.
Fiber. 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 fiber supply agreements in place that ensure a portion of our wood requirements, purchases under these agreements are typically at market rates. For the year ended December 31, 2010, we produced approximately 94% of our pulp requirements, which excludes our sales of market pulp, with the remainder supplied through open market purchases and supply agreements. The price of market pulp has fluctuated significantly. Pulp prices fluctuate due to changes in worldwide consumption of pulp, pulp capacity additions, expansions or curtailments affecting the supply of pulp, changes in inventory levels by pulp consumers, which affect short-term demand, and pulp producer cost changes related to wood availability and environmental issues.
Chemicals. Certain chemicals used in the papermaking process are petroleum-based and fluctuate with the price of crude oil. The price for latex, the largest component of our chemical costs, has historically been volatile. We expect the price of latex to remain volatile.
Energy. We produce a large portion of our energy requirements from burning wood waste and other byproducts of the paper manufacturing process. For the year ended December 31, 2010, we generated approximately 50% of our energy requirements from biomass-related fuels. The remaining energy we purchase from third party suppliers consists of electricity and fuels, primarily natural gas, fuel oil and coal. We expect crude oil and energy costs to remain volatile for the foreseeable future. As prices fluctuate, we have the ability to switch between certain energy sources, within constraints, in order to minimize costs.
Our indirect wholly-owned subsidiary, CWPCo, provides electricity to our mills in central Wisconsin. CWPCo has 33.3 megawatts of generating capacity on 39 generators located in five hydroelectric plants on the Wisconsin River. CWPCo is a regulated public utility and also provides electricity to a small number of residential, light commercial and light industrial customers. See Note 15 to the consolidated financial statements.
Labor costs. Labor costs include wages, salary and benefit expenses attributable to mill personnel. Mill employees at a non-managerial level are generally compensated on an hourly basis in accordance with the terms of applicable union contracts and management employees are compensated on a salaried basis. Wages, salary and benefit expenses included in cost of sales do not vary significantly over the short term. 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 annual 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 annual maintenance shutdowns, we incur incremental costs that are 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 normal operations of our mills.
Depreciation and amortization. Depreciation and amortization expense for assets associated with our mill and converting operations is included in cost of sales.
Foreign currency. We are exposed to changes in foreign currency exchange rates because most of the raw material, labor and other cost of sales at our Port Hawkesbury, Nova Scotia, mill are denominated in Canadian dollars, while North American sales prices for the products produced at the Port Hawkesbury mill are in U.S. dollars (to the extent shipped into the United States) or determined primarily by the U.S. dollar price per ton charged by U.S. producers. A stronger Canadian dollar relative to the U.S. dollar
increases our costs of sales. The U.S. dollar’s weakness against the Canadian dollar, has periodically impaired the ability of the Port Hawkesbury mill to profitably compete in the U.S. market.
Selling, General and Administrative (SG&A) Expenses
The principal components of our SG&A expenses are wages, salaries and benefits for our sales and corporate administrative personnel, travel and entertainment expenses, advertising expenses, information technology expenses and research and development expenses. Over the last three years, we have lowered benefits costs by freezing defined benefit pension plans and reducing retiree medical benefits for salaried employees. In addition, we eliminated duplicative sales, marketing and customer service personnel and centralized our corporate administration, management, finance and human resource functions.
Interest
Interest expense decreased in 2010, compared to 2009, primarily as a result of a charge of $85 million on the extinguishment of debt in September 2009 and $48 million of unrealized losses on our interest rate swaps reclassified from accumulated other comprehensive income (loss) as a result of the retirement of the term loan in September 2009. These charges were partially offset by higher interest rates on outstanding debt and higher levels of outstanding debt during 2010, including the issuance of the Additional First-Lien Notes in February 2010. After the debt refinancing in 2009, we no longer had sufficient variable-rate debt exposure for our outstanding interest rate swaps to qualify for hedge accounting treatment and recorded the changes in fair value as adjustments to interest expense. 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. As of December 31, 2010, we had no interest rate swaps outstanding.
Effects of Inflation/Deflation
While inflationary increases in certain costs, such as energy, wood and chemical costs, have had a significant effect on our operating results over the past three years, changes in general inflation have had a minimal effect on our operating results in each of the last three years. We have benefited from deflationary effects from the decline in oil prices during 2010, which declines are not expected to continue. Sales prices and volumes have historically been more strongly influenced by supply and demand factors in specific markets than by inflationary or deflationary factors. Certain of our costs, including the prices of energy, wood and chemicals that we purchase, can fluctuate substantially, sometimes within a relatively short period of time, and can have a significant effect on our business, financial condition and results of operations. Energy, wood and chemical costs increased during 2008, decreased during 2009 and increased during 2010. These costs are expected to remain volatile in 2011, but at a lower level than the peaks reached in 2008.
Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the paper industry. Typically, the first two quarters are our slowest quarters due to lower demand for coated paper during this period. Our third quarter is typically our strongest sales quarter, reflecting an increase in sales volume as printers prepare for year-end holiday catalogs and advertising. Our accounts receivable and payable generally peak in the third quarter, while inventory generally peaks in the second quarter in anticipation of the third quarter season. Announced price increases and the general economic environment can affect historical seasonal patterns.
Critical Accounting Estimates
Our principal accounting policies are described in the Summary of Significant Accounting Policies in the notes to consolidated financial statements filed with the accompanying consolidated financial statements. The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management believes the accounting estimates discussed below represent those accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results.
Income taxes. We recognize deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the enacted tax laws. Furthermore, we evaluate uncertainty in our tax positions and only recognize benefits when we believe our tax position is more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We have tax filing requirements in many states and are subject to audit in these states, as well as at the federal level in both the U.S. and Canada. Tax audits by their nature are often complex and can require several years to resolve. In the preparation of our consolidated financial statements, management exercises judgments in estimating the potential exposure of unresolved tax matters. While actual results could vary, in management’s judgment we have adequately accrued the ultimate outcome of these unresolved tax matters.
We evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize our deferred tax assets in the future. The assessment of whether or not a valuation allowance is necessary often requires significant judgment, including forecasts of future taxable income and the evaluation of tax planning initiatives. Adjustments to the valuation allowance are made to earnings in the period when the assessment is made.
Pension and other postretirement benefits. We provide retirement benefits for certain employees through employer- and employee-funded defined benefit plans. Benefits earned are a function of years worked and average final earnings during an employee’s pension-eligible service. Certain of the pension benefits are provided in accordance with collective bargaining agreements.
Assumptions used in the determination of defined benefit pension expense and other postretirement benefit expense, including the discount rate, the long-term expected rate of return on plan assets and increases in future medical costs, are evaluated by management, reviewed with the plans’ actuaries at least annually and updated as appropriate. Actual asset returns and medical costs that are more favorable than assumptions can have the effect of lowering future expense and cash contributions, and conversely, actual results that are less favorable than assumptions could increase future expense and cash contributions. In accordance with U.S. GAAP, actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, affect expense in future periods. Unrecognized prior service cost and actuarial gains and losses in the defined benefit pension and other postretirement benefit plans subject to amortization are amortized over the average remaining service of the participants.
Assumptions used in determining defined benefit pension and other postretirement benefit expense are important in determining the costs of our plans. The expected long-term rates of return on plan assets were derived based on the capital market assumptions for each designated asset class under the respective
trust’s investment policy. The capital market assumptions reflect a combination of historical performance analysis and the forward-looking return expectations of the financial markets. A 0.5 percentage-point decrease in the weighted-average long-term expected rate of return on plan assets would increase 2011 net pension expense by approximately $6 million, while a 0.5 percentage-point increase in the weighted-average long-term expected rate of return on plan assets would decrease 2011 net pension expense by approximately $6 million.
The assumed discount rates used in determining the benefit obligations were determined by reference to the yield on zero-coupon corporate bonds rated Aa or AA maturing in conjunction with the expected timing and amount of future benefit payments. A 0.5 percentage-point decrease in the weighted-average discount rates would increase 2011 net pension expense by approximately $8 million, while a 0.5 percentage-point increase in the weighted-average discount rates would decrease 2011 net pension expense by approximately $7 million. The effect on other postretirement benefit expense would be negligible from such changes in the weighted-average discount rates. With respect to benefit obligations, a 0.5 percentage-point decrease in the weighted-average discount rates would increase pension benefit obligations by approximately $104 million and would increase other postretirement benefit obligations by approximately $4 million, while a 0.5 percentage-point increase in the weighted-average discount rates would decrease pension benefit obligations by approximately $94 million and would decrease other postretirement benefit obligations by approximately $4 million.
Equity compensation. We use the Black-Scholes option pricing model to determine the fair value of stock options. 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 the stock price, expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors (term of option).
We estimate the value of the underlying stock by examining the value of comparable market values for others in our industry and making adjustments for our capital structure and by utilizing discounted cash flows analysis. We estimate the volatility of our common stock by considering volatility of appropriate peer companies and adjusting for factors unique to our stock, including the effect of debt leverage. We estimate the expected term of options granted by incorporating the contractual term of the options and employees’ expected exercise behaviors.
Environmental and legal liabilities. We record accruals for estimated environmental liabilities when remedial efforts are probable and the costs can be reasonably estimated. These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities as well as availability of insurance coverage and contribution by other potentially responsible parties. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and changes in governmental regulations and environmental technologies, accruals are subject to substantial uncertainties and actual costs could be materially greater or less than the estimated amounts. We record accruals for other legal contingencies, which are also subject to numerous uncertainties and variables associated with assumptions and judgments, when the contingency is probable of occurring and reasonably estimable.
Restructuring and other charges. We periodically record charges for the reduction of our workforce, the closure of manufacturing facilities and other actions related to business improvement and productivity initiatives. These events require estimates of liabilities for employee separation payments and related benefits, demolition, facility closures, contract termination and other costs, as well as an estimate of the value that could be received from disposal or sale of affected assets. These assumptions could differ from actual costs incurred or value received.
Results of Operations
The following table sets forth our historical results of operations for the years ended December 31, 2010, 2009 and 2008. 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.
2010 Compared to 2009
Net sales for 2010 were $3,596 million compared to $3,106 million for 2009, an increase of $490 million, or 16%. Net sales were affected primarily by higher sales volume of core paper ($533 million) and higher sales volume and higher average prices of other non-core paper, partially offset by lower average core paper prices ($156 million) in 2010 compared to 2009. Core paper volume is principally coated freesheet, coated groundwood and supercalendered paper products sold in North America. Average core paper prices decreased to $871 per ton in 2010 compared to $910 per ton in 2009, reflecting lower core paper prices during the first half of 2010. Average core paper prices have increased sequentially during the second half of 2010. Core paper sales volume increased to 3,514,000 tons in 2010 compared to 2,949,000 tons in 2009. This can be attributed to the decreased advertising spending and magazine and catalog circulation during 2009 largely attributable to general economic factors. We took 39,000 tons of market-related downtime during 2010, compared to 515,000 tons of market-related downtime during 2009.
Cost of sales for 2010 was $3,511 million compared to $3,171 million for 2009, an increase of $340 million, or 11%. The increase was primarily a result of higher core paper sales volume ($420 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. During the fourth quarter of 2010, in connection with the announced closure of the Whiting mill, we recognized a charge of $2 million for employee-related costs in cost of sales. Gross margin (loss) for 2010 was 2.4% compared to (2.1)% for 2009, primarily as a result of higher core paper sales volumes and the effects of taking substantially less market-related downtime in 2010. Maintenance expense at our mills totaled $301 million in 2010 compared to $291 million in 2009.
Selling, general and administrative expenses increased to $183 million for 2010 from $180 million for 2009, primarily as a result of $11 million higher non-cash stock compensation expense, $5 million associated with the long-term incentive plan and $6 million in employee-related costs, primarily associated with certain former executive officers, during 2010, mostly offset by the benefits from cost reduction initiatives and lower pension expense. As a percentage of net sales, selling, general and administrative expenses improved to 5.1% in 2010 from 5.8% in 2009.
Interest expense for 2010 was $393 million compared to $438 million for 2009. Interest expense for NewPage for 2010 was $375 million compared to $418 million for 2009, primarily as a result of a charge of $133 million on the refinancing of debt and related transactions in the third quarter of 2009 partially offset by higher interest rates on outstanding debt and higher levels of outstanding debt during 2010.
Other (income) expense was $182 million for 2010 and $(306) million for 2009. Other (income) expense in 2010 includes asset impairment charges of $210 million, including $196 million during the fourth quarter of 2010 associated with the announced closure of the Whiting mill, partially offset by $(22) million of income recognized for alternative fuel mixture tax credits. Included in other (income) expense in 2009 was $(304) million of income recognized for alternative fuel mixture tax credits.
Income tax expense (benefit) for 2010 and 2009 was $1 million and $(59) million. Income tax expense (benefit) for NewPage for 2010 and 2009 was $1 million and $(54) million. For 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 purposes of allocating the income tax benefit to income (loss) before taxes, amounts of other comprehensive income result in income tax expense recorded in other comprehensive income and the offsetting amount as an allocation to tax benefit from operations. For 2010 and 2009, we have allocated zero and $45 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations. For 2010 and 2009, for NewPage, we have allocated zero and $41 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations. The amounts for 2009 reflect the reclassification to income tax (benefit) of all amounts previously allocated to accumulated other comprehensive income (loss) related to the interest rate swap cash flow hedges. Also included in 2009 was a tax benefit of $12 million, reflecting the decreases to our state deferred tax liabilities as a result of changes in our distribution channels that have occurred as part of our integration with SENA.
Net income (loss) attributable to NewPage Holding was $(674) million in 2010 compared to $(323) million in 2009. Net income (loss) attributable to NewPage was $(656) million in 2010 compared to $(308) million in 2009. The decreases were primarily the result of lower average sales prices, asset impairment charges and lower other income recognized for the alternative fuel mixture tax credits, partially offset by higher core paper sales volume and lower interest expense.
Adjusted EBITDA was $263 million and $432 million for 2010 and 2009. See “Reconciliation of Net Income (Loss) Attributable to the Company to EBITDA and Adjusted EBITDA” for further information on the use of EBITDA and Adjusted EBITDA as a measurement tool.
2009 Compared to 2008
Net sales for 2009 were $3,106 million compared to $4,356 million for 2008, a decrease of $1,250 million, or 29%. The decrease in net sales reflects lower sales volume of core paper ($1,107 million) and lower core paper prices ($165 million) in 2009 compared to 2008. Average core paper prices decreased to $910 per ton in 2009 compared to $964 per ton in 2008. We believe that the benefits of the alternative fuel mixture credit were passed on to customers in the form of lower sales prices. In addition to the effects
of the alternative fuel mixture credit, we believe some of the decline in pricing in 2009 resulted from the negative effects of imports of coated paper from China and Indonesia. Core paper sales volume decreased to 2,949,000 tons in 2009 compared to 4,105,000 tons in 2008. Our volume for core and other paper was lower primarily because of lower demand for catalog and promotional materials by retailers and lower spending on magazine advertising during 2009, as a result of general economic factors and the effect of a greater share of imports from China and Indonesia. As a result of these factors, we took 515,000 tons of market-related downtime during 2009, including 104,000 tons during the fourth quarter to reduce our inventory levels of finished goods to match customer requirements. During 2008, we took 91,000 tons of market-related downtime.
Cost of sales for 2009 was $3,171 million compared to $3,979 million for 2008, a decrease of $808 million, or 20%. The decrease was primarily a result of lower core paper sales volume ($813 million). Gross margin for 2009 decreased to (2.1)% compared to 8.6% for 2008, primarily as a result of significantly lower sales volume, lower sales prices and the effects of taking market-related downtime, partially offset by productivity improvement initiatives and lower input costs resulting primarily from lower crude oil prices. Included in cost of sales for 2008 was $22 million for accelerated depreciation, $5 million for inventory write-offs and $5 million of employee-related costs associated with our restructuring plans.
Maintenance expense at our mills totaled $291 million in 2009 compared to $346 million in 2008. The decrease in maintenance expense was driven primarily as a result of the shutdown of paper machines in 2008 as part of our restructuring activities and from actions taken to reduce the costs of maintenance activities.
Selling, general and administrative expenses decreased to $180 million for 2009 from $217 million for 2008, primarily as a result of lower costs related to our integration with SENA, stock compensation and restructuring charges. As a percentage of net sales, selling, general and administrative expenses increased to 5.8% in 2009 from 5.0% in 2008.
Interest expense for 2009 was $438 million compared to $298 million for 2008. Interest expense for 2009 for NewPage was $418 million compared to $277 million for 2008. Included in interest expense for 2009 is a loss of $85 million on the extinguishment of debt and $48 million of unrealized losses on our interest rate swaps reclassified from accumulated other comprehensive income (loss) as a result of the retirement of the term loan in September 2009.
Other (income) expense was $(306) million for 2009 and $(3) million for 2008. The amount recognized in 2009 was primarily the result of $(304) million of income recognized for alternative fuel mixture tax credits.
Income tax expense (benefit) for 2009 and 2008 was $(59) million and $4 million. Income tax expense (benefit) for NewPage for 2009 and 2008 was $(54) million and zero. We have recorded a valuation allowance against our net deferred income tax benefits as it is unlikely that we will realize those benefits. For purposes of allocating the income tax benefit to income (loss) before taxes, amounts of other comprehensive income result in income tax expense recorded in other comprehensive income and the offsetting amount as an allocation to tax benefit from operations. For 2009, we have allocated $45 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations. For 2009, for NewPage, we have allocated $41 million of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to tax benefit from operations. The amounts for 2009 include the reclassification to income tax (benefit) of all amounts previously allocated to accumulated other comprehensive income (loss) related to the interest rate swap cash flow hedges. Also included in 2009 is a tax benefit of $12 million, reflecting the decreases to our state deferred
tax liabilities as a result of changes in the company’s distribution channels that have occurred as part of our integration with SENA.
Net income (loss) attributable to NewPage Holding was $(323) million in 2009 compared to $(142) million in 2008. Net income (loss) attributable to NewPage was $(308) million in 2009 compared to $(117) million in 2008. The decreases were primarily a result of significantly lower sales volumes and pricing, partially offset by the alternative fuel mixture tax credits and productivity improvements.
Adjusted EBITDA was $432 million and $581 million for 2009 and 2008. 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 EBITDA and 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 U.S. GAAP, are not intended to represent net income (loss) attributable to the company, and should not be used as alternatives to net income (loss) attributable to the company as indicators of performance. EBITDA and Adjusted EBITDA are shown because they are bases upon which our management assesses performance and are primary components of certain covenants under our revolving credit facility. In addition, our management believes EBITDA and Adjusted EBITDA are useful to investors because they and similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. The use of EBITDA and Adjusted EBITDA instead of net income (loss) 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 U.S. GAAP. Some of these limitations are:
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EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments
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EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs
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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
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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 for the years ended December 31, 2010, 2009 and 2008:
Recently Issued Accounting Standards
Variable interest entity
In June 2009, the Financial Accounting Standards Board issued new guidance on the accounting for a variable interest entity (“VIE”). This guidance requires a qualitative approach to identifying a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. This guidance is effective for us as of January 1, 2010. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations and cash flows.
Liquidity and Capital Resources
In September 2009, NewPage and NewPage Holding amended the senior secured credit facilities to obtain more favorable financial covenants. We paid consent fees totaling $15 million in order to amend the senior secured credit facilities and agreed to higher interest rates, as well as certain other changes to the facilities.
Later in September 2009, NewPage issued $1,700 million of First-Lien Notes for proceeds of $1,598 million (the “Notes Offering”). The net proceeds of the Notes Offering, together with approximately $5 million of borrowings under our revolving credit facility, were used to repay all amounts outstanding under our term loan and to pay fees and expenses of the Notes Offering.
We also amended the revolving credit facility and repaid the outstanding term loan to increase our operating and financial flexibility.
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 the same terms as the existing $1.7 billion 11.375% first-lien senior secured notes.
In January 2011, we amended our revolving credit facility in order to extend the termination date. Lenders with commitments aggregating to $470 million accepted the revolver amendment. For those lenders the
revolving credit facility matures on December 21, 2012, unless we do not repay or refinance our second-lien notes by December 2, 2011, in which case the revolving credit facility matures on March 1, 2012. For the remaining $30 million of commitment, the revolving credit facility matures on December 21, 2012 unless we do not repay or refinance our second-lien notes by July 4, 2011, in which case the revolving credit facility matures on October 3, 2011. See Note 7 to the consolidated financial statements for additional details on maturity dates.
The First-Lien Notes mature on the earlier of (i) December 31, 2014 or (ii) the date that is 31 days prior to the maturity date of the second-lien notes, the senior subordinated notes, the NewPage Holding PIK notes or any refinancing thereof. If we do not repay or refinance our second-lien notes by March 31, 2012, the First-Lien Notes would mature on that date. The Second-Lien Notes mature on May 1, 2012. The senior subordinated notes mature on May 1, 2013. The NewPage Holding PIK Notes mature on November 1, 2013.
Available Liquidity
As of December 31, 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 ($388 million as of December 31, 2010).
The revolving credit facility, as amended, requires the maintenance of at least $50 million of borrowing availability at all times under the revolving credit facility and limits our ability to make capital expenditures. To the extent that NewPage’s unused borrowing availability under the revolving credit facility is below $50 million for 10 consecutive business days or $25 million for three consecutive business days, NewPage is required to comply with specified financial ratios and tests, including a minimum interest ratio and maximum senior and total leverage ratios and, subsequent to March 31, 2011, a fixed charge coverage ratio.
As of December 31, 2010, we had $141 million available for borrowing in excess of the $50 million required minimum, after reduction for $105 million in letters of credit and $92 million in outstanding borrowings under the revolving credit facility. During the year ended December 31, 2010, our average daily balance outstanding under our revolving credit facility was $70 million with a weighted-average daily interest rate of 4.5%. 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.
Aggregate indebtedness as of December 31, 2010 totaled $3,469 million, which includes $3,245 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 $(115) million during 2010 compared to $44 million during 2009. The reduction in cash provided by (used for) operating activities was primarily the result of the expiration of the alternative fuel mixture tax credit at the end of 2009, for which we received cash payments of $289 million during 2009, as well as higher cash requirements for interest and the settlement of interest rate swaps in 2010, partially offset by improvements in operations, including less market-related downtime and improvements in working capital. Investing activities in 2010 include spending of $68 million for capital expenditures and the receipt of $12 million of proceeds from the sales of assets. Financing activities during 2010 include $79 million in proceeds from NSPI for the Port Hawkesbury biomass project, the issuance of $70 million of Additional First-Lien Notes (proceeds of $67 million) used to repay existing borrowings under the revolving credit facility and for general corporate purposes and $40 million of net borrowings under the revolving credit facility.
Cash provided by operating activities was $44 million during 2009 compared to $60 million during 2008, primarily the result of the decline in sales demand and lower pricing, largely offset by $289 million of cash received from the alternative fuel mixture credits. Investing activities in 2009 include spending of $75 million for capital expenditures and the receipt of $28 million of proceeds from the sales of assets. Financing activities in 2009 included the issuance of $1,700 million of First-Lien Notes (proceeds of $1,598 million) used to repay the term loan and to pay fees and expenses related to the Notes Offering. We had net borrowings of $52 million under the revolving credit facility as of December 31, 2009, that were used to pay fees and expenses related to the amendments of our senior secured credit facilities, to repay a portion of the term loan and for working capital purposes.
Capital Expenditures
Capital expenditures were $68 million, $75 million and $165 million during 2010, 2009 and 2008. In order to preserve liquidity, we significantly reduced our capital expenditures in 2009 and 2010. In 2011, we expect to incur approximately $75 million in capital expenditures. We expect to fund our capital expenditures from cash flows from operations and our revolving credit facility. Our revolving credit facility limits the amount of capital expenditures we can incur. We do not believe that this limit or our lower level of expected capital expenditures will negatively affect our ability to meet the requirements of our customers.
Compliance with environmental laws and regulations is a significant factor in our business. We expect to incur capital expenditures of approximately $3 million in 2011 in order to maintain compliance with applicable environmental laws and regulations. During 2010 and 2009, we did not incur any capital expenditures associated with maintaining compliance with applicable environmental laws and regulations or to meet new regulatory requirements. Environmental compliance may require increased capital and operating expenditures over time as environmental laws or regulations, or interpretations thereof, change or the nature of our operations require us to make significant additional expenditures.
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 fourth quarter of 2010, we announced a plan to permanently close the Whiting, Wisconsin mill and both paper machines by the end of February 2011. As
a result of these actions, including the evaluation of capacity needs, during the fourth quarter of 2010, we recorded asset impairment charges for the Whiting and Kimberly mills of $196 million in other (income) expense and have classified these assets as held for sale. In addition, during the fourth quarter of 2010, we recognized $2 million of employee-related costs recorded in cost of sales. We expect to recognize an additional charge of approximately $6 million in cost of sales during the first quarter of 2011 for employee-related costs and we expect to recognize additional charges in cost of sales of approximately $10 million to $15 million for contract termination and other closure related costs, primarily during 2011.
In August 2010, benefits under the Canadian pension plan were frozen, resulting in an adjustment to increase the benefit liability of $6 million in the third quarter of 2010 with an offset to accumulated other comprehensive income (loss). This adjustment is the net result of the reduction in benefits from the plan amendment, more than offset by changes in actuarial assumptions as of the re-measurement date. Effective December 31, 2010, accumulated benefits in the U.S. cash balance pension plan were frozen. Accrued benefits will continue to earn annual interest credits, but participants will no longer earn cash balance benefit credits. Certain company contributions will now be made through the defined contribution plan beginning in 2011.
We have various investments held by our defined-benefit pension plan trusts. The returns on these assets have generally matched the broader market. We are monitoring the effects of our underfunded pension plans on our minimum pension funding requirements and pension expense for future periods. We currently do not anticipate material increases in our minimum funding requirements during 2011.
During 2010, we continued evaluating ways to raise capital through the issuance of debt and through the sale of nonstrategic assets. In February 2010, we issued an additional $70 million of Additional First-Lien Notes on the same terms as the existing $1.7 billion 11.375% first-lien senior secured notes.
On November 3, 2010, NPPH completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to NSPI for a cash sales price of $79 million. In addition, NSPI and NPPH have entered into an engineering, procurement and construction contract for NPPH to construct for NSPI a 60 MW biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93 million. NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for NSPI. NPPH was required to post $10 million of letters of credit under these arrangements in 2010 and an additional $5 million in 2011. See Note 8 to the consolidated financial statements.
In February 2010, CWPCo announced that it signed an agreement with Wisconsin Rapids Water Works Lighting Commission to sell the 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. On November 1, 2010, CWPCo entered into an asset sale agreement to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70 million. The closing of the transaction is subject to completion of the CWPCo Utility sale and regulatory approval. We continue to hold and operate the assets in the normal course of our operations.
The U.S. Environmental Protection Agency released a proposed rule in June 2010, which provides for new Industrial Boiler Maximum Achievable Control Technology (MACT) standards to regulate emissions of hazardous air pollutants. The rule as proposed 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 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, have commented on the proposed rule and expect revisions to the final form.
The U.S. Internal Revenue Code allowed a refundable excise tax credit for alternative fuel mixtures produced for sale or for use as a fuel in a trade or business. The credit was equal to fifty cents per gallon of alternative fuel contained in the mixture and expired on December 31, 2009. Income recognized for the credit is included in net income (loss) attributable to the company. We recognized $(22) million and $(304) million of income in other (income) expense for the year ended December 31, 2010 and 2009 for alternative fuel mixtures used through December 31, 2009.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Contractual Commitments
The following table reflects our contractual commitments associated with our debt and other obligations as of December 31, 2010:
(1) Amounts shown represent scheduled maturities assuming the refinancing of certain indebtedness does not occur, and do not take into account any acceleration of indebtedness resulting from mandatory payments required for events such as asset sales or under the excess cash flows provisions of our financing instruments. The amounts for NewPage are $3,253, zero, $3,093, $160 and zero for total, 2011, 2012-13, 2014-15 and thereafter, respectively.
(2) Amounts include contractual interest payments using the interest rates as of December 31, 2010 applicable to our variable-rate debt and stated fixed interest rate for fixed-rate debt. The amounts for NewPage are $475, $332, $139, $4 and zero for total, 2011, 2012-13, 2014-15 and thereafter, respectively.
(3) The contractual commitments consist of the minimum required expenditures to be made pursuant to the fiber supply agreements.
(4) We are required to post letters of credit or other financial assurance obligations with certain of our energy and other suppliers and certain other parties.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of December 31, 2010 and 2009, $541 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 December 31, 2010 and 2009, would be $5 million and $5 million.
Foreign Currency Risk
Our Canadian subsidiary makes a portion of its purchases and sales in U.S. dollars. As a result, it is subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. Foreign currency exchange
contracts may be used periodically to manage the variability in cash flows and revenues from the forecasted payment or receipt of currencies other than our functional currency, the U.S. dollar. As of December 31, 2010 and 2009, we had no foreign currency forward contracts outstanding.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of NewPage Holding Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, equity (deficit) and cash flows present fairly, in all material respects, the financial position of NewPage Holding Corporation and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests effective January 1, 2009.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 17, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of NewPage Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, equity (deficit) and cash flows present fairly, in all material respects, the financial position of NewPage Corporation and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests effective January 1, 2009.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 17, 2011
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
Dollars in millions, except per share amounts
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2010
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2009
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
Dollars in millions, except per share amounts
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2010
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
YEAR ENDED DECEMBER 31, 2009
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
YEAR ENDED DECEMBER 31, 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
See notes to consolidated financial statements.
NEWPAGE HOLDING CORPORATION AND SUBSIDIARIES
NEWPAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
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 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 and equity activity 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.
In December 2007, the Financial Accounting Standards Board issued guidance that establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent. The guidance also establishes reporting requirements that provide disclosures to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. We adopted the accounting treatment effective January 1, 2009 and retroactively adjusted amounts related to the minority interests in the consolidated financial statements to equity and removed the amount of minority interest in the consolidated statements of operations from other (income) expense. Revisions were made to prior period financial statements to present them on a comparable basis.
In December 2009 we purchased the interest of one limited partner in Rumford Cogeneration Company L.P. (“Rumford Cogeneration”), a limited partnership for which we are the general partner, and we entered into an agreement to purchase all our remaining co-investors’ interests for $6. The purchase price was reflected as a liability as of December 31, 2009 and we recorded the excess of the limited partner’s share of noncontrolling interests over the purchase price as an increase in additional paid-in capital. These purchases were completed in the fourth quarter of 2010.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and assumptions
The preparation of these consolidated financial statements required management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash equivalents
Highly liquid securities with an original maturity of three months or less are considered to be cash equivalents.
Foreign currency translation
The statements of operations of our Canadian entity, whose functional currency is the Canadian dollar, are translated into U.S. dollars using the average exchange rates for the period and the balance sheets are translated using the exchange rates at the reporting date. Exchange rate differences arising from the translation of the net investments in foreign entities are recorded as a component of accumulated other comprehensive income (loss).
Concentration of credit risk
We are potentially subject to concentrations of credit risk related to our accounts receivable. The majority of accounts receivable are with paper merchants, printers and publishers. We limit our credit risk by performing ongoing credit evaluations and, when deemed necessary, by requiring accelerated payment terms, letters of credit, guarantees or collateral. For the year ended December 31, 2010, sales to our largest two customers were 18% and 12% of net sales. For each of the years ended December 31, 2009 and 2008, sales to our largest customer was 19% and 21% of net sales. Accounts receivable at December 31, 2010 and 2009, relating to our largest customer were 17% and 17% of accounts receivable, net. Our ten largest customers accounted for approximately 54%, 51% and 52% of our net sales for the years ended December 31, 2010, 2009 and 2008.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for substantially all raw materials and finished goods for U.S.-based operations. Cost of all other inventories, mainly stores and supplies inventories and Canadian inventories, is determined by the average cost and first-in, first-out methods.
Property, plant and equipment
Owned assets are recorded at cost. Costs of renewals and betterments of properties are capitalized. Costs of maintenance and repairs are charged to expense using the direct-expensing method, whereby costs are recorded in the statement of operations in the same period that they are incurred. The cost of plant and equipment is depreciated utilizing the straight-line method over the estimated useful lives of the assets, which range from 20 to 40 years for buildings, 5 to 30 years for machinery and equipment and 10 years for land improvements.
Impairment of long-lived assets
We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets to be held and used may not be recoverable. If these circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. We report an asset held for sale at the lower of its carrying value or its estimated net realizable value.
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 significant 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. For a derivative designated as a cash-flow hedge, the effective portion of the change in the fair value of the derivative is recorded in 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.
Fair value of financial instruments
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. We measured the fair values of our interest rate swaps using observable interest-rate yield curves for comparable assets and liabilities at commonly quoted intervals. We measure the fair values of our foreign currency forward contracts based on current quoted market prices for similar contracts. We measure the fair values of our natural gas contracts based on natural gas futures contracts priced on the New York Mercantile Exchange (“NYMEX”).
Environmental
Environmental expenditures that increase useful lives of assets are capitalized, while other environmental expenditures are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated.
Landfills and other asset retirement obligations
We evaluate obligations associated with the retirement of tangible long-lived assets, primarily costs related to the closure and post-closure monitoring of our owned landfills, and record a liability when incurred. Subsequent to initial measurement, we recognize changes in the amount of the liability resulting from the passage of time and revisions to either the timing or amount of estimated cash flows.
Pension and other postretirement benefits
We maintain various defined benefit pension and other postretirement benefit plans in the United States and Canada. The plans are generally funded through payments to pension funds/trusts or directly by the company and/or employees.
Defined benefit pension and other postretirement benefit expense is recorded on a full accrual basis, as opposed to a cash-paid basis, and is reflected in the consolidated statements of operations over the expected working lives of the employees provided with such benefits. The economic and demographic assumptions used in calculating defined benefit pension and other postretirement benefit expense are reviewed and updated periodically to the extent that local market economic conditions and demographics change. Actual results that differ from assumptions are accumulated and amortized over future periods
and, therefore, affect expense in future periods. Unrecognized prior service cost and actuarial gains and losses are amortized over the average remaining service of the participants.
Revenue recognition
We recognize revenue at the point when title and the risk of ownership passes to the customer. Substantially all of our revenues are generated through product sales, and shipping terms generally indicate when title and the risk of ownership have passed. Revenue is recognized at the time of shipment for sales where shipping terms transfer title and risk of loss at the shipping point. For sales where shipping terms transfer title and risk of loss at the destination point, revenue is recognized when the goods are received by the customer. For sales made under consignment programs, revenue is recognized in accordance with the terms of the contract. We provide allowances for estimated returns and other customer credits, such as discounts and volume rebates, when the revenue is recognized based on historical experience. Sales of byproducts produced during the manufacturing process are recognized as a reduction of cost of sales. We do not recognize sales taxes collected from customers as revenue; rather we record these taxes on a net basis in our statement of operations.
International sales
We had net sales to customers outside of the United States of $271, $273 and $318 for the years ended December 31, 2010, 2009 and 2008. We have no material long-lived assets outside of the United States.
Income taxes
Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities reflect the enacted tax rates in effect for the years the differences are expected to reverse. We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that we will realize the deferred tax assets in the future. We recognize all income tax-related interest expense and statutory penalties imposed by taxing authorities as income tax expense.
Equity compensation
We use the graded vesting attribution method for recognizing stock compensation cost whereby the cost for a stock award is determined on a straight-line basis over the service period for each separate vesting portion of the award as if the award was multiple awards.
3. INVENTORIES
Inventories as of December 31, 2010 and 2009 consist of:
Approximately 71% and 72% of inventories at December 31, 2010 and 2009 are valued using the LIFO method. If inventories had been valued at current costs, they would have been valued at $496 and $607 at December 31, 2010 and 2009. During each of the years ended December 31, 2010 and 2009, inventory quantities were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at
higher costs, the effect of which increased cost of goods sold and net loss by approximately $7 and $11 during 2010 and 2009.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2010 and 2009 consist of:
Property, plant and equipment includes approximately $22 in net book value of assets held for sale as of December 31, 2010. During the fourth quarter of 2010, we recorded asset impairment charges for the Whiting and Kimberly mills. The fair value measurement used to determine the impairments were based on the market approach and reflected expected proceeds from the sales of the assets. The assets held for sale are classified as Level 3 for the use of inputs in determining fair value. See Note 16 for information related to the impairment charge.
See Note 17 for information related to the capital lease.
5. FINANCIAL INSTRUMENTS
Derivative Financial Instruments
Interest Rates
Prior to our debt refinancing in September 2009, we utilized interest-rate swap agreements to manage a portion of our interest-rate risk on our variable-rate debt instruments. During the third quarter ended September 30, 2009, we reclassified $48 of unrealized losses from accumulated other comprehensive income (loss) to interest expense as the hedged forecasted cash flows were no longer probable of occurring as a result of the refinancing. After the debt refinancing, we no longer had sufficient variable-rate debt exposure for our outstanding interest rate swaps to qualify for hedge accounting treatment and recorded the changes in fair value as adjustments to interest expense. We recognized in interest expense a (gain) loss of $3 and $1 for the years ended December 31, 2010 and 2009, for interest rate swaps that did not qualify for hedge accounting.
As of December 31, 2009, we had outstanding interest rate swaps totaling $900 for which we received amounts based on LIBOR and paid amounts based on a fixed rate. As of December 31, 2009, we also had outstanding a $200 interest rate swap with an offsetting exposure for which we received amounts based on a fixed rate and paid 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. As of December 31, 2010, we had no interest rate swaps outstanding. We measured 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 $34, $40 and $6 on our interest rate agreements for the years ended December 31, 2010, 2009 and 2008.
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 December 31, 2010 and 2009, we were party to natural gas futures contracts for notional amounts aggregating 800,000 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.
Foreign Currency
Our Canadian subsidiary makes a portion of its purchases and sales in U.S. dollars. As a result, it is subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. Foreign currency exchange contracts may be used periodically to manage the variability in cash flows and revenues from the forecasted payment or receipt of currencies other than our functional currency, the U.S. dollar. As of December 31, 2010 and 2009, we had no foreign currency forward contracts outstanding. We measure the fair values of our foreign currency forward contracts based on current quoted market prices for similar contracts.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2010 and 2009, the fair values and carrying amounts of our financial assets and liabilities measured on a recurring basis are as follows:
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 years ended December 31, 2010 and 2009 are as follows:
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 December 31, 2010 and 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:
Other Fair Value Disclosures
See Note 9 for fair value information of pension and other postretirement plan assets.
See Note 4 for fair value information of assets held for sale recorded at fair value.
6. OTHER CURRENT LIABILITIES
Accounts payable as of December 31, 2010 and 2009 includes $31 and $13 of outstanding checks in excess of cash.
Other current liabilities as of December 31, 2010 and 2009 consist of:
7. LONG-TERM DEBT
The balances of long-term debt as of December 31, 2010 and 2009 are as follows:
In January 2011, we amended our revolving credit facility in order to extend the termination date. Lenders with commitments aggregating to $470 accepted the revolver amendment. For those lenders the revolving credit facility matures on December 21, 2012, unless we do not repay or refinance our second-lien notes by December 2, 2011, in which case the revolving credit facility matures on March 1, 2012. For the remaining $30 of commitment, the revolving credit facility matures on December 21, 2012 unless we do not repay or refinance our second-lien notes by July 4, 2011, in which case the revolving credit facility matures on October 3, 2011.
In February 2010, we issued $70 in aggregate principal amount of 11.375% senior secured notes due 2014 that have the same terms as the existing first-lien senior secured notes.
Included in interest expense for the year ended December 31, 2009 is a loss of $85 from the extinguishment of debt, including the write-off of $13 of consent fees, and a reclassification adjustment of $48 of unrealized losses from accumulated other comprehensive income (loss) as the hedged forecasted cash flows were no longer probable of occurring as a result of the refinancing of the term loan with the proceeds from the first-lien senior secured notes.
Substantially all of our assets are pledged as collateral under our various debt agreements. These debt agreements contain various customary affirmative and negative covenants (subject to customary exceptions and certain existing obligations and liabilities), including, but not limited to, restrictions on NewPage’s ability and the ability of NewPage’s subsidiaries to (i) dispose of assets, (ii) incur additional indebtedness and guarantee obligations, (iii) repay other indebtedness, (iv) pay certain restricted payments and dividends, (v) create liens on assets or prohibit the creation of liens on assets, (vi) make investments, loans or advances, (vii) restrict distributions to NewPage from its subsidiaries, (viii) make certain acquisitions, (ix) engage in mergers or consolidations, (x) enter into sale and leaseback transactions, (xi) engage in certain transactions with subsidiaries that are not guarantors of the senior secured credit facilities or with affiliates or (xii) amend the terms of the notes and otherwise restrict corporate activities. Our debt agreements also contain customary provisions for events of default. We were in compliance with all covenants as of December 31, 2010.
Principal payments on long-term debt for the next five years are payable as follows: zero in 2011, $2,893 in 2012, $424 in 2013, $160 in 2014 and zero in 2015. For NewPage, principal payments on long-term
debt for the next five years are payable as follows: zero in 2011, $2,893 in 2012, $200 in 2013, $160 in 2014 and zero in 2015.
See Note 17 for additional information on the capital lease.
Revolving Credit Facility
We have a revolving credit facility of $500, of which there were $92 and $52 of borrowings outstanding under the revolving credit facility as of December 31, 2010 and 2009. For $470 of the commitment, the revolving credit facility matures upon the first to occur of (i) December 21, 2012 and (ii) the later of (a) March 1, 2012 and (b) the earliest date that is 61 days prior to the scheduled maturity date of the first-lien notes and the second-lien notes and any refinancing thereof. If we do not repay or refinance our second-lien notes by December 2, 2011, the revolving credit facility for this portion of the commitment would mature on March 1, 2012. For the remaining $30 of the commitment, the revolving credit facility matures upon the first to occur of (i) December 21, 2012 and (ii) the earliest date that is 181 days prior to the scheduled maturity date of the senior secured notes, senior subordinated notes, the NewPage Holding PIK notes, and any refinancing thereof. If we do not repay or refinance our second-lien notes by July 4, 2011, the revolving credit facility for this portion of the commitment would mature on October 3, 2011. Subject to customary conditions, including the absence of defaults under the revolving credit facility, amounts available under the revolving credit facility may be borrowed, repaid and re-borrowed, including in the form of letters of credit and swing line loans, until the maturity date thereof. The revolving credit facility may be utilized to fund working capital, to fund permitted acquisitions and capital expenditures, and for other general corporate purposes. The availability under the revolving credit facility is reduced by NewPage’s outstanding letters of credit, which totaled $105 and $94 at December 31, 2010 and 2009. The amount of loans and letters of credit available to NewPage pursuant to the revolving credit facility is limited to the lesser of $500 or an amount determined pursuant to a borrowing base. As of December 31, 2010, we had $141 available for borrowing in excess of the $50 minimum required balance on the revolving credit facility, after reduction for $105 in letters of credit and $92 in outstanding borrowings under the revolving credit facility. Amounts outstanding bear interest, at the option of NewPage, at a rate per annum equal to either (i) the base rate plus 2.50%, or (ii) LIBOR plus 3.50%. The interest rate spreads are subject to reduction upon meeting certain leverage thresholds or upon the occurrence of an initial public offering. Certain customary fees are payable to the lenders and the agents, including a commitment fee based upon non-use of available funds and letter of credit fees and issuer fronting fees. The weighted-average interest rate on the outstanding balance at December 31, 2010 was 4.7%.
The revolving credit facility is jointly and severally guaranteed by NewPage Holding and each of NewPage’s guarantor subsidiaries. Subject to certain customary exceptions, NewPage and each of its guarantors granted to the lenders under the revolving credit facility a first priority security interest in and lien on NewPage’s and NewPage’s guarantor subsidiaries’ present and future cash, deposit accounts, accounts receivable, inventory and intercompany debt owed to NewPage, NewPage Holding and NewPage’s guarantor subsidiaries.
The revolving credit facility, as amended, requires the maintenance of at least $50 of borrowing availability at all times under the revolving credit facility and limits our ability to make capital expenditures. To the extent that NewPage’s unused borrowing availability under the revolving credit facility is below $50 for 10 consecutive business days or $25 for three consecutive business days, NewPage is required to comply with specified financial ratios and tests, including a minimum interest ratio and maximum senior and total leverage ratios and, subsequent to March 31, 2011, a fixed charge coverage ratio. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the revolving credit facility in an amount sufficient
to enable us to pay our indebtedness or to fund our other liquidity needs. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our indebtedness or to fund our other liquidity needs, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our indebtedness on or before maturity.
11.375% Senior Secured Notes
The senior secured first-lien notes consist of $1,770 face value of 11.375% senior secured first-lien notes (the “First-Lien Notes”) (with an effective interest rate of 13.7%). Interest on the First-Lien Notes is payable semi-annually in arrears on December 31 and June 30 and is computed on the basis of a 360-day year comprised of twelve 30-day months.
The First-Lien Notes are secured on a first-priority basis by substantially all of the assets of NewPage and the guarantor subsidiaries (other than the cash, deposit accounts, accounts receivables, inventory, the capital stock of NewPage’s subsidiaries and intercompany debt). The First-Lien Notes are secured on a second priority basis by the cash, deposit accounts, accounts receivables and inventory of NewPage and the guarantor subsidiaries and secured equally and ratably with all existing and future first-priority obligations (other than capital stock of NewPage’s subsidiaries and intercompany debt of NewPage and the guarantor subsidiaries). The First-Lien Notes are effectively subordinated to any permitted liens other than liens securing second-priority obligations, to the extent of the value of the assets of NewPage and the guarantor subsidiaries subject to those permitted liens and are senior in right of payment to NewPage’s existing and future subordinated indebtedness, including NewPage’s 10% second-lien senior secured notes due 2012, floating rate second-lien senior secured notes due 2012, and 12% senior subordinated notes due 2013. The First-Lien Notes are jointly and severally unconditionally guaranteed by most of NewPage’s subsidiaries.
The First-Lien Notes mature on the earlier of (i) December 31, 2014 or (ii) the date that is 31 days prior to the maturity date of the second-lien notes, the senior subordinated notes, the NewPage Holding PIK notes or any refinancing thereof. If we do not repay or refinance our second-lien notes by March 31, 2012, the First-Lien Notes would mature on that date. At any time after March 30, 2012, NewPage may redeem some or all of the First-Lien Notes at specified redemption prices. In addition, at any time prior to March 31, 2012, NewPage may, on one or more occasions, redeem some or all of the First-Lien Notes at a redemption price equal to 100% plus a “make-whole” premium. At any time before March 31, 2012, NewPage may, on one or more occasions, redeem up to 35% of the First-Lien Notes with the net cash proceeds of one or more qualified public equity offerings at 111.375% of the principal amount of the First-Lien Notes. At any time prior to March 31, 2012, but not more than once in any twelve-month period, NewPage may redeem up to 10% of the original aggregate principal amount of the First-Lien Notes at a redemption price of 103%, subject to certain rights of holders of the First-Lien Notes. Upon a change of control of NewPage, each holder of First-Lien Notes may require NewPage to repurchase all or any part of that holder’s First-Lien Notes for a payment equal to 101% of the aggregate principal amount of the First-Lien Notes.
Floating Rate and 10% Senior Secured Second-Lien Notes
The senior secured second-lien notes consist of $806 face value of 10% senior secured second-lien notes and $225 of floating rate senior secured second-lien notes (collectively, the “Second-Lien Notes”). The Second-Lien Notes mature on May 1, 2012. Interest on the 10% senior secured notes is payable semi-annually in arrears on May 1 and November 1. Interest on the 10% senior secured notes is computed on the basis of a 360-day year comprised of twelve 30-day months. Interest on the floating rate senior secured notes accrues at a rate per annum, reset quarterly, equal to LIBOR plus 6.25% (6.5% and 6.5% at December 31, 2010 and 2009). NewPage pays interest on the floating rate senior secured notes quarterly, in arrears, on every February 1, May 1, August 1 and November 1.
The Second-Lien Notes are secured on a second-priority basis by liens on all of the assets of NewPage and the guarantors other than the collateral securing the revolving credit facility and the stock of NewPage’s subsidiaries; are subordinated, to the extent of the value of the assets securing that indebtedness, to the revolving credit facility and the First-Lien Notes; are senior in right of payment to NewPage’s existing and future subordinated indebtedness, including the senior subordinated notes; and are jointly and severally unconditionally guaranteed by most of NewPage’s subsidiaries.
Prior to May 1, 2011, NewPage may redeem all or a part of the 10% senior secured notes at a redemption price of 103%. After May 1, 2011, NewPage may redeem all or a part of the 10% senior secured notes at a redemption price of 100%. Prior to May 1, 2011, NewPage may redeem all or a part of the floating rate senior secured notes at a redemption price of 101.5%. After May 1, 2011, NewPage may redeem all or a part of the floating rate senior secured notes at a redemption price of 100%. If a change of control occurs, each holder of the Second-Lien Notes has the right to require NewPage to repurchase all or any part of that holder’s Second-Lien Notes at 101% of the face value.
12% Senior Subordinated Notes
The senior subordinated notes consist of $200 face value senior subordinated notes that mature on May 1, 2013. The senior subordinated notes are general unsecured obligations and are subordinated in right of payment to all NewPage’s existing and future senior debt, including the senior secured notes and borrowings under the revolving credit facility. Interest on the senior subordinated notes accrues at the rate of 12.0% per annum and is payable semi-annually in arrears on May 1 and November 1. The senior subordinated notes are jointly and severally guaranteed by most of NewPage’s subsidiaries.
Prior to May 1, 2011, NewPage may redeem all or a part of the senior subordinated notes at a redemption price of 103%. After May 1, 2011, NewPage may redeem all or a part of the senior subordinated notes at a redemption price of 100%. If a change of control occurs, each holder of the senior subordinated notes has the right to require NewPage to repurchase all or any part of that holder’s senior subordinated notes at 101% of the face value.
NewPage Holding Senior Unsecured PIK Notes
The NewPage Holding PIK Notes mature on November 1, 2013. Interest accrues at a rate per annum, reset semi-annually, equal to LIBOR plus 7.00% (7.4% and 7.6% at December 31, 2010 and 2009) and is payable by the issuance of additional NewPage Holding PIK Notes until maturity. The NewPage Holding PIK Notes are unsecured and are not guaranteed.
NewPage Holding may redeem all or part of the NewPage Holding PIK Notes at a redemption price of 100%. Upon a change of control, as defined in the NewPage Holding PIK Notes indenture, and certain asset sales, holders of the NewPage Holding PIK Notes will have the right to require NewPage Holding to repurchase all or part of the holder’s NewPage Holding PIK Notes.
8. PORT HAWKESBURY BIOMASS PROJECT
In November 2010, NewPage Port Hawkesbury Corp. (“NPPH”), an indirect wholly-owned subsidiary of NewPage, completed the sale of certain assets, including a boiler and land at the Port Hawkesbury, Nova Scotia mill, to Nova Scotia Power Inc. (“NSPI”) for a cash sales price of $79. The assets and proceeds of this sale will remain on our books until the completion of the construction phase (proceeds will be shown as a long-term liability).
In addition, NSPI and NPPH entered into a construction agreement for NPPH to construct for NSPI a biomass cogeneration utility plant for the generation of electricity by December 31, 2012 for approximately C$93. All costs of construction up to C$93 will be paid or reimbursed by NSPI. As part of the construction agreement, NPPH is subject to damages for failure to complete certain milestones on time, subject to limitations as provided in the agreement. In addition, NewPage issued a performance guarantee to NSPI, subject to a limitation of C$29, in the event that NPPH defaults on the agreement. Also as part of the construction agreement, NewPage issued a letter of credit of $10 to NSPI in November 2010 and an additional letter of credit of $5 in January 2011 in accordance with the terms of the construction agreement. All construction costs incurred, both directly and indirectly, will become other assets and all reimbursements and direct payments by NSPI will become long-term liabilities, pending completion of the construction. Upon completion of the construction phase, all the previously described assets and liabilities will be de-recognized from the balance sheet and recognized as (gain) loss on sale of assets in the statement of operations.
NSPI and NPPH also entered into a management, operations and maintenance agreement related to NPPH operating the utility assets for and under the control of NSPI for an initial period of 25 years plus the period prior to completion of the turbine, with three automatic five-year renewal terms, unless notice of termination is given. In exchange for these services, NPPH will receive payment from NSPI based upon the amount of energy produced and NPPH will receive a portion of the steam generated from the utility plant for its needs. In addition, NPPH is subject to liquidated damages in the event that a minimum level of output is not achieved. In addition, NewPage issued a performance guarantee to NSPI, subject to a limitation of C$15, in the event that NPPH defaults on the agreement.
9. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
We provide retirement benefits for certain employees. In the U.S., pension benefits are provided through employer-funded qualified and non-qualified (unfunded) defined benefit plans and are a function of either years worked multiplied by a flat monetary benefit, or years worked multiplied by the highest five year’s average earnings out of the last ten years of an employee’s pension-eligible service. Effective January 1, 2009, benefits for U.S. salaried employees are determined under a cash balance plan and existing accumulated benefits have been frozen. Effective December 31, 2010, accumulated benefits in the cash balance pension plan were frozen. Accrued benefits will continue to earn annual interest credits, but participants will no longer earn cash balance benefit credits. Certain company contributions will now be made through the defined contribution plan beginning in 2011.
In Canada, pension benefits are provided through employer- and employee-funded defined benefit plans and benefits are a function of years worked and average final earnings during an employee’s pension-eligible service. Certain of the pension benefits are provided in accordance with collective bargaining agreements. Where pre-funding is required, independent actuaries determine the employer contributions necessary to meet the future obligations of the plans and such plan assets are held in trust for the plans. Benefits under our Canadian supplemental pension plan are unfunded but are secured through a letter of credit arrangement (see Note 11). In September 2010, benefits under the salaried Canadian pension plan were frozen, resulting in an adjustment to increase the benefit liability of $6 in the third quarter of 2010 with an offset to accumulated other comprehensive income (loss). This adjustment is the net result of the reduction in benefits from the plan amendment, more than offset by changes in actuarial assumptions as of the September 2010 remeasurement date.
We also provide other retirement and post-employment benefits for certain employees, which may include healthcare benefits for certain retirees prior to their reaching age 65, healthcare benefits for certain retirees on and after their reaching age 65, long-term disability benefits, continued group life
insurance and extended health and dental benefits. These benefits are provided through various employer- and/or employee-funded postretirement benefit plans. We generally fund the employer portion of these other postretirement benefits on a pay-as-you-go basis. For certain U.S. postretirement healthcare plans, the employer contributions toward the annual healthcare premium equivalent for retirees are limited to a specific monetary value or percentage, in which instance the remainder of the premium equivalent is the responsibility of the retiree. Certain of the other postretirement benefits are provided in accordance with collective bargaining agreements. In November 2009, we amended a postretirement benefit plan to phase-out Company-provided post-age 65 medical benefits for certain retirees by 2012. We recorded an adjustment to reduce the benefit liability of $57 in the fourth quarter of 2009 with an offset to other comprehensive income (loss). This adjustment is the net result of the reduction in benefits from the plan amendment, partially offset by changes in actuarial assumptions as of the November 2009 remeasurement date.
We also sponsor defined contribution plans for certain U.S. employees. Employees may elect to contribute a percentage of their salary on a pre-tax basis, subject to regulatory limitations, into an account with an independent trustee which can then be invested in a variety of investment options at the employee’s discretion. We may also contribute to the employee’s account depending upon the requirements of the plan. For certain employees these employer contributions may be in the form of a specified percentage of each employee’s total compensation or in the form of discretionary profit-sharing that may vary depending on the achievement of certain objectives. For the period from June 1, 2009 through December 31, 2010, we temporarily suspended the employer matching contribution for our salaried employees participating in the 401(k) plan as part of our cost reduction initiatives. Certain of the U.S. defined contribution benefits are provided in accordance with collective bargaining agreements. During the years ended December 31, 2010, 2009 and 2008, we incurred expenses of $8, $11 and $21 for employer contributions to these defined contribution plans.
The following tables set forth the changes in the benefit obligation relating to defined benefit pension and other postretirement benefits and fair value of plan assets during the year and also the funded status of our defined benefit pension and other postretirement benefit plans showing the amounts recognized in our consolidated balance sheets as of December 31, 2010 and 2009. The U.S. defined benefit pension obligations include unfunded liabilities of $13 and $13 as of December 31, 2010 and 2009, associated with a non-qualified defined benefit pension plan in the United States.
The assumed discount rates used in determining the benefit obligations were determined by reference to the yield on zero-coupon corporate bonds rated Aa or AA maturing in conjunction with the expected timing and amount of future benefit payments.
The amounts in accumulated other comprehensive income (loss) before tax that have not been recognized as components of net periodic defined benefit pension and other postretirement benefit cost as of December 31, 2010 and 2009 are as follows:
The components of other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as follows:
The estimated net actuarial loss and prior service cost for the U.S. defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year are $12 and $1. The estimated net actuarial loss and prior service cost for the Canadian defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year are $3 and less than $1. The estimated prior service cost (credit) for U.S. other postretirement benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year is $(12). The estimated net actuarial loss (gain) and prior service cost (credit) for Canadian other postretirement benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year are each $(1).
Total accumulated benefit obligation (“ABO”) as of December 31, 2010 and 2009 was $1,224 and $1,127 for all U.S. defined benefit pension plans and $367 and $314 for all Canadian defined benefit pension plans.
The following shows the ABO, the projected benefit obligation (“PBO”) and the fair value of plan assets as of December 31, 2010 and 2009 for defined benefit pension plans where the ABO exceeds the fair value of plan assets and where the PBO exceeds the fair value of plan assets:
Plan Assets
The Investment Policy Committee (“IPC”), in consultation with our actuarial consultants, investment managers and investment consultant, has developed a diversified investment management program for the pension trusts that efficiently maximizes return and minimizes risk over the longer term, based on risk return and correlation assumptions established by the investment consultant. Funds are allocated among the trusts’ investment managers within asset allocation target ranges. The IPC believes that a strategic long-term asset allocation plan implemented in a consistent and disciplined manner will be the major determinate of investment performance. We believe the trusts have adequate liquidity to meet current and short-term obligations. Additionally, the strategy attempts to match long-term obligations with a long duration bond strategy within the fixed income allocation. The IPC reviews the investment policy statements at least once per year. In addition, the portfolios are reviewed at least quarterly to determine their deviation from target weightings and are rebalanced as necessary.
The long-term strategic allocation target ranges for investments for the U.S. and Canadian pension plans are as follows:
The expected role of equity investments is to invest in well-diversified portfolios of domestic and international securities. The expected role of debt investments is to invest in well-diversified portfolios of debt instruments such that the average weighted duration does not exceed the duration of the Barclays Capital Aggregate Bond Index by more than approximately two years.
The expected long-term rates of return on plan assets were derived based on the capital market assumptions for each designated asset class under the respective trust’s investment policy. The capital market assumptions reflect a combination of historical performance analysis and the forward-looking return expectations of the financial markets.
The returns on these assets have generally matched the broader market. We are monitoring the effects of the market declines on our minimum pension funding requirements and pension expense for future periods. We do not anticipate material increases in our minimum funding requirements during 2011.
The fair values of plan assets at December 31, 2010, by asset classification are as follows:
U.S. Pension Plans
Canadian Pension Plans
The fair values of plan assets at December 31, 2009, by asset classification are as follows:
U.S. Pension Plans
Canadian Pension Plans
(1) Common/collective trusts and registered investment companies are valued using a Net Asset Value (“NAV”) provided by the manager of each fund. The NAV is based on the underlying net assets owned by the fund, divided by the number of shares or units outstanding. The fair value of the underlying securities within the fund, which are generally traded on an active market, are valued at the closing price reported on the active market on which those individual securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value investments.
(2) Corporate debt is valued primarily based on observable market quotations for similar bonds at the closing price reported on the active market on which the individual securities are traded. When such quoted prices are not available, the bonds are valued using a discounted cash flows approach using current yields on similar instruments of issuers with similar credit ratings.
(3) Government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the security is valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks.
(4) Hedge funds are private investment vehicles valued using a NAV provided by the manager of each fund.
(5) Common stocks are valued based on quoted market prices at the closing price as reported on the active market on which the individual securities are traded.
(6) Partnership/joint ventures are valued based on the fair value of the underlying securities within the fund, which include investments both traded on an active market and not traded on an active market. For those investments that are traded on an active market, the values are based on the closing price reported on the active market on which those individual securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value investments.
The following is a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs for Level 3 assets for the U.S. pension plans as of December 31, 2010:
The following is additional information regarding Level 3 investments, held at December 31, 2010 that calculate net asset value per share (or its equivalent):
The following is a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs for Level 3 assets for the U.S. pension plans as of December 31, 2009:
The following is additional information regarding Level 3 investments, held at December 31, 2009 that calculate net asset value per share (or its equivalent):
(a) Invests in equities, equity-related instruments, fixed income and other debt-related instruments, real estate and other tangible assets, cash and cash equivalents, options, futures, swaps and other derivatives. The fund utilizes leverage in its investment program and includes both long and short positions. The fund’s investment objective is to generate consistent, absolute returns with low volatility.
(b) The fund’s objective is to achieve superior risk-adjusted total returns by investing primarily in public and private non-investment grade and nonrated debt securities. Securities and other instruments acquired by the Fund may include all types of debt obligations consisting primarily of public and private non-investment grade and nonrated debt, convertible bonds, preferred stock, bank debt, middle market loans and notes, trade claims, liquidating trusts, assignments, options swaps and any other securities with fixed-income characteristics, including, without limitation, debentures, notes deferred interest, pay-in-kind or zero coupon bonds, mortgages and mortgage-backed securities, collateralized mortgage obligations, other real-estate related instruments. The fund may also acquire common or preferred stock, warrants to purchase common or preferred stock, and any other equity interests.
(c) This category consists of several private equity funds some of which invest in other limited partnerships which make equity-oriented investments in young, growing or emerging companies or entities. Additionally, the funds can invest in limited partnerships or other pooled investment vehicles which, in turn, make investments in management buy-in, management buy-out, leveraged buy-out, mezzanine, special situation and recapitalization transactions or other partnerships either directly or purchased in the secondary market, as well as investments in mezzanine, distressed and venture debt. These funds invest in a wide range of industries primarily in the United States.
These investments cannot be redeemed. Instead, distributions are received when the underlying assets of the funds are liquidated.
A summary of the components of net periodic costs for the years ended December 31, 2010, 2009 and 2008, is as follows:
Pension Plans
Other Postretirement Plans
The annual rate of increase in healthcare costs in the U.S. is assumed to decline ratably each year until reaching 5.0% in 2017. The annual rate of increase in healthcare costs in Canada is assumed to decline ratably each year until reaching 5.0% in 2015.
A one-percentage-point change in assumed retiree healthcare costs trend rates would have the following effects at December 31, 2010:
Estimated future benefit payments for the plans for each of the next five years and for the five years thereafter are expected to be paid as follows:
Expected employer contributions to be paid during the next year are as follows:
10. INCOME TAXES
The principal current and noncurrent deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows:
We have not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on our income tax returns upon review by the taxing authorities. These uncertain tax benefits will be included as an adjustment to income tax expense upon the expiration of the statutes of limitations or upon resolution with the taxing authorities. We expect the amount of unrecognized tax benefits to decrease by $8 within the next 12 months due to expiring statutes of limitations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The significant components of the income tax provision (benefit) are as follows:
The following tables summarize the major differences between the actual income tax provision (benefit) attributable to income (loss) before income taxes and taxes computed at the U.S. federal statutory rate:
We file income tax returns in the United States for federal and various state jurisdictions and in Canada. As of December 31, 2010, periods beginning in 2007 are still open for examination by various taxing authorities; however, taxing authorities have the ability to adjust net operating loss carryforwards from years prior to 2007.
The federal net operating loss carryforward at December 31, 2010 was $2,425 and expires between 2021 and 2030. The Canadian federal net operating loss carryforward available to reduce Canadian federal taxable income at December 31, 2010 was C$1,077 and expires between 2025 and 2027. We have recorded a valuation allowance against our net deferred income tax benefits as it is unlikely that we will realize those benefits. For purposes of allocating the income tax benefit to income (loss) before taxes, amounts of other comprehensive income result in income tax expense recorded in other comprehensive income and the offsetting amount as an allocation to tax benefit from operations. For the year ended December 31, 2010 and 2009, we have allocated zero and $45 of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to income tax (benefit) from operations. For the year ended December 31, 2010 and 2009, for NewPage, we have allocated zero and $41 of tax expense to other comprehensive income (loss) and the corresponding offset as an allocation to income tax (benefit) from operations. The amounts for the year ended December 31, 2009, reflect the reclassification to income tax (benefit) of all amounts previously allocated to other comprehensive income (loss) related to the interest rate swap cash flow hedges. Also included in the year ended December 31, 2009 is a tax benefit of $12, reflecting the decreases to our state deferred tax liabilities resulting from changes in the
company’s distribution channels. Deferred taxes are not provided on translation gains and losses because we expect earnings of our Canadian subsidiary to be permanently reinvested.
A reconciliation of the valuation allowance on deferred tax assets is as follows:
During 2008, we recognized an increase in deferred income tax assets of $281, primarily related to the completion of our analysis of the SENA opening balance sheet to recognize the difference between the book and tax bases for the investment in our Canadian subsidiary and the completion of the related corporate reorganization that generated a worthless stock deduction for tax purposes related to the investment in our Canadian subsidiary. These changes also resulted in an increase in the amount of unrecognized tax benefits of $58.
The tax effect of these adjustments changed our net deferred income tax position from a net deferred income tax liability position to a net deferred income tax asset position. As a result, in 2008 we restored the $39 valuation allowance on NewPage Holding’s deferred income taxes that was originally reversed at December 21, 2007. We also recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain state income taxes as it was more likely than not that we would not realize those benefits as a result of our history of losses. Because of the change to a net deferred income tax asset position, we also reversed the tax benefit recorded in 2007 for NewPage Holding and recognized income tax expense of $4 in 2008, as well as the reversal of the allocation to other comprehensive income (loss) for income tax expense of $6 for NewPage.
11. COMMITMENTS AND CONTINGENCIES
Contingencies
In a notice dated January 25, 2011, staff at the Federal Energy Regulatory Commission, or FERC, reported that they had preliminarily determined that our subsidiary, Rumford Paper Company, or Rumford, violated FERC regulations in connection with Rumford’s participation in ISO-New England’s Day Ahead Load Response Program from July 2007 through February 2008. Under the program, participants were paid to reduce their electrical load on the New England power grid from their “baseline” load levels. FERC asserts that Rumford improperly established and maintained an artificially low baseline, allowing it to receive increased payments under the program. Rumford cooperated with FERC throughout its investigation and has denied any wrongdoing.
Claims have been made against us for the costs of environmental remediation measures taken or to be taken. 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.
Commitments
We are party to fiber supply agreements that entitle us to purchase minimum volumes of wood at market prices for periods through 2026, with renewal periods at our option. We are required to purchase minimum levels and have optional volumes that we can purchase under some of the agreements. The agreements include a limitation of damages under which our maximum potential damages for default are based on a price per ton of wood not delivered, and excuse performance if the failure is the result of a force majeure event that would have prevented either party from performing its obligations. The aggregate maximum amount of potential damages declines from approximately $21 per year in 2011 and totals an aggregate of $160 for all periods. These contracts are assignable by either party with mutual consent.
We have provided letters of credit to various environmental agencies as a means of providing financial assurance with regard to environmental liabilities. We also provided a letter of credit for securing a supplemental pension obligation, letters of credit or other financial assurance obligations to fulfill supplier financial assurance requirements and letters of credit in connection with the Port Hawkesbury biomass project. As of December 31, 2010, we had $105 in outstanding letters of credit. Payment would only be required under these letters of credit if we defaulted on commitments made under these arrangements.
We are a party to a service agreement that provides information technology services through December 31, 2017, necessary to support our operations, at specified monthly base prices. The base price for services under this agreement is approximately $20 annually and can be terminated with early termination payments that decline over time.
In 2006, we were awarded financial assistance in the amount of C$65 from the Province of Nova Scotia. The amount will be paid out over seven years (C$10 in each of the first six years, and C$5 in the seventh year) and is recorded in other (income) expense. Payout is to be made upon completion of each cumulative 12 month period of operation of the paper machines. As of December 31, 2010, there is C$26 remaining to be earned under this grant. If there is no production for 24 continuous months, all current and future payments will be forfeited.
12. EQUITY
As of December 31, 2010, NewPage Group was the sole holder of record of the shares of NewPage Holding common stock and NewPage Holding was the sole holder of record of the shares of NewPage common stock. There is no established public trading market for our common stock and we have never paid or declared a cash dividend on the common stock. Our debt agreements restrict our ability and the ability of our subsidiaries to pay dividends.
Under repurchase agreements entered into with former executive officers, NewPage Group agreed to repurchase each former executive officer’s NewPage Group common stock. NewPage loaned $1, $1 and $6 to NewPage Group to enable it to satisfy its repurchase obligations in 2010, 2009 and 2008. These loans were recorded as a reduction in stockholder’s equity as repayment is not assured.
Equity Compensation
In 2007, the board of directors of NewPage Group adopted the NewPage Group Equity Incentive Plan and authorized 9.9 million shares for issuance under the plan. Grants under the incentive plan may include stock options, stock appreciation rights, restricted stock, performance awards (including cash performance awards) and other equity-based awards. Grants of stock options and other stock-based compensation awards are approved by the compensation committee of NewPage Group’s board of directors.
Furthermore, certain other members of management hold options to purchase NewPage Group Common Stock that only vest upon the occurrence of a change of control or an initial public offering.
Stock options are the only form of compensation granted under the incentive plan as of December 31, 2010. Stock options expire not later than ten years from the date of grant. Half of the options vest in three equal annual installments, while the other 50% of the options vest in three equal annual installments based on meeting performance targets at the sole discretion of the compensation committee. To the extent performance targets are not met in a given year, they can still be met on a cumulative basis in a subsequent period during the three-year vesting period. All options will vest only to the extent the employee remains employed by us on each vesting date. However, a portion of the options will automatically vest upon a change of control or an initial public offering. Because the performance targets are determined annually, the performance-based options will not be considered granted until the performance criteria are approved by the compensation committee. Thus, while the performance-based options have already been awarded, for accounting purposes they will not be considered granted until the performance criteria are approved by the compensation committee in a future period.
The performance criteria for the 2008, 2009 and 2010 tranches of the performance-based options were not met in those years and any previously recognized expense associated with these grants was reversed when it became improbable that performance targets would be met for the year.
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 year ended December 31, 2010 is $8 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 year ended December 31, 2010 is $5 of remaining unamortized grant-date fair value relating to the accelerated vesting of stock options previously awarded to certain former executive officers. In accordance with their stock option agreements, upon their separation all of their outstanding stock options became vested. None of these options were exercised by the executive officers.
We have recognized expense for options of $21, $10 and $18, included in selling, general and administrative expenses, for the years ended December 31, 2010, 2009 and 2008.
The following table summarizes activity in the plan:
The outstanding options and the exercisable options at December 31, 2010, each have a weighted-average remaining contractual life of 7.3 years. As of December 31, 2010, unrecognized compensation cost for outstanding options totaled $3, including $1 for unearned performance-based stock options for which vesting is improbable as of December 31, 2010. Stock compensation expense is expected to be $2 in 2011 for unvested options outstanding as of December 31, 2010. The total fair value of shares vested in 2010, 2009 and 2008 was $27, $12 and $12, respectively.
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:
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is comprised of net income (loss), net unrealized gain (loss) on cash flow hedges, foreign currency translation adjustments and changes related to our defined benefit plans. The components of accumulated other comprehensive income (loss) as of December 31, 2010 and 2009 are as follows:
14. OTHER (INCOME) EXPENSE
During 2010, we recognized asset impairment charges in other (income) expense of $210, including $196 during the fourth quarter of 2010 associated with the Whiting and Kimberly mills assets held for sale.
The U.S. Internal Revenue Code allowed a refundable excise tax credit for alternative fuel mixtures produced for sale or for use as a fuel in a trade or business. The credit was equal to fifty cents per gallon of alternative fuel contained in the mixture and is a refundable credit. We recognized income for the
credits at the time the alternative fuel mixtures were used in our operations and when all income recognition criteria were met. During the years ended December 31, 2010 and 2009, we recognized $(22) and $(304) of income in other (income) expense for alternative fuel mixture tax credits, as income recognition criteria was met.
15. DISPOSITIONS
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 November 2010, CWPCo entered into an asset sale agreement to sell five hydroelectric projects to Great Lakes Utilities for a net cash sales price of approximately $70. The closing of the transaction is subject to completion of the CWPCo Utility sale and regulatory approval. These transactions are expected to close in 2011. 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 year ended December 31, 2009 is a loss on the sale of $3.
16. RESTRUCTURING
Whiting Mill Closure
During the fourth quarter of 2010, we announced a plan to permanently close the Whiting, Wisconsin mill and both paper machines by the end of February 2011. Approximately 360 employees at the facility will be affected. The decision to close the facility was made in order to better align capacity with market demand. As a result of these actions, including the evaluation of capacity needs, during the fourth quarter of 2010 we recorded asset impairment charges for the Whiting and Kimberly mills of $196 in other (income) expense and have classified these assets as held for sale. In addition, during the fourth quarter of 2010, we recognized $2 of employee-related costs recorded in cost of sales. We expect to recognize an additional charge of approximately $6 in cost of sales during the first quarter of 2011 for employee-related costs and we expect to recognize additional charges in cost of sales of approximately $10 to $15 for contract termination and other closure related costs, primarily during 2011. The facility closure and related activities are expected to be substantially completed during the first half of 2011. The severance and other closure cost require the outlay of cash while the asset impairment charge represents a non-cash charge. We expect no material effect on future earnings or cash flows as a result of the Whiting mill closure.
SENA Acquisition
During 2008, we announced actions being taken to integrate NewPage operations and the former SENA 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. These activities were completed in 2010.
During 2008, as a result of these actions, we incurred charges of $34, including $22 in accelerated depreciation and $5 in inventory write-offs recorded in cost of sales and $7 of employee-related costs, of which $5 is recorded in cost of sales and $2 is recorded in selling, general and administrative expenses. During the first quarter ended March 31, 2009, we recorded an adjustment of $1 in selling, general and administrative expenses for the reversal of employee-related costs included as an assumed liability in the purchase price allocation as a result of a change in estimate.
The activity in the accrued restructuring liability relating to the SENA restructuring actions for the year ended December 31, 2010 and 2009 was as follows:
17. LEASE OBLIGATIONS
We lease certain buildings, transportation equipment and office equipment under operating leases with terms of one to 10 years. Rental expense for the years ended December 31, 2010, 2009 and 2008 was $22, $25 and $23.
We are a party to a capital lease for a paper machine. The lease has a basic lease term which expires in 2014. At the end of the basic lease term, we have the option to purchase the machine or the lessor can require us to renew the lease through 2025. The lease contains a purchase option at an amount approximating fair market value at lease termination. The leased asset is included in property, plant and equipment.
Future minimum non-cancelable operating lease payments and capital lease payments and the related present value of the capital lease payments at December 31, 2010 are as follows:
18. RELATED PARTY TRANSACTIONS
Cerberus retains consultants that specialize in operations management and support and who provide Cerberus with consulting advice concerning portfolio companies in which funds and accounts managed by Cerberus or its affiliates have invested. From time to time, Cerberus makes the services of these consultants available to Cerberus portfolio companies, including NewPage. We believe that the terms of these consulting arrangements are materially consistent with those terms that would have been obtained in an arrangement with an unaffiliated third party. Activity related to Cerberus’ monitoring of their equity investment, such as non-independent director fees and expenses, are not charged to the Company. Cerberus also provides certain services free of charge, including chairman and company director fees and expenses. We have commercial arrangements with other entities that are owned or controlled by Cerberus. Commercial Finance LLC, an affiliate of Cerberus, is a lender under our revolving credit facility. We believe that these transactions are on arms’-length terms and are not material to our results of operations or financial position.
We are a party to various purchase and sale agreements with a subsidiary of SEO. We believe that these transactions are on arms’-length terms and are not material to our results of operations or financial position.
19. RECENTLY ISSUED ACCOUNTING STANDARDS
Variable interest entity
In June 2009, the Financial Accounting Standards Board issued new guidance on the accounting for a variable interest entity (“VIE”). This guidance requires a qualitative approach to identifying a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. This guidance is effective for us as of January 1, 2010. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations and cash flows.
20. 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 and Rumford Cogeneration Company L.P., our non-guarantor subsidiaries.
The following condensed consolidating financial statements have been prepared from financial information on the same basis of accounting as the consolidated financial statements. Investments in our subsidiaries are accounted for under the equity method.
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
NEWPAGE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010
YEAR ENDED DECEMBER 31, 2009
YEAR ENDED DECEMBER 31, 2008
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2010
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2009
NEWPAGE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2008
21. CONDENSED PARENT-ONLY FINANCIAL STATEMENTS
NewPage Holding has no independent assets or operations other than its investment in NewPage. The ability to repay the NewPage Holding PIK Notes will be dependent on the ability of NewPage to distribute funds to NewPage Holding or of NewPage Holding to raise sufficient funds from issuing debt or capital stock. Currently, NewPage’s existing indebtedness prevents it from making distributions to NewPage Holding.
The following condensed parent-only financial statements of NewPage Holding reflect majority-owned subsidiaries using the equity basis of accounting.
NEWPAGE HOLDING CORPORATION-PARENT ONLY
CONDENSED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
Dollars in millions, except per share amounts
NEWPAGE HOLDING CORPORATION-PARENT ONLY
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
NEWPAGE HOLDING CORPORATION-PARENT ONLY
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Dollars in millions
*****
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of NewPage Holding’s and NewPage’s disclosure 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.
As of the end of the period covered by this Annual Report on Form 10-K, we evaluated the effectiveness of our “disclosure controls and procedures.” This evaluation was conducted under the supervision and with the participation of management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”). Based on the evaluation of disclosure controls and procedures, our CEO and CFO have concluded that the disclosure controls and procedures were effective, as of December 31, 2010, to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 have been accumulated and communicated to management, including our CEO and CFO, and other persons responsible for preparing these reports to allow timely decisions regarding required disclosure and that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for each of NewPage Holding and NewPage. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). NewPage Holding’s and NewPage’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The audit committee of each of NewPage Holding’s and NewPage’s board of directors is composed of directors, a majority of whom are independent, in accordance with the requirements of the New York Stock Exchange listing standards and the Exchange Act. The audit committee of each of NewPage Holding and NewPage meets with the independent auditors, management and internal auditors periodically to discuss internal control over financial reporting and auditing and financial reporting matters. The committee reviews with the independent auditors the scope and results of the audit effort. The committee also meets periodically with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have free access to the committee.
Based on our assessment, under the criteria established in Internal Control - Integrated Framework, issued by the COSO, management has concluded that NewPage Holding and NewPage maintained effective internal control over financial reporting as of December 31, 2010.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following are the names, ages and a brief account of the business experience for at least the last ten years of the directors and executive officers of NewPage Holding and NewPage as of February 11, 2011.
Chan W. Galbato has been the chairman of the board of directors of NewPage, NewPage Holding and NewPage Group since August 2010. Since August 2009, Mr. Galbato has been a senior operating executive of Cerberus Operations and Advisory Company, LLC, an affiliate of our indirect controlling stockholder. From November 2007 to August 2009, Mr. Galbato owned and managed CWG Hillside Investments LLC, a consulting business providing operational and strategic turnaround expertise to CEOs
of portfolio-based companies. From October 2005 to November 2007, Mr. Galbato served as president and chief executive officer of the Controls Group of businesses for Invensys plc. He was president of Home Services as well as president of the commercial distribution arm of companies for The Home Depot, Inc. from October 2003 to October 2005. Mr. Galbato served as president and chief executive officer of Armstrong Floor Products from June 2001 to July 2003 and chief executive officer of Choice Parts, LLC, a joint-venture auto parts locator and catalog business, from June 2000 to June 2001. He also serves as a director of Brady Corporation and Tower International, Inc.
George F. Martin has been president and chief executive officer and a member of the board of directors of NewPage, NewPage Holding and NewPage Group since August 2010. Prior to that, he had been senior vice president, operations since December 2007. Prior to that Mr. Martin had been vice president, operations since April 2006. Prior to that, Mr. Martin served as vice president, coated operations from May 2005 to March 2006. From February 2003 through April 2005, Mr. Martin was vice president of operations at the Escanaba mill of MeadWestvaco’s Papers Group. From February 2002 through January 2003, Mr. Martin was director of integration for MeadWestvaco’s Papers Group. Previously, he was production manager of the Luke mill of Westvaco since 1997.
Robert M. Armstrong has been a member of the board of directors of NewPage and NewPage Holding since April 2006 and a member of the board of directors of NewPage Group since October 2007. Mr. Armstrong serves on the board and audit committee of the Quantitative Group of Mutual Funds. Mr. Armstrong has been a private consultant since 1998.
Ronald C. Kesselman has been a member of the board of directors of NewPage, NewPage Holding and NewPage Group since May 2010. Mr. Kesselman has a 40-year career in senior executive and management positions with consumer products and food processing companies, including past service as chairman and chief executive officer of Elmer Products, Inc. from 1995 to 2003 and chief executive officer of the Berwind Consumer Products Group from 2003 through 2004 after the sale of Elmer’s to the Berwind Group. Mr. Kesselman currently serves on the boards of directors of American Italian Pasta Company, a pasta manufacturing and marketing company, Imperial Sugar Company, a sugar manufacturing and marketing company, and Inventure Group, Inc., a manufacturer and marketer of snack foods and related food products.
Julian Markby has been a member of the board of directors of NewPage, NewPage Holding and NewPage Group since January 2011. Mr. Markby has been president of J. Markby and Associates, Inc., a consulting firm providing independent merger and acquisition services and consulting services, since January 2005. Mr. Markby was the head of corporate development for PetroAlgae LLC, an alternative energy development company, from May 2009 to October 2009. He was a managing director at Wasserstein Perella/Dresdner Kleinwort Wasserstein from January 1998 to December 2004. Mr. Markby served on the boards of three hedge funds managed by Greenwich Alternative Investments from April 2007 to May 2009.
Robert L. Nardelli has been a member of the board of directors of NewPage, NewPage Holding and NewPage Group since June 2010. Mr. Nardelli was chairman of the board of directors of NewPage, NewPage Holding and NewPage Group from June 2010 until August 2010 and was our principal executive officer during that period. Since July 2009, Mr. Nardelli has been the chief executive officer of Cerberus Operating and Advisory Company LLC, an affiliate of our indirect controlling stockholder. From August 2007 to July 2009, Mr. Nardelli was the chairman of the board and chief executive officer of Chrysler LLC. Prior to that, Mr. Nardelli was the chairman of the board, president and chief executive officer of The Home Depot, Inc. from December 2000 to January 2007. Mr. Nardelli served on the board of directors of The Coca-Cola Company from April 2002 to April 2005.
Lenard B. Tessler has been a member of the board of directors of NewPage and NewPage Holding since May 2005 and a member of the board of directors of NewPage Group since October 2007. Mr. Tessler has been a managing director of Cerberus Capital Management, L.P. from May 2001 to the present. Prior to joining Cerberus, he was a founding partner of TGV Partners, a private investment partnership formed in April 1990. He previously served on the boards of directors of LNR Property Corp., BlueLinx Holdings Inc., Anchor Glass Container Corporation and Scottish Re Group Limited.
Raymond H. Wechsler has been a member of the board of directors of NewPage, NewPage Holding and NewPage Group since January 2011. Mr. Wechsler has been a managing director of Cerberus Capital Management, L.P. since January 2010. Prior to that, Mr. Wechsler was a senior executive and director of Cerberus Operations and Advisory Company, LLC from January 2007 to December 2009. Prior to that, he was a consultant to Cerberus Capital Management, L.P. from March 2004 to December 2006. Mr. Wechsler has served as chairman and chief executive officer of American Equity Partners, Inc. since 1992. He previously served on the boards of directors of LNR Property Corp. and Scottish Re Group Limited.
Alexander M. Wolf has been a member of the board of directors of NewPage and NewPage Holding since May 2005 and a member of the board of directors of NewPage Group since October 2007. Mr. Wolf has been a managing director of Cerberus Capital Management, L.P. since March 2006, a senior vice president from April 2004 through February 2006 and a vice president from December 2001 through March 2004. He previously served on the board of directors of Anchor Glass Container Corporation
George J. Zahringer, III has been a member of the board of directors of NewPage and NewPage Holding since May 2007 and a member of the board of directors of NewPage Group since October 2007. Since June 2008, Mr. Zahringer has been a managing director and client advisor at Deutsche Bank Securities Inc. Prior to that, Mr. Zahringer was a senior managing director of Bear Stearns & Co., Inc. and served in its Private Client Services Division since 1979. Mr. Zahringer serves as a member of the board of directors of Freedom Group, Inc.
Daniel A. Clark has been senior vice president, chief administrative officer since November 2010. Prior to that, he was senior vice president, business excellence and chief information officer since December 2007. Prior to that, Mr. Clark was chief information officer and vice president of order management since May 2005. Prior to that, Mr. Clark was employed by MeadWestvaco’s Papers Group as vice president of order management from January 2002 to May 2005. Prior to that, Mr. Clark was vice president of order management for the Mead Corporation Paper Division from June 2000 to January 2002.
Douglas K. Cooper has been vice president, general counsel and secretary since November 2005. Prior to that, Mr. Cooper was counsel with Arent Fox PLLC, a law firm, from September 2004 through October 2005. From September 2003 to August 2004, Mr. Cooper was in private law practice. Prior to that, he was senior vice president, law and secretary for GDX Automotive, an automotive component supplier, from September 2001 to August 2003. Previously, he served as executive vice president, general counsel and secretary for Peregrine Incorporated since 1997.
Laszlo M. Lukacs has been senior vice president, operations since September 2010. Prior to that, he was vice president, manufacturing operations since November 2009. Prior to that, Mr. Lukacs was vice president, coated operations from July 2009. Prior to that, he was vice president, fine paper operations from December 2007. Prior to that Mr. Lukacs was vice president and mill manager for the Escanaba mill from May 2005. Prior to that, he was director, operations for the Escanaba mill of MeadWestvaco’s Papers Group from May 2003. Prior to that, Mr. Lukacs was the manufacturing operations manager for the Spotswood, New Jersey mill of Schweitzer-Mauduit International, Inc. from September 2001. Prior to
that, he was the operations manager for the Courtland, Alabama mill of International Paper Company from May 2000.
Barry R. Nelson has been senior vice president, sales since January 2008. Prior to that, Mr. Nelson was vice president, printing sales since May 2005. Prior to that, Mr. Nelson was vice president, printing sales of MeadWestvaco’s Papers Group from August 2002 to May 2005. Prior to that, Mr. Nelson was executive vice president of Forest Express from August 2000 to August 2002.
David J. Prystash has been senior vice president and chief financial officer since September 2008. Prior to that, Mr. Prystash was controller, global product development at Ford Motor Company from January 2005 to September 2008. From June 2003 to December 2004, he was executive director, preowned and vehicle remarketing strategy at Ford. From August 2001 to May 2003 he served as controller, North American product programs at Ford. Previously, Mr. Prystash was executive director of corporate business development at Ford from January 2000 to August 2001. From April 2006 until September 2008, he was a member of our board of directors.
Board of Directors
The full board of directors has responsibility for general oversight of risks. The board regularly receives reports at meetings from members of senior management on areas of risk facing the Company. In addition, as part of its charter, the audit committee discusses major financial, environmental, health and safety risk exposures with management and steps taken to monitor and control exposures including risk assessment and risk management policies.
The full board of directors performs annual self-assessments and reviews all nominees for election to the board. All nominees, other than a Stora Enso Oyj appointee, are identified for board membership by members of the board or by our controlling shareholder. Stora Enso Oyj retains the right to appoint a director to the board for as long as it owns at least 75% of the shares acquired on the date of the Acquisition. The board does not have a formal policy regarding diversity. Members of the board bring high levels of integrity and diverse backgrounds including financial expertise, relevant professional business experience and owner-oriented perspectives that contribute to board heterogeneity.
The specific attributes of each director considered for membership on the board of directors included the following:
-
for Mr. Galbato, his background in and experience with strategic turnarounds
-
for Mr. Armstrong, his background, experience and judgment as chief financial officer of a group of investment funds and his expertise as a private consultant
-
for Mr. Kesselman, his background, experience and judgment as a director of and senior executive with public and private companies in the consumer products and food industries
-
for Mr. Markby, the right of Stora Enso Oyj to appoint one director to our boards and his background, experience and judgment as a private consultant in the alternative energy development business, experience as an investment banker, experience with mergers and acquisitions, restructuring and capital markets and his work with numerous traditional media companies
-
for Mr. Nardelli, his background, experience and judgment as a chief executive officer and as a director of several companies
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for Mr. Tessler, his background, experience and judgment as a managing director of our principal shareholder, as a director at companies in several industries and as a founder of a private investment firm
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for Mr. Wechsler, his background, experience and judgment as a managing director of our principal shareholder and at other securities trading firms and as a director of several companies
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for Mr. Wolf, his background, experience and judgment as a managing director of our principal shareholder
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for Mr. Zahringer, his background, experience and judgment concerning financial markets as a managing director at major securities trading firms
The boards of directors of NewPage Group, NewPage Holding and NewPage have established joint audit, compensation, compliance and executive committees.
Our audit committee consists of Messrs. Armstrong, Markby and Wechsler. Messrs. Armstrong and Markby are independent directors of the audit committee. Mr. Armstrong serves as the chairman of the audit committee. Duties of the audit committee include:
-
appointing or replacing independent accountants
-
meeting with our independent accountants to discuss the planned scope of their examinations, the adequacy of our internal controls and our financial reporting
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reviewing the results of the annual examination of our consolidated financial statements and periodic internal audit examinations
-
reviewing and approving the services and fees of our independent accountants
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monitoring and reviewing our compliance with applicable legal requirements
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performing any other duties or functions deemed appropriate by our board of directors
Our board of directors has designated Mr. Armstrong as our audit committee financial expert.
Our compensation committee consists of Messrs. Galbato and Wolf. Mr. Wolf serves as the chairman of the compensation committee. Duties of the compensation committee include administration of our stock option plans and approval of compensation arrangements for our executive officers.
Our compliance committee consists of Messrs. Martin and Zahringer. Mr. Zahringer serves as the chairman of the compliance committee. Duties of the compliance committee include the oversight of our policies, programs and procedures to ensure compliance with relevant laws.
Our executive committee consists of Messrs. Nardelli, Kesselman and Zahringer. Mr. Nardelli serves as the chairman of the executive committee. Duties of the executive committee include exercising the power and duties of our board of directors between board meetings.
The board of directors has determined that the chairman of the board and chief executive officer positions should be held by separate individuals. The board believes that by having a representative of our principal shareholder act as chairman that interests of the principal shareholder can be properly communicated to the board. The board also believes that by separating the roles the chief executive office can focus his attentions on operating the business.
Code of Ethics
We have adopted a code of ethics for all associates, including our chief executive officer, chief financial officer, chief accounting officer and treasurer, addressing business ethics and conflicts of interest. A copy of the code of ethics has been posted on our website at www.newpagecorp.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General Philosophy
The compensation committee has responsibility for establishing, monitoring and implementing our compensation philosophy. We compensate our executive officers named in the Summary Compensation Table, who we refer to as our “Executives,” through a combination of base salary, bonus plan awards, long-term incentive awards, equity ownership, stock options and various other benefits, all designed to be competitive with comparable employers and to align each Executive’s compensation with the long-term interests of our stockholders. Base salary and bonus plan awards are determined and paid annually and are designed to reward current performance. Through various vesting and lock-up restrictions, long-term incentive awards, equity ownership and stock options are designed to reward longer-term performance. We may also use discretionary executive bonus awards for special situations. Our process for setting annual Executive compensation consists of the compensation committee establishing overall compensation targets for each Executive and allocating that compensation between base salary and annual bonus compensation. Other Executive bonus compensation is designed as “at-risk” pay to be earned based on the achievement of company-wide performance objectives, personal performance objectives, the Executive’s demonstrated adherence to our core values and other factors deemed relevant by the compensation committee. The same compensation policies apply to all Executives. Differences in the level of compensation result from the Executive’s position in the company, individual performance and external market considerations relevant to the position.
Targeted Overall Annual Cash Compensation
Under our compensation structure, the mix of base salary and annual bonus compensation for each Executive varies depending upon his position with the company. The targeted allocation between base salary and bonus award at target levels is as follows:
In allocating annual cash compensation between these elements, we believe that a significant portion of the compensation of our Executives-the level of management having the greatest ability to influence our performance-should be performance-based and therefore “at risk.” In making this allocation, we relied in part upon the advice of Frederick W. Cook & Co., which we refer to as “Cook,” and its survey findings and analysis, which validate this approach. We do not utilize Cook for services other than setting compensation for our Executives and senior leadership team and our independent directors.
Compensation-Setting Process
The compensation committee approves all compensation and awards to Executives, as well as other members of our senior leadership team, and has retained Cook as its compensation advisor. Generally, the compensation committee reviews data from Cook regarding compensation for our chief executive officer and considers prior year performance, then-current compensation and, following discussions with the chief executive officer, establishes his compensation levels. For the remaining Executives, our chief executive officer makes recommendations to the compensation committee based on individual performance during the prior year and competitive data from surveys, available public information and Cook. The other Executives do not play a role in setting their own compensation except to discuss their individual performance with the chief executive officer.
Each year Cook prepares a study for the compensation committee that compares the compensation of individual Executives to the compensation for similar positions at the following peer group companies, or Peer Group, which are in the forest products industry: Bemis Company, Inc., Boise Inc., Domtar Inc., P. H. Glatfleter Company, Graphic Packaging Corporation, Greif Inc., MeadWestvaco Corporation, Packaging Corporation of America, Pactiv Corporation, Rock-Tenn Company, Sealed Air Corporation, Sonoco Products Company, Temple-Inland Inc. and Verso Paper, Inc. For 2010, the Cook study also compared the compensation of individual Executives to 2009 national survey data gathered by two independent compensation consultants; Hewitt and Towers Watson. The Hewitt and Towers Watson surveys each covered in excess of one hundred companies participating across all industries. The compensation committee did not review the individual surveys used by Cook to prepare its study nor the names of the companies included in the surveys. The Cook study was used by the chief executive officer and the compensation committee to help determine appropriate compensation levels for all Executives for 2010. The compensation committee reviews total, short-term and long-term compensation annually with a view to aligning it with the 50th percentile of the selected Peer Group.
For purposes of setting 2010 base salary, each Executive was reviewed against his contribution to key 2009 initiatives involving our business as well as overall company performance. Key initiatives during 2010 for all Executives included the following:
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accelerating and implementing productivity and other cost reduction initiatives
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responding to continued changes in the markets for our products to maximize EBITDA
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executing on key asset monetization initiatives
The performance of each Executive was also reviewed for performance against company values including safety, integrity, results, teamwork, communication, judgment and change. A summary of key individual achievements of the Executives in 2010 is presented below.
GEORGE F. MARTIN Mr. Martin became our president and chief executive officer on August 2, 2010. He previously served as senior vice president, operations. In these roles, Mr. Martin led a significant turnaround in the operating performance of the company. Key to this turnaround were decisions around capacity rationalization, improved pricing and commercial terms with our customers, record manufacturing performance at our mills, a major asset monetization project in Canada, and restructuring of our salaried workforce to reduce costs. Mr. Martin has provided stability to the company during a very challenging period.
LASZLO M. LUKACS Mr. Lukacs is responsible for all manufacturing operations. During the year, he also assumed additional responsibilities for corporate engineering and maintenance, and for quality assurance. He provided leadership to our continuing productivity and cost reduction initiatives. As a cornerstone of this effort, he led a successful major strategic initiative to increase production of first-
quality products. Our manufacturing operations exceeded plan productivity savings and improved product quality despite an uncertain market. Furthermore, Mr. Lukacs initiated measures that added talented personnel in key positions to the organization.
DAVID J. PRYSTASH Mr. Prystash provided key leadership in improving our operating efficiencies and liquidity in 2010. He led several key initiatives that significantly enhanced liquidity during the year by monetizing assets, taking advantage of additional tax savings opportunities and improving cash management services. He continued to lead efforts to make significant enhancements in the efficiency and effectiveness of our internal financial reporting. Mr. Prystash also helped to improve our working capital position by directing efforts to reduce inventory levels and improve credit and collection processes. He initiated several system projects to improve efficiency and reduce costs.
DANIEL A. CLARK Mr. Clark became the company’s senior vice president, chief administrative officer, on November 1, 2010. With his new role, he assumed responsibility for order management, strategic sourcing, research and development, communications and human resources, and he has restructured several organizations within his leadership to create tighter alignment with the company’s strategic business objectives. Prior to his new role, Mr. Clark was senior vice president, business excellence, and chief information officer. In this role, he provided leadership and direction to the Lean Six Sigma efforts that provided significant cost savings compared to the prior year. In addition, Mr. Clark developed a strategic technology roadmap that reduced the company’s technology costs in 2010. He has also demonstrated strong leadership on key cross functional initiatives and provided project management resources to ensure excellent execution on these initiatives.
BARRY R. NELSON Mr. Nelson is responsible for sales and marketing. He led several key initiatives that increased sales of our core products, increased margins and enhanced the company’s liquidity position. He was instrumental in changing payment terms for company products, and bringing about the successful conclusion to our trade case. Mr. Nelson also provided leadership on several strategic initiatives to improve customer relationships, supply chain optimization and improved product margins.
RICHARD D WILLETT, JR. Mr. Willett served as our president, chief executive officer and executive chairman until his resignation on January 18, 2010. Because Mr. Willett only served in that role for a limited time in 2010, his key individual achievements for that period are not discussed.
MARK A. SUWYN Mr. Suwyn acted as our interim chief executive officer from January 18, 2010 until February 8, 2010. During his time as chief executive officer, Mr. Suwyn focused our efforts on customer relationships and enhancing products and services.
E. THOMAS CURLEY Mr. Curley was hired as our president and chief executive officer on February 8, 2010, and he served the company in this role until his resignation on June 11, 2010.
Base Salaries
We have established an annual base salary for each Executive that is designed to be competitive by position relative to the marketplace. Base salary compensates each Executive for the primary responsibilities of his position. Base salary is set at levels that we believe enable us to attract and retain talent. Pursuant to each Executive’s employment agreement, his base salary may be increased periodically but may not be decreased. The compensation committee reviews each element of compensation separately but also reviews the effect of any change in base salary on the target percentages relative to total annual compensation. Base salary differences among individual Executives reflect their differing roles in the company and the market pay for those roles. Base levels were set taking into account our approach to the mix between base salary and bonus awards, as outlined in “Targeted Overall Annual Cash Compensation”
above. Increases in 2010 were based on the compensation committee’s evaluation of each Executive’s individual performance and his position relative to comparable executives in Peer Group companies.
Mr. Martin’s base salary was increased by 21.6% effective January 1, 2010 and was increased an additional 38.9% when he was promoted to president and chief executive officer in August 2010. Mr. Prystash’s base salary was increased by 8.4% effective March 1, 2010. Mr. Clark’s base salary was increased by 14.2% effective March 1, 2010, was increased an additional 8.6% effective July 1, 2010 and was increased an additional 7.9% effective November 1, 2010, when he was promoted to senior vice president, chief administrative officer. Mr. Lukacs’ base salary was increased by 5.8% effective July 1, 2010 and was increased an additional 9.1% effective September 1, 2010, when he was promoted to senior vice president, manufacturing operations. Mr. Nelson’s base salary was reviewed and increased effective July 1, 2010 by 18.2%. We did not make annual salary increases for our Executives in 2009.
Annual Bonus Compensation
Annual bonus compensation for each Executive is established by the compensation committee in its sole discretion. Our practice is to pay cash bonus awards based upon the achievement of our annual financial performance goals, our strategic performance initiatives and individual performance objectives. Each Executive’s employment agreement designates an individual bonus target for that Executive, expressed as a percentage of base salary. The compensation committee reviews these bonus targets annually, and may increase a bonus target in its discretion as part of its overall evaluation of compensation. Pursuant to each Executive’s employment agreement, his bonus target may be increased periodically but may not be decreased.
The company’s bonus program consists of a profit sharing plan and a performance excellence plan. This approach is intended to afford broad participation in rewards through the profit sharing plan based on achievement of our financial performance goals, while making additional bonus compensation available through the performance excellence plan to a more limited group of senior managers who can help determine and are responsible for implementing our overall business strategy.
The profit sharing plan includes all of the Executives and all other exempt salaried employees. Each year the compensation committee establishes minimum, target and maximum percentages of salary to be awarded if the compensation committee determines that our financial performance objectives for the year are met, along with any other criteria established at the discretion of the compensation committee. These financial performance objectives consisted of EBITDA and Debt Reduction for 2010. We define “EBITDA” for these purposes as net earnings plus interest, taxes, depreciation and amortization, as adjusted for non-cash items and other items that are allowed at the discretion of the compensation committee. We define “Debt Reduction” as the change in our total indebtedness minus available cash balances. The compensation committee selected these objectives as guidelines because they are the primary financial metrics by which our Executives are evaluated by our principal stockholder. For 2010, EBITDA and Debt Reduction were each weighted at 50%. The weightings were based on their relative importance to our company.
Each objective for 2010 is measured separately against a threshold, target and maximum goal as follows:
The actual results are used by the compensation committee as a general guideline to determine the funding for the plan. If the compensation committee determines that the threshold goals are met or
exceeded, funding will generally range from 50% to 150% of target for each objective, depending on results achieved. Generally, no funding will occur for any objective as to which the threshold goal has not been met. After consideration of these factors, the compensation committee, in its discretion, determines the funding level to be used for the year. All participants receive the same percentage of their base salary in any distribution under the plan. Applying these guidelines, the compensation committee evaluated our overall 2010 performance and did not award a bonus under the profit sharing plan based on the company’s overall financial performance against targets.
Each of the Executives and a select group of our salaried employees participated in the performance excellence plan in 2010. The compensation committee first determines the aggregate amount available under the plan. The committee then considers the recommendations of senior management and selects from the group of eligible participants those individuals who will receive a bonus. Finally, the committee considers the recommendations of senior management and determines the amount of the bonus award for each of the individuals selected.
The targeted annual bonus pool under this plan is based on the aggregate targets for the plan participants as a group, determined by reference to the participants’ base compensation. One half of the annual bonus pool is funded without regard to the financial performance objectives. The other half of the funding is determined by the compensation committee in its discretion based on the achievement of the same financial objectives as under the profit sharing plan and giving consideration to the same weighting and the same threshold, target and maximum levels as in that plan. Plan funding for 2010 was determined by the compensation committee in its discretion and set at a 63% funding level.
The compensation committee in its discretion, after consulting with the chief executive officer, selects Executives who will receive bonus awards and individual bonus awards for those Executives selected. There is no minimum or maximum limit on any individual award. The bonus award for each Executive was determined by the compensation committee in its discretion, after consulting with the chief executive officer, based on the Executive’s performance against his individual performance goals and his adherence to our core values that support those goals, and is shown in the Summary Compensation Table.
For 2011, the compensation committee established financial performance objectives consisting of a combination of EBITDA (70%) and Debt Reduction (30%). We believe the targets to fund profit sharing and performance excellence plans are appropriately challenging and align the interests of investors and operating management. The maximum financial goals were designed to be difficult to achieve, and we believe that they will be.
Long-Term Incentive Plan
In January 2010, the compensation committee approved and adopted a long-term incentive plan, or LTIP. The purpose of the LTIP is to help attract and retain individuals of outstanding ability to serve in key executive positions with the company and its subsidiaries. The plan is designed to help motivate participants to maintain a long-term outlook by providing cash incentives through the granting of awards that vest over multiple years. The LTIP and the individual award agreements under the LTIP provide for a service award and a performance award. The service award is time-based and payable if the participant remains as an employee through December 31, 2012. The performance award is payable if the participant remains as an employee through December 31, 2012, and if the company achieves annual performance goals established each year by the compensation committee during the three years ending December 31, 2012. The participant will receive a pro rata share of the total award if, prior to December 31, 2012, the participant’s employment is terminated by us without cause or by the participant for good reason or in the event of death or disability, each as defined in the LTIP. The participant will receive the entire award if, prior to December 31, 2012, a change in control occurs, as defined in the LTIP.
For 2010, the compensation committee established performance objectives consisting of a combination of Core Share Growth, Cost Advantage per Ton and Asset Monetization, each weighted equally. These objectives tied to our strategic plan for 2010. “Core Share Growth” is defined as an increase in our share of sales of coated paper in the U.S. and Canada. “Cost Advantage per Ton” is defined as the cash cost per ton of paper compared to similar competitors in the U.S. and Canada. “Asset Monetization” is defined as proceeds received from the sale of non-strategic assets. The compensation committee determined the actual performance against the objectives for 2010 was achieved at a 49.5% level, which means that participants in the LTIP will have earned 49.5% of the total performance award for which they were eligible pursuant to the LTIP plan in 2010.
Each objective for 2010 was measured separately against a threshold, target and maximum goal as follows:
For 2011, the compensation committee established performance objectives for the LTIP consisting of a combination of Peer Comparison EBITDA/Ton Advantage, Second-quality Production as a Percentage of First-quality Production and Asset Monetization, each weighted equally. We set these performance objectives for 2011, because they best reflect the company’s strategic objectives. “Peer Comparison EBITDA/Ton Advantage” is defined as the cost per ton of paper excluding depreciation expense compared to similar competitors in the U.S. and Canada. “Second-quality Production as a Percentage of First-quality Production” is defined as the ratio of sub-optimal paper produced that cannot be sold in our primary markets to our primary customers versus paper produced that can be. The maximum goals were designed to be difficult to achieve, and we believe that they will be.
Equity Ownership
We believe that it is a customary and competitive practice to include an equity-based element of compensation in the overall compensation package extended to executives in similarly-situated companies.
Equity ownership is intended to motivate Executives to make stronger business decisions, improve financial performance, focus on both short-term and long-term objectives and encourage behaviors that protect and enhance the corporate interest. The amount of each individual stock option award is determined by the compensation committee based on a number of factors, including the expected contribution of each Executive to the future success of our company, the other compensation, including options, being earned and held by that Executive and the amount of NewPage Group common stock owned by that Executive.
In February 2010, the compensation committee amended the outstanding stock options to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009. These actions were taken in order to ensure that the equity-based compensation remained a vital component of the overall compensation package of the Executives and other participants. Prior to the modification, the options were significantly out-of-the-money and had substantially lost their ability to retain and influence the long-term performance of the participants due to the underlying value of the equity.
Upon the resignations of Messrs. Curley, Edicola, Marziale, Suwyn and Willett, all of their outstanding options became vested and exercisable in accordance with their stock option award agreements. None of these awards were exercised prior to their expiration.
Effective August 2, 2010, Mr. Martin was granted non-qualified options to purchase an additional 400,000 shares of NewPage Group Inc. common stock at an exercise price of $2.00 per share to recognize his increased responsibilities as president and CEO. Effective September 1, 2010, Mr. Lukacs was granted non-qualified options to purchase an additional 30,000 shares of NewPage Group Inc. common stock at an exercise price of $2.00 per share to recognize his increased responsibilities as senior vice president.
Further information on equity ownership can be found in “Equity Awards.”
Severance and Change in Control Benefits
We may terminate an Executive’s employment without “cause” at any time, and an Executive may resign for “good reason,” each as defined in the Executive’s employment agreement. We believe that in these situations we should provide reasonable severance benefits to assist the Executive with this transition, recognizing that it may take time for an Executive to find comparable employment elsewhere.
Each Executive’s employment agreement provides for termination benefits in the event of termination by us without cause or by the Executive for good reason. Additionally, the employment agreements with Messrs. Clark and Martin provide for additional termination benefits if the termination occurs within 12 months following the acquisition by NewPage Holding or its subsidiaries of the stock or assets of a business enterprise of substantially the same revenue and total assets as NewPage Holding on a consolidated basis. This approach also helps align the interests of these Executives with the interests of our stockholders by providing additional compensation for completing a transaction that may be in the best interests of our stockholders but might otherwise be detrimental to those Executives.
The amount and type of severance benefits available to our Executives is described in “Termination Benefits.”
Mr. Willett’s severance in 2010 was determined by the compensation committee based on his four years of service with us and the treatment of other similarly situated executives, as well as by reference to the separation benefits in his prior employment agreement, which expired April 17, 2009, and was not renewed. Severance in 2010 for Messrs. Curley, Edicola, Marziale and Suwyn were determined based on the terms of their respective employment agreements. See “Termination Benefits-Severance Benefits for Former Executives.”
Other Benefits
Our Executives participate in a tax-qualified defined contribution plan, which includes individual and employer matching contributions, as well as various health and welfare benefit plans, all on the same basis as other salaried employees. We suspended the employer matching contribution to this plan from June 1, 2009 through December 31, 2010 for all salaried exempt employees, including our Executives. We also reimburse certain Executives for living expenses and financial planning services. Our objective with these other benefits is to offer all salaried employees, including our Executives, a benefits package that is competitive within our industry and labor markets.
Compensation and Risk
We believe that our compensation policies and practices do not foster risk taking above the level of risk otherwise associated with our business model. Annual bonus compensation is based on metrics established at the sole discretion of the compensation committee. Metrics for the annual bonus plans have focused on EBITDA and Debt Reduction. The LTIP instituted in 2010 focuses on retention and the achievement of long-term goals established at the sole discretion of the compensation committee requiring, in large part, sustained performance for payout. Further, for general control purposes, our compensation is assessed annually against compensation offered by peer companies. As a consequence of all the foregoing, our compensation policies and practices are not reasonably likely to have a material adverse effect on us.
Compensation Committee Report
The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this annual report. Based on that review and discussion, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report.
COMPENSATION COMMITTEE
Chan W. Galbato
Alexander M. Wolf
Compensation Summary
The following table sets forth information concerning the compensation for our current and former chief executive officers, our chief financial officer, and our other three most highly compensated executive officers at the end of 2010. Messrs. Edicola and Marziale are included because they would have each been one of our other three most highly compensated executive officers but for the fact that they were not serving as executive officers at the end of 2010.
SUMMARY COMPENSATION TABLE
(1) Represents base salary actually earned during the year.
(2) For Mr. Prystash, the amount for 2009 represents a bonus paid to compensate him for a retention bonus from his former employer that was forfeited when he accepted employment with us and the amount for 2008 represents a bonus paid upon his commencing employment as senior vice president and chief financial officer.
(3) Represents the amount of grant-date fair value for equity compensation granted during the year in accordance with generally accepted accounting principles. In February 2010, the compensation committee amended the outstanding stock options to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009. Included in the above amounts are the effects of the modifications. See the notes to the financial statements for the assumptions used in the valuation of the options. See “Equity Awards” for more information. The amounts shown are based on the fair value at the date the award is granted using the Black-Scholes option pricing model. This fair value is calculated based on assumptions at the time of the grant and does not represent the ultimate value to be realized by the Executive, if any. No Executive received any value from the exercise of options during the periods shown.
(4) Represents amounts earned under the annual incentive plans and LTIP. The amounts shown for Messrs. Curley, Marziale and Edicola represent pro rata portions of their awards paid to them upon their termination.
(5) Represents the change in value of benefits earned under the cash balance plan. The present value of accumulated benefits under the Cash Balance Pension Plan as of December 31, 2010 was $13,475 for Mr. Martin, $12,250 for Mr. Prystash, $13,475 for Mr. Clark, $11,025 for Mr. Lukacs, $11,025 for Mr. Nelson, $9,800 for Mr. Willett and $14,700 for Mr. Suwyn.
(6) See the following table, which provides further details about All Other Compensation.
(7) Mr. Martin served as senior vice president, operations, until his election as president and chief executive officer on August 2, 2010.
(8) Effective January 18, 2010, Mr. Willett resigned as our president and chief executive officer and Mr. Suwyn was appointed to serve as our chief executive officer in addition to his duties as chairman until February 8, 2010. Thereafter, Mr. Suwyn continued to serve as our chairman until his resignation on June 11, 2010.
(9) Mr. Curley served as our president and chief executive officer from February 8, 2010 until his resignation on June 11, 2010.
(10) Mr. Nardelli served as our chairman and functioned as our principal executive officer from June 11, 2010 until August 2, 2010. Mr. Nardelli is employed by an affiliate of Cerberus and received no compensation by us for his services.
(11) Effective July 2, 2010, Mr. Marziale resigned as senior vice president, marketing, strategy and general management. Under Mr. Marziale’s separation agreement, he received a severance payment equal to $512,248, payment for accrued but unused vacation in 2010 equal to $14,769, continued health and welfare benefits through July 2, 2012 (comprised of medical, dental, life insurance and accidental death and dismemberment insurance benefits) with a total aggregate cost to us of approximately $17,057 and outplacement services with a cost to us of approximately $18,000.
(12) Effective June 11, 2010, Mr. Edicola resigned as vice president, human resources.
ALL OTHER COMPENSATION
(1) Relocation expense includes tax gross-ups of $9,000 for Mr. Marziale in 2008.
(2) “Severance” consists of cash severance, accrued vacation, outplacement services and continued welfare benefits for 24 months after termination. See “Severance Benefits for Former Executive Officers” for more information.
(3) “Other” for Mr. Prystash in 2010 consists of amounts paid to him in reimbursement of personal travel expenses to and from our Dayton headquarters and temporary living expenses in Dayton. “Other” for Mr. Clark and Mr. Lukacs in 2010 consists of amounts paid for financial planning. “Other” for Mr. Willett in 2010 consists of (i) $131,548 for payments to him under a consulting arrangement subsequent to his termination and (ii) $12,480 for financial planning. “Other” for Mr. Suwyn in 2010 consists of (i) $11,056 paid to him in reimbursement of personal travel expenses to and from our Dayton headquarters and temporary living expenses in Dayton, as negotiated in conjunction with Mr. Suwyn’s acceptance of employment as our chief executive officer and (ii) $6,240 for financial planning. “Other” for Mr. Edicola in 2010 consists of amounts paid to him in reimbursement of personal travel expenses to and from our Dayton headquarters and temporary living expenses in Dayton.
Employment Agreements
Each of Messrs. Clark, Lukacs, Martin, Nelson and Prystash is party to an employment agreement under which each is entitled to a minimum annual base salary and each is assigned a minimum bonus target,
expressed as a percentage of base salary. For 2010, bonus targets for Messrs. Clark, Lukacs, Martin, Nelson and Prystash were 65%, 65%, 100%, 65% and 75%, respectively. See “Termination Benefits” for information concerning the severance benefits payable under our Executive employment agreements and other terms applicable in connection with the termination of an Executive’s employment with us.
Equity Awards
GRANTS OF PLAN-BASED AWARDS
(1) The amounts shown represent the estimated possible payment at the time of grant.
(2) The “grant date fair value” of the options was determined in accordance with generally accepted accounting principles and will be recognized over the three-year vesting period. See the notes to the financial statements for information on the material terms of the awards and the assumptions used in determining the grant date fair value.
(3) Amounts represent the estimated range of payout under the profit sharing plan. See “Compensation Discussion and Analysis-Annual Bonus Compensation” for more information about the plan.
(4) Amounts represent the estimated range of payout under the performance excellence plan. There is no limit on the maximum amount that can be awarded to any one Executive, subject to the aggregate amount approved under the plan for all participants. See “Compensation Discussion and Analysis-Annual Bonus Compensation” for more information about the plan.
(5) Amounts represent the estimated range of payout under the long-term incentive plan. See “Compensation Discussion and Analysis-Long-Term Incentive Plan” for more information about the plan and includes grants in January 2010. Mr. Martin and Mr. Lukacs received additional grants in August 2010 and September 2010, respectively.
(6) On February 12, 2010, the compensation committee amended the outstanding stock options to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009. The amounts included in the February 12, 2010 line represent the number of options modified and the grant date fair value of option awards amount reflects the incremental fair value on that date.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
NewPage Group Equity Incentive Plan
On December 21, 2007, each Executive then employed by us was granted non-qualified options to purchase NewPage Group common stock under the NewPage Group equity incentive plan. Vesting of one-half of these stock options was time-based in three equal annual installments commencing December 31, 2008. The other half of the stock options have performance-based vesting and would vest in three equal annual installments commencing December 31, 2008, but only if annual EBITDA and Debt Reduction performance targets, as established by the compensation committee, are met. However, upon a change of control or if we complete an initial public offering, a portion of the stock options will vest upon the change of control or the completion of the initial public offering, as applicable. Finally, the stock options would vest on each vesting date only if the Executive remained employed by us on that vesting date. Because the performance targets are determined annually by the compensation committee, we have only considered the performance-based stock options as granted when the compensation committee sets the performance targets for the applicable year.
Upon Mr. Martin’s promotion to president and chief executive officer, he was granted additional non-qualified options to purchase NewPage Group common stock under the equity incentive plan upon the same terms as the other Executives, except that the vesting of the options is over three equal annual installments commencing December 31, 2010.
Upon Mr. Prystash’s commencement of employment, he was granted non-qualified options to purchase NewPage Group common stock under the equity incentive plan upon the same terms as the other Executives, except that the vesting of the options is over three equal annual installments commencing December 31, 2009. Following his commencement of employment, Mr. Prystash’s stock options received as a director on December 21, 2007 expired. In February 2009, the compensation committee granted Mr. Prystash non-qualified options with similar terms to replace those that expired.
In February 2010, the compensation committee amended the outstanding stock options to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009.
Upon the termination of employment of Messrs. Curley, Edicola, Marziale, Suwyn and Willett, all of their outstanding options became vested and exercisable in accordance with their stock option award agreements. None of these options were exercised.
Each Executive is subject to a five-year lock-up agreement with NewPage Group with respect to his vested options and the underlying shares of NewPage Group common stock, subject to certain limited exceptions.
Pension Benefits
Each of the Executives is a participant in a tax-qualified cash balance pension plan. Benefits are determined based on age and are credited to them annually, along with interest as allowed by IRS regulations. As of December 31, 2010, the amount of the change in the plan for 2010 was equal to the Executives’ account balances. Messrs. Marziale and Edicola received their entire balances as lump sum payments upon their terminations. Effective December 31, 2010, accumulated benefits in the cash balance benefit plan were frozen. Accrued benefits will continue to earn annual interest credits, but participants will no longer earn cash balance benefit credits. See the Summary Compensation Table for further information.
Termination Benefits
Severance Benefits
Severance benefits are specified in each Executive’s employment agreement.
If we terminate an Executive’s employment without “cause” or if the Executive resigns for “good reason,” the Executive will continue to receive base salary and benefits to the date of termination and will receive the following additional benefits after executing, and not revoking, a general release:
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For Messrs. Lukacs, Nelson and Prystash, a cash amount equal to two times their base salary. For Messrs. Clark and Martin, a cash amount equal to (a) twice their base salary less the initial purchase price of their NewPage Group common stock, or (b) three times their base salary less the initial purchase price of their common stock if the termination of employment occurs within 12 months after an acquisition by NewPage Holding or its subsidiaries of the stock or assets of a business enterprise of at least substantially the same revenue and total assets as NewPage Holding on a consolidated basis. In addition, for Messrs. Clark and Martin, if at the time of termination the fair market value of their NewPage Group common stock is less than the purchase price they paid for that common stock, they will also receive a payment equal to that difference.
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The pro rata portion of his annual bonus award for the year of termination. This would be paid at the time of termination based on (a) the bonus award from the prior year if the date of termination is prior to June 1, or (b) what his bonus award would have been had he not been terminated if the date of termination is on or after June 1.
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Continuation of health and welfare benefits for 24 months after the termination date
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Payment for unused accrued vacation time for the year in which termination occurs
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Outplacement services for 12 months
As defined in the employment agreements, “cause” includes commission of a felony, willful and fraudulent conduct, dishonesty resulting in personal gain, and other serious misconduct, and “good reason” includes reduction of base salary or bonus target, required relocation farther than 50 miles and other significant adverse employer actions.
If an Executive’s termination is caused by death or disability, the Executive or his estate will receive the pro rata portion of his annual bonus award and payment of unused accrued vacation time. If an Executive termination is initiated by us for cause or by the Executive without good reason, the Executive will not be entitled to any severance payments other than salary and benefits accrued through the termination date.
A summary of the compensation and severance arrangements for former Executives are included under “Severance Benefits for Former Executives.”
Non-Competition and Non-Solicitation Provisions
Each Executive is subject to certain non-competition and non-solicitation restrictions following termination of employment for any reason. For Messrs. Lukacs, Nelson and Prystash these restrictions run for two years and for the remaining Executives these restrictions run for one year following termination.
Equity Ownership Implications upon Termination
If Mr. Clark’s or Mr. Martin’s employment is terminated by us without cause or if either of them resigns for good reason (each as defined in his employment agreement and summarized above), NewPage Group or NewPage Investments LLC must, upon request, purchase his common stock for fair market value, subject to certain exceptions. If Mr. Clark or Mr. Martin dies, his employment is terminated by us for cause or as a result of disability or if either of them resigns without good reason, NewPage Group or NewPage Investments LLC may, but are not required to, repurchase his NewPage Group common stock at fair market value unless we have then completed an initial public offering.
LTIP Implications Upon Termination
If we terminate the employment of an Executive without cause or the Executive resigns for good reason or employment ceases due to death or disability, the Executive will receive the pro rata portion of the service and performance LTIP award determined by multiplying the full amount of the award by a fraction, the numerator of which is the number of days elapsed from the grant date to the effective date of termination, death or disability, as applicable, and the denominator of which is the number of days from the grant date of the LTIP to the determination date. Upon the effective date of a change in control, the full amount of the service and performance LTIP award will be received by the Executive as of the effective date of the change in control.
Termination Benefits Summary
Below is the summary of the estimated termination benefits that would have been paid to each current Executive as of December 31, 2010 in the various circumstances listed:
TERMINATION BENEFITS
(1) Includes termination by us for cause or resignation by the Executive without good reason. For purposes of this column, we have assumed that NewPage Group would elect to repurchase the common stock, which is valued at fair value at December 31, 2010.
(2) Includes termination by us without cause or resignation by the Executive with good reason. For purposes of this column, we have assumed that the Executive would elect to require NewPage Group to repurchase the common stock, which is valued at fair value at December 31, 2010.
(3) For purposes of this column, we have assumed that NewPage Group would elect to repurchase the common stock, which is valued at fair value at December 31, 2010.
(4) Includes termination by us without cause or resignation by the Executive with good reason, in each case within 12 months following the acquisition by NewPage Holding or its subsidiaries of the stock or assets of a business enterprise of at least substantially the same revenue and total assets as NewPage Holding on a consolidated basis. For purposes of this column, we have assumed that the Executive would elect to require NewPage Group to repurchase the common stock, which is valued at fair value at December 31, 2010.
(5) Cash severance includes payment for unused accrued vacation time and the annual bonus award for the year of termination. For purposes of this table, we have assumed that each Executive would receive a full year of his annual vacation pay.
(6) Termination without cause and death or disability includes prorated long-term incentive plan benefits to date of termination, assumed to be December 31, 2010. Significant Acquisition includes full amount of long-term incentive plan benefits payable to recipients.
Severance Benefits for Former Executives
Mr. Willett’s employment with us terminated on January 18, 2010. Under Mr. Willett’s separation agreement, he received a severance payment equal to $1,300,000, payment for accrued but unused vacation in 2010 equal to $2,500, continued life insurance benefits through January 31, 2012 and medical and dental for 2010 until cancelled by Mr. Willett on September 30, 2010 with a total aggregate cost to us of approximately $9,365, financial advisory services with a total cost to us of approximately $12,480 and outplacement services with a cost to us of $78,750. Under his separation agreement, NewPage Group agreed not to acquire Mr. Willett’s NewPage Group common stock. Mr. Willett remains subject to certain non-competition and non-solicitation restrictions through January 18, 2012. Mr. Willett’s separation benefits were determined by the compensation committee based on his four years of service with us and the treatment of other similarly situated executives, as well as by reference to the separation benefits in his prior employment agreement, which expired April 17, 2009 and was not renewed.
Mr. Curley’s employment with us terminated on June 11, 2010. Under Mr. Curley’s separation agreement, he will receive severance payments equal to $1,100,000, payment of $167,898 representing a pro rata portion of his performance and service awards granted pursuant to the LTIP, payment for accrued but unused vacation time in 2010 equal to $21,154, reimbursement of premiums until June 30, 2012 for health and welfare insurance when incurred by Mr. Curley under a previous plan with a cost to us of $32,297, and outplacement services with a cost to us of approximately $10,500. Mr. Curley remains subject to certain non-competition and non-solicitation restrictions through June 11, 2012.
Mr. Suwyn’s employment with us terminated on June 11, 2010. Under Mr. Suwyn’s separation agreement, he received a severance payment equal to $2,000,000 and a payment for accrued but unused vacation in 2010 equal to $2,981 and continued life insurance benefits until June 30, 2012, which cost us $2,267. Under his separation agreement, NewPage Group agreed not to acquire, and Mr. Suwyn agreed not to require NewPage Group to acquire, Mr. Suwyn’s NewPage Group common stock. Mr. Suwyn remains subject to certain non-competition and non-solicitation restrictions through June 11, 2012.
Mr. Edicola’s employment with us terminated on June 11, 2010. Under Mr. Edicola’s separation agreement, he received a severance payment equal to $650,000, payment of $243,658 representing a pro rata portion of his performance and service awards granted pursuant to the LTIP, payment for accrued but unused vacation in 2010 equal to $7,500, continued health and welfare benefits through June 30, 2012 (comprised of medical, dental, life insurance and accidental death and dismemberment insurance benefits) with a total aggregate cost to us of approximately $23,229 and outplacement services with a cost to us of approximately $18,000. Mr. Edicola remains subject to certain non-competition and non-solicitation restrictions through June 11, 2012.
Mr. Marziale’s employment with us terminated on July 2, 2010. Under Mr. Marziale’s separation agreement, he received a severance payment equal to $512,248, payment of $645,138 by NewPage Group to purchase Mr. Marziale’s NewPage Group common stock, payment of $278,466 representing a pro rata portion of his performance and service awards granted pursuant to the LTIP, payment for accrued but unused vacation in 2010 equal to $14,769, continued health and welfare benefits through July 31, 2012 (comprised of medical, dental, life insurance and accidental death and dismemberment insurance benefits) with a total aggregate cost to us of approximately $17,057 and outplacement services with a cost to us of approximately $18,000. Mr. Marziale remains subject to certain non-competition and non-solicitation restrictions through July 2, 2011.
Compensation of Directors
Effective January 12, 2011, the compensation committee amended the compensation structure for independent directors to better reflect the current median compensation paid to independent directors of the Peer Group companies. Independent directors are not employees of NewPage Holding, NewPage, Cerberus or a Cerberus affiliate. In 2011, independent directors will receive an annual retainer of $100,000 plus $1,250 for attending each board meeting or committee meeting. Independent directors will receive annual retainers for serving on the audit committee and compensation committee of $15,000 and $10,000, respectively, and annual retainers of $20,000 and $10,000 for serving as committee chairs of those respective committees. In 2010, independent directors received an annual retainer of $50,000 plus $1,250 for attending each board or committee meeting and $10,000 per year for serving as a member and $20,000 per year for serving as a chairman of a committee. In addition, on December 21, 2007, Messrs. Armstrong, Long, Sheridan and Zahringer each received an award of non-qualified options to purchase 46,259 shares of NewPage Group common stock on the same terms as the Executives. During 2008, Mr. Long received an award of non-qualified options to purchase 46,259 shares on the same terms as the Executives. During 2010, Mr. Galbato received an award of non-qualified options to purchase 558,161 shares with similar terms that vest over the three years ending December 31, 2013. See “Equity Awards-NewPage Group Equity Incentive Plan.” Except as set forth in the table below, no director received compensation for their services as a director.
2010 DIRECTOR COMPENSATION
(1) Of the 46,259 options awarded to each director listed above other than Mr. Galbato and Mr. Kesselman, options to purchase 7,710 shares, 7,710 shares and 7,709 shares were deemed granted for accounting purposes pursuant to generally accepted accounting principles in 2008, 2009 and 2010. Because the performance targets are determined annually by the compensation committee, we have only considered the performance-based stock options as granted when the compensation committee sets the performance targets for the applicable year. For Mr. Galbato, options to purchase 558,161 shares were awarded in 2010, of which 279,081 shares were deemed granted in 2010. As of December 31, 2010, outstanding options for 38,549 shares were exercisable by Messrs. Armstrong and Zahringer. The other directors had no exercisable options outstanding as of December 31, 2010. In February 2010, the compensation committee amended the outstanding stock options to change the exercise price to $2.00 per share and vest the unearned performance-based options for 2008 and 2009. Included in the above amounts are the effects of the modifications.
Compensation Committee Interlocks and Insider Participation
As of December 31, 2010, our compensation committee consisted of Mr. Wolf. None of our executive officers has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity or insider participation in compensation decisions.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
NewPage is a wholly-owned subsidiary of NewPage Holding, which is a wholly-owned subsidiary of NewPage Group.
The following table sets forth information with respect to the beneficial ownership of NewPage Group as of February 11, 2011 by:
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each person who is known by us to beneficially own 5% or more of the NewPage Group common stock
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each member of the board of directors of NewPage Group, NewPage Holding and NewPage
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each of the Executives
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all directors of NewPage Group, NewPage Holding and NewPage and executive officers of NewPage and NewPage Holding as a group
Beneficial ownership is determined in accordance with the rules of the SEC and includes stock options that could be exercised within 60 days. To our knowledge, each of the holders listed below has sole voting and investment power as to the NewPage Group common stock owned unless otherwise noted.
* Denotes beneficial ownership of less than 1%.
(1) One or more affiliates of Cerberus own 76.8% of the common stock of NewPage Group. Stephen Feinberg exercises sole voting and investment authority over all of the NewPage Group common stock owned by the affiliates of Cerberus. Thus, pursuant to Rule 13d-3 under the Exchange Act, Stephen Feinberg is deemed to beneficially own 76.8% of the common stock of NewPage Group.
(2) The address for Mr. Feinberg is c/o Cerberus Capital Management, L.P., 299 Park Avenue, New York, New York 10171.
(3) The address for SEO is Kanavaranta 1 Fl-00160, Helsinki, Finland.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies and Procedures
We and our audit committee have adopted written procedures regarding related party transactions. Pursuant to those procedures, any related party transaction that would be required to be reported in accordance with the rules of the SEC in this annual report, and any material amendment to such a related party transaction, must first be presented to and approved by our chief executive officer, our chief financial officer and our general counsel and then by the audit committee before we make a binding commitment to the related party. For each related party transaction presented for approval, we will consider all relevant factors, including whether the proposed transaction would be entered into in the ordinary course of our business on customary business terms, whether any related party has been or will be involved in the negotiation or administration of the proposed transaction on our behalf, and whether the proposed transaction appears to have been negotiated on an arms’-length basis without interference or influence on us by any related party. We may condition our approval on any restrictions we deem appropriate, including receiving assurances from any related party that he or she will refrain from participating in the negotiation of the proposed transaction on our behalf and in the ongoing management of the business relationship on our behalf should the proposed transaction be approved. If after a transaction has been completed we discover that it is a related party transaction, we will promptly advise management and our audit committee. In that case, we may honor the contractual commitment if entered into in good faith by an authorized representative of ours, but we may impose appropriate restrictions on the continued maintenance of the business relationship similar to those described above. If our chief executive officer, chief financial officer, general counsel or any member of our audit committee has a direct or indirect interest in a proposed transaction, that individual must disclose his interest in the proposed transaction and refrain from participating in the approval process.
Related Party Transactions
Cerberus Arrangements
Cerberus retains consultants that specialize in operations management and support and who provide Cerberus with consulting advice concerning portfolio companies in which funds and accounts managed by Cerberus or its affiliates have invested. From time to time, Cerberus makes the services of these consultants available to Cerberus portfolio companies, including NewPage. We pre-review and agree on all services rendered. In 2010, we reimbursed Cerberus $1,921,000 for these services. These services were provided at rates not greater than the fees that Cerberus paid to the applicable consultant, together with reimbursement of out-of-pocket expenses incurred by the consultant in providing those services. We believe that the terms of these consulting arrangements are comparable to terms that would have been obtained from an unaffiliated third party. Activity related to Cerberus’ monitoring of their equity investment, such as non-independent director fees and expenses, are not charged to the Company. Cerberus also provides certain services free of charge, including chairman and company director fees and expenses. Depending upon the nature of the assignment, consultants retained by us also provided services for Cerberus and other entities affiliated with Cerberus, including other Cerberus portfolio companies, at the same time as they performed consulting services to us, but the consultants’ duty of loyalty in their performance of their consulting services for us was solely to us. Any future consulting services of Cerberus consultants will be subject to the review and approval procedures described above.
Affiliates of Cerberus
In connection with a tender offer by NP Investor LLC (“NPI”), an affiliate of Cerberus Capital Management, L.P., the indirect controlling stockholder of NewPage, for our second-lien notes, NPI and NewPage entered into a dealer managers agreement, dated July 15, 2009, with Citigroup Global Markets Inc., Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Barclays Capital Inc. (the “Dealer Managers”). Pursuant to the dealer managers agreement, NewPage agreed to indemnify the Dealer Managers for liabilities arising out of material misstatements or omissions in the tender offer documents, breaches of representations and warranties by NPI or NewPage, and all other losses as a result of the dealer managers acting as a dealer manager or providing financial advisory services in connection with the tender offer.
SEO Arrangements
Corenso Arrangements. Prior to the closing of the Acquisition, Stora Enso North America Corp., now called NewPage Wisconsin System Inc. (“NewPage Wisconsin”) and Corenso North America Corp., a wholly-owned subsidiary of SEO that was not part of the Acquisition, which we refer to as “Corenso,” entered into the arrangements described below. Corenso manufactures core boards, cores and tubes for use by manufacturers of paper and board, textile yarn, plastic film, flexible packaging and metal foil.
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NewPage Wisconsin and Corenso entered into real estate lease agreements with respect to the portion of the Wisconsin Rapids mill currently used in Corenso’s operations and NewPage Wisconsin is providing steam, process water and process water effluent treatment to Corenso operations at the leased facility
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NewPage Wisconsin and Corenso entered into a supply agreement pursuant to which Corenso will continue to supply cores to NewPage Wisconsin on mutually agreed terms
NewPage Group PIK Notes. In connection with the Acquisition, NewPage Group issued $200 million in aggregate principal amount of NewPage Group PIK Notes to SEO. The NewPage Group PIK Notes mature on December 21, 2015. Interest on the NewPage Group PIK Notes accrues at a rate per annum, reset semi-annually, equal to LIBOR plus 7.0%. Interest on the NewPage Group PIK Notes compounds semi-annually in arrears on May 1 and November 1 of each year and is payable by the issuance of additional NewPage Group PIK Notes. The NewPage Group PIK Notes have customary redemption provisions, including upon a change in control, and customary events of default.
Loans to NewPage Group
In connection with the separation from NewPage of a former executive officer, we loaned $0.6 million to NewPage Group in August 2010 to enable NewPage Group to satisfy its repurchase obligations.
Director Independence
Although each of NewPage Holding and NewPage do not currently have securities listed on a national securities exchange or on an inter-dealer quotation system, we have selected the definition promulgated by the New York Stock Exchange, or NYSE, to determine which of NewPage Holding’s and NewPage’s directors qualifies as independent. Using the independence tests promulgated by the NYSE, the boards of directors of NewPage Holding and NewPage have determined that Messrs. Armstrong, Kesselman, Markby and Zahringer are independent directors.
Under the NYSE rules, NewPage Holding and NewPage are each considered a “controlled company” because more than 50% of their respective voting power is held by a single person. Accordingly, even if
NewPage Holding or NewPage were a listed company, they would not be required by NYSE rules to maintain a majority of independent directors on their respective board of directors, nor would they be required to maintain a compensation committee or a nominating committee comprised entirely of independent directors. As a result, NewPage Holding and NewPage do not maintain a nominating committee and the joint compensation committee does not include an independent director.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees
The audit committee has selected PricewaterhouseCoopers LLP as our independent auditor. The following table presents fees for professional services rendered by PricewaterhouseCoopers LLP for the years ended December 31, 2010 and 2009.
Audit fees consist of fees billed or agreed to be billed for services related to the audit of NewPage Holding’s and NewPage’s consolidated annual financial statements and reviews of the interim consolidated financial statements and services that are normally provided by PricewaterhouseCoopers LLP in connection with regulatory filings.
“Audit-related fees” consist of fees billed for assurance and related services that are reasonably related to the performance of the audit and not reported under “Audit fees,” including audits of NewPage subsidiaries that have separate reporting requirements. In 2010, this category includes services in respect of registration of debt securities. In 2009, this category includes services in respect of the debt refinancing in September 2009.
“Tax fees” consist of fees billed for tax compliance services for our Canadian subsidiary and for the evaluation of alternative fuel mixtures excise tax credits.
Policy on Pre-Approval of Services of the Independent Auditor
The policy of the audit committee of NewPage Holding and NewPage is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other permitted non-audit services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. Any general, pre-approved category of service with fees in excess of $100,000 or other permitted non-audit services requires specific approval of the audit committee or its designee. The audit committee has delegated pre-approval authority to the chairman of the audit committee when expedition of services is necessary, with follow-up with the audit committee at its next meeting. The audit committee pre-approved all of the services for us performed by the independent auditor in 2010.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of NewPage Holding and NewPage and its subsidiaries are incorporated by reference as part of this Report at Item 8 hereof.
Reports of Independent Registered Public Accounting Firm
NewPage Holding
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Equity (Deficit) for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
NewPage
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Equity (Deficit) for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
NewPage Holding and NewPage
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The information required to be submitted in the Financial Statement Schedules for NewPage Holding and NewPage and consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or required under Regulation S-X; therefore, those schedules have been omitted.
(a)(3) Exhibits
+ Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Supplemental Information to Be Furnished With Reports Filed Pursuant to Section 15(d) of the Act
by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report or proxy material will be provided to our security holder.