Edgar Filing: BOISE INC.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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

For the transition period from to

LOGO

1111 West Jefferson Street, Suite 200

Boise, Idaho 83702-5388

(Address of principal executive offices) (Zip code)

(208) 384-7000

(Registrants’ telephone number, including area code)


Commission File Number	Exact Name of Registrant as Specified in Its Charter	I.R.S. Employer Identification No.	State or Other Jurisdiction of Incorporation or Organization
001-33541	Boise Inc.	20-8356960	Delaware
333-166926-04	BZ Intermediate Holdings LLC	27-1197223	Delaware

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


Boise Inc.	Yes x	No ¨
BZ Intermediate Holdings LLC	Yes ¨	No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Boise Inc.	Yes ¨	No ¨
BZ Intermediate Holdings LLC	Yes ¨	No ¨

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:


Boise Inc.	Large accelerated filer	¨	Accelerated filer	x
	Non-accelerated filer	¨	Smaller reporting company	¨
	(Do not check if smaller reporting company)

BZ Intermediate Holdings LLC	Large accelerated filer	¨	Accelerated filer	¨
	Non-accelerated filer	x	Smaller reporting company	¨
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Boise Inc.	Yes ¨	No x
BZ Intermediate Holdings LLC	Yes ¨	No x

There were 84,760,220 common shares, $.0001 per share par value, of Boise Inc. and 1,000 common units, $.01 per unit par value, of BZ Intermediate Holdings LLC outstanding as of July 30, 2010.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Boise Inc. and BZ Intermediate Holdings LLC. BZ Intermediate Holdings LLC meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, any reference in this report to the “Company,” “we,” “us,” “our,” or “Boise” refers to Boise Inc. together with BZ Intermediate Holdings LLC and its consolidated subsidiaries.

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements	1

	Boise Inc. and Subsidiaries
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009	1
	Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	5

	BZ Intermediate Holdings LLC and Subsidiaries
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009	6
	Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009	8
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	10

	Notes to Unaudited Quarterly Consolidated Financial Statements	11
	1. Nature of Operations and Basis of Presentation	11
	2. Net Income Per Common Share	12
	3. Transactions With Related Parties	12
	4. Other (Income) Expense, Net	13
	5. Income Taxes	13
	6. Leases	14
	7. Concentrations of Risk	14
	8. Inventories	15
	9. Property and Equipment, Net	15
	10. Intangible Assets	16
	11. Asset Retirement Obligations	16
	12. Debt	17
	13. Financial Instruments	20
	14. New and Recently Adopted Accounting Standards	25
	15. Retirement and Benefit Plans	26
	16. Stockholders’ Equity and Capital	27
	17. Comprehensive Income	29
	18. St. Helens Mill Restructuring	30
	19. Segment Information	30
	20. Alternative Fuel Mixture Credits	32
	21. Commitments and Guarantees	33
	22. Legal Proceedings and Contingencies	33
	23. Consolidating Guarantor and Nonguarantor Financial Information	33

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

	Background	44
	Our Segments	44
	Financial Highlights	45
	Debt Refinancing	46
	Recent Trends and Operational Outlook	47
	Factors That Affect Our Operating Results	48
	Our Operating Results	52
	Liquidity and Capital Resources	59
	Contractual Obligations	65
	Off-Balance-Sheet Activities	65
	Guarantees	65
	Inflationary and Seasonal Influences	65
	Working Capital	66
	Environmental	66
	Critical Accounting Estimates	66
	New and Recently Adopted Accounting Standards	66

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66

Item 4.	Controls and Procedures	66



PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	68

Item 4.	(Removed and Reserved)	68

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 the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on 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.

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Boise Inc.

Consolidated Statements of Income

(unaudited, dollars and shares in thousands, except per-share data)


	Three Months Ended June 30
	2010			2009
Sales
Trade	$	511,012		$	469,877
Related parties		10,549			9,490

		521,561			479,367


Costs and expenses
Materials, labor, and other operating expenses		419,594			386,013
Fiber costs from related parties		5,168			8,933
Depreciation, amortization, and depletion		32,267			32,892
Selling and distribution expenses		14,254			14,024
General and administrative expenses		12,569			12,691
St. Helens mill restructuring		(434	)		1,133
Alternative fuel mixture credits, net		—			(75,337	)
Other (income) expense, net		(11	)		2,434

		483,407			382,783


Income from operations		38,154			96,584


Foreign exchange gain (loss)		(323	)		1,157
Change in fair value of interest rate derivatives		(13	)		627
Loss on extinguishment of debt		(28	)		—
Interest expense		(16,165	)		(21,389	)
Interest income		61			91

		(16,468	)		(19,514	)


Income before income taxes		21,686			77,070
Income tax (provision) benefit		(8,376	)		(26,187	)

Net income	$	13,310		$	50,883


Weighted average common shares outstanding:
Basic		80,624			78,142
Diluted		84,093			84,254

Net income per common share:
Basic	$	0.17		$	0.65
Diluted	$	0.16		$	0.60

See accompanying notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Statements of Income

(unaudited, dollars and shares in thousands, except per-share data)


	Six Months Ended June 30
	2010			2009
Sales
Trade	$	996,863		$	954,745
Related parties		18,803			24,907

		1,015,666			979,652


Costs and expenses
Materials, labor, and other operating expenses		828,079			799,152
Fiber costs from related parties		14,999			14,636
Depreciation, amortization, and depletion		64,398			64,864
Selling and distribution expenses		27,988			27,806
General and administrative expenses		24,028			23,064
St. Helens mill restructuring		(306	)		4,781
Alternative fuel mixture credits, net		—			(75,337	)
Other (income) expense, net		(314	)		2,673

		958,872			861,639


Income from operations		56,794			118,013


Foreign exchange gain (loss)		364			479
Change in fair value of interest rate derivatives		(42	)		495
Loss on extinguishment of debt		(22,225	)		—
Interest expense		(32,610	)		(43,543	)
Interest income		98			145

		(54,415	)		(42,424	)


Income before income taxes		2,379			75,589
Income tax (provision) benefit		(1,754	)		(25,622	)

Net income	$	625		$	49,967


Weighted average common shares outstanding:
Basic		80,214			77,818
Diluted		84,143			81,906

Net income per common share:
Basic	$	0.01		$	0.64
Diluted	$	0.01		$	0.61

See accompanying notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets

(unaudited, dollars in thousands)


	June 30, 2010		December 31, 2009
ASSETS

Current
Cash and cash equivalents	$	128,062	$	69,393
Short-term investments		10,606		10,023
Receivables
Trade, less allowances of $616 and $839		205,268		185,110
Related parties		2,236		2,056
Other		4,274		62,410
Inventories		255,335		252,173
Deferred income taxes		12,151		—
Prepaid and other		10,829		4,819

		628,761		585,984

Property
Property and equipment, net		1,186,072		1,205,679
Fiber farms and deposits		17,825		17,094

		1,203,897		1,222,773


Deferred financing costs		32,980		47,369
Intangible assets, net		30,981		32,358
Other assets		7,546		7,306

Total assets	$	1,904,165	$	1,895,790

See accompanying notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets (continued)

(unaudited, dollars and shares in thousands, except per-share data)


	June 30, 2010			December 31, 2009
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current
Short-term borrowings	$	3,536		$	—
Current portion of long-term debt		29,163			30,711
Income taxes payable		63			240
Accounts payable
Trade		193,238			172,518
Related parties		931			2,598
Accrued liabilities
Compensation and benefits		53,690			67,948
Interest payable		11,319			4,946
Other		17,019			23,735

		308,959			302,696


Debt
Long-term debt, less current portion		763,081			785,216


Other
Deferred income taxes		53,065			32,253
Compensation and benefits		122,446			123,889
Other long-term liabilities		33,729			30,801

		209,240			186,943


Commitments and contingent liabilities

Stockholders’ equity
Preferred stock, $.0001 par value per share:		—			—
1,000 shares authorized; none issued
Common stock, $.0001 par value per share:		8			8
250,000 shares authorized; 84,760 shares and 84,419 shares issued and outstanding
Additional paid-in capital		579,211			578,669
Accumulated other comprehensive income (loss)		(70,770	)		(71,553	)
Retained earnings		114,436			113,811

Total stockholders’ equity		622,885			620,935


Total liabilities and stockholders’ equity	$	1,904,165		$	1,895,790

See accompanying notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)


	Six Months Ended June 30
	2010			2009
Cash provided by (used for) operations
Net income	$	625		$	49,967
Items in net income not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other		68,864			71,178
Share-based compensation expense		1,834			1,744
Notes payable interest expense		—			5,349
Pension and other postretirement benefit expense		4,705			4,877
Deferred income taxes		912			16,593
Change in fair value of energy derivatives		617			(1,277	)
Change in fair value of interest rate derivatives		42			(495	)
(Gain) loss on sales of assets, net		45			10
Other		(364	)		(385	)
Loss on extinguishment of debt		22,225			—
Decrease (increase) in working capital, net of acquisitions
Receivables		37,899			12,982
Inventories		(5,347	)		68,237
Prepaid expenses		1,503			(2,650	)
Accounts payable and accrued liabilities		6,352			(7,121	)
Current and deferred income taxes		344			8,420
Pension and other postretirement benefit payments		(5,864	)		(7,031	)
Other		(101	)		331

Cash provided by (used for) operations		134,291			220,729


Cash provided by (used for) investment
Acquisition of businesses and facilities		—			(543	)
Expenditures for property and equipment		(37,481	)		(35,854	)
Purchases of short-term investments		(11,825	)		(10,000	)
Maturities of short-term investments		11,247			—
Sales of assets		575			317
Other		230			571

Cash provided by (used for) investment		(37,254	)		(45,509	)


Cash provided by (used for) financing
Issuances of long-term debt		300,000			10,000
Payments of long-term debt		(323,683	)		(92,631	)
Payments of short-term borrowings		(1,752	)		—
Payments of deferred financing fees		(11,613	)		—
Other		(1,320	)		—

Cash provided by (used for) financing		(38,368	)		(82,631	)


Increase in cash and cash equivalents		58,669			92,589

Balance at beginning of the period		69,393			22,518

Balance at end of the period	$	128,062		$	115,107

See accompanying notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Income

(unaudited, dollars in thousands)


	Three Months Ended June 30
	2010			2009
Sales
Trade	$	511,012		$	469,877
Related parties		10,549			9,490

		521,561			479,367


Costs and expenses
Materials, labor, and other operating expenses		419,594			386,013
Fiber costs from related parties		5,168			8,933
Depreciation, amortization, and depletion		32,267			32,892
Selling and distribution expenses		14,254			14,024
General and administrative expenses		12,569			12,691
St. Helens mill restructuring		(434	)		1,133
Alternative fuel mixture credits, net		—			(75,337	)
Other (income) expense, net		(11	)		2,434

		483,407			382,783


Income from operations		38,154			96,584


Foreign exchange gain (loss)		(323	)		1,157
Change in fair value of interest rate derivatives		(13	)		627
Loss on extinguishment of debt		(28	)		—
Interest expense		(16,165	)		(18,663	)
Interest income		61			91

		(16,468	)		(16,788	)


Income before income taxes		21,686			79,796
Income tax (provision) benefit		(8,371	)		(25,596	)

Net income	$	13,315		$	54,200

See accompanying notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Income

(unaudited, dollars in thousands)


	Six Months Ended June 30
	2010			2009
Sales
Trade	$	996,863		$	954,745
Related parties		18,803			24,907

		1,015,666			979,652


Costs and expenses
Materials, labor, and other operating expenses		828,079			799,152
Fiber costs from related parties		14,999			14,636
Depreciation, amortization, and depletion		64,398			64,864
Selling and distribution expenses		27,988			27,806
General and administrative expenses		24,028			23,064
St. Helens mill restructuring		(306	)		4,781
Alternative fuel mixture credits, net		—			(75,337	)
Other (income) expense, net		(314	)		2,673

		958,872			861,639


Income from operations		56,794			118,013


Foreign exchange gain (loss)		364			479
Change in fair value of interest rate derivatives		(42	)		495
Loss on extinguishment of debt		(22,225	)		—
Interest expense		(32,610	)		(38,195	)
Interest income		98			145

		(54,415	)		(37,076	)


Income before income taxes		2,379			80,937
Income tax (provision) benefit		(913	)		(25,368	)

Net income	$	1,466		$	55,569

See accompanying notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets

(unaudited, dollars in thousands)


	June 30, 2010		December 31, 2009
ASSETS

Current
Cash and cash equivalents	$	128,062	$	69,393
Short-term investments		10,606		10,023
Receivables
Trade, less allowances of $616 and $839		205,268		185,110
Related parties		2,236		2,056
Other		4,274		62,410
Inventories		255,335		252,173
Deferred income taxes		12,151		—
Prepaid and other		10,829		4,819

		628,761		585,984

Property
Property and equipment, net		1,186,072		1,205,679
Fiber farms and deposits		17,825		17,094

		1,203,897		1,222,773


Deferred financing costs		32,980		47,369
Intangible assets, net		30,981		32,358
Other assets		7,546		7,306

Total assets	$	1,904,165	$	1,895,790

See accompanying notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets (continued)

(unaudited, dollars in thousands)


	June 30, 2010		December 31, 2009
LIABILITIES AND CAPITAL

Current
Short-term borrowings	$	3,536	$	—
Current portion of long-term debt		29,163		30,711
Income taxes payable		63		240
Accounts payable
Trade		193,238		172,518
Related parties		931		2,598
Accrued liabilities
Compensation and benefits		53,690		67,948
Interest payable		11,319		4,946
Other		17,019		23,735

		308,959		302,696


Debt
Long-term debt, less current portion		763,081		785,216


Other
Deferred income taxes		44,564		24,563
Compensation and benefits		122,446		123,889
Other long-term liabilities		33,734		30,836

		200,744		179,288


Commitments and contingent liabilities

Capital
Business unit equity		631,381		628,590


Total liabilities and capital	$	1,904,165	$	1,895,790

See accompanying notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)


	Six Months Ended June 30
	2010			2009
Cash provided by (used for) operations
Net income	$	1,466		$	55,569
Items in net income not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other		68,864			71,178
Share-based compensation expense		1,834			1,744
Pension and other postretirement benefit expense		4,705			4,877
Deferred income taxes		907			19,710
Change in fair value of energy derivatives		617			(1,277	)
Change in fair value of interest rate derivatives		42			(495	)
(Gain) loss on sales of assets, net		45			10
Other		(364	)		(385	)
Loss on extinguishment of debt		22,225			—
Decrease (increase) in working capital, net of acquisitions
Receivables		37,899			12,982
Inventories		(5,347	)		68,237
Prepaid expenses		1,503			(2,650	)
Accounts payable and accrued liabilities		6,352			(7,121	)
Current and deferred income taxes		(492	)		5,050
Pension and other postretirement benefit payments		(5,864	)		(7,031	)
Other		(101	)		331

Cash provided by (used for) operations		134,291			220,729


Cash provided by (used for) investment
Acquisition of businesses and facilities		—			(543	)
Expenditures for property and equipment		(37,481	)		(35,854	)
Purchases of short-term investments		(11,825	)		(10,000	)
Maturities of short-term investments		11,247			—
Sales of assets		575			317
Other		230			571

Cash provided by (used for) investment		(37,254	)		(45,509	)


Cash provided by (used for) financing
Issuances of long-term debt		300,000			10,000
Payments of long-term debt		(323,683	)		(92,631	)
Payments of short-term borrowings		(1,752	)		—
Payments of deferred financing fees		(11,613	)		—
Other		(1,320	)		—

Cash provided by (used for) financing		(38,368	)		(82,631	)


Increase in cash and cash equivalents		58,669			92,589

Balance at beginning of the period		69,393			22,518

Balance at end of the period	$	128,062		$	115,107

See accompanying notes to unaudited quarterly consolidated financial statements.

Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Boise Inc. is a large, diverse United States-based manufacturer of 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. We own pulp and paper mill operations in the following locations: Jackson, Alabama; International Falls, Minnesota; St. Helens, Oregon; and Wallula, Washington, all of which manufacture uncoated freesheet paper. We also own a mill in DeRidder, Louisiana, which produces containerboard (linerboard) as well as newsprint. Additionally, we have a network of five corrugated container plants located in the Pacific Northwest, a corrugated sheet plant in Nevada, and a corrugated sheet feeder plant in Texas. Headquartered in Boise, Idaho, we operate our business in three reportable segments: Paper, Packaging, and Corporate and Other (support services).

The unaudited consolidated financial statements included herein are those of the following:

•

Boise Inc. and its wholly owned subsidiaries, including BZ Intermediate Holdings LLC (BZ Intermediate).

•

BZ Intermediate and its wholly owned subsidiaries.

There are no significant differences between the results of operations and financial condition of Boise Inc. and those of BZ Intermediate other than income taxes. Historical differences between the two entities resulted primarily from the effect of income taxes, the notes payable at Boise Inc. that were repurchased and canceled in October 2009, and the associated interest expense on those notes. Unless the context indicates otherwise, the terms “Company,” “we,” “us,” “our,” or “Boise” refer to Boise Inc. and its consolidated subsidiaries, including BZ Intermediate.

The following sets forth our operating structure:

LOGO

Boise Finance Company and Boise Co-Issuer Company, two wholly owned subsidiaries of Boise Paper Holdings, L.L.C. (Boise Paper Holdings), are not shown on this chart. This chart also excludes Boise Paper Holdings’ indirect subsidiaries.

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 notes to unaudited consolidated financial statements should be read in conjunction with our 2009 Annual Report on Form
10-K, our Quarterly Reports on Form 10-Q, and the other reports we file with the Securities and Exchange Commission (SEC).

2. Net Income Per Common Share

For the three and six months ended June 30, 2010, net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Boise Inc.’s basic and diluted net income per share is calculated as follows (dollars and shares in thousands, except per-share data):


	Three Months Ended June 30				Six Months Ended June 30
	2010		2009		2010		2009

Net income	$	13,310	$	50,883	$	625	$	49,967

Weighted average number of common shares for basic net income per share		80,624		78,142		80,214		77,818
Incremental effect of dilutive common stock equivalents:
Common stock warrants (a)		—		—		—		—
Restricted stock and restricted stock units		3,469		6,112		3,929		4,088

Weighted average number of shares for diluted net income per share		84,093		84,254		84,143		81,906


Net income per share:
Basic	$	0.17	$	0.65	$	0.01	$	0.64

Diluted (a)	$	0.16	$	0.60	$	0.01	$	0.61

(a)

For the three and six months ended June 30, 2010 and 2009, warrants to purchase shares of common stock were not included in the computation of diluted net income per share, because the exercise price exceeded the average market price of our common stock.

Net income per common share is not applicable to BZ Intermediate because it does not have common shares.

3. Transactions With Related Parties

From February 22, 2008, through early March 2010, Boise Cascade Holdings, L.L.C. (Boise Cascade) held a significant interest in us, and our transactions with Boise Cascade were related-party transactions. In early March 2010, Boise Cascade sold all of its remaining investment in us, and accordingly, it is no longer a related party.

The transportation and other outsourcing services revenues described below were earned during January and February 2010. Beginning in March 2010, no transactions between Boise Cascade and us will be considered related-party transactions, except those concerning Louisiana Timber Procurement Company, L.L.C. (LTP) described below.

Related-Party Sales

We provide transportation services to Boise Cascade. For the six months ended June 30, 2010, we recorded $0.3 million of sales for transportation services in “Sales, Related parties” in the Consolidated Statements of Income, and for the three and six months ended June 30, 2009, we recorded $0.7 million and $1.3 million, respectively.

We are party to 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 agreement, as extended, expires on February 22, 2012. 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 expiration date. For the six months ended June 30, 2010, we recognized $2.3 million in “Sales, Related parties” in the Consolidated Statements of Income, and for the three and six months ended June 30, 2009, we recognized $3.6 million and $7.2 million, respectively.

LTP, a variable-interest entity that is 50% owned by Boise Inc. and 50% owned by Boise Cascade, sells wood to Boise Cascade and Boise Inc. at prices designed to approximate market prices. LTP procures saw timber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of Boise Inc. and Boise Cascade. We are the primary beneficiary of LTP; therefore, we consolidate LTP in our financial statements in our Packaging segment. Although Boise Cascade is no longer a related party to our operations, Boise Cascade continues to be a related party to LTP; therefore, sales between Boise Cascade and LTP are related-party sales in our consolidated financial statements. As of June 30, 2010, the carrying amounts of LTP’s assets and liabilities on our Consolidated Balance Sheet were $5.7 million and relate primarily to noninventory working capital. During the three and six months ended June 30, 2010, we recorded $10.6 million and $16.2 million, respectively, of LTP sales to Boise Cascade in “Sales, Related parties” in the Consolidated Statements of Income and approximately the same amount of expenses in “Materials, labor, and other operating expenses.” During the three and six months ended June 30, 2009, we recorded $5.2 million and $16.4 million, respectively, of LTP sales to Boise Cascade in “Sales, Related parties” in the Consolidated Statements of Income.

Related-Party Costs and Expenses

During the three and six months ended June 30, 2010, fiber purchases from related parties were $5.2 million and $15.0 million, respectively. During the three and six months ended June 30, 2009, fiber purchases from related parties were $8.9 million and $14.6 million, respectively. All of the costs associated with these purchases were recorded as “Fiber costs from related parties” in the Consolidated Statements of Income. Beginning in March 2010, “Fiber costs from related parties” represent only LTP’s purchases from Boise Cascade. Fiber purchases from Boise Cascade by Boise Inc. subsequent to February 2010 are recorded as “Materials, labor, and other operating expenses” in the Consolidated Statements of Income.

4. Other (Income) Expense, Net

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


	Three Months Ended June 30					Six Months Ended June 30
	2010			2009		2010			2009

Sales of assets, net	$	159		$	30	$	45		$	10
Other, net (a)		(170	)		2,404		(359	)		2,663

	$	(11	)	$	2,434	$	(314	)	$	2,673

(a)	The three and six months ended June 30, 2009, included $1.9 million of expense related to the indefinite idling of the #2 newsprint machine (D-2) at our mill in DeRidder, Louisiana.

5. Income Taxes

For the three months ended June 30, 2010, Boise Inc.’s effective tax rate was 38.6%. For the six months ended June 30, 2010, Boise Inc.’s effective tax rate was 73.7% as a result of discrete tax items. This rate is not representative of our annual expected tax rate for 2010. The primary reason for the difference from the federal statutory income tax rate of 35.0% was the effect of state income taxes and discrete tax items. For the three and six months ended June 30, 2010, we recorded $8.4 million and $1.8 million, respectively, of income tax expense. For the three and six months ended June 30, 2009, our effective tax rate was 34.0%. The primary reason for the difference from the federal statutory income tax rate was the release of valuation allowances recorded in the prior year. For the three and six months ended June 30, 2009, we recorded $26.2 million and $25.6 million, respectively, of income tax expense.

For the three and six months ended June 30, 2010, BZ Intermediate’s effective tax rates were 38.6% and 38.4%, respectively. The primary reason for the difference from the federal statutory income tax rate of 35.0% was the effect of state income taxes. For the three and six months ended June 30, 2010, we recorded $8.4 million and $0.9 million, respectively, of income tax expense. For the three and six months ended June 30, 2009, our effective tax rates were 32.1% and 31.3%, respectively. The primary reason for the difference from the federal statutory income tax rate was the release of valuation allowances recorded in the prior year. For the three and six months ended June 30, 2009, we recorded $25.6 million and $25.4 million, respectively, of income tax expense.

Uncertain Income Tax Positions

Both Boise Inc. and BZ Intermediate recognize interest and penalties related to uncertain tax positions as income tax expense in the Consolidated Statements of Income. Interest expense related to uncertain tax positions was nominal for the six months ended June 30, 2010 and 2009. We did not record any penalties associated with our uncertain tax positions during the six months ended June 30, 2010 and 2009.

Other

During the six months ended June 30, 2010, refunds received for taxes, net of payments made, were $0.1 million, and during the six months ended June 30, 2009, cash paid for taxes was $0.6 million.

Due to Internal Revenue Code Section 382, Boise Cascade’s sales of its remaining investment in us limit the amount of net operating losses that we may utilize in any one year. However, we believe it is more likely than not that our net operating losses will be fully realizable before they expire in 2028 and 2029.

We file federal income tax returns in the U.S. and state income tax returns in various state jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. Boise Inc.’s open tax years are 2009, 2008, and 2007.

Two corporate consolidated entities of Boise Inc. are subject to audit by taxing authorities for the year 2006 and the years that follow. We are responsible for any tax adjustments resulting from such audits.

6. Leases

We lease our 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 renewal 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. We do not have any sublease rental income for the periods presented below. We do not expect sublease rental income in the future to be material. Accordingly, our future minimum lease payment requirements have not been reduced by sublease rental income. Rental expense for operating leases is as follows (dollars in thousands):


	Three Months Ended June 30				Six Months Ended June 30
	2010		2009		2010		2009

Rental expense	$	3,803	$	3,868	$	7,530	$	7,787

For noncancelable operating leases with remaining terms of more than one year, the minimum lease payment requirements are as follows (dollars in thousands):


	Remaining 2010		2011		2012		2013		2014		2015 and Thereafter

Minimum payment	$	6,190	$	11,808	$	10,919	$	8,391	$	6,918	$	19,358

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 approximately six years, with fixed payment terms similar to those in the original lease agreements.

7. Concentrations of Risk

Business

Sales to OfficeMax represent a concentration in the volume of business transacted and in revenue generated from those transactions and a concentration of credit risk. Sales to OfficeMax were $126.7 million

and $254.9 million, respectively, during the three and six months ended June 30, 2010, representing 24% and 25%, respectively, of total sales for those periods. During the three and six months ended June 30, 2009, sales to OfficeMax were $138.2 million and $280.0 million, respectively, representing 28% and 29% of total sales for those periods. At June 30, 2010, and December 31, 2009, we had $30.5 million and $34.7 million, respectively, of accounts receivable due from OfficeMax.

Labor

As of June 30, 2010, we had approximately 4,100 employees. Approximately 57% of these employees work pursuant to collective bargaining agreements. As of June 30, 2010, approximately 49% of our employees were working pursuant to collective bargaining agreements that have expired or will expire within one year, including agreements at the following facility locations: Wallula, Washington; DeRidder, Louisiana; Jackson, Alabama; St. Helens, Oregon; Nampa, Idaho; and International Falls, Minnesota. The labor contract at our paper mill in Wallula, Washington (332 employees represented by the Association of Western Pulp & Paper Workers, or AWPPW) expired in March 2009 and was terminated by the AWPPW in October 2009. In February 2010, the union employees at Wallula rejected a new collective bargaining agreement that union leadership had recommended unanimously, and we declared an impasse in the bargaining process and implemented the terms of the last contract offer. We are currently negotiating the labor contract at our mill in DeRidder, Louisiana (387 employees represented by the United Steelworkers), which expired in February 2010, and the labor contract at our mill in St. Helens, Oregon (122 employees represented by the AWPPW), which expired in March 2010. We expect to begin negotiating the labor contract at our mill in Jackson, Alabama (379 employees also represented by the United Steel Workers) after August 31, 2010, when that contract expires.

8. Inventories

Inventories include the following (dollars in thousands):


	June 30, 2010		December 31, 2009

Finished goods	$	120,149	$	120,817
Work in process		27,129		22,677
Fiber		34,662		34,557
Other raw materials and supplies		73,395		74,122

	$	255,335	$	252,173

9. Property and Equipment, Net

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


	June 30, 2010			December 31, 2009

Land and land improvements	$	31,875		$	31,875
Buildings and improvements		204,722			199,086
Machinery and equipment		1,197,526			1,176,494
Construction in progress		32,181			18,992

		1,466,304			1,426,447
Less accumulated depreciation		(280,232	)		(220,768	)

	$	1,186,072		$	1,205,679

10. Intangible Assets

Intangible assets represent primarily the values assigned to trademarks and trade names, customer relationships, and technology. Customer relationships are amortized over approximately ten years, and technology is amortized over approximately five years. Trademarks and trade names are not amortized. During the three and six months ended June 30, 2010 and 2009, intangible asset amortization was $0.7 million and $1.4 million, respectively. Our estimated amortization expense is $1.4 million for the remainder of 2010, $2.8 million in 2011 and 2012, $1.6 million in 2013, and $1.4 million in 2014 and 2015. The gross carrying amount, accumulated amortization, and net carrying amount as of June 30, 2010, and December 31, 2009, were as follows (dollars in thousands):


	As of June 30, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Trademarks and trade names	$	16,800	$	—		$	16,800
Customer relationships		13,700		(3,197	)		10,503
Technology and other		6,895		(3,217	)		3,678

	$	37,395	$	(6,414	)	$	30,981


	As of December 31, 2009
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Trademarks and trade names	$	16,800	$	—		$	16,800
Customer relationships		13,700		(2,512	)		11,188
Technology and other		6,895		(2,525	)		4,370

	$	37,395	$	(5,037	)	$	32,358

11. Asset Retirement Obligations

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. Occasionally, we become aware of events or circumstances that require us to revise our future estimated cash flows. When revision becomes necessary, we recalculate our obligation and adjust our asset and liability accounts utilizing appropriate discount rates. Upon settlement of the liability, we will recognize a gain or loss for any difference between the settlement amount and the liability recorded.

At June 30, 2010, and December 31, 2009, we had $10.8 million and $10.4 million, respectively, of asset retirement obligations primarily recorded in “Other long-term liabilities” on the Consolidated Balance Sheets. These liabilities primarily related 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. During 2009, our estimated future cash flows for retirement obligations relating to items at two of our mills were reduced as a result of discussions with third-party organizations. These changes reduced our expected asset retirement obligations. No assets are legally restricted for purposes of settling asset retirement obligations. The table below describes changes to the asset retirement obligations for the six months ended June 30, 2010, and for the year ended December 31, 2009 (dollars in thousands):


	Period Ended
	June 30, 2010		December 31, 2009

Asset retirement obligation at beginning of period	$	10,362	$	14,283
Liabilities incurred		—		—
Accretion expense		413		1,165
Payments		—		(122	)
Revisions in estimated cash flows		—		(4,964	)

Asset retirement obligation at end of period	$	10,775	$	10,362

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 facility 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.

12. Debt

At June 30, 2010, and December 31, 2009, our long-term debt and the interest rates on that debt were as follows (dollars in thousands):


	June 30, 2010					December 31, 2009
	Amount			Interest Rate		Amount			Interest Rate

Revolving credit facility, due 2013	$	—		—	%	$	—		—	%
Tranche A term loan, due 2013		192,244		3.13			203,706		3.25
Tranche B term loan, due 2014		—		—			312,221		5.75
9% senior notes, due 2017		300,000		9.00			300,000		9.00
8% senior notes, due 2020		300,000		8.00			—		—
Current portion of long-term debt		(29,163	)	3.13			(30,711	)	3.97

Long-term debt, less current portion		763,081		7.35			785,216		6.41
Current portion of long-term debt		29,163		3.13			30,711		3.97

	$	792,244		7.20	%	$	815,927		6.32	%

As of June 30, 2010, Boise Inc. and BZ Intermediate’s debt consisted of the following:

•

The Revolving Credit Facility: A five-year nonamortizing $250.0 million senior secured revolving credit facility (the Revolving Credit Facility) with interest at either the London Interbank Offered Rate (LIBOR) plus an applicable margin, which is currently 275 basis points, or a calculated base rate plus an applicable margin, which is currently 175 basis points (collectively with the Tranche A term loan facility, the Credit Facilities).

•

The Tranche A Term Loan Facility: A five-year amortizing senior secured loan facility with interest at LIBOR plus an applicable margin, which is currently 275 basis points, or a calculated base rate plus an applicable margin, which is currently 175 basis points. The Tranche A term loan facility was originally issued at $250.0 million. At December 31, 2009, our LIBOR applicable margin was 300 basis points, and our calculated base rate applicable margin was 200 basis points.

•

The 9% Senior Notes: An eight-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 9%.

•

The 8% Senior Notes: A ten-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 8%.

The Credit Facilities are secured by a first-priority lien on all of the assets of our subsidiaries that guarantee or are borrowers, and in the event of default, the lenders generally would be entitled to seize these assets. All borrowings under the Credit Facilities bear interest at a rate per annum equal to an applicable margin plus a calculated base rate or adjusted Eurodollar rate. The calculated 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%. The adjusted Eurodollar rate means LIBOR rounded to the nearest 1/16 of 1.0% and adjusted for any applicable reserve requirements. In addition to paying interest, we pay a commitment fee to the lenders under the Revolving Credit Facility at a rate of 0.375% per annum times the daily average undrawn portion of the Revolving Credit Facility (reduced by the amount of letters of credit issued and outstanding), which fee is payable quarterly in arrears. We also pay letter of credit fees of 275 basis points times the average daily maximum outstanding amount of the letters of credit and a fronting fee of 15 basis points to the issuing bank of outstanding letters of credit. These fees are payable quarterly and in arrears.

At June 30, 2010, and December 31, 2009, we had no borrowings outstanding under the Revolving Credit Facility. For the six months ended June 30, 2010, and the year ended December 31, 2009, the average interest rates for our borrowings under our Revolving Credit Facility were zero and 3.7%, respectively. The minimum and maximum borrowings under the Revolving Credit Facility were zero for the six months ended June 30, 2010, and zero and $60.0 million for the year ended December 31, 2009. The weighted average amount of borrowings outstanding under the Revolving Credit Facility during the six months ended June 30, 2010 and 2009, was zero and $17.2 million, respectively. At June 30, 2010, we had availability of $245.1 million, which is net of outstanding letters of credit of $4.9 million.

Debt Refinancing

On March 19, 2010, Boise Paper Holdings and Boise Co-Issuer Company (together, the 8% Senior Note Issuers), two of our wholly owned indirect subsidiaries, issued a $300 million aggregate principal amount of 8% senior notes due on April 1, 2020 (the 8% Senior Notes) through a private placement that is exempt from the registration requirements of the Securities Act of 1933, as amended. The 8% Senior Notes pay interest semiannually in arrears on April 1 and October 1, commencing on October 1, 2010. As a result of this refinancing, we extended the maturity of our debt and fixed our interest rates.

Following the sale of the 8% Senior Notes, we used the net proceeds of the sale, as well as cash on hand, to repay the Tranche B term loan facility plus accrued and unpaid interest at par. Upon the repayment of all of the indebtedness outstanding under the Tranche B term loan facility, such debt was canceled.

The issuance of the 8% Senior Notes and the repayment of our Tranche B term loan facility represented a substantial modification to our debt structure. Therefore, we wrote off $22.2 million of previously unamortized deferred financing costs for the Tranche B term loan facility in “Loss on extinguishment of debt” in our Consolidated Statements of Income. We recorded $11.6 million of new deferred financing costs related to the March 2010 debt refinancing.

In connection with the issuance of the 8% Senior Notes, the 8% Senior Notes Issuers and BZ Intermediate, the parent company of Boise Paper Holdings and its restricted subsidiaries (together the 8% Senior Notes Guarantors) entered into the 8% Senior Notes Registration Rights Agreement, dated as of March 19, 2010. The 8% Senior Notes Registration Rights Agreement required us to register under the Securities Act the 8% Senior Notes due in 2020 (the 8% Exchange Notes) having substantially identical terms to the 8% Senior Notes and to complete an exchange of the privately placed 8% Senior Notes for the publicly registered 8% Exchange Notes or, in certain circumstances, to file and keep effective a shelf registration statement for resale of the privately placed 8% Senior Notes. We completed the public registration of the 8% Exchange Notes in June 2010, and in July 2010, we completed an exchange of the privately placed 8% Senior Notes for the publicly registered 8% Exchange Notes having substantially identical terms.

The 8% Senior Notes are senior unsecured obligations and rank equally with all of the Issuers’ present and future senior indebtedness, senior to all of their future subordinated indebtedness, and effectively subordinated to all of our present and future senior secured indebtedness (including all borrowings with respect to the Credit Facilities to the extent of the value of the assets securing such indebtedness).

Debt Restructuring

On October 26, 2009, Boise Paper Holdings and Boise Finance Company (together, the 9% Senior Notes Issuers), two of our wholly owned indirect subsidiaries, issued a $300 million aggregate principal amount of 9% senior notes due on November 1, 2017 (the 9% Senior Notes) through a private placement that is exempt from the registration requirements of the Securities Act of 1933, as amended. The 9% Senior Notes pay interest semiannually in arrears on May 1 and November 1, commencing on May 1, 2010.

In connection with the issuance of the 9% Senior Notes, the 9% Senior Notes Issuers and BZ Intermediate, the parent company of Boise Paper Holdings and its restricted subsidiaries (together the 9% Senior Notes Guarantors) entered into the 9% Senior Notes Registration Rights Agreement, dated as of October 26, 2009. The 9% Senior Notes Registration Rights Agreement required us to register under the Securities Act the 9% Senior Notes due in 2017 (the 9% Exchange Notes) having substantially identical terms to the 9% Senior Notes and to complete an exchange of the privately placed 9% Senior Notes for the publicly registered 9% Exchange Notes or, in certain circumstances, to file and keep effective a shelf registration statement for resale of the privately placed 9% Senior Notes. We completed the public registration of the 9% Exchange Notes in June 2010, and in July 2010, we completed an exchange of the privately placed 9% Senior Notes for the publicly registered 9% Exchange Notes having substantially identical terms.

The 9% Senior Notes are senior unsecured obligations and rank equally with all of the Issuers’ present and future senior indebtedness, senior to all of their future subordinated indebtedness, and effectively subordinated to all of our present and future senior secured indebtedness (including all borrowings with respect to the Credit Facilities to the extent of the value of the assets securing such indebtedness).

Covenants

The Credit Facilities require BZ Intermediate and its subsidiaries to maintain financial covenant ratios. We are required to have a total leverage ratio of less than 4.75:1.00, stepping down to 4.50:1.00 at September 30, 2011, and a secured leverage ratio of 3.25:1.00, stepping down to 3.00:1.00 at September 30, 2011. The total leverage ratio is defined in our loan agreements at the end of any fiscal quarter as the ratio of (i) consolidated total net debt as defined in our Credit Facilities debt agreement as of such day to (ii) consolidated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the four-fiscal-quarter period ending on such date. The Credit Facilities secured leverage ratio is defined in our First Amendment to our loan agreement as the ratio as of the last day of any fiscal quarter of (i) consolidated first lien secured total net debt as defined in our credit agreement amendments as of such day to (ii) consolidated adjusted EBITDA for the four-fiscal-quarter period ending on such date. The Credit Facilities also limit the ability of BZ Intermediate and its subsidiaries to make capital expenditures, generally to $150 million per year.

The 9% and 8% Senior Notes indenture agreements contain covenants which, subject to certain exceptions, limit the ability of the 9% and 8% Senior Notes Issuers and the 9% and 8% Senior Notes Guarantors to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted payments, engage in transactions with affiliates, and create liens on assets of the 9% and 8% Senior Notes Issuers or 9% and 8% Senior Notes Guarantors. Upon a change of control, the 9% and 8% Senior Notes Issuers must offer to repurchase the 9% and 8% Senior Notes at 101% of the principal amount, plus accrued and unpaid interest. If the 9% and 8% Senior Notes Issuers sell certain assets and do not use the proceeds from such sales for specified purposes, they must offer to repurchase the 9% and 8% Senior Notes at 100% of the principal amount, plus accrued and unpaid interest.

Guarantees

Our obligations under our Credit Facilities are guaranteed by each of Boise Paper Holdings’ existing and subsequently acquired domestic subsidiaries (collectively, the Credit Facility Guarantors). The Credit Facilities are secured by a first-priority security interest in substantially all of the real, personal, and mixed property of Boise Paper Holdings and the Credit Facility Guarantors, including 100% of the equity interests of Boise Paper Holdings and each domestic subsidiary of Boise Paper Holdings, 65% of the equity interests of each of Boise Paper 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 Boise Paper Holdings), and all intercompany debt.

The 9% and 8% Senior Notes are jointly and severally guaranteed on a senior unsecured basis by BZ Intermediate and each existing and future subsidiary of BZ Intermediate (other than their respective issuers). The 9% and 8% Senior Notes Guarantors do not include Louisiana Timber Procurement Company, L.L.C., or foreign subsidiaries.

Prepayments

We may redeem all or a portion of the 9% Senior Notes at any time on or after November 1, 2013, at a premium decreasing to zero by November 1, 2015, plus accrued and unpaid interest. In addition, prior to November 1, 2012, the 9% Senior Notes Issuers may redeem up to 35% of the aggregate principal amount of the 9% Senior Notes at a redemption price of 109% of the principal amount thereof with the net proceeds of one or more qualified equity offerings.

We may redeem all or a portion of the 8% Senior Notes at any time on or after April 1, 2015, at a premium decreasing to zero by April 1, 2018, plus accrued and unpaid interest. In addition, prior to April 1, 2013, the 8% Senior Notes Issuers may redeem up to 35% of the aggregate principal amount of the 8% Senior Notes at a redemption price of 108% of the principal amount thereof with the net proceeds of one or more qualified equity offerings.

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. As of June 30, 2010, required debt principal repayments, excluding those from excess cash flows, total $10.4 million during the remainder of 2010, $43.7 million in 2011, $129.7 million in 2012, $8.4 million in 2013, zero in 2014 and 2015, and $600.0 million thereafter.

Other

At June 30, 2010, and December 31, 2009, we had $33.0 million and $47.4 million, respectively, of costs recorded in “Deferred financing costs” on our Consolidated Balance Sheet. As noted above, we repaid the Tranche B term loan facility with the proceeds from the March 2010 debt refinancing, and as a result, we expensed approximately $22.2 million of previously unamortized deferred financing costs. We recorded this charge in “Loss on extinguishment of debt” in our Consolidated Statement of Income. In addition, $11.6 million of new deferred financing costs related to the debt refinancing are included, net of amortization, in “Deferred financing costs” on our Consolidated Balance Sheet. The amortization of these costs is recorded in interest expense using the effective interest method over the life of the loans. In “Interest expense” in our Consolidated Statements of Income, we recorded $1.5 million and $3.8 million, respectively, of amortization expense for the three and six months ended June 30, 2010, and $2.9 million and $5.8 million, respectively, for the three and six months ended June 30, 2009.

In April 2010, we entered into a short-term borrowing agreement for $5.3 million at a fixed interest rate of 2.5%. Principal and interest payments are payable monthly through January 2011.

For the six months ended June 30, 2010 and 2009, cash payments for interest, net of interest capitalized, were $21.8 million and $31.8 million, respectively.

13. Financial Instruments

We are exposed to market risks, including changes in interest rates, energy prices, and foreign currency exchange rates.

Interest Rate Risk—Debt

With the exception of the Tranche A term loan facility, our debt is fixed-rate debt. At June 30, 2010, the estimated fair value of our fixed-rate debt, based on quoted market prices for our debt, was approximately $8.5 million more than the amount recorded on our Consolidated Balance Sheet. At June 30, 2010, the estimated fair value of our variable-rate debt, based on quoted market prices for our debt, was approximately $3.6 million less than the amount recorded on our Consolidated Balance Sheet. The fair value of long-term debt is estimated based on quoted market prices for our debt and the discounted value of our expected future cash payments.

We use interest rate derivative instruments to hedge a portion of our interest rate risk. We have derivatives in place with a cap rate of 5% on a notional amount of $300 million through the period ending March 31, 2011. At June 30, 2010, the fair value of the interest rate derivatives was nominal. In “Change in fair value of interest rate derivatives” in our Consolidated Statements of Income, we recorded the change in fair value of these derivatives, or $13,000 and $42,000 of expense, respectively, during the three and six months ended June 30, 2010, and $0.4 million and $0.3 million of income, respectively, during the three and six months ended June 30, 2009. For the amortization of the premiums paid for the interest rate derivatives, we recorded zero and $0.1 million, respectively, in “Interest expense” during the three and six months ended June 30, 2010, and $0.1 million and $0.3 million, respectively, during the three and six months ended June 30, 2009. Changes in the fair value of these derivatives are recorded in “Change in fair value of interest rate derivatives” in our Consolidated Statements of Income.

In connection with the repayment of our Tranche B term loan facility, the remaining amounts recorded in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheet relating to the interest rate derivatives were charged to “Interest expense” in our Consolidated Statement of Income. As a result, during the three and six months ended June 30, 2010, we recognized zero and $0.4 million, respectively, in “Interest expense” in our Consolidated Statements of Income. For the three and six months ended June 30, 2009, we amortized $0.1 million and $0.2 million, respectively, of the amounts recorded in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheet to “Interest expense” in our Consolidated Statement of Income.

Interest Rate Risk—Investments

Our exposure to market risk for changes in interest rates also relates to our cash, cash equivalents, and short-term investments. As of June 30, 2010, our cash, cash equivalents, and short-term investments consisted primarily of funds invested in money market accounts and Federal Deposit Insurance Corporation (FDIC) insured certificates of deposit. As the interest rates on a significant portion of our cash, cash

equivalents, and short-term investments are variable, a change in interest rates earned would affect interest income and cash flows but would not have a significant impact on the fair market value of the related underlying instruments.

The components of cash, cash equivalents, and short-term investments as of and for the six months ended June 30, 2010, are as follows (dollars in thousands):


	Six Months Ended June 30, 2010
	Cost Basis		Accrued Interest		Unrealized Gains (Losses)		Recorded Basis		Cash and Cash Equivalents		Short-Term Investments

Cash	$	5,839	$	—	$	—	$	5,839	$	5,839	$	—
Money market accounts		122,223		—		—		122,223		122,223		—
Certificates of deposit		10,601		5		—		10,606		—		10,606

Total	$	138,663	$	5	$	—	$	138,668	$	128,062	$	10,606

During the six months ended June 30, 2010, $11.2 million of certificates of deposit matured, and $11.8 million were purchased. At June 30, 2010, we did not have any investments in individual securities that had been in a continual unrealized loss position for more than 12 months.

Energy Risk

We enter into transactions to hedge the variable cash flow risk of natural gas purchases. As of June 30, 2010, we had entered into derivative instruments related to approximately 50% of our forecasted natural gas purchases for July 2010 through October 2010, approximately 34% of our forecasted natural gas purchases for November 2010 through March 2011, approximately 28% of our forecasted natural gas purchases for April 2011 through October 2011, approximately 6% of our forecasted natural gas purchases for November 2011 through March 2012, and approximately 3% of our forecasted natural gas purchases for April 2012 through October 2012. At June 30, 2010, these derivatives included three-way collars and call spreads.

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 the 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 strategy enables us to decrease the floor and the ceiling price of the collar beyond the range of a traditional collar while offsetting the associated cost with the sale of the written call. The following table summarizes our position related to these instruments as of June 30, 2010 (in millions of British thermal units, or mmBtu, per day):


	Three-Way Collars
	July 2010 Through August 2010						October 2010						November 2010 Through March 2011			April 2011 Through October 2011

Volume hedged		5,500			9,500			5,500			9,500			4,000			1,000

Strike price of call sold	$	12.00		$	11.00		$	12.00		$	11.00		$	11.00		$	11.00
Strike price of call bought		9.00			8.00			9.00			8.00			8.00			8.00
Net cap premium		5.90			5.03			5.90			5.03			5.66			5.33

Approximate percent hedged		18	%		32	%		18	%		32	%		11	%		3	%

A call spread is a combination of a purchased call and a written call. The purchased call establishes a maximum price unless the market exceeds the written call, at which point the maximum price would be the NYMEX price, less the difference between the purchased call and the written call strike price, plus any applicable net premium associated with the two options. The following table summarizes our position related to these instruments as of June 30, 2010 (in mmBtu per day):


	Call Spreads
	September 2010						November 2010 Through March 2011

Volume hedged		5,500			9,500			4,500			4,000

Strike price of call sold	$	12.00		$	11.00		$	11.00		$	10.00
Strike price of call bought		9.00			8.00			8.00			7.00
Net cap premium		1.10			0.55			0.40			0.28

Approximate percent hedged		18	%		32	%		12	%		11	%


	April 2011 Through October 2011						November 2011 Through March 2012			April 2012 Through October 2012

Volume hedged		2,500			5,000			2,500			1,000

Strike price of call sold	$	11.00		$	10.00		$	11.00		$	11.00
Strike price of call bought		8.00			7.00			8.00			8.00
Net cap premium		0.37			0.31			0.35			0.25

Approximate percent hedged		8	%		17	%		6	%		3	%

We have elected to account for these instruments as economic hedges. At June 30, 2010, we recorded the fair value of the derivatives, or $2.1 million, in “Accrued liabilities, Other” on our Consolidated Balance Sheet. During the three months and six months ended June 30, 2010, we recorded the change in fair value of the instruments, or $2.7 million of income and $0.6 million of expense, respectively, in “Materials, labor, and other operating expenses” in our Consolidated Statements of Income.

Foreign Currency Risk

While we are exposed to foreign currency risk in our operations, none of this risk was material to our financial position or results of operations as of June 30, 2010.

Fair Value Measurements

We record our financial assets and liabilities, which consist of cash equivalents, short-term investments, and derivative financial instruments that are used to hedge exposures to interest rate and energy risks, at fair value. The fair value hierarchy under U.S. generally accepted accounting principles (GAAP) gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value (Level 1). If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly (Level 2). If quoted prices for identical or similar assets are not available or are unobservable, we may use internally developed valuation models, whose inputs include bid prices and third-party valuations utilizing underlying asset assumptions (Level 3). We enter into these hedges with large financial institutions, and we monitor their credit ratings to determine if any adjustments to fair value need to be made. No such adjustments were made in any period presented.

At June 30, 2010, and December 31, 2009, fair value for these financial instruments was determined based on applicable interest rates such as LIBOR, interest rate curves, and NYMEX price quotations under the terms of the contracts, using current market information as of the reporting date. Our certificates of deposit, interest rate derivatives, and energy derivatives are valued using third-party valuations based on quoted prices for similar assets and liabilities. The following table provides a summary of our assets and liabilities measured at fair value on a recurring basis and the inputs used to develop these estimated fair values under the hierarchy discussed above (dollars in thousands):


	Fair Value Measurements at June 30, 2010, Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market accounts (a)	$	122,223	$	122,223	$	—	$	—
Certificates of deposit (b)		10,606		—		10,606		—
Interest rate derivatives (c)		—		—		—		—

	$	132,829	$	122,223	$	10,606	$	—


Liabilities:
Energy derivatives (d)	$	2,064	$	—	$	2,064	$	—

	$	2,064	$	—	$	2,064	$	—


	Fair Value Measurements at December 31, 2009, Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market accounts (a)	$	65,125	$	65,125	$	—	$	—
Certificates of deposit (b)		10,023		—		10,023		—
Interest rate derivatives (c)		163		—		163		—

	$	75,311	$	65,125	$	10,186	$	—


Liabilities:
Energy derivatives (d)	$	1,447	$	—	$	1,447	$	—

	$	1,447	$	—	$	1,447	$	—

(a)	Recorded in “Cash and cash equivalents” on our Consolidated Balance Sheet.

(b)	Recorded in “Short-term investments” on our Consolidated Balance Sheet.

(c)	Recorded in “Other assets” on our Consolidated Balance Sheet.

(d)	Recorded in “Accrued liabilities, Other” on our Consolidated Balance Sheet.

As of June 30, 2010, and December 31, 2009, we did not have any fair value measurements using significant unobservable inputs (Level 3).

Tabular Disclosure of the Fair Values of Derivative Instruments and the Effect of Those Instruments

(dollars in thousands)


	Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	June 30, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives designated as economic hedging instruments (a)
Interest rate contracts	Other assets	$	—	Accrued liabilities	$	—
Natural gas contracts	Other assets		—	Accrued liabilities		2,064

Total derivatives designated as economic hedging instruments		$	—		$	2,064


Total derivatives		$	—		$	2,064


	Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	December 31, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives designated economic hedging instruments (a)
Interest rate contracts	Other assets	$	163	Accrued liabilities	$	—
Natural gas contracts	Other assets		—	Accrued liabilities		1,447

Total derivatives designated as economic hedging instruments		$	163		$	1,447


Total derivatives		$	163		$	1,447


The Effect of Derivative Instruments on the Consolidated Statement of Income for the Three Months Ended June 30, 2010
Derivatives Designated as Cash Flow Hedging Instruments (b)	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)			Derivatives Designated as Economic Hedging Instruments (a)	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative


Interest rate contracts	$	—	Interest income/expense	$	—		Interest rate contracts	Change in fair value of interest rate derivatives	$	(13	)

							Natural gas contracts	Materials, labor, and other operating expenses		2,713

	$	—		$	—				$	2,700


The Effect of Derivative Instruments on the Consolidated Statement of Income for the Six Months Ended June 30, 2010
Derivatives Designated as Cash Flow Hedging Instruments (b)	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)			Derivatives Designated as Economic Hedging Instruments (a)	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative


Interest rate contracts	$	—	Interest income/expense	$	(422	)	Interest rate contracts	Change in fair value of interest rate derivatives	$	(42	)

							Natural gas contracts	Materials, labor, and other operating expenses		(617	)

	$	—		$	(422	)			$	(659	)


The Effect of Derivative Instruments on the Consolidated Statement of Income for the Three Months Ended June 30, 2009
Derivatives Designated as Cash Flow Hedging Instruments (b)	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)			Derivatives Designated as Economic Hedging Instruments (a)	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative


Interest rate contracts	$	—	Interest income/expense	$	(85	)	Interest rate contracts	Change in fair value of interest rate derivatives	$	627

							Natural gas contracts	Materials, labor, and other operating expenses		3,468

	$	—		$	(85	)			$	4,095


The Effect of Derivative Instruments on the Consolidated Statement of Income for the Six Months Ended June 30, 2009
Derivatives Designated as Cash Flow Hedging Instruments (b)	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified From Accumulated OCI Into Income (Effective Portion)			Derivatives Designated as Economic Hedging Instruments (a)	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative


Interest rate contracts	$	—	Interest income/expense	$	(169	)	Interest rate contracts	Change in fair value of interest rate derivatives	$	495

							Natural gas contracts	Materials, labor, and other operating expenses		1,277

	$	—		$	(169	)			$	1,772

(a)	See discussion above for additional information on our purpose for entering into derivatives designated as economic hedges and our overall risk management strategies.

(b)	As of January 1, 2009, we no longer have interest rate derivatives designated as cash flow hedges. During the six months ended June 30, 2010 and 2009, these derivatives were accounted for as economic hedges.

14. New and Recently Adopted Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. This ASU amends FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, to require reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The ASU also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. We adopted this guidance on January 1, 2010, and the adoption did not have a material impact on our financial position or results of operations. The detailed Level 3 roll-forward disclosures are effective for fiscal years beginning after December 15, 2010. We do not expect the adoption of the Level 3 roll-forward disclosures to have a material impact on our financial position or results of operation.

In June 2009, the FASB issued ASU 2009-17 (Statement of Financial Accounting Standards No. 167), Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amends the consolidation guidance applicable to variable-interest entities (VIEs). This guidance requires that entities evaluate former qualified special-purpose entities for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative

assessment to a qualitative assessment, and increases the frequency of required reassessment to determine whether a company is the primary beneficiary of a VIE. It also requires additional year-end and interim disclosures. We adopted this guidance on January 1, 2010, and the adoption did not have a material impact on our financial position or results of operations. During first quarter 2010, we reassessed our primary beneficiary assertion relating to Louisiana Timber Procurement, L.L.C., our only VIE, after Boise Cascade sold all of its remaining interest in us. This analysis did not change our assertions or have a material impact on our financial position or results of operations.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

15. Retirement and Benefit Plans

During all of the periods presented, some of our employees participated in our retirement plans. These plans consist of noncontributory defined benefit pension plans, contributory defined contribution savings plans, deferred compensation plans, and postretirement healthcare benefit plans. Compensation expense was calculated based on costs directly attributable to our employees.

Components of Net Periodic Benefit Cost and Other Comprehensive (Income) Loss

The components of net periodic benefit cost and other comprehensive (income) loss are as follows (dollars in thousands):


	Pension Benefits						Other Benefits
	Three Months Ended June 30						Three Months Ended June 30
	2010			2009			2010			2009

Service cost	$	1,192		$	1,914		$	1		$	1
Interest cost		6,309			6,032			8			32
Expected return on plan assets		(5,790	)		(5,735	)		—			—
Amortization of actuarial (gain) loss		440			83			(4	)		(1	)
Amortization of prior service costs and other		13			9			—			—

Company-sponsored plans		2,164			2,303			5			32
Multiemployer plans		98			92			—			—

Net periodic benefit cost	$	2,262		$	2,395		$	5		$	32


	Pension Benefits						Other Benefits
	Six Months Ended June 30						Six Months Ended June 30
	2010			2009			2010			2009

Service cost	$	2,700		$	3,830		$	2		$	2
Interest cost		12,655			12,073			16			63
Expected return on plan assets		(11,669	)		(11,469	)		—			—
Amortization of actuarial (gain) loss		895			166			(143	)		(1	)
Amortization of prior service costs and other		26			18			—			—

Company-sponsored plans		4,607			4,618			(125	)		64
Multiemployer plans		223			195			—			—

Net periodic benefit cost	$	4,830		$	4,813		$	(125	)	$	64

During the three and six months ended June 30, 2010, net periodic pension expense included $0.4 million and $0.9 million, respectively, of net loss that was amortized from “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets. During the three and six months ended June 30, 2009, net periodic pension expense included $0.3 million and $0.2 million, respectively, of net loss that was amortized from “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets.

We made a voluntary contribution of $5.5 million to our qualified pension plans during the six months ended June 30, 2010. In July 2010, we made an additional voluntary contribution of $5.5 million to our qualified pension plans. We have satisfied our pension contribution requirements for 2010; however, we may choose to make further voluntary contributions during the remainder of 2010.

16. Stockholders’ Equity and Capital

Boise Inc.

Preferred Stock. We are authorized to issue 1.0 million shares of preferred stock with such designations, voting, and other rights and preferences as may be determined from time to time by the board of directors. No shares were issued or outstanding at June 30, 2010, and December 31, 2009.

Common Stock. We are authorized to issue 250.0 million shares of common stock, of which 84.8 million shares were issued and outstanding at June 30, 2010. Of these shares outstanding, 4.2 million shares were restricted stock (discussed below). At December 31, 2009, we had 84.4 million shares issued and outstanding, of which 6.5 million shares were restricted stock. The common stock outstanding does not include restricted stock units.

Warrants. In connection with our public offering in June 2007, we issued 41.4 million units (the Units). Each Unit consists of one share of our common stock and one Redeemable Common Stock Purchase Warrant (the Warrants). Each Warrant entitled the holder to purchase one share of common stock at an exercise price of $7.50 and expires on June 18, 2011. We may redeem the Warrants, at a price of $0.01 per Warrant, upon 30 days’ notice while the Warrants are exercisable, only in the event that the last sale price of the common stock is at least $14.25 per share for any 20 trading days within a 30-trading-day period ending on the third day prior to the date on which notice of redemption is given.

Simultaneous with the consummation of our public offering, our then chairman and our chief executive officer each privately purchased 1.5 million warrants for an aggregate total of 3.0 million warrants (the Insider Warrants) at $1.00 per warrant (for an aggregate purchase price of $3.0 million). The amount paid for the Insider Warrants approximated fair value on the date of issuance. All of the proceeds received from these purchases were placed in cash held in trust. The Insider Warrants purchased were identical to the Warrants underlying the Units issued in the public offering, except that the Insider Warrants may not be called for redemption and may be exercisable on a “cashless basis,” at the holder’s option, so long as such securities are held by such purchaser or his affiliates. At June 30, 2010, and December 31, 2009, 44.4 million warrants were outstanding. At June 30, 2010, 2.3 million of the original Insider Warrants continued to be held by insiders.

Restricted Stock and Restricted Stock Units. In our consolidated financial statements, we evaluate share-based compensation for awards granted under the Boise Inc. Incentive and Performance Plan (the Plan) on a quarterly basis based on our estimate of expected restricted stock forfeiture, review of recent forfeiture activity, and expected future turnover. We recognize the effect of adjusting the forfeiture rate for all expense amortization in the period that we change the forfeiture estimate. The effect of forfeiture adjustments during the three and six months ended June 30, 2010 and 2009, was zero.

Service-Condition Vesting Awards. In March 2010, pursuant to the Plan, we granted 0.2 million shares of restricted stock to our nonemployee directors. The shares will vest fully on March 15, 2011. Any shares not vested on or before March 15, 2011, will be forfeited.

In March 2009, pursuant to the Plan, we granted to directors and members of management 4.6 million shares of restricted stock and 1.2 million restricted stock units (collectively, restricted stock). The 2.0 million shares of restricted stock granted to the directors vested on March 15, 2010. The grants to members of management vested or will vest as follows: one-fifth on March 15, 2010, one-fifth on March 15, 2011, and three-fifths on March 15, 2012. Any shares not vested on or before March 15, 2012, will be forfeited.

In May 2008, directors and members of management were granted awards of 0.4 million and 0.8 million shares, respectively, of restricted stock subject to service-condition vesting. The restricted stock granted to directors vested on March 2, 2009. Additionally, one-third of the management grants subject to service-condition vesting restrictions vested on March 2, 2009. Half of the remaining management grants subject to service-condition vesting restrictions vested on February 28, 2010, and the remaining half will vest on February 28, 2011. Any shares not vested on or before February 28, 2011, will be forfeited.

Market-Condition Vesting Awards. In May 2008, members of management were granted 1.9 million shares of restricted stock, subject to market-based vesting restrictions. Of this 1.9 million, 0.7 million will vest

on February 28, 2011, if the closing price of Boise Inc. stock has been at least $10 per share for at least 20 trading days in any period of 30 consecutive trading days between the grant date and February 28, 2011. The weighted average grant-date fair value of these awards was $2.03 per share. The remaining 1.2 million shares of the restricted stock grants will vest on February 28, 2011, if the closing price of Boise Inc. stock has been at least $12.50 per share for at least 20 trading days in any period of 30 consecutive trading days between the grant date and February 28, 2011. The weighted average grant-date fair value of these awards was $1.57 per share. Any shares not vested on February 28, 2011, will be forfeited.

Compensation Expense. We recognize compensation expense for the restricted stock based on the fair value on the date of the grant, as described below. Compensation expense is recognized ratably over the vesting period for the restricted stock grants that vest over time and ratably over the award period for the restricted stock grants that vest based on the closing price of Boise Inc. stock, as discussed above. During the three and six months ended June 30, 2010, we recognized $0.9 million and $1.8 million, respectively, of compensation expense, and during the three and six months ended June 30, 2009, we recognized $0.9 million and $1.7 million, respectively. Most of these costs were recorded in “General and administrative expenses” in our Consolidated Statements of Income.

Fair Value Measurement. The fair value of service-condition restricted stock is determined based on the number of shares or units granted and the quoted price of our stock at the date of grant and is expensed on a straight-line basis over the vesting period. The fair value on the date of grant was $5.46 per share for the 2010 restricted stock grant, $0.43 per share for the 2009 grant, and $4.16 per share for the 2008 grant. Compensation expense is adjusted if the service condition is not met.

The equity grants that vest based on the stock price of Boise Inc. are market-condition grants. Because the market-based restrictions represent a more difficult threshold to meet before payout, with greater uncertainty that the market condition will be satisfied, these awards have a lower fair value than those that vest based primarily on the passage of time. However, compensation expense is required to be recognized for an award regardless of when, if ever, the market condition is satisfied. We determined the fair value on the date of grant of the market-condition awards that vest based on the stock price of Boise Inc. at $10 per share and $12.50 per share to be approximately $2.03 per share and $1.57 per share, respectively. The fair value of market-condition restricted stock or units is estimated at the grant date using a Monte Carlo simulation. We assumed a risk-free rate of 2.59%, an expected stock volatility of 58.60%, and a stock price for Boise Inc.’s common shares of $4.16 per share. The $4.16-per-share value is based on Boise Inc.’s closing stock price on the date of grant. Expense is recognized on a straight-line basis over the service period.

The following summarizes the activity of our outstanding service- and market-condition restricted stock and units awarded under the Plan as of June 30, 2010, and December 31, 2009, and changes during the six months ended June 30, 2010, and the year ended December 31, 2009 (number of shares and aggregate fair value in thousands):


	Service-Condition Vesting Awards							Market-Condition Vesting Awards
	Number of Shares		Weighted Average Grant-Date Fair Value		Aggregate Fair Value			Number of Shares		Weighted Average Grant-Date Fair Value		Aggregate Fair Value

Outstanding at December 31, 2008 (a)	1,143		$	4.16	$	4,754		1,916		$	1.75	$	3,345

Granted	5,841			0.43		2,512		—			—		—
Vested (b)	(604	)		4.16		(2,511	)	—			—		—
Forfeited	(49	)		1.27		(63	)	(32	)		1.75		(56	)

Outstanding at December 31, 2009 (a)(c)	6,331		$	0.74	$	4,692		1,884		$	1.75	$	3,289


Granted	200		$	5.46	$	1,090		—		$	—	$	—
Vested (b)	(3,009	)		0.77		(2,304	)	(4	)		1.75		(7	)
Forfeited	(43	)		4.26		(180	)	(2	)		1.75		(3	)

Outstanding at June 30, 2010 (a)(c)	3,479		$	0.95	$	3,298		1,878		$	1.75	$	3,279

(a)	Outstanding awards included all nonvested and nonforfeited awards.

(b)	We repurchase for cash any fractional shares as they vest. During the six months ended June 30, 2010, and the year ended December 31, 2009, we repurchased 25.18 shares and 24.33 shares, respectively.

(c)	The remaining weighted average contractual term is approximately 1.1 years for the service-condition awards and 0.8 years for the market-condition awards.

In 2010, employees were given the option to utilize shares to cover minimum tax withholdings upon the vesting of restricted stock. As of June 30, 2010, a total of 0.2 million shares and 0.1 million units were withheld from employees to cover taxes. The shares were canceled and retired.

At June 30, 2010, we had approximately $2.4 million and $0.7 million, respectively, of total unrecognized compensation cost related to the nonvested service-condition and market-condition restricted stock grants under the Plan. The cost is expected to be recognized generally over a weighted average period of 2.0 years and 3.0 years for the service-condition and market-condition awards, respectively. Unrecognized compensation expense is calculated net of estimated forfeitures. During the three and six months ended June 30, 2010, we recognized $0.9 million and $1.8 million, respectively, of compensation expense, $1.3 million of which related to the grant-date fair value of service-condition awards and $0.5 million of which related to the market-condition awards. During the three and six months ended June 30, 2009, we recognized $0.9 million and $1.7 million, respectively, of compensation expense, $0.6 million and $1.2 million of which related to the grant-date fair value of service-condition awards and $0.3 million and $0.5 million of which related to the market-condition awards.

Dividends. Our ability to pay dividends is restricted by our Credit Facilities, as well as Delaware law and state regulatory authorities. Under Delaware law, our board of directors may not authorize payment of a dividend unless it is either paid out of our capital surplus, as calculated in accordance with the Delaware General Corporation Law, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. To the extent we do not have adequate surplus or net profits, we will be prohibited from paying dividends. We have not paid any cash dividends on our common stock to date.

BZ Intermediate Holdings LLC

BZ Intermediate has authorized 1,000 voting common units with a par value of $.01. All of these units have been issued to Boise Inc. BZ Intermediate refers to its capital as “Business unit equity” on its Consolidated Balance Sheets, and this represents its equity transactions with Boise Inc., net income (loss) from the operations of its subsidiaries, the effect of changes in other comprehensive income, and restricted stock. Share-based compensation costs in BZ Intermediate’s financial statements represent expenses for restricted stock of Boise Inc., which have been pushed down to BZ Intermediate for accounting purposes and are explained in more detail above.

17. Comprehensive Income

Comprehensive income includes the following (dollars in thousands):


	Boise Inc.
	Three Months Ended June 30					Six Months Ended June 30
	2010		2009			2010		2009


Net income	$	13,310	$	50,883		$	625	$	49,967
Other comprehensive income (loss), net of tax:
Cash flow hedges		—		314			259		398
Unfunded accumulated benefit obligation		255		276			519		184
Unrealized gains (losses) on short-term investments		2		(4	)		5		(4	)

Comprehensive income	$	13,567	$	51,469		$	1,408	$	50,545


	BZ Intermediate Holdings LLC
	Three Months Ended June 30					Six Months Ended June 30
	2010		2009			2010		2009


Net income	$	13,315	$	54,200		$	1,466	$	55,569
Other comprehensive income (loss), net of tax:
Cash flow hedges		—		314			259		398
Unfunded accumulated benefit obligation		255		276			519		184
Unrealized gains (losses) on short-term investments		2		(4	)		5		(4	)

Comprehensive income	$	13,572	$	54,786		$	2,249	$	56,147

18. St. Helens Mill Restructuring

In November 2008, we announced the restructuring of our paper mill in St. Helens, Oregon. The restructuring was primarily the result of declining product demand coupled with continuing high costs. We expect to spend approximately $1.0 million in 2010 and zero in 2011 in decommissioning and other costs. During the three and six months ended June 30, 2010, we spent $0.1 million and $0.2 million, respectively, in decommissioning costs and received proceeds of zero and $0.5 million, respectively, from sales of assets. During the three and six months ended June 30, 2009, we spent $1.0 million and $4.3 million, respectively, in decommissioning costs and $0.1 million and $0.5 million, respectively, in other costs, all of which are recorded in “St. Helens mill restructuring” in our Consolidated Statements of Income. These expenses are recorded in our Paper segment when the liability is incurred. At June 30, 2010, and December 31, 2009, we had $0.3 million and $0.5 million, respectively, of severance liabilities included in “Accrued liabilities, Compensation and benefits” on the Consolidated Balance Sheets.

19. Segment Information

There are no differences in our basis of segmentation or in our basis of measurement of segment profit or loss from those disclosed in Note 18, Segment Information, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in our 2009 Form 10-K. Segment operating results for Boise Inc. and BZ Intermediate are identical for all periods presented. For differences in interest expense and income tax provision (benefit), see the reconciliation of net income to EBITDA that concludes this Note 19, Segment Information.

An analysis of operations by segment is as follows (dollars in millions):


	Sales										Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Three Months Ended June 30, 2010	Trade		Related Parties		Inter- segment			Total			Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	348.5	$	—	$	15.7		$	364.2		$	25.7	(a)	$	21.7	$	47.4	(a)
Packaging		155.0		10.6		0.6			166.2			17.1	(a)		9.6		26.7	(a)
Corporate and Other		7.5		—		8.9			16.4			(5.0	)		1.0		(4.0	)

		511.0		10.6		25.2			546.8			37.8			32.3		70.1

Intersegment eliminations		—		—		(25.2	)		(25.2	)		—			—		—
Change in fair value of interest rate derivatives		—		—		—			—			—			—		—
Loss on extinguishment of debt		—		—		—			—			—			—		—
Interest expense		—		—		—			—			(16.2	)		—		—
Interest income		—		—		—			—			—			—		—

	$	511.0	$	10.6	$	—		$	521.6		$	21.7		$	32.3	$	70.1


	Sales										Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Three Months Ended June 30, 2009	Trade		Related Parties		Inter- segment			Total			Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	342.4	$	—	$	14.0		$	356.4		$	84.5	(b)	$	21.1	$	105.6	(b)
Packaging		124.4		5.2		0.6			130.2			20.3	(b)		10.8		31.1	(b)
Corporate and Other		3.1		4.3		7.8			15.2			(7.1	)(b)		1.0		(6.1	)

		469.9		9.5		22.4			501.8			97.7			32.9		130.6

Intersegment eliminations		—		—		(22.4	)		(22.4	)		—			—		—
Change in fair value of interest rate derivatives		—		—		—			—			0.6			—		—
Interest expense		—		—		—			—			(21.4	)		—		—
Interest income		—		—		—			—			0.1			—		—

	$	469.9	$	9.5	$	—		$	479.4		$	77.1		$	32.9	$	130.6


	Sales										Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Six Months Ended June 30, 2010	Trade		Related Parties		Inter- segment			Total			Income Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	687.8	$	—	$	29.9		$	717.7		$	55.7	(a)	$	43.2	$	98.8	(a)
Packaging		296.9		16.2		1.2			314.3			11.3	(a)		19.3		30.6	(a)
Corporate and Other		12.2		2.6		18.2			33.0			(9.8	)		1.9		(7.9	)

		996.9		18.8		49.3			1,065.0			57.2			64.4		121.5

Intersegment eliminations		—		—		(49.3	)		(49.3	)		—			—		—
Change in fair value of interest rate derivatives		—		—		—			—			—			—		—
Loss on extinguishment of debt		—		—		—			—			(22.2	)(a)		—		(22.2	)(a)
Interest expense		—		—		—			—			(32.6	)		—		—
Interest income		—		—		—			—			0.1			—		—

	$	996.9	$	18.8	$	—		$	1,015.7		$	2.4		$	64.4	$	99.3


	Sales										Income (Loss) Before Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Six Months Ended June 30, 2009	Trade		Related Parties		Inter- segment			Total			Income (Loss) Before Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	679.4	$	—	$	29.0		$	708.4		$	109.3	(b)	$	42.5	$	151.7	(b)
Packaging		269.7		16.4		1.3			287.4			21.5	(b)		20.4		41.9	(b)
Corporate and Other		5.7		8.5		16.2			30.4			(12.3	)(b)		2.0		(10.3	)(b)

		954.8		24.9		46.5			1,026.2			118.5			64.9		183.4

Intersegment eliminations		—		—		(46.5	)		(46.5	)		—			—		—
Change in fair value of interest rate derivatives		—		—		—			—			0.5			—		—
Interest expense		—		—		—			—			(43.5	)		—		—
Interest income		—		—		—			—			0.1			—		—

	$	954.8	$	24.9	$	—		$	979.7		$	75.6		$	64.9	$	183.4

(a)	The three and six months ended June 30, 2010, included $0.4 million of income and $0.3 million of income recorded in the Paper segment associated with the restructuring of the St. Helens mill.

The three and six months ended June 30, 2010, included $2.7 million of income and $0.6 million of expense related to the change in fair value of energy hedges, of which $2.3 million and $0.5 million was recorded in the Paper segment and $0.4 million and $0.1 million in the Packaging segment.

The three and six months ended June 30, 2010, included $22.2 million of noncash expense recorded in the Corporate and Other segment associated with the refinancing of our debt.

(b)

The three and six months ended June 30, 2009, included $57.0 million of income recorded in the Paper segment, $19.9 million of income recorded in the Packaging segment, and $1.6 million of expenses recorded in the Corporate and Other segment relating to alternative fuel mixture credits. These amounts are net of fees and expenses and before taxes.

The three and six months ended June 30, 2009, included $1.9 million of expense related to the indefinite idling of our D-2 newsprint machine at our mill in DeRidder, Louisiana, which was recorded in the Packaging segment.

The three and six months ended June 30, 2009, included $1.1 million and $4.8 million, respectively, of expense recorded in the Paper segment associated with the restructuring of the St. Helens mill.

The three and six months ended June 30, 2009, included $3.5 million and $1.3 million of income related to the impact of energy hedges, $2.8 million and $1.0 million of which was recorded in the Paper segment and $0.7 million and $0.3 million in the Packaging segment.

(c)

EBITDA represents income (loss) before interest (interest expense, interest income, and change in fair value of interest rate derivatives), income tax provision (benefit), and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision makers to evaluate segment operating performance and to decide how to allocate resources to segments. We believe EBITDA is useful to investors because it provides a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that are used by our internal decision makers and because it is frequently used by investors and other interested parties in the evaluation of companies with substantial financial leverage. We believe EBITDA is a meaningful measure because it presents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. For example, we believe that the inclusion of items such as taxes, interest expense, and interest income distorts management’s ability to assess and view the core operating trends in our segments. EBITDA, however, is not a measure of our liquidity or financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income (loss), income (loss) from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of EBITDA instead of net income (loss) or segment income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense, interest income, change in fair value of interest rate derivatives, and associated significant cash requirements; and the exclusion of depreciation, amortization, and depletion, which represent significant and unavoidable operating costs, given the level of our indebtedness and the capital expenditures needed to maintain our businesses. Management compensates for these limitations by relying on our GAAP results. Our measures of EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.

The following is a reconciliation of net income to EBITDA (dollars in millions):


	Boise Inc.
	Three Months Ended June 30						Six Months Ended June 30
	2010			2009			2010			2009

Net income	$	13.3		$	50.9		$	0.6		$	50.0
Change in fair value of interest rate derivatives		—			(0.6	)		—			(0.5	)
Interest expense		16.2			21.4			32.6			43.5
Interest income		(0.1	)		(0.1	)		(0.1	)		(0.1	)
Income tax provision (benefit)		8.4			26.2			1.8			25.6
Depreciation, amortization, and depletion		32.3			32.9			64.4			64.9

EBITDA	$	70.1		$	130.6		$	99.3		$	183.4


	BZ Intermediate Holdings LLC
	Three Months Ended June 30						Six Months Ended June 30
	2010			2009			2010			2009

Net income	$	13.3		$	54.2		$	1.5		$	55.6
Change in fair value of interest rate derivatives		—			(0.6	)		—			(0.5	)
Interest expense		16.2			18.7			32.6			38.2
Interest income		(0.1	)		(0.1	)		(0.1	)		(0.1	)
Income tax provision (benefit)		8.4			25.6			0.9			25.4
Depreciation, amortization, and depletion		32.3			32.9			64.4			64.9

EBITDA	$	70.1		$	130.6		$	99.3		$	183.4

20. Alternative Fuel Mixture Credits

The U.S. Internal Revenue Code allowed an excise tax credit for taxpayers using alternative fuels in the taxpayer’s trade or business. As of December 31, 2009, we recorded a receivable of $56.6 million in “Receivables, Other” on our Consolidated Balance Sheet for alternative fuel mixture credits. We received this credit in March 2010 after we filed our 2009 federal income tax return. Eligibility for new credits expired on December 31, 2009. During the three and six months ended June 30, 2009, we recorded $75.3 million in “Alternative fuel mixture credits, net” in our Consolidated Statements of Income.

In early July 2010, the Internal Revenue Service Office of Chief Counsel released a memo opining that black liquor qualifies for a cellulosic biofuel producer credit (CBPC) and clarifying that companies may claim either the alternative fuel mixture credit or the CBPC for black liquor produced in 2009. Companies that claimed the alternative fuels mixture credit may return the cash received and file for the CBPC, which carries a higher credit value. However, this credit is taxable, may only be used to offset a portion of taxable income, and has a relatively short carry-forward period. We are evaluating the impact of filing for the CBPC on our specific tax situation.

21. Commitments and Guarantees

Commitments

We have financial commitments for lease payments and for the purchase of wood fiber and utilities. In addition, we have other financial obligations that we enter into in the normal course of our business to purchase goods and services and to make capital improvements to our facilities.

These agreements are discussed in Note 19, Commitments and Guarantees, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2009 Form 10-K. At June 30, 2010, there have been no material changes to our commitments outside of the normal course of business, except as disclosed in Note 12, Debt, of the Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.

Guarantees

We provide guarantees, indemnifications, and assurances to others in the normal course of our business. See Note 12, Debt, for a description of the guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make.

22. Legal Proceedings and Contingencies

We are a party to routine proceedings that arise in the course of our business. We are not currently a party to any legal proceedings or environmental claims that we believe would have a material adverse effect on our financial position, results of operations, or liquidity.

23. Consolidating Guarantor and Nonguarantor Financial Information

Our 9% and 8% Senior Notes are jointly and severally guaranteed on a senior unsecured basis by BZ Intermediate and each of its existing and future subsidiaries (other than: (i) the co-issuers, Boise Paper Holdings, Boise Co-Issuer Company, and Boise Finance Company; (ii) Louisiana Timber Procurement Company, L.L.C.; and (iii) our foreign subsidiaries). The following consolidating financial statements present the results of operations, financial position, and cash flows of (i) BZ Intermediate Holdings LLC (parent); (ii) co-issuers; (iii) guarantor subsidiaries; (iv) nonguarantor subsidiaries; and (v) eliminations to arrive at the information on a consolidated basis.

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Statements of Income

For the Three Months Ended June 30, 2010

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Sales
Trade	$	—	$	3,557		$	505,822		$	1,633		$	—		$	511,012
Intercompany		—		—			—			27,625			(27,625	)		—
Related parties		—		—			—			10,549			—			10,549

		—		3,557			505,822			39,807			(27,625	)		521,561


Costs and expenses
Materials, labor, and other operating expenses		—		3,768			403,644			39,807			(27,625	)		419,594
Fiber costs from related parties		—		—			5,168			—			—			5,168
Depreciation, amortization, and depletion		—		856			31,411			—			—			32,267
Selling and distribution expenses		—		—			14,198			56			—			14,254
General and administrative expenses		—		4,080			8,489			—			—			12,569
St. Helens mill restructuring		—		—			(434	)		—			—			(434	)
Other (income) expense, net		—		—			19			(30	)		—			(11	)

		—		8,704			462,495			39,833			(27,625	)		483,407


Income (loss) from operations		—		(5,147	)		43,327			(26	)		—			38,154


Foreign exchange gain (loss)		—		(69	)		(254	)		—			—			(323	)
Change in fair value of interest rate derivatives		—		(13	)		—			—			—			(13	)
Loss on extinguishment of debt		—		(28	)		—			—			—			(28	)
Interest expense		—		(16,165	)		—			—			—			(16,165	)
Interest expense—intercompany		—		(50	)		—			(4	)		54			—
Interest income		—		60			1			—			—			61
Interest income—intercompany		—		4			50			—			(54	)		—

		—		(16,261	)		(203	)		(4	)		—			(16,468	)


Income (loss) before income taxes and equity in net income (loss) of affiliates		—		(21,408	)		43,124			(30	)		—			21,686
Income tax (provision) benefit		—		(8,370	)		(1	)		—			—			(8,371	)


Income (loss) before equity in net income (loss) of affiliates		—		(29,778	)		43,123			(30	)		—			13,315
Equity in net income (loss) of affiliates		13,315		43,093			—			—			(56,408	)		—


Net income (loss)	$	13,315	$	13,315		$	43,123		$	(30	)	$	(56,408	)	$	13,315

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Statements of Income

For the Three Months Ended June 30, 2009

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Sales
Trade	$	—	$	—		$	468,510		$	1,367		$	—		$	469,877
Intercompany		—		—			1			20,041			(20,042	)		—
Related parties		—		3,622			681			5,187			—			9,490

		—		3,622			469,192			26,595			(20,042	)		479,367


Costs and expenses
Materials, labor, and other operating expenses		—		3,441			376,018			26,596			(20,042	)		386,013
Fiber costs from related parties		—		—			8,933			—			—			8,933
Depreciation, amortization, and depletion		—		892			32,000			—			—			32,892
Selling and distribution expenses		—		—			13,974			50			—			14,024
General and administrative expenses		—		5,386			7,305			—			—			12,691
St. Helens mill restructuring		—		—			1,133			—			—			1,133
Alternative fuel mixture credits, net		—		1,577			(76,914	)		—			—			(75,337	)
Other (income) expense, net		—		645			1,850			(61	)		—			2,434

		—		11,941			364,299			26,585			(20,042	)		382,783


Income (loss) from operations		—		(8,319	)		104,893			10			—			96,584


Foreign exchange gain (loss)		—		538			619			—			—			1,157
Change in fair value of interest rate derivatives		—		627			—			—			—			627
Interest expense		—		(18,663	)		—			—			—			(18,663	)
Interest expense—intercompany		—		(39	)		—			(3	)		42			—
Interest income		—		91			—			—			—			91
Interest income—intercompany		—		3			39			—			(42	)		—

		—		(17,443	)		658			(3	)		—			(16,788	)


Income (loss) before income taxes and equity in net income (loss) of affiliates		—		(25,762	<