May 17, 2011 LCD ISSUER REPORT NewPage First-quarter earnings review NewPage reported adjusted EBITDA of $85 million International Paper, Condé Nast Publications, Quad/ for the quarter ended March 31, versus $2 million in Graphics, R.R. Donnelley, Sears, and Lindenmeyr. the comparable period of 2010. Leverage improved NewPage operates mills in Kentucky, Maine, Maryland, signifi cantly as LTM adjusted EBITDA increased to Michigan, Minnesota, Wisconsin and Nova Scotia, $324 million, from $78 million a year ago. Effective Canada, with aggregate annual production capacity of May 10, Robert Nardelli resigned from the board of 4.1 million tons. directors and was replaced by Thomas Zambelli. The current quarter is the last easy comp for the company. A review of the company’s 10-Q and press release reveals the following: In light of the earnings release, the following report will discuss the company’s strengths and weaknesses going • Quarterly revenue increased by $87 million year over forward. year, to $904 million, but it declined sequentially, from $946 million. The increase was attributed to Note that this analysis is not affi liated in any way with a higher volume of core products and higher sales S&P’s ratings group and does not include any non-public prices. Core volume advanced by 14% year over year, information, as LCD is not privy to that information. to 829,000 tons, but it declined sequentially by 9.4%, from 915,000 tons. Key financial data $ thousand 3/31/2011 3/31/2010 Change • Gross margin for the quarter increased to 11.9%, versus Sales: 1Q 904,000 817,000 11% 4.4% a year ago, but it declined sequentially, from Sales: LTM 3,683,000 3,201,000 15% 15.8%. Prices for wood, petroleum-based chemicals GPM: LTM 11.6% 5.5% and purchased pulp, as well as transportation costs, LCD EBITDA: 1Q 68,000 -13,000 - were signifi cantly higher year over year. There was NewPage adjusted EBITDA: 1Q 85,000 2,000 - no market-related downtime in the quarter, versus NewPage LTM adjusted EBITDA 324,000 78,000 315% 39,900 tons in the prior year. Senior debt 1,864,000 1,672,000 Total debt 3,741,900 3,609,932 • SG&A declined by $9 million year over year, to $40 million. Senior secured debt/LTM adj. EBITDA 5.8x 21.4x Total debt/LTM adjusted EBITDA 11.5x 46.3x • Adjusted EBITDA for the quarter rebounded from the S&P/Moody's ratings CCC+/Caa1 year-ago low, but it declined sequentially by 35%, to Notes: LCD EBITDA does not include various adjustments, such as restructuring $85 million, 9.4% margin, from $132 million, 14% charges. EBITDA excludes fuel-tax credit in all periods. Total debt includes capital margin. LTM adjusted EBITDA increased to $324 leases and both tranches of PIK notes. million, 8.8% margin, from $78 million, 2.4% margin, Company overview in the comparable period of last year. Adjustments to NewPage, headquartered in Miamisburg, Ohio, is the EBITDA in all periods included alternative-fuel tax largest coated-paper manufacturer in North America, credits, impairment charges, integration and severance with 37% of production capacity. The company’s expenses, non-cash pension expense and other outlays. broad product offering includes coated freesheet, coated groundwood, and supercalendered paper (the • Liquidity of $170 million comprised $9 million in “core products”), newsprint, and specialty papers. cash and $161 million in revolver availability. Products are used in numerous applications, including commercial printing, magazines, catalogs, books, • NewPage in March agreed to sell the assets of the and packaging. The company’s 10 largest clients Rumford Cogeneration Company for $61 million, represent roughly 54% of annual revenue and include payable half in cash at closing, with the balance in © 2011 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. LCD Issuer Report: NewPage the form of a 10-year note. The transaction is scheduled • Competitive industry. to close no later than the third quarter. The sale of fi ve hydroelectric projects announced in February 2010, which Valuation was expected to raise $70 million, has not yet closed. The Market pricing: The 11.375% senior secured notes due transaction requires regulatory approval and is expected to December 2014 (CCC+) currently trade near par, according close by year-end, according to the company. to sources. The 10% second-lien notes due May 2012 (CCC-) recently traded near 40, while the 12% senior subordinated • Note that the second quarter represents the company’s notes due May 2013 (CCC-) recently traded near 9. last easy comp. Should second-quarter adjusted EBITDA come in at the March level of $85 million, LTM adjusted DCF valuation: The following tables revise the previous EBITDA at June may reach $399 million. valuation and potential recovery outcomes for NewPage’s debt obligations. The forecast assumes suffi cient liquidity for the • Assuming bull scenario EBITDA of $423 million for 2011, season based on a combination of trade, announced asset sales, free cash fl ow is roughly negative $18 million ($423 million and revolving loan availability. The bear scenario assumes in EBITDA, less $333 million in cash interest expense, less EBITDA of roughly $400 million for 2011 that slightly $70 million in capex, less $2 million in cash taxes), relative increases throughout the projection period. The mid and bull to $3.7 billion of debt obligations. scenarios assume EBITDA increases in 2011 and thereafter on improving end-market demand, favorable pricing and benign • In January, lenders holding $470 million of the $500 million input costs. asset-based revolver agreed to extend its maturity to Dec. 21, 2012, from March 1, 2012, provided that the second- Projected 2011 Projected 2015 Highest Cost of $ million EBITDA EBITDA capex capital EV lien notes are refi nanced by Dec. 2. The non-extended Bear 400 420 71 10.3% 2,883 portion matures on Oct. 3, but it may be extended to Dec. Mid 423 477 71 10.3% 3,096 21, 2012, if the second-lien notes are refi nanced by July 4. Bull 445 555 71 10.3% 3,618 Strengths Recovery Amount Bear Mid Bull • Industry leader in North America, with 37% and 24% of Revolver, term loans $205M Par Par Par coated and supercalendered paper capacity, respectively. Senior secured notes 1,770 Par Par Par Second-lien notes 1,031 88% Par Par • Entrenched client relationships with leaders in the Senior subordinated notes 200 NA 45% Par publishing and print-media industries. RC includes letters of credit of $110 million. Capital leases excluded. Multiples valuation: The following table highlights a range • Printer/merchant inventories are at historic lows; NewPage of valuations for each scenario assuming a set of EBITDA will benefi t from any increase in demand. multiples. The multiples are derived from historical and estimated data presented by Capital IQ from a set of publicly Weaknesses traded companies. • Cash fl ow relative to working-capital requirements, debt obligations and interest payments. Using historical multiples & EV EBITDA 1st-lien 1st-lien 2nd-lien Sr sub $ million 2011 5.75 6.25 6.75 7.25 RC notes notes notes • Highly leveraged due to the 2005 acquisition from MeadWestvaco and the 2007 acquisition of Stora Enso Bear 400 2,300 2,500 2,700 2,900 Par Par 51% NA North America from Stora Enso Oyj. Mid 423 2,429 2,641 2,852 3,063 Par Par 65% NA Bull 445 2,559 2,781 3,004 3,226 Par Par 78% NA • Input costs are volatile. RC includes letters of credit of $110 million. Capital leases excluded. From the tables above, the DCF and multiples analyses • Management turnover. indicate the senior secured debt obligations are covered by NewPage’s enterprise value. For second-lien investors to • Customer concentration. achieve a substantial recovery, the company would need to operate at a level higher than the bull scenario. Note that the • Advertising and print-media end markets are seasonal analyses assume only partial utilization of the ABL facility. and remain cyclically weak. Print media will continue to If the revolver were fully drawn, that incremental debt could struggle in light of Internet applications. impact recovery outcomes. 2 May 17, 2011 LCD Issuer Report: NewPage Conclusion easy comp for NewPage, and rising input costs will be a Although volume, prices and gross margin improved year headwind that may squeeze margins and cash fl ow going over year, driving EBITDA higher, each of these variables forward. suffered sequentially. The June quarter will be the last – Peter DeLuca No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modifi ed, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affi liates, and any third party providers, as well as their directors, offi cers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRAN- TIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION.