Edgar Filing: BOISE INC.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33541

Boise Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-8356960
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1111 West Jefferson Street, Suite 200
Boise, Idaho 83702-5388

(Address of principal executive offices) (Zip Code)

(208) 384-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Shares Outstanding as of October 31, 2008
Common Stock, $.0001 Par Value		79,722,147

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PART I—FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements			1
		Notes to Unaudited Quarterly Consolidated Financial Statements		6
		1.	Nature of Operations and Basis of Presentation	6
		2.	Acquisition of Boise Cascade’s Paper and Packaging Operations	7
		3.	Net Income (Loss) Per Common Share	9
		4.	Transactions With Related Parties	10
		5.	Other (Income) Expense, Net	12
		6.	Income Taxes	13
		7.	Leases	13
		8.	Receivables	14
		9.	Inventories	14
		10.	Property and Equipment, Net	14
		11.	Goodwill and Intangible Assets	15
		12.	Asset Retirement Obligations	15
		13.	Debt	16
		14.	Financial Instruments	20
		15.	New and Recently Adopted Accounting Standards	23
		16.	Retirement and Benefit Plans	24
		17.	Stockholders’ Equity	25
		18.	Comprehensive Income (Loss)	29
		19.	Segment Information	29
		20.	Commitments and Guarantees	33
		21.	Legal Proceedings and Contingencies	34

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
		Understanding Our Financial Information		34
		Background and Executive Overview		34
		Acquisition of Boise Cascade’s Paper and Packaging Operations		35
		Our Segments		37
		Recent Trends and Operational Outlook		38
		Factors That Affect Operating Results		40
		Operating Results		46
		Industry Mergers and Acquisitions		53
		Liquidity and Capital Resources		53
		Contractual Obligations		60
		Off-Balance-Sheet Activities		60
		Guarantees		60
		Environmental		60
		Critical Accounting Estimates		60
		New and Recently Adopted Accounting Standards		62

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			63

Item 4T.	Controls and Procedures			65

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings			67

Item 1A.	Risk Factors			67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			67

Item 3.	Defaults Upon Senior Securities			67

Item 4.	Submission of Matters to a Vote of Securityholders			67

Item 5.	Other Information			68

Item 6.	Exhibits			68

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via Electronic Data Gathering Analysis and Retrieval (EDGAR) through the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.boiseinc.com as soon as reasonably practicable after filing such material with the SEC.

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PART I—FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Boise Inc.

(Formerly Aldabra 2 Acquisition Corp., a Corporation in the Development Stage)

Consolidated Statements of Income (Loss)

(unaudited, in thousands, except for share data)

	Boise Inc.						Predecessor
	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			Three Months Ended September 30, 2007

Sales
Trade	$	610,909		$	—		$	409,393
Related parties	22,209			—			174,337
	633,118			—			583,730

Costs and expenses
Materials, labor, and other operating expenses	526,731			—			472,865
Fiber costs from related parties	21,213			—			9,527
Depreciation, amortization, and depletion	31,426			—			22,969
Selling and distribution expenses	13,803			—			14,720
General and administrative expenses	9,891			134			12,608
Other (income) expense, net	(36		)	—			317
	603,028			134			533,006

Income (loss) from operations	30,090			(134		)	50,724

Foreign exchange gain (loss)	(449		)	—			605
Change in fair value of interest rate derivatives	(306		)	—			—
Interest expense	(27,484		)	(3		)	—
Interest income	153			5,259			190
	(28,086		)	5,256			795

Income before income taxes	2,004			5,122			51,519
Income tax (provision) benefit	2,379			(2,331		)	(1,301		)
Net income	$	4,383		$	2,791		$	50,218

Weighted average common shares outstanding:
Basic	77,259,947			51,750,000			—
Diluted	78,438,847			51,750,000			—

Net income per common share:
Basic and diluted	$	0.06		$	0.05		$	—

See accompanying notes to unaudited quarterly consolidated financial statements.

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Boise Inc.

(Formerly Aldabra 2 Acquisition Corp., a Corporation in the Development Stage)

Consolidated Statements of Income (Loss)

(unaudited, in thousands, except share data)

	Boise Inc.						Predecessor
	Nine Months Ended September 30, 2008			February 1 (Inception) Through September 30, 2007			January 1 Through February 21, 2008			Nine Months Ended September 30, 2007

Sales
Trade	$	1,423,536		$	—		$	258,430		$	1,215,777
Related parties	55,977			—			101,490			529,276
	1,479,513			—			359,920			1,745,053

Costs and expenses
Materials, labor, and other operating expenses	1,266,250			—			313,931			1,464,284
Fiber costs from related parties	46,857			—			7,662			30,834
Depreciation, amortization, and depletion	76,862			—			477			84,536
Selling and distribution expenses	34,563			—			9,097			43,587
General and administrative expenses	26,702			152			6,606			32,335
Other (income) expense, net	(160		)	—			(989		)	(567		)
	1,451,074			152			336,784			1,655,009

Income (loss) from operations	28,439			(152		)	23,136			90,044

Foreign exchange gain (loss)	(1,511		)	—			54			1,207
Change in fair value of interest rate derivatives	204			—			—			—
Interest expense	(65,064		)	(3		)	(2		)	—
Interest income	2,152			5,769			161			475
	(64,219		)	5,766			213			1,682

Income (loss) before income taxes	(35,780		)	5,614			23,349			91,726
Income tax (provision) benefit	5,742			(2,555		)	(563		)	(2,982		)
Net income (loss)	$	(30,038	)	$	3,059		$	22,786		$	88,744

Weighted average common shares outstanding:
Basic and diluted	72,418,643			27,628,512			—			—

Net income (loss) per common share:
Basic and diluted	$	(0.41	)	$	0.11		$	—		$	—

See accompanying notes to unaudited quarterly consolidated financial statements.

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Boise Inc.

(Formerly Aldabra 2 Acquisition Corp., a Corporation in the Development Stage)

Consolidated Balance Sheets

(unaudited, in thousands)

	Boise Inc.				Predecessor
	September 30, 2008		December 31, 2007		December 31, 2007

ASSETS

Current
Cash and cash equivalents	$	27,128	$	186	$	8
Cash held in trust	—		403,989		—
Receivables
Trade, less allowances of $880, $0, and $1,063	245,141		—		181,799
Related parties		4,154	—		36,452
Other	5,451		—		10,224
Inventories	334,502		—		324,679
Deferred income taxes	15,137		85		—
Other	13,570		59		6,936
	645,083		404,319		560,098

Property
Property and equipment, net	1,286,450		—		1,192,344
Fiber farms and deposits	14,213		—		17,843
	1,300,663		—		1,210,187

Deferred financing costs	75,368		—		—
Goodwill	—		—		42,218
Intangible assets, net	35,860		—		23,967
Other assets	6,929		3,293		9,242
Total assets	$	2,063,903	$	407,612	$	1,845,712

See accompanying notes to unaudited quarterly consolidated financial statements.

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Boise Inc.

(Formerly Aldabra 2 Acquisition Corp., a Corporation in the Development Stage)

Consolidated Balance Sheets (continued)

(unaudited, in thousands, except share data)

	Boise Inc.					Predecessor
	September 30, 2008			December 31, 2007		December 31, 2007
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current
Current portion of long-term debt	$	14,125		$	—	$	—
Income taxes payable	450			1,280		306
Accounts payable
Trade	209,049			—		178,686
Related parties	9,427			—		299
Accrued liabilities
Compensation and benefits	44,532			—		53,573
Interest payable	753			—		—
Deferred underwriting fee	—			12,420		—
Other	23,524			1,015		16,716
	301,860			14,715		249,580

Debt
Long-term debt, less current portion	1,031,075			—		—
Notes payable	64,083			—		—
	1,095,158			—		—

Other
Deferred income taxes	22,448			—		896
Compensation and benefits	63,747			—		6,030
Other long-term liabilities	31,060			—		29,427
	117,255			—		36,353

Common stock subject to possible conversion	—			159,760		—
(16,555,860 shares at conversion value at December 31, 2007)

Commitments and contingent liabilities

Stockholders’ Equity
Business unit equity	—			—		1,559,779
Preferred stock, $.0001 par value per share: 1,000,000 shares authorized; none issued	—			—		—
Common stock, $.0001 par value per share: 250,000,000 shares authorized; 79,722,147 shares and 51,750,000 shares issued and outstanding (which included 16,555,860 shares subject to possible conversion at December 31, 2007)	8			5		—
Additional paid-in capital	573,990			227,640		—
Accumulated other comprehensive income	178			—		—
Income accumulated during development stage	—			5,492		—
Accumulated deficit	(24,546		)	—		—
Total stockholders’ equity	549,630			233,137		1,559,779

Total liabilities and stockholders’ equity	$	2,063,903		$	407,612	$	1,845,712

See accompanying notes to unaudited quarterly consolidated financial statements.

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Boise Inc.

(Formerly Aldabra 2 Acquisition Corp., a Corporation in the Development Stage)

Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Boise Inc.						Predecessor
	Nine Months Ended September 30, 2008			February 1 (Inception) Through September 30, 2007			January 1 Through February 21, 2008			Nine Months Ended September 30, 2007
Cash provided by (used for) operations
Net income (loss)	$	(30,038	)	$	3,059		$	22,786		$	88,744
Items in net income (loss) not using (providing) cash
Depreciation, amortization, and depletion of deferred financing costs and other	83,803			—			477			84,536
Share-based compensation expense	1,934			—			—			—
Related-party interest expense	2,760			—			—			—
Notes payable interest expense	2,989			—			—			—
Interest income on cash held in trust	—			(5,766		)	—			—
Pension and other postretirement benefit expense	7,128			—			1,826			9,938
Deferred income taxes	(5,742		)	—			11			130
Change in fair value of energy derivatives	7,471			—			(37		)	375
Change in fair value of interest rate derivatives	(204		)	—			—			—
Gain on changes in retiree healthcare programs	—			—			—			(4,367		)
(Gain) loss on sales of assets, net	4			—			(943		)	1,271
Other	1,511			—			(54		)	(1,207		)
Decrease (increase) in working capital, net of acquisitions
Receivables	(1,851		)	—			(23,522		)	(31,030		)
Inventories	(20,660		)	—			5,343			(8,083		)
Prepaid expenses	(5,400		)	(53		)	875			(793		)
Accounts payable and accrued liabilities	29,869			14			(10,718		)	8,001
Current and deferred income taxes	(1,488		)	2,463			335			1,831
Pension and other postretirement benefit payments	(291		)	—			(1,826		)	(9,938		)
Other	(3,388		)	—			2,326			548
Cash provided by (used for) operations	68,407			(283		)	(3,121		)	139,956

Cash provided by (used for) investment
Acquisition of businesses and facilities	(1,215,641		)	(694		)	—			—
Cash released from (held in) trust, net	403,989			(398,765		)	—			—
Expenditures for property and equipment	(58,928		)	—			(10,168		)	(106,021		)
Sales of assets	241			—			17,662			5,163
Other	(1,838		)	—			863			1,759
Cash provided by (used for) investment	(872,177		)	(399,459		)	8,357			(99,099		)

Cash provided by (used for) financing
Issuances of long-term debt	1,105,700			—			—			—
Payments of long-term debt	(60,500		)	—			—			—
Issuances of short-term debt	—			137			—			—
Payments of short-term debt	—			(137		)	—			—
Payments to stockholders for exercise of conversion rights	(120,170		)	—			—			—
Payments of deferred financing fees	(81,898		)	—			—			—
Payments of deferred underwriters fees	(12,420		)	(16,560		)	—			—
Proceeds from sale of shares of common stock to initial stockholders	—			25			—			—
Proceeds from public offering	—			414,000			—			—
Proceeds from issuance of insider warrants	—			3,000			—			—
Net equity transactions with related parties	—			—			(5,237		)	(40,856		)
Other	—			(640		)	—			—
Cash provided by (used for) financing	830,712			399,825			(5,237		)	(40,856		)

Increase (decrease) in cash and cash equivalents	26,942			83			(1		)	1

Balance at beginning of the period	186			—			8			7
Balance at end of the period	$	27,128		$	83		$	7		$	8

See accompanying notes to unaudited quarterly consolidated financial statements.

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Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Boise Inc. (formerly Aldabra 2 Acquisition Corp.) or “the Company,” “we,” “us,” or “our” was a blank check company created on February 1, 2007 (inception) and organized for the purpose of effecting a merger, capital stock exchange, asset acquisition, or other similar business combination with an operating business. On February 22, 2008, Boise Inc. completed the acquisition (the Acquisition) of Boise White Paper, L.L.C., Boise Packaging & Newsprint, L.L.C., Boise Cascade Transportation Holdings Corp. (collectively, the Paper Group), and other assets and liabilities related to the operation of the paper, packaging and newsprint, and transportation businesses of the Paper Group and part of the headquarters operations of Boise Cascade, L.L.C. (Boise Cascade). The business we acquired is referred to in this report on Form 10-Q as the “Predecessor.” The Acquisition was accomplished through the Company’s acquisition of Boise Paper Holdings, L.L.C. See Note 2, Acquisition of Boise Cascade’s Paper and Packaging Operations, for more information related to the Acquisition.

The following sets forth our corporate structure following the Acquisition:

Boise Inc. operates its business in three reportable segments, Paper, Packaging, and Corporate and Other (support services), and is headquartered in Boise, Idaho. Boise Inc. manufactures packaging products and papers, including corrugated containers, containerboard, label and release and flexible packaging papers, imaging papers for the office and home, printing and converting papers, newsprint, and market pulp.

The accompanying consolidated statements of income (loss) for the three and nine months ended September 30, 2008, and cash flows for the nine months ended September 30, 2008, include the activities of Aldabra 2 Acquisition Corp. prior to the Acquisition and the operations of the acquired businesses from February 22, 2008, through September 30, 2008. The consolidated statements of income (loss) for the period of January 1 through February 21, 2008, and for the three and nine months ended September 30, 2007, and the consolidated statements of cash flows for the period of January 1 through February 21, 2008, and the nine months ended September 30, 2007, of the Predecessor are presented for comparative purposes. The three months ended September 30, 2007, and the period of

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February 1 (inception) through September 30, 2007, represents the activities of Aldabra 2 Acquisition Corp.

The quarterly consolidated financial statements presented have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the results for the periods presented. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited consolidated financial statements should be read in conjunction with our Quarterly Reports on Form 10-Q, our 2007 Annual Report on Form 10-K, and the audited consolidated financial statements and footnotes included in Boise Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on February 28, 2008, which includes the accounting policies of the Predecessor that we adopted in conjunction with the Acquisition, as well as the other reports we file with the SEC.

For the Predecessor periods presented, the consolidated financial statements include accounts specifically attributed to the Paper Group and a portion of Boise Cascade’s shared corporate general and administrative expenses. These shared services include, but are not limited to, finance, accounting, legal, information technology, and human resource functions. Some corporate costs related solely to the Predecessor and were allocated totally to these operations. Shared corporate general and administrative expenses not specifically identifiable to the Paper Group were allocated primarily based on average sales, assets, and labor costs. The Predecessor consolidated financial statements do not include an allocation of Boise Cascade’s debt, interest, and deferred financing costs, because none of these items were specifically identified as corporate advances to, or borrowings by, the Predecessor. Boise Cascade used interest rate swaps to hedge variable interest rate risk. Because debt and interest costs are not allocated to the Predecessor, the effects of the interest rate swaps are not included in the consolidated financial statements. During the Predecessor periods presented, income taxes, where applicable, were calculated as if the Predecessor were a separate taxable entity. For the period of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the majority of the businesses and assets of the Predecessor were held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. In addition to the businesses and assets held and operated by limited liability companies, the Predecessor had taxable corporations subject to federal, state, and local income taxes for which taxes were recorded. Information on the allocations and related-party transactions is included in Note 4, Transactions With Related Parties.

Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period’s presentation.

2. Acquisition of Boise Cascade’s Paper and Packaging Operations

On February 22, 2008, we acquired the paper, packaging, and most of the corporate and other segments of Boise Cascade for cash and securities. We have five pulp and paper mills, five corrugated container plants, a corrugated sheet plant, and two paper distribution facilities located in the United States. Our corporate headquarters office is in Boise, Idaho.

The Acquisition was accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Upon completion of the transaction, Boise Cascade owned 37.9 million, or 49%, of our outstanding shares. Subsequent to the transaction, Boise Cascade transferred the shares to its parent company, Boise Cascade Holdings, L.L.C.

The purchase price was paid with cash, the issuance of shares of our common stock, and a note payable. These costs, including direct transaction costs and purchase price adjustments, are summarized as follows:

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	February 22, 2008
	(thousands)

Cash paid to Boise Cascade	$	1,252,281
Cash paid to Boise Cascade for financing and other fees	24,915
Less: cash contributed by Boise Cascade	(38,000		)
Net cash	1,239,196

Equity at $9.15 average price per share	346,395
Lack of marketability discount	(41,567		)
Total equity	304,828

Note payable to Boise Cascade at closing	41,000
Working capital adjustment	17,334
Total note payable to Boise Cascade	58,334

Fees and expenses	60,967

Total purchase price	$	1,663,325

Cash

Upon closing, we paid Boise Cascade $1,252.3 million in cash related to the base purchase price plus $24.9 million incurred by Boise Cascade for transaction financing costs and fees. Immediately prior to the Acquisition, Boise Cascade contributed $38.0 million of cash to the acquired businesses.

Equity

The number of shares issued to Boise Cascade totaled 37,857,374. The equity price per share was calculated based on the average per-share closing price of our common stock for the 20 trading days ending on the third trading day immediately prior to the consummation of the Acquisition. Since that average price was below the $9.54 floor provided in the purchase agreement, we determined a new measurement date in accordance with Issue No. 2 of Emerging Issues Task Force (EITF) 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination. We calculated a $9.15 average price per share based on two days before and after the Acquisition measurement date, which was February 14, 2008. The value of stock consideration paid to Boise Cascade was reduced by a 12% discount for a lack of marketability, since the stock delivered as consideration was not registered for resale.

Note Payable

In connection with the Acquisition, Boise Inc. issued a $41.0 million subordinated promissory note to Boise Cascade. After the Acquisition, and pursuant to the purchase agreement, the note was amended to increase the amount payable to $58.3 million effective February 22, 2008. The increase of the note reflects $17.3 million of postclosing working capital adjustments in Boise Cascade’s favor. After the transaction, Boise Cascade transferred the note payable to its parent, Boise Cascade Holdings, L.L.C., and on June 10, 2008, Boise Cascade Holdings, L.L.C., sold the note payable to eight individual parties for $53.8 million, including accrued interest but before transaction costs. The full amount of the original note, as amended, together with accrued and unpaid interest from March 31, 2008, is now represented by eight separate notes payable, each with terms (other than the amount) identical to the original note payable. Because none of the eight holders of the notes are related to either Boise Inc. or Boise Cascade, we no longer record the notes as related-party notes payable on our Consolidated Balance Sheet. See Note 4, Transactions With Related Parties, and Note 13, Debt, for further information on the notes.

Fees and expenses consist primarily of debt issuance fees and direct costs of the transaction.

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We have substantially completed our purchase price allocation of the fair value of assets acquired and liabilities assumed. However, we continue to evaluate the amounts included in our allocation as information is received from third parties. We expect to be complete by the one-year anniversary date of the Acquisition. The following table summarizes the fair value allocation of the assets acquired and liabilities assumed in the Acquisition as of September 30, 2008:

	February 22, 2008, Fair Value
	(thousands)

Current assets	$	571,936
Property and equipment	1,305,616
Fiber farms and deposits	11,006
Intangible assets:
Trademark and trade name	16,800
Customer list	13,700
Technology	6,860
Deferred financing costs	81,898
Other long-term assets	4,465
Current liabilities	(247,292		)
Long-term liabilities	(101,664		)
Total purchase price	$	1,663,325

The following pro forma results are based on the individual historical results of Boise Inc. and the Predecessor (prior to the Acquisition on February 22, 2008) with adjustments to give effect to the combined operations as if the Acquisition had been consummated on January 1, 2007. The pro forma results are intended for information purposes only and do not purport to represent what the combined companies’ results of operations would actually have been had the transaction in fact occurred on January 1, 2007.

	Pro Forma
	Three Months Ended September 30		Nine Months Ended September 30
	2007		2008			2007
	(thousands, except per-share data)

Sales	$	583,730	$	1,839,433		$	1,745,053
Net income (loss)	16,365		(40,961		)	(12,205		)
Net income (loss) per share—basic and diluted	0.21		(0.53		)	(0.16		)

3. Net Income (Loss) Per Common Share

For the three and nine months ended September 30, 2008, the three months ended September 30, 2007, and the period of February 1 (inception) through September 30, 2007, when we had publicly traded shares outstanding, net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Basic and diluted net income (loss) per share is calculated as follows (in thousands, except per-share amounts):

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	Boise Inc.
	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008			Three Months Ended September 30, 2007		February 1 (Inception) Through September 30, 2007

Net income (loss)	$	4,383	$	(30,038	)	$	2,791	$	3,059

Weighted average number of common shares for basic net income (loss) per share	77,260		72,419			51,750		27,629
Incremental effect of dilutive common stock equivalents:
Common stock warrants (a) (b)	—		—			—		—
Restricted stock (c)	898		—			—		—
Restricted stock units (c)	281		—			—		—
Weighted average number of shares for diluted net income (loss) per share	78,439		72,419			51,750		27,629

Net income (loss) per share—basic and diluted (a) (b) (c)	$	0.06	$	(0.41	)	$	0.05	$	0.11

(a)		Warrants to purchase 44.4 million shares of common stock for the three and nine months ended September 30, 2008, were not included in the computation of diluted net income (loss) per share because the exercise price exceeded the average market price of our common stock for each respective reporting date.

(b)		Warrants to purchase 44.4 million shares of common stock for the nine months ended September 30, 2007, and for the period of February 1 (inception) through September 30, 2007, were not included in the computation of diluted net income per share because the warrants were contingently exercisable.

(c)		Restricted stock and restricted stock units for the nine months ended September 30, 2008, were not included in the computation of diluted net loss per share because inclusion of these amounts would be antidilutive.

4. Transactions With Related Parties

During the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the Predecessor participated in Boise Cascade’s centralized cash management system. Cash receipts attributable to the Predecessor’s operations were collected by Boise Cascade, and cash disbursements were funded by Boise Cascade. The net effect of these transactions has been reflected as “Net equity transactions with related parties” in the Consolidated Statements of Cash Flows. The following table includes the components of these related-party transactions:

	Predecessor
	January 1 Through February 21, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007
	(thousands)

Cash collections	$	(354,222	)	$	(567,015	)	$	(1,720,035	)
Payment of accounts payable	336,605			511,749			1,561,691
Capital expenditures and acquisitions	10,168			37,322			106,021
Income taxes	217			(208		)	1,021
Corporate general and administrative expense allocation	1,995			3,652			10,446
Net equity transactions with related parties	$	(5,237	)	$	(14,500	)	$	(40,856	)

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Related-Party Sales

During the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the Predecessor sold paper and paper products to OfficeMax Incorporated (OfficeMax) at sales prices that were designed to approximate market prices. For the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, sales to OfficeMax were $90.1 million, $154.5 million, and $471.8 million, respectively. During each of these periods, sales to OfficeMax represented 25%, 26%, and 27% of total sales, respectively. These sales are included in “Sales, Related parties” in the Consolidated Statements of Income (Loss). Subsequent to the Acquisition, OfficeMax is no longer a related party. During the three and nine months ended September 30, 2008, sales to OfficeMax were $147.4 million and $357.5 million, or 23% and 24% of total sales.

Boise Inc. and the Predecessor provided transportation services to Boise Cascade. For the three and nine months ended September 30, 2008, Boise Inc. recorded $1.1 million and $2.8 million of sales for transportation services. For the Period of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the Predecessor recorded $0.6 million, $1.4 million, and $3.9 million, respectively, of sales for transportation services. During these same periods, the Predecessor sold $10.8 million, $18.4 million, and $53.6 million of wood to Boise Cascade. These sales are included in “Sales, Related parties” in the Consolidated Statements of Income (Loss).

In connection with the Acquisition, we entered into an outsourcing services agreement under which we provide a number of corporate staff services to Boise Cascade at our cost. These services include information technology, accounting, and human resource services. The initial term of the agreement is for three years. It will automatically renew for one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the applicable term. For the three and nine months ended September 30, 2008, we recognized $3.7 million and $9.1 million in “Sales, Related parties” and the same amounts in “Cost and expenses” in our Consolidated Statements of Income (Loss) related to this agreement.

Subsequent to the Acquisition, Louisiana Timber Procurement Company, L.L.C., a fully consolidated entity, began selling chips and logs to Boise Cascade. During the three and nine months ended September 30, 2008, we recorded $17.4 million and $44.1 million of sales to Boise Cascade in “Sales, Related parties” in the Consolidated Statements of Income (Loss) and recorded approximately the same amounts of expenses in “Materials, labor, and other operating expenses.”

Related-Party Costs and Expenses

The Predecessor purchased fiber from related parties at prices that approximated market prices. During the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, fiber purchases from related parties were $7.7 million, $9.5 million, and $30.8 million, respectively. Most of these purchases related to chip and log purchases from Boise Cascade’s wood products business. All of the costs associated with these purchases were recorded as “Fiber costs from related parties” in the Consolidated Statements of Income (Loss).

During the Predecessor periods, the Predecessor used services and administrative staff of Boise Cascade. These services included, but were not limited to, finance, accounting, legal, information technology, and human resource functions. The costs not specifically identifiable to the Predecessor were allocated based primarily on average sales, assets, and labor costs. These costs are included in “General and administrative expenses” in the Consolidated Statements of Income (Loss). The Predecessor believes the allocations are a reasonable reflection of its use of the services. However, had the Predecessor operated on a stand-alone basis, it estimates that its Corporate and Other segment would have reported approximately $2.5 million, $4.5 million, and $13.5 million of segment expenses before interest, taxes, depreciation, and amortization for the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, respectively.

During the Predecessor periods, some of the Predecessor’s employees participated in Boise Cascade’s noncontributory defined benefit pension and contributory defined contribution savings plans. The Predecessor treated its participants in the pension plans as participants in multiemployer plans. Accordingly, the Predecessor has not reflected any assets or liabilities related to the plans on the

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Consolidated Balance Sheet at December 31, 2007. The Predecessor, however, recorded costs associated with the employees who participated in these plans in the Consolidated Statements of Income (Loss). For the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the Statements of Income (Loss) included $3.9 million, $6.1 million, and $16.8 million, respectively, of expenses attributable to its participation in Boise Cascade’s defined benefit and defined contribution plans.

During the Predecessor periods presented, the Predecessor’s employees and former employees also participated in Boise Cascade’s other postretirement healthcare benefit plans. All of the Predecessor’s postretirement healthcare benefit plans were unfunded (see Note 16, Retirement and Benefit Plans). In addition, some of the Predecessor’s employees participated in equity compensation programs.

Note Payable

In connection with the Acquisition, we issued a $41.0 million subordinated promissory note to Boise Cascade. After the Acquisition, and pursuant to the purchase agreement, the note was amended to increase the amount payable to $58.3 million effective February 22, 2008. The increase of the note reflects $17.3 million of postclosing working capital adjustments in Boise Cascade’s favor. The note bears interest at 15.75% compounded quarterly. To the extent that interest is not paid in cash, interest will be added to the principal amount of the note. The note matures on August 21, 2015, provided that if such date is more than 181 days after the scheduled maturity date of the indebtedness under our credit agreements, then the maturity date shall automatically be deemed to be 181 days after the latest maturity date of any such indebtedness. We may prepay the note at any time in whole or in part, subject to restrictions contained in our credit agreements.

After the transaction, Boise Cascade transferred the note payable to its parent, Boise Cascade Holdings, L.L.C., and on June 10, 2008, Boise Cascade Holdings, L.L.C., sold the note payable to eight individual parties for $53.8 million, including accrued interest but before transaction costs. The full amount of the original note, as amended, together with accrued and unpaid interest from March 31, 2008, is now represented by eight separate notes payable, each with terms (other than the amount) identical to the original note payable. Because none of the eight holders of the notes is related to either Boise Inc. or Boise Cascade, we no longer record the notes as related-party notes on our Consolidated Balance Sheet.

In 2008, prior to the sale of the note, we recorded $2.8 million of related-party interest expense in “Interest expense” in our Consolidated Statements of Income (Loss). At September 30, 2008, we had $64.1 million recorded in “Notes payable” on our Consolidated Balance Sheet.

5. Other (Income) Expense, Net

“Other (income) expense, net” includes miscellaneous income and expense items. The components of “Other (income) expense, net” in the Consolidated Statements of Income (Loss) are as follows (in thousands):

	Boise Inc.						Predecessor
	Three Months Ended September 30, 2008			Nine Months Ended September 30, 2008			January 1 Through February 21, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007

Changes in retiree healthcare programs	$	—		$	—		$	—		$	—		$	(4,367	)
Sales of assets, net	24			4			(941		)	(71		)	1,271
Closure costs (a)	—			—			—			174			2,211
Other, net	(60		)	(164		)	(48		)	214			318
	$	(36	)	$	(160	)	$	(989	)	$	317		$	(567	)

(a)

The three and nine months ended September 30, 2007, included expenses related to the closure of a paper converting facility in Salem, Oregon, which was closed in third quarter 2007.

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During the period of February 1 (inception) through September 30, 2007, and the three months ended September 30, 2007, “Other (income) expense, net” was zero.

6. Income Taxes

For the three months ended September 30, 2008, we recorded $2.4 million of income tax benefits. These tax benefits relate primarily to the release of valuation allowances we previously recorded against deferred tax assets. We released these valuation allowances because we determined it is more likely than not that we will use our deferred tax assets to offset deferred tax liabilities. During the nine months ended September 30, 2008, we recorded $5.7 million of income tax benefits related to losses incurred during the nine-month period. As a result of significantly completing our purchase price allocation, during the three months ended September 30, 2008, we recorded $12.4 million of deferred tax liabilities. At September 30, 2008, our deferred tax liability, net of deferred tax assets, was $7.3 million. Because of its pass-through tax structure, the Predecessor recorded tax expense related only to small subsidiaries that are taxed as corporations.

For the three months ended September 30, 2008, the effective tax rate was not meaningful. For the nine months ended September 30, 2008, the effective tax benefit rate was 16.05%. The primary reason for the difference from the statutory income tax rate of 38.7% is due to nondeductible permanent items. The effective tax rate for each of the three months ended September 30, 2007, and the period of February 1 (inception) through September 30, 2007, was 45.5%.

During the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, the majority of the Predecessor businesses and assets were held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. For the separate Predecessor subsidiaries that are taxed as corporations, the effective tax rates were 37.6%, 43.3%, and 41.8%, respectively. During these periods, the primary reason for the difference in tax rates is the effect of state income taxes.

During the nine months ended September 30, 2008, cash paid for taxes, net of refunds due, was $1.9 million. During the period of February 1 (inception) through September 30, 2007, we made $0.1 million of tax payments. During the Predecessor period of January 1 through February 21, 2008, cash paid for taxes, net of refunds due, was immaterial and $1.5 million during the Predecessor nine months ended September 30, 2007.

7. Leases

We lease our distribution centers, as well as other property and equipment, under operating leases. During the Predecessor periods presented, the Predecessor leased its distribution centers, as well as other property and equipment, under operating leases. For purposes of determining straight-line rent expense, the lease term is calculated from the date of possession of the facility, including any periods of free rent and any option periods that are reasonably assured of being exercised. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor. Rental expense for operating leases was as follows (in thousands):

	Boise Inc.						Predecessor
	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008		February 1 (Inception) Through September 30, 2007		January 1 Through February 21, 2008		Three Months Ended September 30, 2007		Nine Months Ended September 30, 2007

Rental expenses	$	4,153	$	9,298	$	—	$	2,044	$	3,174	$	9,969

For noncancelable operating leases with remaining terms of more than one year, the minimum lease payment requirements are $2.9 million for the remainder of 2008, $11.6 million in 2009, $11.1 million in 2010, $10.3 million in 2011, $9.7 million in 2012, and $8.1 million in 2013, with total

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payments thereafter of $26.0 million. These future minimum lease payment requirements have not been reduced by sublease rentals due in the future under noncancelable subleases. Minimum sublease income received in the future is not expected to be material.

Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to purchase the leased property. Additionally, some agreements contain renewal options averaging five years, with fixed payment terms similar to those in the original lease agreements.

8. Receivables

We have a large, diversified customer base. A large portion of our uncoated freesheet and office paper sales volume is sold to OfficeMax. We (as did the Predecessor) market our newsprint through a subsidiary of Abitibi-Consolidated Inc. (Abitibi) pursuant to an arrangement whereby Abitibi purchases all of the newsprint we produce at a price equal to the price at which Abitibi sells newsprint produced at its mills located in the southern United States, less associated expenses and a sales and marketing discount. Sales to OfficeMax and Abitibi represent concentrations in the volumes of business transacted and concentrations of credit risk. At September 30, 2008, we had $47.5 million and $29.3 million of accounts receivable due from OfficeMax and Abitibi, respectively.

9. Inventories

Inventories include the following (in thousands):

	Boise Inc.				Predecessor
	September 30, 2008		December 31, 2007		December 31, 2007

Finished goods and work in process	$	202,046	$	—	$	192,161
Raw materials	61,247		—		43,686
Supplies and other	71,209		—		88,832
	$	334,502	$	—	$	324,679

10. Property and Equipment, Net

Property and equipment consisted of the following asset classes (in thousands):

	Boise Inc.					Predecessor
	September 30, 2008			December 31, 2007		December 31, 2007

Land and land improvements	$	31,875		$	—	$	31,592
Buildings and improvements	182,042			—		185,509
Machinery and equipment	1,105,202			—		1,212,425
Construction in progress	38,836			—		36,535
	1,357,955			—		1,466,061
Less accumulated depreciation	(71,505		)	—		(273,717		)
	$	1,286,450		$	—	$	1,192,344

Property and equipment acquired in the Acquisition was recorded at estimated fair value on the date of the Acquisition. We have substantially completed our purchase price allocation of the fair value of property and equipment or assets acquired and liabilities assumed. However, we may have changes to the amount we have included in our allocation up to the one-year anniversary date of the Acquisition (see Note 2, Acquisition of Boise Cascade’s Paper and Packaging Operations, for more information).

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11. Goodwill and Intangible Assets

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. We account for goodwill in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, which requires us to assess our acquired goodwill and intangible assets with indefinite lives for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. We assess goodwill and intangible assets with indefinite lives in the fourth quarter of each year using a fair-value-based approach. We also evaluate the remaining useful lives of our finite-lived purchased intangible assets to determine whether any adjustments to the useful lives are necessary.

We account for acquisitions using the purchase method of accounting. As a result, we allocate the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the date of acquisition. In accordance with SFAS No. 141, Business Combinations, we have one year from the purchase date to finalize or receive information to determine changes in estimates of the fair value of assets acquired and liabilities assumed.

We have not allocated any amounts related to the Acquisition to goodwill. Previously recorded goodwill of the Predecessor of approximately $42.2 million at December 31, 2007, was eliminated as part of the purchase price allocation.

Intangible assets represent the values assigned to trade names and trademarks, customer relationships, and technology in connection with the Acquisition. Customer relationships will be amortized over approximately ten years, and technology will be amortized over five years. Trade names and trademarks are not amortized. During the three and nine months ended September 30, 2008, intangible asset amortization was $0.8 million and $1.5 million. During the Predecessor periods of January 1 through February 21, 2008, and the three and nine months ended September 30, 2007, intangible asset amortization was zero, $1.3 million, and $3.5 million, respectively. Our estimated amortization expense is $0.5 million for the remainder of 2008, $2.1 million in 2009, 2010, 2011, and 2012, and $1.1 million in 2013. These estimates may change if we receive new information concerning these assets up to the one-year anniversary from the purchase date.

	Nine Months Ended September 30, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
			(thousands)

Trade names and trademarks	$	16,800	$	—		$	16,800
Customer relationships	13,700		(761		)	12,939
Technology	6,860		(739		)	6,121
	$	37,360	$	(1,500	)	$	35,860

Intangible assets of the Predecessor totaling $24.0 million at December 31, 2007, were eliminated as part of the purchase price allocations.

12. Asset Retirement Obligations

We account for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, and Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations — an Interpretation of FASB Statement No. 143. We accrue for asset retirement obligations in the period in which they are incurred if sufficient information is available to reasonably estimate the fair value of the obligation. When we record the liability, we capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its settlement value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we will recognize a gain or loss for any difference between the settlement amount and the liability recorded.

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At September 30, 2008, we had $13.9 million of asset retirement obligations recorded on the Consolidated Balance Sheet. At December 31, 2007, the Predecessor had $13.3 million of asset retirement obligations recorded on the Consolidated Balance Sheet. These liabilities related primarily to landfill closure and closed-site monitoring costs. These liabilities are based on the best estimate of current costs and are updated periodically to reflect current technology, laws and regulations, inflation, and other economic factors. No assets are legally restricted for purposes of settling asset retirement obligations. The table below describes changes to the asset retirement obligations for Boise Inc. for the nine months ended September 30, 2008, and the Predecessor’s year ended December 31, 2007 (in thousands):

	Boise Inc.			Predecessor
	September 30, 2008			December 31, 2007

Asset retirement obligation at beginning of period	$	—		$	10,771
Asset retirement liability recorded in preliminary purchase price allocation	13,655			—
Liabilities incurred	—			—
Accretion expense	652			869
Payments	(450		)	(37		)
Revisions in estimated cash flows	—			1,700
Asset retirement obligation at end of period	$	13,857		$	13,303

We have additional asset retirement obligations with indeterminate settlement dates. The fair value of these asset retirement obligations cannot be estimated due to the lack of sufficient information to estimate the settlement dates of the obligations. These asset retirement obligations include, for example, (i) removal and disposal of potentially hazardous materials related to equipment and/or an operating facility if the equipment and/or facilities were to undergo major maintenance, renovation, or demolition; (ii) wastewater treatment ponds that may be required to be drained and/or cleaned if the related operating facility is closed; and (iii) storage sites or owned facilities for which removal and/or disposal of chemicals and other related materials are required if the operating facility is closed. We will recognize a liability in the period in which sufficient information becomes available to reasonably estimate the fair value of these obligations.

13. Debt

At September 30, 2008, our long-term debt and the interest rates on that debt were as follows:

	September 30, 2008
	Amount			Interest Rate
	(thousands)

Revolving credit facility, due 2013	$	65,000		7.00	%
Tranche A term loan, due 2013	246,875			7.06	%
Tranche B term loan, due 2014	472,625			7.50	%
Second lien term loan, due 2015	260,700			11.00	%
Current portion of long-term debt	(14,125		)	7.21	%
Long-term debt, less current portion	1,031,075			8.25	%
Current portion of long-term debt	14,125			7.21	%
	1,045,200

15.75% notes payable, due 2015	64,083			15.75	%
	$	1,109,283

Boise Inc. and the Predecessor had no short- or long-term debt outstanding at December 31, 2007.

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Senior Secured Credit Facilities

Our senior secured credit facilities consist of:

·		A five-year nonamortizing $250.0 million senior secured revolving credit facility with interest at either the London Interbank Offered Rate (LIBOR) plus 325 basis points or a calculated base rate plus 325 basis points (the Revolving Credit Facility and collectively with the Tranche A Term Loan Facility and the Tranche B Term Loan Facility, the First Lien Facilities);

·		A five-year amortizing $250.0 million senior secured Tranche A Term Loan Facility with interest at LIBOR plus 325 basis points or a calculated base rate plus 325 basis points (the Tranche A Term Loan Facility);

·		A six-year amortizing $475.0 million senior secured Tranche B Term Loan Facility with interest at LIBOR plus 350 basis points (subject to a floor of 4.00%) or a calculated base rate plus 250 basis points (the Tranche B Term Loan Facility); and

·		A seven-year nonamortizing $260.7 million Second Lien Term Loan Facility with interest at LIBOR plus 700 basis points (subject to a floor of 5.50%) or a calculated base rate plus 600 basis points (the Second Lien Facility and together with the First Lien Facilities, the Credit Facilities).

All borrowings under the Credit Facilities bear interest at a rate per annum equal to an applicable margin plus a customary base rate or Eurodollar rate. The base rate means, for any day, a rate per annum equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 0.50%. In addition to paying interest, the Company pays a commitment fee to the lenders under the Revolving Credit Facility at a rate of 0.50% per annum (which shall be reduced to 0.375% when the leverage ratio is less than 2.25:1.00) times the daily average undrawn portion of the Revolving Credit Facility (reduced by the amount of letters of credit issued and outstanding), which fee will accrue from the Acquisition closing date and shall be payable quarterly in arrears. At September 30, 2008, we had $65.0 million of borrowings outstanding under the Revolving Credit Facility. For the nine months ended September 30, 2008, the average interest rate for our borrowings under our Revolving Credit Facility was 5.95%. The minimum and maximum borrowings under the Revolving Credit Facility were zero and $80.0 million for the nine months ended September 30, 2008. The weighted average amount of borrowings outstanding under the Revolving Credit Facility during the nine months ended September 30, 2008, was $60.2 million. At September 30, 2008, we had availability of $158.1 million, which is net of outstanding letters of credit of $26.9 million, above the amount we had borrowed.

The loan documentation for the Credit Facilities contains, among other terms, representations and warranties, covenants, events of default and indemnification customary for loan agreements for similar leveraged acquisition financings, and other representations and warranties, covenants, and events of default deemed by the administrative agent of the First Lien Facilities or the Second Lien Facility, as applicable, to be appropriate for the specific transaction. The First Lien Facilities require BZ Intermediate Holdings LLC (Holdings), a wholly owned consolidated entity of Boise Inc. and the parent company of Boise Paper Holdings, L.L.C. (the Borrower), and its subsidiaries to maintain a minimum interest coverage ratio and a maximum leverage ratio, the Second Lien Facility requires Holdings and its subsidiaries to maintain a maximum leverage ratio, and the Credit Facilities limit the ability of Holdings and its subsidiaries to make capital expenditures.

Guarantees

The Company’s obligations under its Credit Facilities are guaranteed by each of the Borrower’s existing and subsequently acquired domestic (and, to the extent no material adverse tax consequences to Holdings or Borrower would result therefrom and as reasonably requested by the administrative agent under each Credit Facility, foreign) subsidiaries and Holdings (collectively, the Guarantors). The First Lien Facilities are secured by a first-priority security interest in substantially all of the real, personal, and mixed property of Borrower and the Guarantors, including a first-priority security interest in 100% of the equity interests of Borrower and each domestic subsidiary of Holdings, 65% of the equity interests of each of Holdings’ foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does not account for more than $2.5 million of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) during any fiscal year of Borrower), and all intercompany debt.

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The Second Lien Facility is secured by a second-priority security interest in substantially all of the real, personal, and mixed property of Borrower and the Guarantors, including a second-priority security interest in 100% of the equity interests of Borrower and each domestic subsidiary of Holdings, 65% of the equity interests of each of Holdings' foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does not account for more than $2.5 million of consolidated EBITDA during any fiscal year of Borrower), and all intercompany debt.

Prepayments

In the event all or any portion of the Tranche B Term Loan Facility is repaid pursuant to any voluntary prepayments or mandatory prepayments with respect to asset sale proceeds or proceeds received from the issuance of debt prior to the second anniversary of the Acquisition closing date, such repayments will be made at (a) 102.0% of the amount repaid if such repayment occurs prior to the first anniversary of the Acquisition closing date and (b) 101.0% of the amount repaid if such repayment occurs on or after the first anniversary of the Acquisition closing date and prior to the second anniversary of the Acquisition closing date.

Subject to the provisions of the intercreditor agreement between the First Lien Facility and the Second Lien Facility, in the event the Second Lien Facility is prepaid as a result of a voluntary or mandatory prepayment (other than as a result of a mandatory prepayment with respect to insurance/condemnation proceeds or excess cash flow) at any time prior to the third anniversary of the Acquisition closing date, Borrower shall pay a prepayment premium equal to the “make-whole premium” described below.

At any time after the third anniversary of the Acquisition closing date and prior to the sixth anniversary of the Acquisition closing date, subject to the provisions of the First Lien Facilities, the Second Lien Facility may be prepaid in whole or in part subject to the “call premium” described below, provided that loans bearing interest with reference to the reserve-adjusted Eurodollar rate will be prepayable only on the last day of the related interest period unless Borrower pays any related breakage costs.

With respect to a Second Lien Facility loan on any date of prepayment, the “make-whole premium” means the present value of (a) all required interest payments due on such Second Lien Facility loan from the date of prepayment through and including the make-whole termination date, excluding accrued interest (assuming that the interest rate applicable to all such interest is the LIBOR swap rate at the close of business on the third business day prior to the date of such prepayment with the termination date nearest to the make-whole termination date plus 7.00%) plus (b) the prepayment premium that would be due if such prepayment were made on the day after the make-whole termination date, in each case discounted to the date of prepayment on a quarterly basis (assuming a 360-day year and actual days elapsed) at a rate equal to the sum of such swap rate plus 0.50%.

The “call premium” means that in the event all or any portion of the Second Lien Facility is repaid as a result of a voluntary prepayment or mandatory prepayment with respect to asset sale proceeds or proceeds received from the issuance of debt after the third anniversary of the Acquisition closing date and prior to the sixth anniversary of the Acquisition closing date, such repayments will be made at (i) 105.0% of the amount repaid if such repayment occurs on or after the third anniversary of the Acquisition closing date and prior to the fourth anniversary of the Acquisition closing date, (ii) 103.0% of the amount repaid if such repayment occurs on or after the fourth anniversary of the Acquisition closing date and prior to the fifth anniversary of the Acquisition closing date, and (iii) 101.0% of the amount repaid if such repayment occurs on or after the fifth anniversary of the Acquisition closing date and prior to the sixth anniversary of the Acquisition closing date.

Other Provisions

Subject to specified exceptions, the Credit Facilities require that the proceeds from certain asset sales, casualty insurance, certain debt issuances, and 75% (subject to step-downs based on certain leverage ratios) of the excess cash flow for each fiscal year must be used to pay down outstanding borrowings. Required debt principal repayments under the Credit Facilities, excluding those from excess cash flows, total $2.8 million for the balance of 2008, $15.7 million in 2009, $26.6 million in 2010, $48.5 million in 2011, $134.4 million in 2012, and $817.2 million thereafter.

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Notes Payable

The notes bear interest at 15.75% per annum (computed on the basis of a 360-day year) payable quarterly (each such quarterly payment date, an Interest Payment Date). To the extent interest is not paid in cash, interest will be added to the principal amount of the notes on each Interest Payment Date. The notes mature on August 21, 2015, provided that if such date is more than 181 days after the scheduled maturity date of the indebtedness under the Credit Facilities, then the maturity date shall automatically be deemed to be 181 days after the latest maturity date of any such indebtedness. At maturity, the amount of the notes will be approximately $185.6 million, assuming none of the interest has been paid in cash.

We may prepay the notes at any time in whole or in part, without premium or penalty, subject to any restrictions contained in the senior credit facilities. We must prepay the notes upon the occurrence of the following events: (i) a Change of Control (as defined in the Credit Facilities), (ii) a sale or transfer of 50% or more of the company’s assets, and (iii) Events of Default (as provided in the notes). We must use the proceeds from the sale of equity or debt securities or borrowings to repay the notes, subject to any restrictions contained in our senior credit facilities.

Other

At September 30, 2008, we had $75.4 million of costs recorded in “Deferred financing costs” on our Consolidated Balance Sheet related to the Acquisition. The amortization of these costs is recorded in interest expense using the effective interest method over the life of the loans. We recorded $3.5 million and $6.5 million of amortization expense for the three and nine months ended September 30, 2008, in “Interest expense” in our Consolidated Statements of Income (Loss).

In April 2008, we entered into interest rate derivative instruments to hedge a portion of our interest rate risk as required under the terms of the First Lien Facilities. At September 30, 2008, our average effective interest rate was not affected by our interest rate derivatives, as the effective cap rates were above the interest rates on the hedged debt. For additional information on our interest rate derivatives, see Note 14, Financial Instruments.

For the nine months ended September 30, 2008, cash payments for interest, net of interest capitalized, were $51.6 million. No payments were made during the period of February 1 (inception) through September 30, 2007, or the Predecessor period of January 1 through February 21, 2008, and the nine months ended September 30, 2007.

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14. Financial Instruments

We are exposed to market risks including changes in interest rates, energy prices, and foreign currency exchange rates. We employ a variety of practices to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Derivative instruments are used only for risk management purposes and not for speculation or trading. Derivatives are such that a specific debt instrument, contract, or anticipated purchase determines the amount, maturity, and other specifics of the hedge. If a derivative contract is entered into, we either determine that it is an economic hedge or we designate the derivative as a cash flow or fair value hedge. We formally document all relationships between hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking various hedged transactions. For those derivatives designated as cash flow or fair value hedges, we formally assess, both at the derivatives’ inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the hedged items. The ineffective portion of hedging transactions is recognized in income (loss).

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, we record all derivative instruments as assets or liabilities on our Consolidated Balance Sheets at fair value. The fair value of these instruments is determined by third parties. Changes in the fair value of derivatives are recorded in either “Net income (loss)” or “Other comprehensive income (loss),” as appropriate. The gain or loss on derivatives designated as cash flow hedges is included in “Other comprehensive income (loss)” in the period in which changes in fair value occur and is reclassified to income (loss) in the period in which the hedged item affects income (loss), and any ineffectiveness is recognized currently in our Consolidated Statements of Income (Loss). The fair value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. The gain or loss on derivatives designated as fair value hedges and the offsetting gain or loss on the hedged item attributable to the hedged risk are included in income (loss) in the period in which changes in fair value occur. The gain or loss on derivatives that have not been designated as hedging instruments is included in income (loss) in the period in which changes in fair value occur.

Interest Rate Risk

With the exception of the 15.75% notes payable, maturing in August 2015, our debt is variable-rate debt. At September 30, 2008, the estimated value of the notes payable, based on then-current interest rates for similar obligations with like maturities, was approximately $6.1 million less than the amount recorded on our Consolidated Balance Sheet.

In April 2008, we entered into interest rate derivative instruments to hedge a portion of our interest rate risk as required under the terms of the First Lien Facilities. We purchased interest rate caps with a term of three years and a cap rate of 5.50% on a notional amount of $260.0 million to hedge the interest rate on our Second Lien Facility. We also purchased interest rate caps to hedge part of the interest rate risk on our Tranche B Term Loan Facility with a LIBOR cap rate of 5.00% on a notional amount of $425.0 million for the period of April 21, 2008, through March 31, 2009; a notional amount of $350.0 million for the period of March 31, 2009, through March 31, 2010; and a notional amount of $300.0 million for the period of March 31, 2010, through March 31, 2011.

Second Lien Facility. We account for the interest rate derivatives with a notional amount of $260.0 million that hedge our exposure to interest rate fluctuations on our Second Lien Facility as economic hedges. At September 30, 2008, we recorded the fair value of the interest rate derivatives, or $0.8 million, in “Other assets” on our Consolidated Balance Sheet. During the three and nine months ended September 30, 2008, we recorded the change in fair value of these derivatives, or $0.3 million of expense and $0.2 million of income, in “Change in fair value of interest rate derivatives” in our Consolidated Statements of Income (Loss). During the three and nine months ended September 30, 2008, we recorded $0.1 million in “Interest expense” for the amortization of the premiums paid for the interest rate derivatives.

First Lien Facility. We account for the interest rate derivatives that hedge part of the interest rate risk on our Tranche B Term Loan Facility as cash flow hedges. These derivatives have a cap rate of 5.00% on a notional amount of $425.0 million for the period of April 21, 2008, through March 31, 2009; a

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notional amount of $350.0 million for the period of March 31, 2009, through March 31, 2010; and a notional amount of $300.0 million for the period of March 31, 2010, through March 31, 2011. At September 30, 2008, we recorded the fair value of the interest rate derivatives, or $1.5 million, in “Other assets.” During the three months ended September 30, 2008, we recorded the change in the fair value of these derivatives, or a $0.5 million loss, in “Accumulated other comprehensive income” on our Consolidated Balance Sheet. No amounts were reclassified to interest expense. During the three and nine months ended September 30, 2008, we recorded $0.1 million and $0.3 million in “Interest expense” for the amortization of the premiums paid for the interest rate derivatives. At September 30, 2008, there was no ineffectiveness related to these hedges.

Energy Risk

We enter into natural gas swaps, options, or a combination of these instruments to hedge the variable cash flow risk of natural gas purchases at index prices. As of September 30, 2008, we had entered into derivative instruments related to approximately 72%, 70%, and 62% of our forecasted natural gas purchases for the months of October 2008, November 2008, and December 2008, respectively. We also entered into derivative instruments related to approximately 54% of our forecasted natural gas purchases for the period of January through February 2009, approximately 51% of our forecasted natural gas purchases for March 2009, and approximately 37% of our forecasted natural gas purchases from April 2009 through October 2009. These derivatives include three-way collars, caps, call spreads, and swaps.

A three-way collar is a combination of options: a written put, a purchased call, and a written call. The purchased call establishes a maximum price unless the market price exceeds the written call, at which point the maximum price would be New York Mercantile Exchange (NYMEX) price less the difference between the purchased call and the written call strike price. The written put establishes a minimum price (the floor) for the volumes under contract. The following table summarizes our position related to these instruments as of September 30, 2008:

	Three-Way Cashless Collar
	October 2008		October 2008 Through March 2009		November 2008 Through March 2009		April 2009 Through October 2009		April 2009 Through October 2009

Volume hedged	1,000 mmBtu/day		1,000 mmBtu/day		1,000 mmBtu/day		1,000 mmBtu/day		3,000 mmBtu/day

Strike price of call sold	$	13.00	$	14.00	$	14.00	$	14.00	$	12.00
Strike price of call bought	10.00		11.00		11.00		11.00		9.00
Strike price of put sold	6.00