NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business —
Our core business platform is as a producer of coated freesheet, specialty and coated groundwood papers. Our products are used primarily in media and marketing applications, including catalogs, magazines, commercial printing applications, such as high-end advertising brochures, annual reports and direct-mail advertising, and specialty applications, such as flexible packaging and label and converting. Our market kraft pulp is used to manufacture printing, writing and specialty paper grades and tissue products.
Basis of Presentation —
On the Petition Date, Verso announced that the Debtors filed voluntary petitions for relief under the Bankruptcy Code. On June 23, 2016, the Bankruptcy Court entered an order, confirming the Plan. On the Effective Date, the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 Cases (see Note 2).
In accordance with the provisions of ASC 852,
Reorganizations,
and
in conformity with ASC 805
, Business Combinations,
the Company adopted fresh-start accounting upon emergence from the Chapter 11 Cases and became a new entity for financial reporting purposes as of July 15, 2016. For accounting purposes all emergence-related transactions of the Predecessor including the impact of the issuance of the Successor common stock and warrants and entering into the Exit Credit Facilities (as defined below) were recorded as of July 14, 2016. Accordingly, the Unaudited Condensed Consolidated Financial Statements for the Successor are not comparable to the Unaudited Condensed Consolidated Financial Statements for the Predecessor. In connection with the adoption of fresh-start accounting, we elected to make certain material accounting policy changes as described below.
This report contains the Unaudited Condensed Consolidated Financial Statements of Verso as of December 31, 2016 (Successor) and
September 30, 2017
(Successor) and for the period from July 1, 2016 through July 14, 2016 (Predecessor), for the period from January 1, 2016 through July 14, 2016 (Predecessor), for the period July 15, 2016 through
September 30, 2016
(Successor) and for the
three months
and
nine months
ended
September 30, 2017
(Successor). The
December 31, 2016
(Successor), Unaudited Condensed Consolidated Balance Sheet data was derived from audited financial statements, but it does not include all disclosures required annually by accounting principles generally accepted in the United States of America, or “GAAP.” In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Verso’s respective financial conditions, results of operations and cash flows for the interim periods presented. Except as disclosed in the notes to the Unaudited Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Variable interest entities, or “VIEs,” for which Verso is the primary beneficiary are consolidated (see Note 11). Intercompany balances and transactions are eliminated in consolidation. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Verso contained in its Annual Report on Form 10-K for the year ended
December 31, 2016
.
Going Concern —
The Unaudited Condensed Consolidated Financial Statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Planned Major Maintenance Costs —
Prior to the Effective Date, costs for planned major maintenance shutdowns were deferred and then expensed ratably over the period until the next major planned shutdown. Upon the Effective Date, costs for all repair and maintenance activities are expensed in the month that the related activity is performed under the direct expense method of accounting.
Successor Cost of products sold/ Selling, general and administrative expenses —
Certain centralized costs attributable to manufacturing overhead, including enterprise-wide human resources management, procurement and information systems support, presented in Selling, general and administrative expenses of the Predecessor are presented in Cost of products sold of the Successor. The amount presented in Cost of products sold, related to these costs, in the Unaudited Condensed Consolidated Statements of Operations for the
three months
and
nine months
ended
September 30, 2017
(Successor) was
$6 million
and
$20 million
, respectively, and
$7 million
for the period from July 15, 2016 through
September 30, 2016
(Successor).
2.
BANKRUPTCY RELATED DISCLOSURES
Chapter 11 Filing
On the Petition Date, the Debtors filed the Chapter 11 filings in the Bankruptcy Court. The Chapter 11 filings constituted an event of default and automatic acceleration under the agreements governing all of the Predecessor’s debt (excluding the
$23 million
loan from Verso Finance Holdings to Chase NMTC Verso Investment Fund). The Chapter 11 Cases were consolidated for procedural purposes only and administered jointly under the caption “In re: Verso Corporation, et al., Case No. 16-10163.” During the pendency of the Chapter 11 Cases, Verso continued to manage its properties and operated our businesses as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
In connection with the Chapter 11 Cases, on January 26, 2016, the Company entered into a Restructuring Support Agreement, or “RSA,” with creditors who collectively held at least a majority in principal amount of substantially all tranches of the Company’s outstanding debt, or the “Consenting Creditors.” The RSA contemplated the implementation of a restructuring through a conversion of approximately
$2.4 billion
of our outstanding debt into equity. The RSA incorporated the economic terms agreed to by the parties reflected in a term sheet within the RSA. The restructuring transactions were effectuated through the reorganization Plan as described below.
Verso Finance, Verso Holdings and certain of its subsidiaries entered into the Verso DIP Facility (as defined in Note 7) for an aggregate principal amount of up to
$100 million
, and NewPage Corp and certain of its subsidiaries entered into the NewPage DIP ABL Facility (as defined in Note 7) for an aggregate principal amount of up to
$325 million
and the NewPage DIP Term Loan Facility (as defined in Note 7) for an aggregate principal amount of
$350 million
. The NewPage DIP Term Loan Facility consisted of
$175 million
of new money term loans and
$175 million
of loans that aggregated and replaced existing loans, or “NewPage DIP Roll Up Loans,” to refinance loans outstanding under the existing term loan facility of NewPage Corp that were outstanding on the Petition Date.
We operated in the normal course of business during the reorganization process. Unless otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibited us from making payments to creditors for goods furnished and services provided prior to the Petition Date. Vendors were, however, paid for goods furnished and services provided after the Petition Date in the ordinary course of business.
Plan of Reorganization and Emergence from Chapter 11
On March 26, 2016, the Debtors filed the Plan with the Bankruptcy Court together with a disclosure statement in respect of the Plan. The Plan set forth, among other things, the treatment of claims against and equity interests in the Debtors. On June 23, 2016, the Bankruptcy Court entered the Confirmation Order, confirming the Plan. On the Effective Date, the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 Cases.
Key components of the Plan included:
|
|
•
|
Entry into an asset-based loan facility and a term loan facility upon emergence from Chapter 11 on July 15, 2016. These Exit Credit Facilities (as defined in Note 7) provided exit financing in an amount sufficient to repay in full all amounts outstanding under the Verso debtor-in-possession credit agreements of Verso Holdings and its subsidiaries, pay fees and expenses related to the facilities and the emergence of Verso and its subsidiaries from bankruptcy.
|
|
|
◦
|
The satisfaction in full, in cash, of claims under the Verso DIP Facility, claims under the NewPage DIP ABL Facility, claims relating to the
$175 million
of new money term loans under the NewPage DIP Term Loan Facility and claims entitled to administrative expense or priority status under the Bankruptcy Code.
|
|
|
•
|
Issuance of
34,390,643
shares of stock or
100%
of Verso’s equity (subject to dilution by warrants issued to certain creditors described below, or “Plan Warrants,” and equity issuable to our employees under a management incentive plan) to our existing creditors in exchange for the cancellation of all of the Debtors’ pre-petition indebtedness (principal and interest) existing as of the date of bankruptcy totaling
$2.6 billion
.
|
|
|
◦
|
Holders of first-lien secured debt issued by Verso Holdings, including lenders under Verso Holdings’ revolving credit facilities and the holders of Verso Holdings’
11.75%
senior secured notes due 2019 (issued in 2012 and 2015), received
17,195,319
shares of Class A common stock,
$0.01
par value, or “Class A Common
|
Stock,” or
50%
of Verso’s equity and Plan Warrants to purchase
1,810,035
shares of Class A Common Stock at an initial exercise price of
$27.86
.
|
|
◦
|
Lenders under the NewPage Corp senior secured term loan and the
$175 million
of “rolled up” term loans under the NewPage DIP Term Loan Facility, collectively, received
15,139,745
shares of Class A Common Stock and
1,023,859
shares of Class B common stock,
$0.01
par value, or “Class B Common Stock,” or
47%
of Verso’s equity.
|
|
|
◦
|
Holders of Verso Holdings’ senior debt received
980,133
shares of Class A Common Stock or
2.85%
of Verso’s equity.
|
|
|
◦
|
Holders of Verso Holdings’ subordinated (unsecured) debt received
51,587
shares of Class A Common Stock or
0.15%
of Verso’s equity.
|
|
|
•
|
All general unsecured claims were satisfied in full for an aggregate settlement totaling
$3 million
in cash (except with respect to general unsecured claims against Debtors that have only de minimis assets, which have received no distributions under the Plan).
|
|
|
•
|
All shares of Verso’s common stock issued and outstanding immediately prior to the Effective Date were cancelled and discharged.
|
|
|
•
|
The shared services agreement between Verso, NewPage and NewPage Corp was terminated.
|
|
|
•
|
The prior employee incentive plans and other employment agreements were terminated and any awards issued under them were no longer honored, and a new performance incentive plan was adopted by Verso. See “Performance Incentive Plan” below.
|
|
|
•
|
The Management and Transaction Fee Agreement dated as of August 1, 2006 among Verso Paper LLC, Verso Paper Investments LP, Apollo Management V, L.P. and Apollo Management VI, L.P., and all rights and remedies thereunder were terminated, extinguished, waived and released.
|
|
|
•
|
Employee retirement contracts and collective bargaining agreements were honored by Verso upon emergence.
|
Plan Warrants
On the Effective Date, and in accordance with the Plan, warrants to purchase up to an aggregate of
1,810,035
shares of Class A Common Stock were issued to holders of first-lien secured debt holders. Each Plan Warrant has a
seven
year term (commencing on the Effective Date) and has an initial exercise price of
$27.86
per share of Class A Common Stock. The warrant agreement governing the Plan Warrants, or the “Warrant Agreement,” contains customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. In addition, the Warrant Agreement provides for anti-dilution adjustments in the event of below market stock issuances at less than
95%
of the average closing price of the Class A Common Stock for the
10
consecutive trading days immediately prior to the applicable determination date, and for pro rata repurchases of Class A Common Stock.
The fair value of the Plan Warrants was estimated on the Effective Date using the Black-Scholes option pricing model. The weighted average assumptions used included a risk free interest rate of
1%
, an expected stock price volatility factor of
37%
and a dividend rate of
0%
. The aggregate fair value of the Plan Warrants was
$10 million
on the Effective Date.
Performance Incentive Plan
On the Effective Date, pursuant to the operation of the Plan, the Verso Corporation Performance Incentive Plan became effective. The maximum number of shares of Class A Common Stock that may be issued or transferred pursuant to awards under this plan is
3,620,067
. The Compensation Committee of the Board of Directors is the administrator of the Verso Corporation Performance Incentive Plan. There were no stock awards issued on the Effective Date pursuant to the Plan.
Reporting During Bankruptcy
During the pendency of the Debtors’ Chapter 11 Cases, expenses, gains and losses directly associated with reorganization proceedings were reported as Reorganization items, net in the Unaudited Condensed Consolidated Statements of Operations and liabilities subject to compromise in the Chapter 11 Cases were segregated from liabilities of non-filing entities, fully secured liabilities not expected to be compromised and from post-petition liabilities. In addition, effective as of the Petition Date and during the pendency of the Debtors’ Chapter 11 Cases, the Company ceased recording contractual interest expense on the outstanding pre-petition debt classified as Liabilities subject to compromise or “LSTC”. Upon the Debtors’ emergence from our Chapter 11 Cases, the Company settled and extinguished or reinstated liabilities that were subject to compromise.
Fresh-Start Accounting
Under ASC 852,
Reorganizations
, fresh-start accounting is required upon emergence from Chapter 11 if (i) the value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims; and (ii) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity. The Company qualified for and adopted fresh-start accounting as of the Effective Date. Adopting fresh-start accounting results in a new reporting entity with no beginning retained earnings or deficits. The cancellation of all existing shares outstanding on the Effective Date and issuance of new shares of the reorganized entity caused a change of control of the Company under ASC 852.
Adoption of fresh-start accounting resulted in Verso becoming a new entity for financial reporting purposes and the recording of the Company’s assets and liabilities at their fair value as of the Effective Date in conformity with ASC 805,
Business Combinations
. The fair values of the Company’s assets and liabilities as of that date differed materially from the recorded values of its assets and liabilities as reflected in its historical consolidated financial statements. In addition, the Company’s adoption of fresh-start accounting materially affected its results of operations following the fresh-start reporting date, as the Company had a new basis in its assets and liabilities. The Company also adopted various new accounting policies in connection with its adoption of fresh-start accounting. Consequently, the Company’s financial statements on or after the Effective Date are not comparable with the financial statements prior to that date and the historical financial statements before the Effective Date are not reliable indicators of its financial condition and results of operations for any period after it adopted fresh-start accounting.
Reorganization Value
Reorganization value is the value attributed to an entity emerging from bankruptcy, as well as the expected net realizable value of those assets that will be disposed before emergence occurs. This value is viewed as the value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after emergence. Fresh-start accounting requires that the reporting entity allocate the reorganization value to its assets and liabilities in relation to their fair values upon emergence from Chapter 11. The Company’s valuation of the reorganized Company dated as of
April 27, 2016
, which was included in the disclosure statement related to the Plan, purported the estimated enterprise value of the Company to be in a range between $
1.05 billion
and $
1.10 billion
. The estimated enterprise value, which was approved by the Bankruptcy Court, included the equity value in a range between
$675 million
and
$725 million
. As part of determining the reorganization value as of July 15, 2016, the Company estimated the equity value of the Successor to be
$675 million
and the reorganization value to be approximately
$2 billion
. As the Company issued
100%
of its equity to existing creditors in exchange for the cancellation of all pre-petition indebtedness upon confirmation of the Plan, the distribution of the Company’s equity in settlement of pre-existing indebtedness was the primary objective of the Plan. Accordingly, Verso’s equity value represents the primary assumption utilized by the Company in the determination of reorganization value. The Company believes that an equity value at the low-end of the range of
$675
-
$725 million
was appropriate due to declines in projected operating performance from the submission of the Plan through the Effective Date.
In order to determine the reorganization value, Verso estimated the enterprise value of the Successor utilizing the discounted cash flow analysis, comparable company analysis, and precedent transaction analysis. The use of each approach provides corroboration for the other approaches.
To estimate the fair value utilizing the discounted cash flow analysis, Verso established an estimate of future cash flows for the period from 2016 to 2025 and discounted the estimated future cash flows to the present value. The expected cash flows for the period 2016 to 2025 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable, and expressed as a multiple of EBITDA (defined below). The discount rate of
9.5%
was estimated based on an after-tax weighted average cost of capital reflecting the rate of return that would be expected by a market participant.
To estimate the fair value utilizing the comparable company analysis, Verso estimated the value of the Company based on a relative comparison with other publicly traded companies with similar operating and financial characteristics. Under this methodology, valuation multiples, derived from the operating data of publicly-traded benchmark companies such as the projected financial measures of revenue and earnings before interest, taxes, depreciation, and amortization, or “EBITDA” were applied to projected operating data of Verso.
To estimate the fair value utilizing the precedent transaction analysis method, Verso determined an estimate of value by examining merger and acquisition transactions involving paper companies. The valuation paid in such acquisitions or implied in such mergers were analyzed as ratios of various financial results. These transaction multiples were calculated based on the purchase price (including any debt assumed) paid to acquire companies that are comparable to Verso.
The fair value of the Plan Warrants was estimated on the Effective Date using the Black-Scholes option pricing model with the following assumptions. The weighted average assumptions used included a risk free interest rate of
1%
, an expected stock price volatility factor of
37%
and a dividend rate of
0%
. The aggregate fair value of the Plan Warrants was determined to be
$10 million
on the Effective Date, therefore the residual common stock value was determined to be
$665 million
.
The following table reconciles the equity value to the estimated reorganization value as of the Effective Date (dollars in millions):
|
|
|
|
|
Value of Successor Stock
|
$
|
665
|
|
Add: Fair value of Plan Warrants
|
10
|
|
Equity Value
|
675
|
|
Add: Fair value of long-term debt
|
318
|
|
Add: Other non-interest bearing liabilities
|
1,021
|
|
Less: Debt issuance costs
|
(8
|
)
|
Reorganization value of Successor assets
|
$
|
2,006
|
|
The fair value and carrying value of debt represented
$318 million
of borrowings under the Exit Credit Facilities on the Effective Date. The fair value of long-term debt was determined based on a market approach utilizing market yields and was estimated to be approximately
94%
of the par value or less
$22 million
original issue discount on the Exit Term Loan Facility (as defined in Note 7).
The Company’s reorganization value was allocated to its assets and liabilities in conformity with ASC 805
.
The valuation of the Company’s assets and liabilities in connection with fresh-start accounting include the following general valuation approaches:
|
|
•
|
The income approach was used to estimate value based on the present value of future economic benefits that are expected to be produced;
|
|
|
•
|
The market approach was used to estimate the value through the analysis of recent sales of comparable assets or business entities; and
|
|
|
•
|
The cost approach was used to provide a systematic framework for estimating the value of tangible assets or intangible assets based on the economic principal of substitution.
|
The significant assumptions related to the valuation of the Company’s assets are included in the footnotes to the Fresh-Start Balance sheet below. Most valuation inputs, related to inventory, property, plant and equipment, and intangible assets are considered to be Level 3 inputs as they are based on significant inputs that are not observable in the market.
Reorganization Adjustments
The consolidated financial information below gives effect to the following Reorganization Adjustments, the Plan and the implementation of the transactions contemplated by the Plan. These adjustments give effect to the terms of the Plan and certain underlying assumptions, which include, but are not limited to, the following:
|
|
•
|
Borrowing of
$318 million
from the Exit Credit Facilities;
|
|
|
•
|
Issuance of
34,390,643
shares of stock or
100%
of Verso’s equity and Plan Warrants to purchase an aggregate of
1,810,035
shares of Class A Common Stock in exchange for the cancellation of all of our pre-petition indebtedness existing as of the Petition Date totaling
$2.6 billion
;
|
|
|
•
|
Payment for the satisfaction of general unsecured claims in aggregate settlement totaling
$3 million
; and
|
|
|
•
|
Repayment of
$279 million
of liabilities under the DIP Facilities (as defined in Note 7).
|
Fresh-Start Balance Sheet
The following fresh-start balance sheet as of the Effective Date, July 15, 2016, illustrates the financial effects on the Company of the implementation of the Plan and the adoption of fresh-start reporting. This fresh-start balance sheet reflects the effect of the completion of the transactions included in the Plan, including the issuance of successor equity and the settlement of old indebtedness.
Reorganization adjustments, shown in column 2 of the following schedule, represent amounts recorded on the Effective Date for the implementation of the Plan, including the settlement of liabilities subject to compromise and related payments, the issuance of new shares of common stock and new warrants, repayment of the DIP Facilities and cancellation of Predecessor common stock.
Fresh-start adjustments, as shown in column 3 of the following schedule, represent amounts recorded on the Effective Date as a result of the adoption of fresh-start accounting, which resulted in Verso becoming a new entity for financial reporting purposes. The Company’s assets and liabilities have been recorded at fair value as of the fresh-start reporting date or Effective Date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Predecessor
|
|
Reorganization Adjustments
|
|
Fresh-Start Adjustments
|
|
Successor
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
27
|
|
|
$
|
20
|
|
(a)
|
$
|
—
|
|
|
$
|
47
|
|
Accounts receivable, net
|
201
|
|
|
—
|
|
|
(2
|
)
|
|
199
|
|
Inventories
|
503
|
|
|
—
|
|
|
(14
|
)
|
(l)
|
489
|
|
Prepaid expenses and other assets
|
27
|
|
|
(3
|
)
|
|
—
|
|
|
24
|
|
Total current assets
|
758
|
|
|
17
|
|
|
(16
|
)
|
|
759
|
|
Property, plant, and equipment, net
|
1,660
|
|
|
—
|
|
|
(480
|
)
|
(m)
|
1,180
|
|
Intangibles and other assets, net
|
97
|
|
|
—
|
|
|
(30
|
)
|
(n)
|
67
|
|
Total assets
|
$
|
2,515
|
|
|
$
|
17
|
|
|
$
|
(526
|
)
|
|
$
|
2,006
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
103
|
|
|
$
|
41
|
|
(b)
|
$
|
—
|
|
|
$
|
144
|
|
Accrued liabilities
|
140
|
|
|
10
|
|
(c)
|
2
|
|
|
152
|
|
Current maturities of long-term debt
|
461
|
|
|
(443
|
)
|
(d)
|
—
|
|
|
18
|
|
Total current liabilities
|
704
|
|
|
(392
|
)
|
|
2
|
|
|
314
|
|
Long-term debt
|
—
|
|
|
292
|
|
(e)
|
—
|
|
|
292
|
|
Other liabilities
|
597
|
|
|
5
|
|
(f)
|
123
|
|
(o)
|
725
|
|
Liabilities subject to compromise
|
2,535
|
|
|
(2,535
|
)
|
(g)
|
—
|
|
|
—
|
|
Total liabilities
|
3,836
|
|
|
(2,630
|
)
|
|
125
|
|
|
1,331
|
|
Commitment and contingencies
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
Predecessor preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Successor preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Predecessor common stock
|
1
|
|
|
(1
|
)
|
(h)
|
—
|
|
|
—
|
|
Successor common stock
|
—
|
|
|
—
|
|
(i)
|
—
|
|
|
—
|
|
Treasury stock
|
(1
|
)
|
|
1
|
|
(h)
|
—
|
|
|
—
|
|
Predecessor paid-in capital
|
322
|
|
|
(322
|
)
|
(h)
|
—
|
|
|
—
|
|
Successor paid-in-capital
|
—
|
|
|
665
|
|
(i)
|
—
|
|
|
665
|
|
Warrants
|
—
|
|
|
10
|
|
(j)
|
—
|
|
|
10
|
|
Retained earnings (deficit)
|
(1,541
|
)
|
|
2,294
|
|
(k)
|
(753
|
)
|
(p)
|
—
|
|
Accumulated other comprehensive loss
|
(102
|
)
|
|
—
|
|
|
102
|
|
(p)
|
—
|
|
Total equity (deficit)
|
(1,321
|
)
|
|
2,647
|
|
|
(651
|
)
|
|
675
|
|
Total liabilities and equity
|
$
|
2,515
|
|
|
$
|
17
|
|
|
$
|
(526
|
)
|
|
$
|
2,006
|
|
Reorganization Adjustments
(a) Reflects payments and receipts recorded as of the Effective Date as follows (dollars in millions):
|
|
|
|
|
Sources:
|
|
Amount borrowed under the Exit Credit Facilities
|
$
|
340
|
|
Less discount on Exit Term Loan Facility
|
(22
|
)
|
Total Sources
|
318
|
|
Uses:
|
|
Repayment of DIP facility (principal and interest)
|
(279
|
)
|
Payment of deferred financing costs on exit financing
|
(8
|
)
|
Payment of professional fees
|
(8
|
)
|
Aggregate settlement of unsecured claims
|
(3
|
)
|
Total uses
|
(298
|
)
|
Net source
|
$
|
20
|
|
(b) Represents recognition of accounts payable related to the cure of defaults for assumed executory contracts and leases.
(c) Primarily represents recognition of accrued liabilities for success-based professional fees upon the Company’s emergence from its Chapter 11 Cases.
(d) Represents the short-term portion of borrowing pursuant to the Exit Term Loan Facility net of the payment of the principal balance of the NewPage DIP Facilities and settlement of the NewPage DIP Roll Up Loan (dollars in millions):
|
|
|
|
|
Short-term portion of Exit Term Loan
|
$
|
18
|
|
Payment of the NewPage DIP Facilities
|
(278
|
)
|
Settlement of NewPage DIP Roll Up Loans
|
(183
|
)
|
|
$
|
(443
|
)
|
(e) Represents the long-term portion of the Exit Term Loan Facility and Exit ABL Facility net of debt issuance costs as follows (dollars in millions):
|
|
|
|
|
Exit ABL Facility Borrowing
|
$
|
120
|
|
Exit Term Loan Facility Borrowing
|
220
|
|
Debt Discount
|
(22
|
)
|
Debt issuance costs
|
(8
|
)
|
Less: Current Portion
|
(18
|
)
|
Long-term Debt
|
$
|
292
|
|
(f) Primarily represents the reinstatement of certain pre-petition liabilities from LSTC.
(g) LSTC under the Plan reflected the Company’s estimate of pre-petition liabilities and other expected allowed claims to be addressed by the Chapter 11 Cases. Debt amounts excluded related unamortized deferred financing costs, discounts/premiums, and deferred gains which were written off to Reorganization items, net, in the accompanying Consolidated Statement of Operations prior to our emergence from bankruptcy. Amounts classified to LSTC did not include pre-petition liabilities that were fully collateralized by letters of credit or cash deposits. Borrowing under the NewPage DIP Roll-Up Notes represented borrowing during the pendency of the Company’s bankruptcy and were settled in exchange for stock as described above. Both the LSTC and NewPage DIP Roll-Up Notes were resolved and satisfied as of the Effective Date.
This entry records the settlement of LSTC and the NewPage DIP Roll Up Loans (dollars in millions):
|
|
|
|
|
Settlement of LSTC debt
|
$
|
(2,324
|
)
|
Settlement of LSTC accrued interest
|
(126
|
)
|
Settlement of LSTC accounts payable and accrued liabilities
|
(85
|
)
|
Settlement of LSTC
|
(2,535
|
)
|
Settlement of NewPage DIP Roll-Up Loans (principal and interest)
|
(184
|
)
|
Reinstatement of certain liabilities from LSTC
|
49
|
|
Cash paid for the satisfaction of unsecured claims in aggregate settlement
|
3
|
|
Issuance of New Common Stock
|
665
|
|
Issuance of Plan Warrants
|
10
|
|
Net gain on settlement of LSTC and DIP Roll-Up Loans
|
$
|
(1,992
|
)
|
(h) Reflects the cancellation of Predecessor equity.
(i) Reflects the issuance of
34,390,643
shares of common stock, or 100% of the Company’s equity (subject to dilution by Plan Warrants issued to certain creditors and equity that may be issued to our employees under the management incentive plan) to existing creditors for the cancellation of indebtedness.
(j) Reflects the issuance of Plan Warrants to purchase up to
1,810,035
shares of Class A Common Stock at an initial exercise price of
$27.86
issued to holder of first-lien secured debt holders in exchange for the cancellation of indebtedness.
(k) Reflects the cumulative impact of the reorganization adjustment discussed above (dollars in millions):
|
|
|
|
|
Gain on settlement of LSTC
|
$
|
1,992
|
|
Professional fees paid at emergence
|
(8
|
)
|
Success fees accrued at emergence
|
(12
|
)
|
Net gain on reorganization adjustments
|
1,972
|
|
Cancellation of Predecessor equity
(1)
|
322
|
|
Net impact to Retained earnings
|
$
|
2,294
|
|
(1) Net of recognition of previously unamortized stock compensation cost of the Predecessor.
|
Fresh-Start Adjustments
(l) An adjustment of
$14 million
was recorded to decrease the book value of inventories to their estimated fair value as follows (dollars in millions):
|
|
|
|
|
Replacement parts and other supplies
|
$
|
(52
|
)
|
Work-in-process and finished goods
|
38
|
|
|
$
|
(14
|
)
|
|
|
•
|
The fair value of work-in-process was determined based on the estimated selling price once completed less costs to complete the manufacturing effort, costs to sell including disposal and holding period costs, and a reasonable profit margin.
|
|
|
•
|
The fair value of finished goods inventory was determined based on the estimated price to sell including disposal and holding period costs and a reasonable profit margin on the selling and disposal.
|
|
|
•
|
The fair value of replacement parts and other supplies was determined based upon the cost approach. This approach considers the amount required to purchase a new asset of equal utility at current market prices, with adjustments in value for functional and economic obsolescence. Functional obsolescence is the loss in value of usefulness of an asset caused by inefficiencies or inadequacies of the asset itself, when compared to a more efficient or less costly replacement parts that a new technology has developed. Economic obsolescence is the loss in value of usefulness of an asset due to factors external to the asset such as the cost of materials, related demand for the product, increased competition, and environmental regulations.
|
(m) Represents the adjustment to reduce the net book value of Property, plant, and equipment, net to fair value. The adjustment to the fair value of Property, plant and equipment, net was attributable to an adjustment of
$382 million
to machinery and equipment and an adjustment of
$98 million
to real estate.
The fair value of the machinery and equipment was determined as follows:
|
|
•
|
The cost approach was utilized to determine the fair market value of machinery and equipment. This approach considers the amount required to construct or purchase a new asset of equal utility at current market prices, with adjustments in value for functional and economic obsolescence. Functional obsolescence is the loss in value of usefulness of an asset caused by inefficiencies or inadequacies of the property itself, when compared to a more efficient or less costly replacement property that a new technology has developed. Economic obsolescence is the loss in value of usefulness of an asset due to factors external to the asset such as the cost of materials, related demand for the product, increased competition, and environmental regulations.
|
|
|
•
|
The sales approach was also used to determine the fair market value of machinery and equipment. The principal behind this approach is the value of the asset is equal to the market price of an asset with comparable features such as design, location, size, construction materials, use, capacity, specifications, operational characteristics, technology level, accessories and other features that may impact value or marketability.
|
|
|
•
|
The income approach was also used to determine the fair market value of machinery and equipment. The principal behind this approach is the value of the asset is equal to the earnings potential of the assets such as the net rental savings attributable to owning the asset.
|
The adjustment related to real estate fair value was determined as follows:
|
|
•
|
The market approach was utilized to determine the fair market value of real estate. This approach considers comparable land sale data and land held for sale. Variances in market conditions at the time of sale, property characteristics, and other relevant factors were considered and analyzed when necessary.
|
|
|
•
|
Land and building improvements were valued using the cost approach which considers the replacement cost of the improvement.
|
(n) An adjustment of
$30 million
was recorded to decrease the book value to fair value of Intangible and other assets to estimated fair value as follows (dollars in millions):
|
|
|
|
|
Successor Trade Names
|
$
|
16
|
|
Successor Customer Relationships
|
26
|
|
Write-off of Predecessor intangible and other assets
|
(72
|
)
|
|
$
|
(30
|
)
|
(o) Represents an adjustment to the fair value of pension and postretirement obligations totaling
$135 million
, off-set by the write-off of
$8 million
of tax liabilities resulting from the Reorganization Adjustments, and other adjustments to asset retirement obligations and workers’ compensation reserves.
(p)
Reflects the cumulative impact of fresh-start adjustments as discussed above and shown in the table below and the elimination of the Predecessor accumulated other comprehensive income (dollars in millions):
|
|
|
|
|
Accounts receivable, net
|
$
|
(2
|
)
|
Inventory
|
(14
|
)
|
Write down Property, plant and equipment, net
|
(480
|
)
|
Record fair value of Intangibles and other assets
|
(30
|
)
|
Accrued liabilities
|
(2
|
)
|
Other long-term liabilities
|
4
|
|
Pension
|
(135
|
)
|
Change in deferred taxes
|
8
|
|
Total loss recorded as a result of Fresh-Start Accounting
|
(651
|
)
|
Elimination of Predecessor accumulated other comprehensive loss
|
(102
|
)
|
Net impact on Retained earnings (deficit)
|
$
|
(753
|
)
|
Contractual Interest
Effective January 26, 2016, Verso discontinued recording interest expense on outstanding pre-petition debt classified as LSTC. The table below shows contractual interest amounts for debt classified as LSTC calculated in accordance with the respective agreements without giving effect to any penalties as a result of the default on such agreements, which are amounts due under the contractual terms of the outstanding debt. Interest expense reported in the Unaudited Condensed Consolidated Statements of Operations for the period from July 1, 2016 through July 14, 2016 (Predecessor) and for the period January 1, 2016 through
July 14, 2016 (Predecessor) does not include
$10 million
and
$123 million
, respectively and per the table below, in contractual interest on pre-petition debt classified as LSTC, which was stayed by the Bankruptcy Court effective on the Petition Date.
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2016
|
January 26, 2016
|
|
Through
|
Through
|
(Dollars in millions)
|
July 14, 2016
|
July 14, 2016
|
Verso Holdings
|
$
|
8
|
|
$
|
98
|
|
NewPage Corp
|
2
|
|
25
|
|
Total contractual interest
|
$
|
10
|
|
$
|
123
|
|
Reorganization items, net
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the Unaudited Condensed Consolidated Statements of Operations as Reorganization items, net as required by ASC 852. Reorganization items, net include adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments are determined.
The following table presents reorganization items incurred in the period from July 1, 2016 through July 14, 2016 (Predecessor) and for the period from January 26, 2016 through July 14, 2016 (Predecessor), as reported in the Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2016
|
|
January 26, 2016
|
|
Through
|
|
Through
|
(Dollars in millions)
|
July 14, 2016
|
|
July 14, 2016
|
Net gain on settlement of LSTC and DIP Roll-Up Notes
|
$
|
(1,992
|
)
|
|
$
|
(1,992
|
)
|
Total loss recorded as a result of Fresh-Start Accounting
|
651
|
|
|
651
|
|
Professional fees
|
20
|
|
|
52
|
|
DIP financing cost
|
—
|
|
|
22
|
|
Write-off of unamortized deferred financing costs, discounts/premiums and deferred gains
(1)
|
—
|
|
|
(81
|
)
|
Contract modifications and rejections, net
|
16
|
|
|
14
|
|
Other
|
3
|
|
|
(4
|
)
|
Total reorganization items, net
|
$
|
(1,302
|
)
|
|
$
|
(1,338
|
)
|
(1) Primarily represents
$116 million
of non-cash reorganization gain off-set by non-cash reorganization expense of
$35 million
. The gains are recognized as the difference between the Petition Date carrying values of certain Verso notes previously recorded as a troubled debt restructuring and their par value (estimated allowed claim) for such debt. The expenses represent the write-off of debt issuance costs and other carrying value adjustments.
For the period from January 26, 2016 through July 14, 2016 (Predecessor), the cash used in reorganization items included
$28 million
of professional fees and
$22 million
of financing costs in connection with the DIP Facilities. For the period from July 15, 2016 through
September 30, 2016
(Successor), cash used in reorganization items included
$18 million
for professional fees. The cash outflow is included in Net cash provided by operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows for the periods presented.
Common Stock Privileges
The
33,366,784
shares of Class A Common Stock and
1,023,859
shares of Class B Common Stock issued in connection with the cancellation of all of the Company’s pre-petition indebtedness are identical and entitle the holders thereof the same rights and privileges, except that the Class B Common Stock is not qualified for listing and trading on the New York Stock Exchange. One share of Class B Common Stock is convertible into one fully paid and non-assessable share of Class A Common Stock at the option of the holder thereof at any time upon written notice to the Company.
3.
RECENT ACCOUNTING DEVELOPMENTS
Accounting Guidance Adopted in 2017
ASC Topic 330, Inventory
.
In July 2015, the Financial Accounting Standards Board, or “FASB,” issued Accounting Standard Update, or “ASU,” 2015-11,
Simplifying the Measurement of Inventory (Topic 330).
This ASU provides that entities should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This ASU was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years. The Company adopted this guidance on January 1, 2017 on a prospective basis and it did not have an impact on our Unaudited Condensed Consolidated Financial Statements.
ASC Topic 718, Stock Compensation.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The guidance requires all income tax effects of awards (previously presented as a component of total stockholders’ equity) to be recognized in the income statement on a prospective basis. The guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The guidance also allows for an accounting policy election to estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years. The Company adopted this guidance on January 1, 2017 on a prospective basis, except for the election of an accounting policy to account for forfeitures as they occur, which was adopted on a modified-retrospective basis. The adoption did not have an impact on our Unaudited Condensed Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted
ASC Topic 718, Stock Compensation.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award and when an entity should apply modification accounting. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
ASC Topic 715, Compensation - Retirement Benefits
. In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715)
, which amends the existing guidance relating to the presentation of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amendment requires an employer to disaggregate the service cost component from the other components of net benefit cost and provides explicit guidance on how to present the service cost component and other components in the statement of operations. In addition, on a prospective basis, the guidance permits only the service cost component of net benefit cost to be capitalized. The guidance is effective for interim and annual periods beginning after December 15, 2017. The guidance requires a retrospective method to adopt the presentation of service costs in the statement of operations and a prospective transition to adopt the requirement to limit capitalization. Currently the net benefit costs for our defined benefit plans and other postretirement plans are presented within Cost of products sold and Selling, general and administrative expenses. Upon adoption of this guidance, service cost will continue to be presented in Cost of products sold and Selling, general and administrative expenses while the other components of net benefit cost will be presented in non-operating income. See Note 8 for detail of our net benefit cost by component.
ASC Topic 230, Statement of Cash Flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements and distributions from certain equity method investees. In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force)
. This ASU adds or clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017. The guidance requires application on a retrospective basis. We are currently evaluating the impact of this guidance.
ASC Topic 842, Leases
. In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 supersedes existing lease guidance, including ASC Topic 840,
Leases
and requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance also requires enhanced disclosures regarding the amount,
timing and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018. We plan to adopt this guidance on January 1, 2019. The guidance requires the use of a modified retrospective approach and the Company expects to adopt this guidance for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to recognize a liability and corresponding asset associated with in-scope leases, but we are still in the process of determining those amounts and the processes required to account for leasing activity on an ongoing basis.
ASC Topic 606, Revenue from Contracts with Customers
. In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
This guidance will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Additionally, the new guidance requires enhanced disclosures regarding revenue. This guidance was initially effective for periods beginning after December 15, 2016 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date,
which defers the effective date to annual reporting periods beginning after December 15, 2017. The FASB has continued to clarify this guidance in various updates during 2015 and 2016, all of which have the same effective date as the original guidance. We expect to adopt this accounting standard on a modified retrospective basis in the first quarter of 2018 where the cumulative effect will be recognized as of the date of adoption. While we anticipate changes in certain contracts with respect to rebate agreements and other customer incentives, we do not currently believe ASU 2014-09 will have a material impact on the timing or amount of revenue recognized in our financial statements. We continue to assess the impact of required disclosures around revenue recognition in the notes to the financial statements and any necessary policy and process changes, in preparation for adoption. We will continue to evaluate the impact of this guidance as we progress with our implementation plan.
4.
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Earnings Per Share
—
Earnings per share is computed by dividing net income or net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income or net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.
The following table provides a reconciliation of basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
July 1, 2016
|
|
|
July 15, 2016
|
|
Three Months
|
|
Through
|
|
|
Through
|
|
Ended
|
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Net income (loss) available to common shareholders (in millions)
|
$
|
1,299
|
|
|
|
$
|
(40
|
)
|
|
$
|
4
|
|
Weighted average common shares outstanding (in thousands)
|
81,541
|
|
|
|
34,391
|
|
|
34,456
|
|
Weighted average restricted shares (in thousands)
|
282
|
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - basic
|
81,823
|
|
|
|
34,391
|
|
|
34,456
|
|
Dilutive shares from stock awards (in thousands)
|
—
|
|
|
|
—
|
|
|
4
|
|
Weighted average common shares outstanding - diluted
|
81,823
|
|
|
|
34,391
|
|
|
34,460
|
|
Basic income (loss) per share
|
$
|
15.88
|
|
|
|
$
|
(1.16
|
)
|
|
$
|
0.12
|
|
Diluted income (loss) per share
|
$
|
15.88
|
|
|
|
$
|
(1.16
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Net income (loss) available to common shareholders (in millions)
|
$
|
1,178
|
|
|
|
$
|
(40
|
)
|
|
$
|
(66
|
)
|
Weighted average common shares outstanding (in thousands)
|
81,450
|
|
|
|
34,391
|
|
|
34,421
|
|
Weighted average restricted shares (in thousands)
|
397
|
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - basic (in thousands)
|
81,847
|
|
|
|
34,391
|
|
|
34,421
|
|
Dilutive shares from stock awards (in thousands)
|
—
|
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - diluted (in thousands)
|
81,847
|
|
|
|
34,391
|
|
|
34,421
|
|
Basic income (loss) per share
|
$
|
14.39
|
|
|
|
$
|
(1.16
|
)
|
|
$
|
(1.92
|
)
|
Diluted income (loss) per share
|
$
|
14.39
|
|
|
|
$
|
(1.16
|
)
|
|
$
|
(1.92
|
)
|
As a result of the net loss from continuing operations presented for the Successor,
0.3 million
restricted stock units and
1.8 million
Plan Warrants of the Successor have been excluded from the calculations of diluted earnings per share as their inclusion would be anti-dilutive. In accordance with ASC Topic 260,
Earnings Per Share
, unvested restricted stock awards issued by the Predecessor contained nonforfeitable rights to dividends and qualified as participating securities. No dividends were declared or paid in the periods presented.
Inventories and Replacement Parts and Other Supplies
—
Inventory values include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead, and these values are presented at the lower of cost or market. Costs of raw materials, work-in-progress and finished goods are determined using the first-in, first-out method. Replacement parts and other supplies are stated using the average cost method.
The following table summarizes inventories, net by major category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
(Dollars in millions)
|
2016
|
|
2017
|
Raw materials
|
$
|
95
|
|
|
$
|
80
|
|
Work-in-process
|
62
|
|
|
54
|
|
Finished goods
|
264
|
|
|
238
|
|
Replacement parts and other supplies
|
24
|
|
|
27
|
|
Inventories, net
|
$
|
445
|
|
|
$
|
399
|
|
Asset Retirement Obligations
—
In accordance with ASC Topic 410,
Asset Retirement and Environmental Obligations
,
a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The liability is accreted over time and the asset is depreciated over its useful life. Our asset retirement obligations under this standard relate primarily to closure and post-closure costs for landfills. Revisions to the liability could occur due to changes in the estimated costs or timing of closure or possible new federal or state regulations affecting the closure.
As of
December 31, 2016
(Successor) and
September 30, 2017
(Successor),
$2 million
of restricted cash was included in Intangibles and other assets, net in the Unaudited Condensed Consolidated Balance Sheets related to asset retirement obligations in the state of Michigan. These cash deposits are required by the state and may only be used for the future closure of a landfill. We are also required to maintain certain financial assurance (in the form of letters of credit and other similar instruments) at certain mills, for the expected cost of landfill closure and post-closure care.
The following table presents activity related to our asset retirement obligations. Long-term obligations are included in Other liabilities and current portions are included in Accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Asset retirement obligations, beginning balance
|
$
|
16
|
|
|
|
$
|
13
|
|
|
$
|
14
|
|
Accretion expense
|
—
|
|
|
|
—
|
|
|
1
|
|
Settlement of existing liabilities
|
—
|
|
|
|
—
|
|
|
—
|
|
Adjustments to existing liabilities
|
(3
|
)
|
|
|
—
|
|
|
—
|
|
Asset retirement obligations, ending balance
|
13
|
|
|
|
13
|
|
|
15
|
|
Less: Current portion
|
—
|
|
|
|
—
|
|
|
(1
|
)
|
Non-current portion of asset retirement obligations, ending balance
|
$
|
13
|
|
|
|
$
|
13
|
|
|
$
|
14
|
|
In addition to the above obligations, we may be required to remove certain materials from our facilities or to remediate them in accordance with current regulations that govern the handling of certain hazardous or potentially hazardous materials. At this time, any such obligations have an indeterminate settlement date, and we believe that adequate information does not exist to reasonably estimate any such potential obligations. Accordingly, no liability for such remediation was recorded.
Property, Plant and Equipment
—
Property, plant and equipment is stated at cost, net of accumulated depreciation. Interest costs capitalized, depreciation expense and capital expenditures unpaid for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
July 1, 2016
|
|
|
July 15, 2016
|
|
Three Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Depreciation expense
|
$
|
7
|
|
|
|
$
|
22
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Interest costs capitalized
|
$
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Depreciation expense
|
97
|
|
|
|
22
|
|
|
82
|
|
Capital expenditures unpaid as of July 14, 2016 (Predecessor), September 30, 2016 (Successor) and September 30, 2017 (Successor) were
$8 million
,
$9 million
and
$3 million
, respectively.
Fair Value of Financial Instruments —
The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments. We determine the fair value of our debt based on market information and a review of prices and terms available for similar obligations. See Note 2 and Note 7 for additional information regarding the fair value.
We use fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities and disclosures. Fair value is generally defined as the exit price at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale.
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions used to value the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
|
|
|
▪ Level 1:
|
Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
|
▪ Level 2:
|
Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
|
▪ Level 3:
|
Unobservable inputs reflecting management’s own assumption about the inputs used in pricing the asset or liability at the measurement date.
|
5.
ACQUISITIONS AND DISPOSITIONS
Sale of hydroelectric generation facilities —
On January 6, 2016, Verso Maine Power Holdings LLC, or “VMPH,” and Verso Androscoggin Power LLC, or “VAP,”
two
indirect, wholly owned subsidiaries of Verso, entered into a purchase agreement with Eagle Creek Renewable Energy, LLC, or “Eagle Creek,” pursuant to which VMPH sold all the outstanding limited liability company interests of VAP to Eagle Creek for a purchase price of approximately
$62 million
in cash. VAP owned
four
hydroelectric generation facilities associated with Verso’s Androscoggin pulp and paper mill located in Jay, Maine. The purchase agreement contains customary representations and warranties by, and customary covenants among, the parties. The parties contemporaneously entered into the purchase agreement and consummated the transaction. For the period from January 1, 2016 to July 14, 2016 (Predecessor), we recognized a gain on sale of fixed assets of approximately
$55 million
which is included in Other operating (income) expense in the Unaudited Condensed Consolidated Statements of Operations.
6.
INTANGIBLES AND OTHER ASSETS
The following table summarizes intangibles and other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
(Dollars in millions)
|
2016
|
|
2017
|
Intangible assets:
|
|
|
|
Customer relationships, net of accumulated amortization of $1 million on December 31, 2016 and $3 million on September 30, 2017
|
$
|
25
|
|
|
$
|
23
|
|
Trademarks, net of accumulated amortization of $1 million on December 31, 2016 and $4 million on September 30, 2017
|
15
|
|
|
12
|
|
Other assets:
|
|
|
|
|
|
Restricted cash
|
3
|
|
|
3
|
|
Other
|
15
|
|
|
15
|
|
Total other assets
|
18
|
|
|
18
|
|
Intangibles and other assets, net
|
$
|
58
|
|
|
$
|
53
|
|
The following table summarizes amortization expense related to intangible assets for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
July 1, 2016
|
|
|
July 15, 2016
|
|
Three Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Customer Relationships
|
$
|
—
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Trademarks
|
—
|
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Customer Relationships
|
$
|
2
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Trademarks
|
—
|
|
|
|
1
|
|
|
3
|
|
The estimated future amortization expense for our intangible assets over the next five years is as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Remainder of 2017
|
$
|
1
|
|
2018
|
6
|
|
2019
|
6
|
|
2020
|
6
|
|
2021
|
4
|
|
7.
DEBT
The following table summarizes debt:
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
(Dollars in millions)
|
Maturity
|
December 31, 2016
|
|
September 30, 2017
|
Exit ABL Facility
|
7/14/2021
|
$
|
112
|
|
|
$
|
117
|
|
Exit Term Loan Facility
|
10/14/2021
|
211
|
|
|
171
|
|
Unamortized (discount) and debt issuance costs, net
|
|
(30
|
)
|
|
(24
|
)
|
Less: Current portion
|
|
(28
|
)
|
|
(18
|
)
|
Total long-term debt
|
|
$
|
265
|
|
|
$
|
246
|
|
We determine the fair value of our long-term debt based on market information and a review of prices and terms available for similar obligations. Our debt is classified as Level 2 within the fair value hierarchy (see Note 4). As of
September 30, 2017
(Successor), the fair value of Verso’s total debt outstanding was
$290 million
.
During the three months ended
September 30, 2017
(Successor), we elected to make a
$20 million
voluntary principal prepayment on the Exit Term Loan Facility (as defined below), from available liquidity including amounts under our Exit ABL Facility (as defined below), and applied that payment against the final maturity amount due in October 2021.
On October 19, 2017, we elected to make an additional
$20 million
voluntary principal prepayment on the Exit Term Loan Facility, from available liquidity including amounts under our Exit ABL Facility, and applied that payment against the final maturity amount due in October 2021.
Amounts included in interest expense and amounts of cash interest payments related to long-term debt for the periods presented, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
July 1, 2016
|
|
|
July 15, 2016
|
|
Three Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Interest expense
|
$
|
2
|
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Cash interest paid
|
4
|
|
|
|
5
|
|
|
8
|
|
Debt issuance cost and discount amortization
(1)
|
—
|
|
|
|
1
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Interest expense
|
$
|
39
|
|
|
|
$
|
7
|
|
|
$
|
23
|
|
Cash interest paid
|
12
|
|
|
|
5
|
|
|
23
|
|
Debt issuance cost and discount amortization
(1)
|
1
|
|
|
|
1
|
|
|
6
|
|
(1) Amortization of debt issuance cost and original issue discount are included in interest expense on the unaudited condensed consolidated statements of operations.
|
Exit Credit Facilities
On the Effective Date, pursuant to the terms of Plan, Verso Holdings entered into a
$375 million
asset-based revolving credit facility, or the “Exit ABL Facility,” and a
$220 million
senior secured term loan (with loan proceeds of
$198 million
after the deduction of the original issue discount), or the “Exit Term Loan Facility,” and collectively termed the “Exit Credit Facilities.”
Verso Holdings borrowed
$340 million
under the Exit Credit Facilities on the Effective Date, with available loan proceeds of
$318 million
, consisting of (i) the borrowing of
$120 million
under the Exit ABL Facility and (ii) the net borrowing of
$198 million
(
$220 million
par value less
$22 million
of original issue discount) under the Exit Term Loan Facility. The proceeds of the borrowings on the Effective Date under the Exit Credit Facilities were used (i) to repay outstanding indebtedness under the
debtor-in-possession financing credit agreements, (ii) to pay outstanding allowed administrative expenses and allowed claims in accordance with the Plan and (iii) to pay fees, costs and expenses related to and contemplated by the Exit Credit Facilities and emergence by Verso and its subsidiaries from bankruptcy. The proceeds of the borrowings under the Exit ABL Facility after the Effective Date will be used for working capital and general corporate purposes, including permitted acquisitions.
The Exit ABL Facility will mature on
July 14, 2021
. The outstanding borrowings under the Exit ABL Facility bear interest at a per annum rate equal to, at the option of Verso Holdings, either (i) a customary London interbank offered rate, or “LIBOR,” plus an applicable margin ranging from
1.25%
to
2.00%
or (ii) a customary base rate plus an applicable margin ranging from
0.25%
to
1.00%
, determined based upon the average excess availability under the Exit ABL Facility. As of
September 30, 2017
(Successor), the weighted-average interest rate on outstanding borrowings was
3.28%
. Verso Holdings is also required to pay a commitment fee for the unused portion of the Exit ABL Facility, which ranges from
0.25%
to
0.375%
per annum, based upon the average revolver usage under the Exit ABL Facility. Verso Holdings has the right to prepay loans under the Exit ABL Facility at any time without a prepayment penalty, other than customary “breakage” costs with respect to eurocurrency loans. As of
September 30, 2017
(Successor), the outstanding balance of the Exit ABL Facility was
$117 million
, with $
55 million
issued in letters of credit and
$175 million
available for future borrowings. The Company incurred
$3 million
of debt issuance costs associated with the Exit ABL Facility and recorded this amount as a direct deduction of the debt liability, which is being amortized over the life of the Exit ABL Facility.
The Exit Term Loan Facility will mature on
October 14, 2021
. The outstanding borrowings under the Exit Term Loan Facility bear interest at a rate equal to, at the option of Verso Holdings, either (i) a LIBOR (subject to a floor of
1%
) plus
11%
or (ii) a customary base rate plus
10%
. With respect to LIBOR denominated loans under the Exit Credit Facilities, Verso Holdings may elect an interest period of one, two, three or six months or such other period subject to the terms of the Exit Credit Facilities. As of
September 30, 2017
(Successor), the Exit Term Loan’s interest rate was
12.32%
per annum. The term loans provided under the Exit Term Loan Facility are subject to quarterly principal amortization payments in an amount equal to the greater of (a)
2.00%
of the initial principal amount of the term loans or (b) the excess cash flow in respect of such quarter as further described under the Exit Term Loan Facility; however, if the liquidity, as defined in the Exit Term Loan Facility, of Verso Holdings is less than
$75 million
at any time during the 90-day period following the due date of such quarterly amortization payment or excess cash flow payment date, then the portion of such amortization amount that results in such liquidity being less than
$75 million
will not be payable by Verso Holdings, as further described in the Exit Term Loan Facility.
Per the above described quarterly principal amortization, installments due are at least
$4 million
(subject to increase depending on excess cash flow) for each quarter ending in 2016 through 2021 with the remaining balance due on
October 14, 2021
. As the result of the excess cash flow requirement, we were obligated to fund an additional principal amortization of
$7 million
in the first quarter of 2017, which is reflected in our Unaudited Condensed Consolidated Statement of Cash Flows for the
nine months
ended
September 30, 2017
(Successor). Any voluntary prepayment by Verso Holdings of the term loans under the Exit Term Loan Facility will be subject to customary “breakage” costs with respect to eurocurrency loans and a
2%
prepayment premium until July 14, 2018, and a
1%
prepayment premium after July 15, 2018, but before July 14, 2020, and thereafter no prepayment premium will apply to any voluntary prepayment of term loans. Such prepayment premium may also apply to certain repricing amendments of the Exit Term Loan Facility as further described therein. The Company incurred
$8 million
of debt issuance costs associated with the Exit Term Loan Facility and recorded this amount as a direct deduction of the debt liability, which is being amortized over the life of the Exit Term Loan Facility.
All obligations under the Exit Credit Facilities are unconditionally guaranteed by Verso Finance and certain of the subsidiaries of Verso Holdings, and are secured by liens on certain assets of Verso Finance and liens on substantially all of the assets of Verso Holdings and the other guarantor subsidiaries. The security interest with respect to the Exit ABL Facility consists of a first-priority lien on the current assets of Verso Holdings and the guarantor subsidiaries, including accounts receivables, inventory, deposit accounts, securities accounts and commodities accounts, and a second-priority lien on all other collateral. The security interest, with respect to the Exit Term Loan Facility, consists of a first-priority lien on all other collateral and second-priority lien on collateral securing the Exit ABL Facility.
The Exit Credit Facilities contain financial covenants requiring the Company, among other things, to maintain a minimum fixed charge coverage ratio in certain circumstances and a maximum total net leverage ratio. The Exit Credit Facilities also contain restrictions, among other things and subject to certain exceptions, on the Company’s ability to incur debt or liens, pay dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets and make investments in or merge with another company.
DIP Financing
In connection with the Chapter 11 Filings, Verso Finance, Verso Holdings and certain of its subsidiaries entered into an asset-based credit facility in an aggregate principal amount of up to
$100 million
, or the “Verso DIP Facility,” and NewPage Corp and certain of its subsidiaries entered into an asset-based credit facility in an aggregate principal amount of up to
$325 million
, or the “NewPage DIP ABL Facility,” and a term loan credit facility in an aggregate principal amount of
$350 million
, or the “NewPage DIP Term Loan Facility,” together with the NewPage DIP ABL Facility, the “NewPage DIP Facilities,” and NewPage DIP Facilities together with the Verso DIP Facility, the “DIP Facilities.” The NewPage DIP Term Loan Facility consisted of
$175 million
of new money term loans and
$175 million
of loans that aggregated and replaced existing loans outstanding on the Petition Date (i.e., such loans were deemed to become loans under the NewPage DIP Term Loan Facility), or “NewPage DIP Roll Up Loans.” On January 28, 2016, up to
$550 million
in loans under the DIP Facilities became available for borrowing following the entry of an order by the Bankruptcy Court approving the DIP Facilities on an interim basis on January 27, 2016. The Bankruptcy Court entered orders approving the DIP Facilities on a final basis on March 2, 2016.
Borrowings under the Verso DIP Facility bore interest at a rate equal to an applicable margin plus, at Verso Holdings’ and NewPage Corp’s option, either (a) a base rate determined by reference to the highest of (1) the U.S. federal funds rate plus
0.50%
, (2) the prime rate of the administrative agent, and (3) the adjusted LIBOR (as defined below) for a one-month interest period plus
1.00%
, or (b) a eurocurrency rate, or “LIBOR” determined by reference to the costs of funds for eurocurrency deposits in dollars in the London interbank market for the interest period relevant to such borrowing, adjusted for certain additional costs. The applicable margin for advances under both the Verso DIP Facility and the NewPage DIP ABL was
1.50%
for base rate advances and
2.50%
for LIBOR advances. The applicable margin for advances under the NewPage DIP Term Loan Facility was
8.50%
for base rate advances and
9.50%
for LIBOR advances. Interest that accrued on any “rolled-up” term loans under the NewPage DIP Term Loan Facility was capitalized, compounded and added to the unpaid principal amount of such “rolled-up” loans on the applicable interest payment date. Verso Holdings and NewPage Corp paid commitment fees for the unused amount of commitments at an annual rate equal to
0.75%
and
0.375%
, respectively. The Company incurred
$22 million
of debt issuance costs associated with the DIP Facility which was recorded as interest expense on the Unaudited Condensed Consolidated Statements of Operations during the period from January 1 to July 14, 2016 (Predecessor).
The DIP Facilities matured on the Effective Date of the Plan. On the maturity date, the Verso DIP Facility had
no
balance outstanding and the NewPage DIP ABL Facility had a
$103 million
outstanding balance which was repaid in full using the Exit Credit Facilities entered into on the Effective Date. The NewPage DIP Term Loan Facility of
$175 million
of new money term loans was also repaid in full, while the
$175 million
of “rolled up” loans and its capitalized interests of
$9 million
, totaling to
$184 million
, were converted into Verso equity (see Note 2).
Pre-petition Debt
The filing of the Chapter 11 Cases by the Debtors on January 26, 2016, constituted an event of default and automatic acceleration under the agreements governing all of our debt (excluding the
$23 million
loan from Verso Finance to Chase NMTC Verso Investment Fund). As of the date of the filing of the Chapter 11 Cases, approximately
$2.5 billion
of debt and interest were outstanding under the Predecessor’s pre-petition credit agreements, excluding related unamortized deferred financing costs, discounts/premiums and deferred gains, which were written off to Reorganization items, net upon filing the Chapter 11 Cases. All of the Predecessor’s pre-petition debt and interest were cancelled in exchange for the issuance of
34,390,643
of stock or
100%
of the Company’s equity.
8.
RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
Verso has
three
defined benefit pension plans covering approximately
80%
of our employees. The pension plans provide defined benefits based on years of service multiplied by a flat monetary benefit or based on a percentage of compensation as defined by the respective plan document. As of December 31, 2015, all of our defined benefit pension plans were frozen to new entrants. The majority of our pension plan participants are in the union hourly plan and continue to earn service accruals toward their pension benefits but no longer receive multiplier increases. We also offer a cash balance defined benefit pension plan for certain salaried employees in which participants continue to earn annual interest credits, but no longer earn cash balance benefit credits and a pension plan for certain non-union hourly employees for which benefit accruals are frozen.
The following tables summarize the components of net periodic pension cost of our pension plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
July 1, 2016
|
|
|
July 15, 2016
|
|
Three Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Service cost
|
$
|
1
|
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Interest cost
|
2
|
|
|
|
13
|
|
|
17
|
|
Expected return on plan assets
|
(3
|
)
|
|
|
(16
|
)
|
|
(19
|
)
|
Net periodic pension cost
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
January 1, 2016
|
|
|
July 15, 2016
|
|
Nine Months
|
|
Through
|
|
|
Through
|
|
Ended
|
(Dollars in millions)
|
July 14, 2016
|
|
|
September 30, 2016
|
|
September 30, 2017
|
Service cost
|
$
|
9
|
|
|
|
$
|
3
|
|
|
$
|
12
|
|
Interest cost
|
36
|
|
|
|
13
|
|
|
49
|
|
Expected return on plan assets
|
(40
|
)
|
|
|
(16
|
)
|
|
(56
|
)
|
Amortization of actuarial loss
|
1
|
|
|
|
—
|
|
|
—
|
|
Net periodic pension cost
|
$
|
6
|
|
|
|
$
|
—
|
|
|
$
|
5
|
|
The estimated net actuarial loss and prior service cost that are amortized from Accumulated other comprehensive loss and into Net periodic pension cost are classified as Cost of products sold in our Unaudited Condensed Consolidated Statements of Operations.
We make contributions that are sufficient to fund our actuarially-determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. For the periods from July 1 to July 14, 2016 (Predecessor) and January 1 to July 14, 2016 (Predecessor), we made contributions of
$6 million
and
$16 million
, respectively. For the period from July 15 through
September 30, 2016
(Successor), we made contributions of
$3 million
. For the
three months
and
nine months
ended and
September 30, 2017
(Successor), we made contributions to the pension plans of
$13 million
and
$25 million
, respectively. We expect to make cash contributions of
$7 million
to the pension plans in the remainder of
2017
.
Our other postretirement benefits obligations 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. The service and interest costs related to these obligations were not material for the periods from July 1 through July 14, 2016 (Predecessor), January 1 through July 14, 2016 (Predecessor), July 15 through
September 30, 2016
(Successor) nor the
three months
and
nine months
ended
September 30, 2017
(Successor).
As described in Note 2, employee retirement contracts and collective bargaining agreements were honored by the Company after emergence from the Chapter 11 Cases on the Effective Date.
9.
RELATED PARTY TRANSACTIONS
Management Agreement —
In connection with the acquisition of our business from International Paper Company on August 1, 2006, we entered into a management agreement with certain affiliates of Apollo Global Management, LLC, or “Apollo,” our then majority owner, relating to the provision of certain financial and strategic advisory services and consulting services, which was scheduled to expire on
August 1, 2018
. Under the management agreement, Apollo, upon providing notice to us, had the right to act, in return for additional fees to be mutually agreed by the parties to the management agreement, as our financial advisor or investment banker for any merger, acquisition, disposition, financing or similar transaction if we decided to engage someone to fill such role. If Apollo exercised its right to act as our financial advisor or investment banker for any such transaction, and if we were unable to agree with Apollo on its compensation for serving in such role, then at the closing of any merger, acquisition, disposition, financing or similar transaction, we agreed to pay Apollo a fee equal to
1%
of the aggregate enterprise value (including the aggregate value of equity securities, warrants, rights and options acquired or retained; indebtedness acquired, assumed or refinanced; and any other consideration or compensation paid in connection with such transaction). We also agreed to indemnify Apollo, its affiliates and their directors, officers and representatives for losses relating to the services contemplated by the management agreement and the engagement of affiliates of Apollo pursuant to, and the performance by them of the services contemplated by, the management agreement. Apollo did not exercise its right to act as our financial advisor or investment banker for any such transaction in the periods presented and thus, we made
no
payment to Apollo under the management agreement during those periods. On the Effective Date, in connection with our emergence from bankruptcy, such management agreement was terminated and all rights and remedies thereunder were terminated, extinguished, waived and released.
Transactions with Affiliates
—
Prior to the Effective Date, we transacted business with affiliates of Apollo from time to time. Our product sales to Apollo affiliates were
$1 million
and
$15 million
for the period from July 1 through July 14, 2016 (Predecessor) and the period from January 1 through July 14, 2016 (Predecessor), respectively. Our product purchases from Apollo affiliates were negligible for the Predecessor. As of the Effective date, Apollo is no longer a related party. Upon the Effective Date, several of our significant shareholders became our debt holders. For the period from July 15 through September 30, 2016 (Successor), and the
three months
and the
nine months
ended
September 30, 2017
(Successor), we did not transact any material business with affiliates.
10.
RESTRUCTURING CHARGES
Corporate Restructuring —
In November 2016, Verso announced the closure of its Memphis office headquarters and relocation of its Corporate headquarters to Miamisburg, Ohio. The following table details the charges incurred related to the Memphis office closure as included in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations for the Successor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
Cumulative
Incurred
|
|
Ended
|
|
Ended
|
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2017
|
|
Severance and benefit costs
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Write-off of purchase obligations
|
2
|
|
|
2
|
|
|
2
|
|
Other costs
|
—
|
|
|
1
|
|
|
1
|
|
Total restructuring costs
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
6
|
|
The following details the changes in our restructuring reserve liabilities related to Corporate restructuring activities including the Memphis corporate headquarters closure and the NewPage acquisition which are included in Accrued liabilities on our Unaudited Condensed Consolidated Balance Sheets for the Successor:
|
|
|
|
|
|
|
|
Nine Months
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
Beginning balance of reserve
|
$
|
3
|
|
Severance and benefit costs
|
1
|
|
Severance and benefit payments
|
(4
|
)
|
Purchase obligations
|
2
|
|
Other costs
|
1
|
|
Payments on other costs
|
(1
|
)
|
Ending balance of reserve
|
$
|
2
|
|
Androscoggin/Wickliffe Capacity Reductions
—
On August 20, 2015, Verso announced plans to make production capacity reductions at
two
of our mills by shutting down the No. 1 pulp dryer and No. 2 paper machine at our Androscoggin Mill in Jay, Maine, and by indefinitely idling our Wickliffe Mill in Wickliffe, Kentucky. Together, these actions reduced our production capacity by approximately
430,000
tons of coated paper and approximately
130,000
tons of dried market pulp. On April 5, 2016, we announced our decision to permanently close the Wickliffe Mill and the associated Property, plant and equipment were written down to salvage value. On November 1, 2016, we announced the temporary idling of the No. 3 paper machine at our Androscoggin Mill and on July 19, 2017, we announced plans to permanently shut down the No. 3 paper machine and associated equipment, reducing annual coated paper production capacity by approximately
200,000
tons. In connection with the temporary idling of the No. 3 paper machine at our Androscoggin Mill, we determined a reduction in the useful life of the machine was necessary and accordingly recognized
$43 million
of accelerated depreciation during the fourth quarter of 2016 (Successor). During the first quarter of 2017 (Successor), an additional
$6 million
of accelerated depreciation was recognized, which is included in Depreciation, amortization and depletion in our Unaudited Condensed Consolidated Statements of Operations. As a result of the acceleration of depreciation, no impairment charge was required to be recorded with the temporary idling or closure of the No. 3 paper machine and associated equipment at the Androscoggin Mill.
The permanent shut down of the No. 3 paper machine and associated equipment has resulted in the elimination of jobs, impacting approximately
120
employees at the Androscoggin Mill. During the fourth quarter of 2016 (Successor), Verso incurred a charge to earnings of
$4 million
in severance and benefit costs, which were paid in the third quarter of 2017 (Successor). Verso also recorded a non-cash charge of
$1 million
for the write-off of spare parts and inventory produced on the No. 3 paper machine during the fourth quarter of 2016 (Successor). Verso does not expect to incur any additional charges as a result of the permanent closure of the No. 3 paper machine and associated equipment.
The following table details the charges incurred related primarily to the
Androscoggin/Wickliffe Capacity Reductions
and primarily attributable to the paper segment as included in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations for the Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2016
|
|
January 1, 2016
|
|
|
|
|
Through
|
|
Through
|
|
Cumulative
Incurred
|
|
(Dollars in millions)
|
July 14, 2016
|
|
July 14, 2016
|
|
|
Property and equipment write down
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
127
|
|
|
Severance and benefit costs
|
—
|
|
|
10
|
|
|
26
|
|
|
Write-off of spare parts and inventory
|
—
|
|
|
9
|
|
|
12
|
|
|
Write-off of purchase obligations and commitments
|
—
|
|
|
2
|
|
|
3
|
|
|
Other costs
|
—
|
|
|
3
|
|
|
4
|
|
|
Total restructuring costs
|
$
|
—
|
|
|
$
|
151
|
|
|
$
|
172
|
|
|
The following table details the charges incurred related primarily to the
Androscoggin/Wickliffe Capacity Reductions
as included in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations for the Successor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 15, 2016
|
|
Three Months
|
|
Nine Months
|
|
Cumulative
Incurred
|
|
Through
|
|
Ended
|
|
Ended
|
|
(Dollars in millions)
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2017
|
|
Severance and benefit costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Write-off of purchase obligations and commitments
|
1
|
|
|
—
|
|
|
1
|
|
|
2
|
|
Other costs
|
1
|
|
|
2
|
|
|
3
|
|
|
6
|
|
Total restructuring costs
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
13
|
|
The following details the changes in our restructuring reserve liabilities related to the
Androscoggin/Wickliffe Capacity Reductions
during the
nine months
ended
September 30, 2017
(Successor), which are included in Accrued liabilities on our Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
Nine Months
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
Beginning balance of reserve
|
$
|
6
|
|
Severance and benefit payments
|
(5
|
)
|
Purchase obligations
|
1
|
|
Payments on purchase obligations
|
(1
|
)
|
Other costs
|
3
|
|
Payments on other costs
|
(3
|
)
|
Ending balance of reserve
|
$
|
1
|
|
11.
NEW MARKET TAX CREDIT ENTITIES
In 2010, we entered into a financing transaction with Chase Community Equity, LLC, or “Chase,” related to a
$43 million
renewable energy project at our mill in Quinnesec, Michigan, in which Chase made a capital contribution and Verso Finance made a loan to Chase NMTC Verso Investment Fund, LLC, or the “Investment Fund,” under a qualified New Markets Tax Credit, or “NMTC,” program, provided for in the Community Renewal Tax Relief Act of 2000.
By virtue of its contribution, Chase is entitled to substantially all of the benefits derived from the NMTCs. This transaction also includes a put/call provision whereby we may be obligated or entitled to repurchase Chase’s interest. We believe that Chase will exercise the put option in December 2017 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to
100%
recapture for a period of
7 years
as provided in the Internal Revenue Code. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require us to indemnify Chase for any loss or recapture of NMTCs related to the financing until such time as our obligation to deliver tax benefits is relieved. We do not anticipate any credit recaptures will be required in connection with this arrangement.
We have determined that the Investment Fund is a VIE of which we are the primary beneficiary, and have consolidated it in accordance with the accounting standard for consolidation. Chase’s contribution, net of syndication fees, is included in Other liabilities in the Unaudited Condensed Consolidated Balance Sheets. The impact of the VIE was
$8 million
of Other liabilities for the Successor as of
December 31, 2016
and
September 30, 2017
. Direct costs incurred in structuring the financing arrangement are deferred and will be recognized as expense over the term of the loans. Incremental costs to maintain the structure during the compliance period are recognized as incurred.
12.
COMMITMENTS AND CONTINGENCIES
Represented Employees —
Approximately
70%
of our hourly workforce is represented by unions. All represented employees were covered by the Master Labor Agreement 2012–2016, dated as of December 21, 2012, covering wages and benefits; certain
represented mills also had local agreements covering general work rules, until the expiration of the Master Labor Agreement
in December 2016. The parties continue to have dialogue toward reaching a new agreement. In the interim, each of the represented sites has local agreements which govern wages and benefits, along with terms and conditions of employment on the local level. In the event the Master Labor Agreement is not renegotiated, management will bargain site-by-site as local agreements reach their respective expiration dates.
General Litigation
—
We are involved from time to time in legal proceedings incidental to the conduct of our business. We do not believe that any liability that may result from these proceedings will have a material, adverse effect on our Unaudited Condensed Consolidated Financial Statements.
13.
INFORMATION BY INDUSTRY SEGMENT
We have
two
operating segments, paper and pulp, however, subsequent to the Effective Date, we have determined that the operating loss of the pulp segment is immaterial for disclosure purposes. Our paper products are used primarily in media and marketing applications, including catalogs, magazines and commercial printing applications such as high-end advertising brochures, annual reports and direct-mail advertising. Our market kraft pulp is used to manufacture printing, writing and specialty paper grades and tissue products. Our assets are utilized across segments in our integrated mill system and are not identified by segment or reviewed by management on a segment basis. We operate primarily in one geographic segment, North America.
The following table summarizes the industry segment data for the periods from July 1 through July 14, 2016 and January 1 through July 14, 2016 (Predecessor):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2016
|
|
January 1, 2016
|
|
|
Through
|
|
Through
|
|
(Dollars in millions)
|
July 14, 2016
|
|
July 14, 2016
|
|
Net Sales
|
|
|
|
|
Paper
|
$
|
92
|
|
|
$
|
1,349
|
|
|
Pulp
|
6
|
|
|
91
|
|
|
Intercompany eliminations
|
(1
|
)
|
|
(23
|
)
|
|
Total
|
$
|
97
|
|
|
$
|
1,417
|
|
|
Operating income (loss)
(1)
|
|
|
|
|
|
Paper
|
$
|
(1
|
)
|
|
$
|
(104
|
)
|
|
Pulp
|
—
|
|
|
(17
|
)
|
|
Total
|
$
|
(1
|
)
|
|
$
|
(121
|
)
|
|
Depreciation, amortization and depletion
|
|
|
|
|
|
Paper
|
$
|
7
|
|
|
$
|
92
|
|
|
Pulp
|
—
|
|
|
8
|
|
|
Total
|
$
|
7
|
|
|
$
|
100
|
|
|
Capital expenditures
|
|
|
|
|
|
Paper
|
$
|
2
|
|
|
$
|
26
|
|
|
Pulp
|
—
|
|
|
5
|
|
|
Total
|
$
|
2
|
|
|
$
|
31
|
|
|
(1) Operating losses in the period from January 1, 2016 through July 14, 2016, include
$135 million
of Restructuring charges attributable to the paper segment and
$16 million
of Restructuring charges related to the pulp segment.