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 compete in the global printing and writing paper business, producing coated papers, supercalendered papers, and other uncoated and specialty products. We also sell our excess market pulp. Most of our sales represent coated paper shipments to North American customers. 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, Minnesotaand Wisconsin.
Agreement and Plan of Merger
For information regarding our pending merger with Verso and the Merger Agreement, see Note 19 to the consolidated financial statements.
Creditor Protection Proceedings For information regarding the Creditor Protection Proceedings from which we emerged on
Trends in our Business Demand for printing and writing papers in
North Americais influenced by multiple factors. Demand for particular grades of coated paper is partially driven by advertising spending which in turn is impacted by macroeconomic factors. Examples include spending on catalog and promotional materials by retailers and spending on print magazine advertising. Demand is also being negatively influenced by electronic media and the means by which consumers get information. Demand for printing and writing papers in North Americadeclined 1.6% in 2013 compared with 2012, including a 4.3% reduction in coated paper. In response to the lower demand, we took 69,000 tons of market-related downtime during 2013. This compares to 34,000 tons of market-related downtime during 2012. We will consider the need for market-related downtime from time to time based on market conditions. Available North American capacity of printing and writing papers continues to be rationalized. North American capacity was reduced by approximately 550,000 short tons in 2013 compared with 2012, of which about 420,000 short tons was coated paper capacity. Announced actions by printing and writing paper producers will remove additional capacity in 2014. Prices for printing and writing products sold in North Americahave been determined by supply and demand factors (including imports), rather than directly by raw material costs or other costs of sales. Selected Factors That Affect Our Operating Results Net Sales 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 Stateseconomy 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 grades are typically sold to customers on an as-needed basis, some of which are 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 grades having the greatest effect. Prices for paper products are a function of supply and demand and typically are not directly affected by raw material costs or other costs of sales. Consequently there is limited ability to pass through increases in costs to customers. Cost of Sales The principal components of our cost of sales are fiber, chemicals, energy, labor costs, 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, 2013, we produced approximately 95% of our pulp requirements with the remainder supplied through open market purchases and supply agreements. The price of market pulp has fluctuated significantly. 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, 2013, we generated approximately 54% 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 electrical energy to our mills in central Wisconsin. CWPCo has a FERC license for 32.9 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. 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. Effective January 1, 2013, the Successor Companyelected a new accounting policy that defers the costs for planned major maintenance and recognize the costs over the period until the next corresponding planned major shutdown. 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. Depreciation expense for the Successor Companyis lower as a result of the decrease in carrying value of the property, plant and equipment to reflect its fair value pursuant to fresh start accounting upon emergence from Chapter 11. 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 29
employees. In addition, we successfully implemented cost reduction initiatives over the last three years, including personnel reductions announced in the first quarter of 2013. Effects of Inflation/Deflation While price changes in certain costs, such as energy, wood and chemicals, 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 declining prices for wood and chemicals in 2013 and the decline in natural gas prices during 2012, which declines are not expected to continue. Sales prices and volumes have historically been more strongly influenced by supply and demand factors 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. These costs are expected to remain volatile in 2014. 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 second half is typically our strongest sales period, 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. The emergence from Chapter 11 was considered a change of control for purposes of Section 382 of the Internal Revenue Code. As a result,
NewPage Holdingswill be subject to limitations on the amount of net operating losses it is able to utilize on an annual basis. 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 change in the weighted-average long-term expected rate of return on plan assets would change 2014 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 change in the weighted-average discount rates would change 2014 net pension expense by approximately $6 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 $81 millionand would increase other postretirement benefit obligations by approximately $1 million, while a 0.5 percentage-point increase in the weighted-average discount rates would decrease pension benefit obligations by approximately $73 millionand would decrease other postretirement benefit obligations by approximately $1 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 31
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 do not have a history of market prices for our common stock because our stock is not publicly exchange traded. As necessary, we utilize an independent appraisal to estimate the fair value of the shares of our common stock. 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. Stock based awards that will be settled in cash or otherwise require liability classification are recognized as a liability, which is re-measured at fair value as of each balance sheet date. The cumulative effect of the change in fair value is recognized in the period of the change as an adjustment to compensation cost. Impairment of long-lived assets. Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable. 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. Intangible assets are recognized at the time of an acquisition, based upon their fair value. Our intangible assets primarily consist of customer-related intangible assets and trademarks/trade names with finite lives. Similar to long-lived tangible assets, intangible assets with finite lives are subject to periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As with tangible assets, considerable judgment must be exercised. Management believes that the accounting estimates associated with determining fair value as part of an impairment analysis are critical accounting estimates because estimates and assumptions are made about our future performance and cash flows. We use a variety of methodologies to determine the fair value of these assets including discounted future cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use. While management uses the best information available to estimate future performance and cash flows, future adjustments to management's projections may be necessary if economic conditions differ substantially from the assumptions used in making the estimates. 32
Results of Operations The implementation of the Chapter 11 plan and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our consolidated financial statements and resulted in our becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements for periods prior to
December 31, 2012will not be comparable to our consolidated financial statements as of December 31, 2012or for periods subsequent to December 31, 2012. For additional information regarding the impact of the implementation of the Chapter 11 plan and the application of fresh start accounting see Note 1 to the consolidated financial statements. The following table sets forth our historical results of operations for the years ended December 31, 2013, 2012 and 2011: Successor Predecessor Year ended, Year ended December 31, December 31, 2013 2012 2011 (in millions) $ % $ % $ % Net sales 3,054 100.0 3,131 100.0 3,502 100.0 Cost of sales 2,865 93.8 3,015 96.3 3,375 96.4 Selling, general and administrative expenses 146 4.8 139 4.4 145 4.1 Interest expense 47 1.5 26 0.9 391 11.2 Other (income) expense, net - - - - 2 0.1 Income (loss) before reorganization items and income taxes (4 ) (0.1 ) (49 ) (1.6 ) (411 ) (11.8 ) Reorganization items, net - - (1,288 ) (41.2 ) 86 2.3 Income (loss) before income taxes (4 ) (0.1 ) 1,239 39.6 (497 ) (14.1 ) Income tax (benefit) (2 ) (0.1 ) (19 ) (0.6 ) 1 0.1 Net income (loss) (2 ) (0.1 ) 1,258 40.2 (498 ) (14.2 ) Supplemental Information Adjusted EBITDA (see Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA below) $ 269 $ 238 $ 3242013 Compared to 2012 Net sales in 2013 were $3,054 millioncompared to $3,131 millionin 2012, a decrease of $77 million, or 2%. The decrease was primarily the result of lower sales volume of paper ( $48 million) and lower average paper prices ( $71 million), partially offset by improved mix ( $39 million). Paper sales volume totaled 3,318,000 tons and 3,371,000 tons in 2013 and 2012. Average paper prices were $891per ton and $901per ton in 2013 and 2012. These reductions were the result of the continuing decline in demand for paper. We also took 69,000 and 34,000 tons of market-related downtime during 2013 and 2012. Cost of sales in 2013 was $2,865 millioncompared to $3,015 millionin 2012, a decrease of $150 million, or 5%. The decrease was a result of lower paper sales volume ( $41 million), lower pension expense ( $26 million), lower depreciation and maintenance expense, and other cost reduction initiatives. These reductions were partially offset by inflation ( $41 million). Depreciation expense at our mills totaled $17233
$230 millionin 2013 and 2012, as a result of the decrease in carrying value of property, plant and equipment to reflect its fair value pursuant to fresh start accounting upon emergence from Chapter 11. Maintenance expense at our mills totaled $236 millionand $272 millionin 2013 and 2012. The lower expense in the current year is primarily the result of our adoption of a new major maintenance policy that resulted in the net deferral of $23 millionof expense during 2013. During 2013, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $3 millionfor employee-related costs in cost of sales. Gross margin was 6.2% and 3.7% in 2013 and 2012. Selling, general and administrative expenses were $146 millionin 2013 compared to $139 millionin 2012, primarily as a result of $13 millionhigher non-cash stock compensation expense and $16 millionhigher legal and consulting costs, including costs associated with merger activity, certain bankruptcy-related items no longer classified as reorganization items and other items, partially offset by lower employee related incentive compensation costs of $12 million, lower pension expense of $4 millionand other cost reduction initiatives. During 2013, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $1 millionfor employee-related costs in selling, general and administrative expense. Interest expense in 2013 was $47 millioncompared to $26 millionin 2012, an increase of $21 million. During 2012, $63 millionof post-petition First Lien Notes interest expense was reversed into income as it was re-characterized as a principal reduction. This interest was previously expensed in 2011. The year-ended 2012 also includes $53 millionof non-cash interest expense from the accelerated amortization of the discount and deferred financing fees associated with the first-lien debt. The remaining difference is primarily due to the higher levels of outstanding debt in 2013 compared to 2012. Reorganization items represent revenues, expenses, gains and losses directly related to the reorganization process under the Chapter 11 Proceedings. Reorganization items, net, in 2012 totaled a net gain of $(1,288) millionand include $(2,263) milliongain on extinguishment of debt, $759 millionloss on fresh start revaluation, $80 millionloss related to the tax impact of the Chapter 11 plan, $70 millionin professional fees and $66 millionin other items. Income tax expense (benefit) in 2013 and 2012 was $(2) millionand $(19) million. The benefit in 2012 reflects the reversal of a tax reserve associated with the December 2007acquisition of Stora Enso North America. In 2013 and 2012, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits. Net income (loss) was $(2) millionin 2013 compared to $1,258 millionin 2012. The decrease was primarily the result of the reorganization items, partially offset by improved gross margin. Adjusted EBITDA was $269 millionand $238 millionin 2013 and 2012. See "Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA" for additional information on the use of EBITDA and Adjusted EBITDA as a measurement tool. 2012 Compared to 2011 Net sales in 2012 were $3,131 millioncompared to $3,502 millionin 2011, a decrease of $371 million, or 11%. Net sales were affected primarily by lower sales volume of paper ( $388 million). Volumes decreased 11% in 2012 as we sold 3,371,000 tons compared to 3,807,000 tons sold in 2011. On a reported basis, average prices increased 1% to $901per ton in 2012 versus $891per ton in 2011, primarily a result of improved mix. Both price and volume were impacted by the shutdown of the Port Hawkesbury mill in
September 2011. Excluding the impacts of the shutdown, average paper price was down 2%, as a result of the continuing decline in demand for coated paper, and tons sold were relatively flat compared to 2011. We also took 34,000 tons of market-related downtime during 2012 and did not take any market-related downtime during 2011. Cost of sales in 2012 was $3,015 millioncompared to $3,375 millionin 2011, a decrease of $360 million, or 11%. The decrease was a result of lower paper sales volume ( $314 million) and lower maintenance expense, primarily due to the shutdown of the Port Hawkesbury mill. Maintenance expense at our mills totaled $272 millionin 2012 compared to $300 millionin 2011. Selling, general and administrative expenses decreased to $139 millionin 2012 from $145 millionin 2011, primarily as a result of $31 millionlower legal and consulting costs, partially offset by $18 millionhigher employee related incentive compensation costs. As a percentage of net sales, selling, general and administrative expenses increased to 4.4% in 2012 from 4.1% in 2011. Interest expense in 2012 was $26 millioncompared to $391 millionin 2011, a decrease of $365 million. The decrease was primarily the result of $288 millionlower interest expense associated with pre-petition debt in 2012 compared to 2011 and $27 millionlower non-cash interest expense associated with pre-petition debt (both discounts and deferred financing fees). As a result of the stay of claims pursuant to the Chapter 11 Proceedings the company was not obligated to pay interest on pre-petition unsecured or under-secured debt. Also, in 2012, $63 millionof post-petition First Lien Notes interest expense was reversed into income as it was re-characterized as a principal reduction. This interest was previously expensed in 2011. Offsetting these items was interest expense associated with the debtor in possession financing which was $17 millionhigher in 2012 compared to 2011. Reorganization items represent revenues, expenses, gains and losses directly related to the reorganization process under the Chapter 11 Proceedings. Reorganization items, net, in 2012 totaled a net gain of $(1,288) millionand include $(2,263) milliongain on extinguishment of debt, $759 millionloss on fresh start revaluation, $80 millionloss related to the tax impact of the Chapter 11 plan, $70 millionin professional fees and $66 millionin other items. Reorganization items in 2011 totaled $86 millionand include $28 millionin charges to adjust reserves to estimated allowed claims, $22 millionin debtor in possession financing costs, $21 millionin professional fees, $12 millionfor the write-off of pre-petition debt discounts, premiums and deferred financing costs, an $18 milliongain relating to the deconsolidation of NPPH and $21 millionof other items. Income tax expense (benefit) in 2012 and 2011 was $(19) millionand $1 million. The benefit in 2012 reflects the reversal of a tax reserve associated with the December 2007acquisition of Stora Enso North America. In 2012 and 2011, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was more likely than not that we would not realize those benefits. Net income (loss) was $1,258 millionin 2012 compared to $(498) millionin 2011. The increase was primarily the result of the reorganization items and lower interest expense. Adjusted EBITDA was $238 millionand $324 millionin 2012 and 2011. See "Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA" for additional information on the use of EBITDA and Adjusted EBITDA as a measurement tool. 35
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA and Adjusted EBITDA (as described in the table below) are not measures of our performance under U.S. GAAP, are not intended to represent net income (loss), and should not be used as alternatives to net income (loss) as indicators of performance. EBITDA and Adjusted EBITDA are shown because they are bases upon which our management assesses performance and are primary components of certain covenants under our revolving credit facility. In addition, our management believes EBITDA and Adjusted EBITDA are useful to investors because they and similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. The use of EBITDA and Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital needs; • EBITDA and Adjusted EBITDA do not reflect the interest expense, or the
cash requirements necessary to service interest or principal payments, on
• 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; and
• our measures of EBITDA and Adjusted EBITDA are not necessarily comparable
to other similarly titled captions of other companies due to potential
inconsistencies in the methods of calculation.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business.
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the years ended
Successor Predecessor (in millions) 2013 2012 2011 Net income (loss)
$ (2 ) $ 1,258 $ (498 )Interest expense 47 26 391 Income tax (benefit) (2 ) (19 ) 1 Depreciation and amortization 184 242 243 EBITDA 227 1,507 137 Equity awards 14 1 (1 ) (Gain) loss on disposal of assets 2 6 11 Non-cash U.S. pension expense - 6 12 Integration and related severance costs and other charges 14 8 23 Reorganization items, net - (1,288 ) 86 Pre-petition professional fees - - 19 Port Hawkesbury operations - - 37 Post-emergence bankruptcy-related items 4 - - Merger related costs 8 - - Other - (2 ) - Adjusted EBITDA $ 269 $ 238 $ 324Recently Issued Accounting Standards There is no new accounting guidance issued which we have not yet adopted that is expected to materially impact our results of operations or financial position. Liquidity and Capital Resources On February 11, 2014, we entered into a $750 millionsenior secured term loan facility ("New Term Loan Facility") and a $350 millionsenior secured asset-backed revolving credit facility (the "New ABL Facility"). The New Term Loan Facility was used to refinance NewPage's former $500 millionsenior secured exit term loan credit facility, to fund the Special Distribution, to pay certain transaction costs and for general corporate purposes. The New ABL Facility replaced NewPage's former $350 millionrevolving credit facility for general corporate purposes and will also be used to pay certain transaction costs and expenses of the Merger. Future minimum principal payments related to the New Term Loan Facility are: $19 millionin 2015, $38 millionin 2016, $56 millionin 2017, $75 millionper year between 2018 and 2020 and $412 millionin 2021. For information regarding the Merger Agreement, the New Term Loan Facility, the New ABL Facility and the Special Distribution, see Note 19 to the consolidated financial statements. 37
Available Liquidity Our principal sources of liquidity include cash generated from operating activities and availability under our New ABL Facility. The amount of borrowings and letters of credit available to NewPage under that facility is limited to the lesser of
$350 millionor an amount determined pursuant to a borrowing base, as defined in the revolving credit agreement ( $363 millionas of December 31, 2013). As of December 31, 2013, we had $317 millionavailable for borrowings under our revolving credit facility after reduction for $33 millionin letters of credit. At December 31, 2013, there were no borrowings outstanding on the revolving credit facility. During 2013, our average daily balance outstanding under our revolving credit facility was $8 millionwith a weighted-average interest rate of 4.23%. Total liquidity at December 31, 2013, was $400 million, consisting of $317 millionof availability under the revolving credit facility and $83 millionof available cash and cash equivalents. The New Term Loan Facility and New ABL Facility did not materially change our available liquidity or our total liquidity. 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, available borrowings under our New ABL Facility and cash and cash equivalents will be adequate to meet our liquidity needs for the next twelve months. Employee Benefit Obligations We made pension contributions of $41 millionduring 2013 to satisfy our required annual pension contributions for 2013. Based on current assumptions, we anticipate that our required pension funding contributions during 2014 will total approximately $56 million. Additionally, based on current assumptions, we estimate that our required annual pension contributions, will be approximately $50 millionper year from 2015 through 2017; approximately $30 millionin 2018; and approximately $15 millionin 2019. We expect future contributions to be funded by cash flows from operations. The amount and timing of future required contributions to the pension trust depend on assumptions concerning future events. The most significant of these assumptions relate to the benchmark interest rate used to discount benefits to their present value, future investment performance of the pension funds and actuarial data relating to plan participants. During the Chapter 11 proceedings, all our labor unions entered into a comprehensive bargaining agreement in a continued effort to control pension costs. See Note 11 to the consolidated financial statements for additional information. 38
Cash Flows Cash provided by (used for) operating activities was
$116 millionduring 2013 compared to $3 millionduring 2012, primarily the result of lower cash requirements for interest and other bankruptcy related activities as a result of the Chapter 11 Proceedings, as well as improved gross margins driven by cost reductions. Cash used for operating activities during 2013 includes $60 millionin non-recurring bankruptcy-related payments. Cash used for operating activities during 2012 includes $69 millionof non-recurring bankruptcy-related payments and a $38 millioninterest payment on pre-petition debt. Investing activities in 2013 include spending of $75 millionfor capital expenditures. Financing activities during 2013 primarily consisted of borrowings and payments on the revolving credit facility. Cash provided by (used for) operating activities was $3 millionduring 2012 compared to $87 millionduring 2011, primarily the result of the decline in sales due to lower pricing, partially offset by lower cash requirements for interest as a result of the Chapter 11 Proceedings. Investing activities in 2012 include spending of $157 millionfor capital expenditures (which includes $54 millionassociated with the purchase of a paper machine ("PM 35") previously under a capital lease pursuant to the Chapter 11 plan). Financing activities during 2012 include the issuance of $500 millionexit financing term loan facility (proceeds of $490 million), $166 millionrepayment of first-lien pre-petition debt (consisting of $103 millioncash payment upon emergence pursuant to the Chapter 11 plan and the reversal of $63 millionin post-petition first-lien debt interest expense from 2011 that was re-characterized as a principal reduction in 2012) and $250 millionrepayment of the debtor in possession financing. Capital Expenditures Capital expenditures were $75 million, $157 millionand $77 millionduring 2013, 2012 and 2011. Capital expenditures in 2012 include $54 millionassociated with the purchase of the PM 35 capital lease pursuant to the Chapter 11 plan. Approximately half of our capital expenditures in each of the years presented related to improvement projects, while the remaining related to maintaining the operational effectiveness of our equipment or compliance with environmental laws and regulations. In 2014, we expect to spend approximately $75 millionin capital expenditures. We expect to fund our capital expenditures with cash flows from operations, although working capital may be funded seasonally through our revolving credit facility. Compliance with environmental laws and regulations is a significant factor in our business. We incurred $3 millionin 2013 to maintain compliance with applicable environmental laws and regulations or to meet new regulatory requirements and we expect to incur capital expenditures of approximately $3 millionin 2014 in order to maintain compliance with applicable environmental laws and regulations. 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. We anticipate that environmental compliance will continue to require increased capital expenditures in connection with environmental laws or regulations, or interpretations, or change of the nature of operations, requiring us to make significant additional capital expenditures. Off-balance sheet arrangements We do not have any off-balance sheet arrangements.
The following table reflects our contractual commitments associated with our debt and other obligations as of
2015- 2017- There- (in millions) Total 2014 2016 2018 after Contractual Obligations Long-term debt (1)
$ 495 $ 25 $ 50 $ 420$ - Interest expense (2) 168 37 69 62 - Operating leases 15 4 6 4 1
Fiber supply agreements (3) 164 58 55 28
Purchase obligations 252 85 72 95
Other long-term obligations 50 - 19 12
19 Pension OPEB 270 11 19 13 227 Total
$ 1,414 $ 220 $ 290 $ 634 $ 270Other Commercial Commitments Standby letters of credit (4) $ 33 $ 33$ - $ - $ - Total $ 33 $ 33$ - $ - $ -
(1) Amounts shown represent scheduled maturities of outstanding indebtedness as
December 31, 2013and 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. See Note 19 to the consolidated financial statements for
additional information on the refinancing on
reflected in this table and related interest expense.
(2) Amounts include contractual interest payments using the interest rates as of
consolidated financial statements for additional information on the
related interest expense.
(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