UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q




(Mark
One)




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


For
      the quarterly period ended September 30,
2009




or





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


For
      the transition period from __________ to
  __________





Commission
file number:  333-142283





Verso
Paper Holdings LLC


(Exact name of
registrant as specified in its charter)





Delaware
              56-2597634(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification Number)6775
      Lenox Center Court, Suite 400, Memphis, Tennessee
              38115-4436(Address
      of principal executive offices)
              (Zip
      Code)





(901)
369-4100


(Registrant’s
telephone number, including area code)





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




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). oYes o
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:




Large accelerated filero
              Accelerated fileroNon-accelerated
      filerþ
              Smaller
      reporting company o(Do
      not check if a smaller reporting company)




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


oYes  þ
No





As of
October 31, 2009, the registrant had one outstanding limited liability company
interest.








TABLE
OF CONTENTS







PART I.
            
            FINANCIAL INFORMATION
            
            PageItem 1.
            
            Financial StatementsUnaudited Condensed Consolidated Balance
    Sheets
            
            3Unaudited Condensed Consolidated Statements of
      Operations
            
            4Unaudited Condensed Consolidated Statements of Changes in
      Member’s Equity
            
            5Unaudited Condensed Consolidated Statements of Cash
      Flows
            
            6Notes to Unaudited Condensed Consolidated Financial
      Statements
            
            7Item 2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            28Item 3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            36Item 4T.
            
            Controls and Procedures
            
            39PART II.
            
            OTHER INFORMATIONItem 1.
            
            Legal Proceedings
            
            40Item 1A.
            
            Risk Factors
            
            40Item 2.
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            40Item 3.
            
            Defaults Upon Senior Securities
            
            40Item 4.
            
            Submission of Matters to a Vote of Security
      Holders
            
            40Item 5.
            
            Other Information
            
            40Item 6.
            
            Exhibits
            
            41SIGNATURES
            
            42EXHIBIT INDEX
            
            43








2





PART I.  FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS





VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED BALANCE
      SHEETSSeptember
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              87,726
              
              
              $
              119,520Accounts
      receivable - net
              
              
              134,412
              
              
              
              83,045Inventories
              
              
              162,730
              
              
              
              195,934Prepaid
      expenses and other assets
              
              
              11,383
              
              
              
              2,512Total
      Current Assets
              
              
              396,251
              
              
              
              401,011Property,
      plant, and equipment - net
              
              
              1,049,851
              
              
              
              1,115,657Reforestation
              
              
              13,177
              
              
              
              770Intangibles
      and other assets - net
              
              
              92,878
              
              
              
              86,083Goodwill
              
              
              10,551
              
              
              
              10,551Total
      Assets
              
              $
              1,562,708
              
              
              $
              1,614,072LIABILITIES
      AND MEMBER'S EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              97,107
              
              
              $
              122,041Accrued
      liabilities
              
              
              87,600
              
              
              
              122,649Current
      maturities of long-term debt
              
              
              -
              
              
              
              2,850Total
      Current Liabilities
              
              
              184,707
              
              
              
              247,540Long-term
      debt
              
              
              1,170,336
              
              
              
              1,242,821Other
      liabilities
              
              
              28,735
              
              
              
              32,007Total
      Liabilities
              
              
              1,383,778
              
              
              
              1,522,368Commitments
      and contingencies (Note 12)
              
              
              -
              
              
              
              -Member's
      EquityPaid-in-capital
              
              
              316,655
              
              
              
              301,110Retained
      deficit
              
              
              (119,493
              )
              
              
              (167,135
              )Accumulated
      other comprehensive loss
              
              
              (18,232
              )
              
              
              (42,271
              )Total
      Member's Equity
              
              
              178,930
              
              
              
              91,704Total
      Liabilities and Member's Equity
              
              $
              1,562,708
              
              
              $
              1,614,072Included
      in the balance sheet line items above are related-party balances as
      follows:Accounts
      receivable
              
              $
              12,215
              
              
              $
              8,312Accounts
      payable
              
              
              533
              
              
              
              4,135See
      notes to unaudited condensed consolidated financial
      statements.





3





VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
      OPERATIONSThree
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      sales
              
              $
              394,663
              
              
              $
              485,423
              
              
              $
              979,852
              
              
              $
              1,390,932Costs
      and expenses:Cost
      of products sold - (exclusive ofdepreciation,
      amortization, and depletion)
              
              
              338,592
              
              
              
              385,560
              
              
              
              906,080
              
              
              
              1,137,859Depreciation,
      amortization, and depletion
              
              
              33,229
              
              
              
              33,752
              
              
              
              100,584
              
              
              
              100,577Selling,
      general, and administrative expenses
              
              
              15,040
              
              
              
              18,225
              
              
              
              45,142
              
              
              
              58,644Restructuring
      and other charges
              
              
              369
              
              
              
              1,117
              
              
              
              643
              
              
              
              26,553Operating
      income (loss)
              
              
              7,433
              
              
              
              46,769
              
              
              
              (72,597
              )
              
              
              67,299Interest
      income
              
              
              (71
              )
              
              
              (126
              )
              
              
              (150
              )
              
              
              (458
              )Interest
      expense
              
              
              32,733
              
              
              
              25,036
              
              
              
              84,047
              
              
              
              76,577Other
      income, net
              
              
              (60,344
              )
              
              
              -
              
              
              
              (219,862
              )
              
              
              -Net
      income (loss)
              
              $
              35,115
              
              
              $
              21,859
              
              
              $
              63,368
              
              
              $
              (8,820
              )Included
      in the financial statement line itemsabove
      are related-party transactions as follows(Notes
      10 and 11):Net
      sales
              
              $
              42,293
              
              
              $
              47,780
              
              
              $
              95,691
              
              
              $
              128,423Purchases
      included in cost of products sold
              
              
              1,271
              
              
              
              1,450
              
              
              
              3,355
              
              
              
              5,711Restructuring
      and other charges
              
              
              -
              
              
              
              (41
              )
              
              
              -
              
              
              
              23,281See
      notes to unaudited condensed consolidated financial
      statements.








4





VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
      MEMBER'S EQUITYFOR
      THE PERIODS ENDED SEPTEMBER 30, 2009 AND 2008AccumulatedOtherComprehensive
              
              
              TotalPaid-in-
              
              
              Retained
              
              
              Income
              
              
              Member's(In
      thousands of U.S. dollars)
              
              Capital
              
              
              Deficit
              
              
              (Loss)
              
              
              EquityBeginning
      Balance - January 1, 2008
              
              $
              289,911
              
              
              $
              (105,188
              )
              
              $
              (9,870
              )
              
              $
              174,853Cash
      distributions
              
              
              -
              
              
              
              (18,563
              )
              
              
              -
              
              
              
              (18,563
              )Net
      loss
              
              
              -
              
              
              
              (8,820
              )
              
              
              -
              
              
              
              (8,820
              )Other
      comprehensive income (loss):Net
      unrealized losses on derivativefinancial
      instruments, net ofreclassification
      of $5.8 million ofnet
      gains included in net loss
              
              
              -
              
              
              
              -
              
              
              
              (12,755
              )
              
              
              (12,755
              )Defined
      benefit pension planprior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              654
              
              
              
              654Total other comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              (12,101
              )
              
              
              (12,101
              )Comprehensive
      loss
              
              
              -
              
              
              
              (8,820
              )
              
              
              (12,101
              )
              
              
              (20,921
              )Equity
      award expense
              
              
              11,127
              
              
              
              -
              
              
              
              -
              
              
              
              11,127Ending
      Balance - September 30, 2008
              
              $
              301,038
              
              
              $
              (132,571
              )
              
              $
              (21,971
              )
              
              $
              146,496Beginning
      Balance - January 1, 2009
              
              $
              301,110
              
              
              $
              (167,135
              )
              
              $
              (42,271
              )
              
              $
              91,704Parent
      company contributions
              
              
              15,281
              
              
              
              (3,569
              )
              
              
              -
              
              
              
              11,712Cash
      distributions
              
              
              -
              
              
              
              (12,157
              )
              
              
              -
              
              
              
              (12,157
              )Net
      income
              
              
              -
              
              
              
              63,368
              
              
              
              -
              
              
              
              63,368Other
      comprehensive income:Net
      unrealized losses on derivativefinancial
      instruments, net ofreclassification
      of $34.0 million ofnet
      losses included in net income
              
              
              -
              
              
              
              -
              
              
              
              23,146
              
              
              
              23,146Defined
      benefit pension plan:Net
      actuarial loss
              
              
              -
              
              
              
              -
              
              
              
              239
              
              
              
              239Prior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              654
              
              
              
              654Total other comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              24,039
              
              
              
              24,039Comprehensive
      income
              
              
              -
              
              
              
              63,368
              
              
              
              24,039
              
              
              
              87,407Equity
      award expense
              
              
              264
              
              
              
              -
              
              
              
              -
              
              
              
              264Ending
      Balance - September 30, 2009
              
              $
              316,655
              
              
              $
              (119,493
              )
              
              $
              (18,232
              )
              
              $
              178,930See
      notes to unaudited condensed consolidated financial
      statements.








5





VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWS
  Nine
      Months EndedSeptember
      30,(In
      thousands of U.S. dollars)
                
                2009
                
                
                2008Cash
      Flows From Operating Activities:Net
      income (loss)
                
                $
                63,368
                
                
                $
                (8,820
                )Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activities:Depreciation,
      amortization, and depletion
                
                
                100,584
                
                
                
                100,577Amortization
      of debt issuance costs
                
                
                3,989
                
                
                
                4,071Accretion
      of discount on long-term debt
                
                
                1,144
                
                
                
                -Gain
      on retirement of debt
                
                
                (27,333
                )
                
                
                -Loss
      on disposal of fixed assets
                
                
                164
                
                
                
                213Equity
      award expense
                
                
                264
                
                
                
                11,127Change
      in unrealized losses on derivatives, net
                
                
                22,556
                
                
                
                (12,755
                )Other
      - net
                
                
                407
                
                
                
                (571
                )Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (51,928
                )
                
                
                (18,775
                )Inventories
                
                
                28,039
                
                
                
                (34,554
                )Prepaid
      expenses and other assets
                
                
                (22,261
                )
                
                
                (19,349
                )Accounts
      payable
                
                
                (20,233
                )
                
                
                20,505Accrued
      liabilities
                
                
                (38,363
                )
                
                
                (3,036
                )Net
      cash provided by operating activities
                
                
                60,397
                
                
                
                38,633Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
                
                
                83
                
                
                
                108Capital
      expenditures
                
                
                (29,966
                )
                
                
                (59,632
                )Net
      cash used in investing activities
                
                
                (29,883
                )
                
                
                (59,524
                )Cash
      Flows From Financing Activities:Proceeds
      from long-term debt
                
                
                352,838
                
                
                
                -Repayments
      of long-term debt
                
                
                (392,892
                )
                
                
                (2,138
                )Debt
      issuance costs
                
                
                (10,097
                )
                
                
                -Cash
      distributions
                
                
                (12,157
                )
                
                
                (18,563
                )Net
      cash used in financing activities
                
                
                (62,308
                )
                
                
                (20,701
                )Change
      in cash and cash equivalents
                
                
                (31,794
                )
                
                
                (41,592
                )Cash
      and cash equivalents at beginning of period
                
                
                119,520
                
                
                
                58,499Cash
      and cash equivalents at end of period
                
                $
                87,726
                
                
                $
                16,907See
      notes to unaudited condensed consolidated financial
      statements.






6





VERSO
PAPER HOLDINGS LLC





NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF SEPTEMBER 30, 2009, AND DECEMBER 31, 2008, AND FOR THE THREE-MONTH AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008


1.  BACKGROUND
AND BASIS OF PRESENTATION





The
accompanying consolidated financial statements include the accounts of Verso
Paper Holdings LLC, a Delaware limited liability company, and its
subsidiaries.  Unless otherwise noted, the terms “Verso,” “Verso
Paper,” “Company,”  “we,” “us,” and “our” refer collectively to Verso
Paper Holdings LLC and its subsidiaries.





The
Company began operations on August 1, 2006, when it acquired the assets and
certain liabilities comprising the business of the Coated and Supercalendered
Papers Division of International Paper Company, or “International
Paper.”  The Company was formed by affiliates of Apollo Management,
L.P., or “Apollo,” for the purpose of consummating the acquisition from
International Paper, or the “Acquisition.”  Verso Paper Corp., of
which we are an indirect, wholly-owned subsidiary, went public on May 14, 2008,
with an initial public offering, or “IPO," of 14 million shares of common
stock which generated $152.2 million in net proceeds.




The
Company operates, through its subsidiaries, in the following three segments:
coated and supercalendered papers; hardwood market pulp; and other, consisting
of specialty paper.  The Company’s core business platform is as a
producer of coated freesheet, coated groundwood, and uncoated supercalendered
papers.  These products serve customers in the catalog, magazine,
inserts, and commercial print markets.





Included
in this report are the unaudited condensed consolidated financial statements of
Verso Paper Holdings LLC as of September 30, 2009, and for the three-month and
nine-month periods ended September 30, 2009 and 2008.  The December
31, 2008, condensed consolidated balance sheet data was derived from audited
financial statements but does not include all disclosures required annually by
accounting principles generally accepted in the United States of America. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments that are necessary for the fair
presentation of the Company’s financial position, results of operations, and
cash flows for the interim periods presented.  Except as disclosed in
the notes to the unaudited condensed consolidated financial statements, such
adjustments are of a normal, recurring nature. All material intercompany
balances and transactions are eliminated.  Results for the three-month
and nine-month periods ended September 30, 2009 and 2008, may not necessarily be
indicative of full-year results.  It is suggested that these financial
statements be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto as of December 31, 2008, and for the year
then ended.





2.  RECENT
ACCOUNTING DEVELOPMENTS





Accounting
Standards Codification —The Financial Accounting Standards Board, or
“FASB,” issued Accounting Standards Codification, or “ASC,” 105, Generally Accepted Accounting
Principles,which establishes the FASB Accounting Standards
CodificationTM,
or the “Codification,” as the source of authoritative U.S. generally accepted
accounting principles recognized by the FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission, or “SEC,” under authority of federal securities laws are
also sources of authoritative guidance for SEC registrants.  All
guidance contained in the Codification carries an equal level of
authority.  All non-grandfathered, non-SEC accounting literature not
included in the Codification is superseded and deemed non-authoritative. FASB
ASC 105 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009.  The adoption of FASB ASC 105
had no impact on our financial condition, results of operations, or cash
flows.





7


Measuring
Liabilities at Fair Value —In August 2009, the FASB issued Accounting
Standards Update, or “ASU,” 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value,which
amends FASB ASC 820,Fair
Value Measurements and Disclosures, regarding the fair value measurement
of liabilities and provides clarification that in circumstances in which a
quoted price in an active market for the identical liabilities is not available,
a reporting entity is required to measure fair value using one or more of the
techniques provided for in this update.  This ASU is effective for the
first interim or annual reporting period beginning after issuance, which for the
Company will be the fourth quarter of 2009. The adoption of this ASU is not
expected to have a material impact on our financial condition, results of
operations, or cash flows.





Subsequent Events
—FASB ASC 855, Subsequent Events,
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. FASB ASC 855 defines (1) the period after the
balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, (2) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and (3) the disclosures an entity should make
about events or transactions that occurred after the balance sheet date. FASB
ASC 855 is effective prospectively for interim and annual periods ending after
June 15, 2009.  The adoption of FASB ASC 855 had no impact on our
financial condition, results of operations, or cash flows.





Fair Value of
Financial Instruments —FASB ASC 825-10-65 updates FASB ASC 825, Financial Instruments, to
increase the frequency of fair value disclosures from an annual basis to a
quarterly basis.  The guidance relates to fair value disclosures for
any financial instruments that are not currently reflected on the balance sheet
at fair value.  These provisions of FASB ASC 825 are effective for
interim and annual periods ending after June 15, 2009. Since these provisions
only affect disclosure requirements, the adoption of these provisions under FASB
ASC 825 had no impact on our financial condition, results of operations, or cash
flows.





Postretirement
Benefit Plan Assets —FASB ASC 715-20-65 updates FASB ASC 715, Compensation – Retirement
Benefits, to require more detailed disclosures about employers’ pension
plan assets.  New disclosures will include more information on
investment strategies, major categories of plan assets, concentrations of risk
within plan assets and valuation techniques used to measure the fair value of
plan assets.  These provisions of FASB ASC 715 are effective for
fiscal years ending after December 15, 2009.  Since these provisions
only affect disclosure requirements, the adoption of these provisions under FASB
ASC 715 will have no impact on our financial condition, results of operations,
or cash flows.





Intangible Assets—FASB ASC
350-30-65 updates FASB ASC 350, Intangibles – Goodwill and
Other, and FASB ASC 275, Risks and Uncertainties, to
provide guidance on the renewal or extension assumptions used in the
determination of the useful life of a recognized intangible
asset.  The intent is to better match the useful life of the
recognized intangible asset to the period of the expected cash flows used to
measure its fair value.  This guidance is effective for fiscal years
and interim periods beginning after December 15, 2008.  The adoption
of these provisions under FASB ASC 350 and FASB ASC 275 did not have a material
impact on our financial condition, results of operations, or cash
flows.





8


Derivatives and
Hedging Activities —FASB ASC 815-10-65 updates FASB ASC 815, Derivatives and Hedging, and
changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under FASB ASC 815, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  These
provisions of FASB ASC 815 were effective for fiscal years and interim periods
beginning after November 15, 2008.  Since these provisions only affect
disclosure requirements, the adoption of these provisions under FASB ASC 815 had
no impact on our financial condition, results of operations, or cash
flows.


Business
Combinations—FASB ASC 805-10-65 updates FASB ASC 805, Business Combinations,
toestablish
principles and requirements for how an acquirer recognizes and measures
identifiable assets acquired, liabilities assumed and noncontrolling interests;
recognizes and measures goodwill acquired in a business combination or gain from
a bargain purchase; and establishes disclosure requirements.  These
provisions of FASB ASC 805 are effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.  The Company will
apply these provisions of FASB ASC 805 to any future
acquisitions.





Noncontrolling
Interests—FASB
ASC 810-10-65, updates FASB ASC 810, Consolidation, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.  These
provisions of FASB ASC 810 are effective, on a prospective basis, for fiscal
years and interim periods beginning on or after December 15,
2008.  The presentation and disclosure requirements for existing
minority interests should be applied retrospectively for all periods
presented.  The adoption of these provisions under FASB ASC 810 did
not have a material impact on our financial condition, results of operations, or
cash flows.





Fair Value
Measurements—FASB ASC 820-10-65 updates FASB ASC 820 to define fair value, establish a
framework for measuring fair value, and expand disclosures about fair value
measurements.  FASB ASC 820 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy.  These
provisions of FASB ASC 820 were effective for financial statements issued for
fiscal years beginning after November 15, 2007.  However, FASB
ASC 820-10-65 delayed the implementation of FASB ASC 820 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008.  The adoption of these provisions
of FASB ASC 820 did not have a material impact on the Company’s financial
condition, results of operations, or cash flows.





Other new
accounting pronouncements issued but not effective until after September 30,
2009, are not expected to have a significant effect on our financial condition,
results of operations, or cash flows.


3.  SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION





Inventories and
Replacement Parts and Other Supplies —Inventory values include all costs
directly associated with manufacturing products: materials, labor, and
manufacturing overhead.  These values are presented at the lower of
cost or market.  Costs of raw materials, work-in-progress, and
finished goods are determined using the first-in, first-out
method.  Replacement parts and other supplies are stated using the
average cost method.





9


Inventories
by major category include the following:




September
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008Raw
      materials
              
              $
              24,765
              
              
              $
              29,858Woodyard
      logs
              
              
              4,726
              
              
              
              7,970Work-in-process
              
              
              26,930
              
              
              
              19,001Finished
      goods
              
              
              80,087
              
              
              
              113,050Replacement
      parts and other supplies
              
              
              26,222
              
              
              
              26,055Inventories
              
              $
              162,730
              
              
              $
              195,934




Asset Retirement
Obligations —In accordance with FASB ASC 410, Asset Retirement and Environmental
Obligations, a liability and an asset are recorded equal to the present
value of the estimated costs associated with the retirement of long-lived assets
where a legal or contractual obligation exists.  The liability is
accreted over time, and the asset is depreciated over its useful
life.  The Company’s asset retirement obligations under this standard
relate to closure and post-closure costs for landfills.  Revisions to
the liability could occur due to changes in the estimated costs or timing of
closure or possible new federal or state regulations affecting the
closure.





On
September 30, 2009, the Company had $0.8 million of restricted cash included in
Other assets in the accompanying condensed consolidated balancesheet
related to an asset retirement obligation in the state of
Michigan.  This cash deposit is required by the state and may only be
used for the future closure of a landfill.  The following table
presents an analysis related to the Company’s asset retirement obligations
included in Other liabilities in the accompanying balance sheets:




Nine
      Months EndedSeptember
      30,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008Asset
      retirement obligations, January 1
              
              $
              14,028
              
              
              $
              11,614New
      liabilities
              
              
              -
              
              
              
              1,091Accretion
      expense
              
              
              572
              
              
              
              435Settlement
      of existing liabilities
              
              
              (1,058
              )
              
              
              (1,020
              )Adjustment
      to existing liabilities
              
              
              (159
              )
              
              
              2,030Asset
      retirement obligations, September 30
              
              $
              13,383
              
              
              $
              14,150
  In
addition to the above obligations, the Company may be required to remove certain
materials from its facilities, or to remediate in accordance with current
regulations that govern the handling of certain hazardous or potentially
hazardous materials.  At this time, any such obligations have an
indeterminate settlement date, and the Company believes that adequate
information does not exist to reasonably estimate any such potential
obligations.  Accordingly, the Company will record a liability for
such remediation when sufficient information becomes available to estimate the
obligation.




Property, Plant,
and Equipment —Property, plant, and equipment is stated at cost, net of
accumulated depreciation. Interest is capitalized on projects meeting certain
criteria and is included in the cost of the assets.  The capitalized
interest is depreciated over the same useful lives as the related
assets.  Expenditures for major repairs and improvements are
capitalized, whereas normal repairs and maintenance are expensed as
incurred.  For the three-month and nine-month periods ended September
30, 2009, interest costs of $0.1 million and $0.5 million, respectively, were
capitalized.  For the three-month and nine-month periods ended
September 30, 2008, interest costs of $0.4 million and $1.2 million,
respectively, were capitalized.





10


Depreciation
is computed using the straight-line method over the assets’ estimated useful
lives.  Depreciation expense was $31.4 million and $94.3 million for
the three-month and nine-month periods ended September 30, 2009, compared to
$31.7 million and $95.0 million for the three-month and nine-month periods ended
September 30, 2008, respectively.





4.  INTANGIBLES
AND OTHER ASSETS





Intangibles
and other assets consist of the following:




September
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008Amortizable
      intangible assets:Customer
      relationships - net of accumulated amortization of $4.2 million
      and$3.3
      million, respectively
              
              $
              9,045
              
              
              $
              10,020Patents
      - net of accumulated amortization of $0.36 million and $0.28
      million,respectively
              
              
              784
              
              
              
              870Total
      amortizable intangible assets
              
              
              9,829
              
              
              
              10,890Unamortizable
      intangible assets:Trademarks
              
              
              21,473
              
              
              
              21,473Other
      assets:Financing
      costs-net of accumulated amortization of $12.1 million and$13.1
      million, respectively
              
              
              29,404
              
              
              
              31,040Deferred
      major repair
              
              
              10,070
              
              
              
              9,543Deferred
      software cost-net of accumulated amortization of $4.4
    millionand
      $3.0 million, respectively
              
              
              1,861
              
              
              
              2,746Replacement
      parts-net
              
              
              3,546
              
              
              
              5,625Other
              
              
              16,695
              
              
              
              4,766Total
      other assets
              
              
              61,576
              
              
              
              53,720Intangibles
      and other assets
              
              $
              92,878
              
              
              $
              86,083






11


Amounts
reflected in depreciation, amortization, and depletion expense related to
intangibles and other assets are as follows:




Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,(In
      thousands of U.S. dollars)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Intangible
      amortization
                
                $
                354
                
                
                $
                392
                
                
                $
                1,061
                
                
                $
                1,174Software
      amortization
                
                
                495
                
                
                
                443
                
                
                
                1,373
                
                
                
                1,287Replacement parts amortization(1)
                
                
                908
                
                
                
                1,260
                
                
                
                3,680
                
                
                
                3,127
 ________________(1)
      The value of current replacement parts is included in
      inventory.




The
estimated future amortization expense for intangible assets over the next five
years is as follows:




(In
      thousands of U.S. dollars)Remainder
      of 2009
              
              $
              3542010
              
              
              1,2652011
              
              
              1,0652012
              
              
              9152013
              
              
              815





5.  LONG-TERM
DEBT





A summary
of long-term debt is as follows:




As
      of September 30, 2009
              
              
              As
      of December 31, 2008EffectiveOriginal
              
              Interest
              
              
              
              
              
              Fair
              
              
              
              
              
              Fair(In
      thousands of U.S. dollars)
              Maturity
              
              Rate
              
              
              Balance
              
              
              Value
              
              
              Balance
              
              
              ValueFirst
      Priority Revolving Credit Facility
              8/1/2012
              
              
              3.25
              %
              
              $
              45,000
              
              
              
              45,000
              
              
              $
              92,083
              
              
              $
              66,760First
      Priority Term Loan
              8/1/2013
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              253,588
              
              
              
              183,851Senior
      Secured Notes - Fixed
              7/1/2014
              
              
              13.75
              %
              
              
              300,040
              
              
              
              333,125
              
              
              
              -
              
              
              
              -Second
      Priority Senior Secured Notes - Fixed
              8/1/2014
              
              
              9.13
              %
              
              
              337,080
              
              
              
              260,900
              
              
              
              350,000
              
              
              
              141,750Second
      Priority Senior Secured Notes - Floating
              8/1/2014
              
              
              4.23
              %
              
              
              188,216
              
              
              
              121,964
              
              
              
              250,000
              
              
              
              80,000Senior
      Subordinated Notes
              8/1/2016
              
              
              11.38
              %
              
              
              300,000
              
              
              
              196,800
              
              
              
              300,000
              
              
              
              90,0001,170,336
              
              
              
              957,789
              
              
              
              1,245,671
              
              
              
              562,361Less
      current maturities
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              (2,850
              )
              
              
              (2,066
              )Long-term
      debt
              
              
              
              
              
              
              $
              1,170,336
              
              
              $
              957,789
              
              
              $
              1,242,821
              
              
              $
              560,295
  The
Company determines the fair value of its long-term debt based on market
information and a review of prices and terms available for similar
obligations.





12


Amounts
included in interest expense related to long-term debt and amounts of cash
interest payments on long-term debt are as follows:




Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,(In
      thousands of U.S. dollars)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      expense
                
                $
                31,496
                
                
                $
                24,080
                
                
                $
                80,545
                
                
                $
                73,732Cash
      interest paid
                
                
                37,273
                
                
                
                40,669
                
                
                
                83,619
                
                
                $
                91,960Debt
      issuance cost amortization (1)
                
                
                1,305
                
                
                
                1,357
                
                
                
                3,989
                
                
                
                4,071
 ________________(1)
      Amortization of debt issuance cost is included in interest
      expense.
  During the
third quarter of 2009, the Company repurchased and retired $26.3 million of the
second priority senior secured floating rate notes due on August 1, 2014, for a
total purchase price of $16.0 million, which resulted in a gain of $9.7 million,
net of the write-off of unamortized debt issuance costs. The Company also
repurchased and retired $12.9 million of the second priority senior secured
fixed rate notes due on August 1, 2014, for a total purchase price of $7.9
million, which resulted in a gain of $4.7 million, net of the write-off of
unamortized debt issuance costs. For the nine months ended September 30, 2009,
the Company has repurchased and retired $74.7 million of these fixed and
floating rate notes for a total purchase price of $38.1 million, which resulted
in gains of $34.8 million, net of the write-off of unamortized debt issuance
costs.  In addition, the Company de-designated the interest rate swap
hedging interest payments on these notes and recognized losses of $1.3 million
on the interest rate swap.  The net gain resulting from these
transactions is recognized in Other income, net on the condensed consolidated
statement of operations.




On
June 11, 2009, the Company issued $325.0 million aggregate principal amount
of 11.5% senior secured notes due July 1, 2014.  These notes are
secured by substantially all of the property and assets of the
Company.  The notes are secured on a ratable and pari passu basis with
the Company’s senior secured credit facility.  The net proceeds after
deducting the discount, underwriting fees and issuance costs were $288.8
million, which funds were used to repay in full $252.9 million outstanding on
the Company’s first priority term loan and to temporarily reduce the debt
outstanding under the revolving credit facility by $35.0 million.  The
write-off of unamortized debt issuance costs related to the term loan resulted
in a loss of $5.9 million, which was recognized in Other income, net on the
condensed consolidated statement of operations.





6.  RETIREMENT
PLANS





The
Company maintains a defined benefit pension plan that provides retirement
benefits to hourly employees at the Androscoggin, Bucksport, and Sartell
mills.  The plan provides defined benefits based on years of credited
service times a specified flat dollar benefit rate.





The
Company makes contributions that are sufficient to fully fund its actuarially
determined costs, generally equal to the minimum amounts required by the
Employee Retirement Income Security Act (ERISA).  In the third quarter
of 2009, the Company made contributions of $2.9 million with $1.9 million
attributable to the 2009 plan year and $1.0 million attributable to the 2008
plan year.  In the third quarter of 2008, the Company made
contributions of $3.6 million with $2.1 million attributable to the 2008 plan
year and $1.5 million attributable to the 2007 plan year.  For the
nine months ended September 30, 2009, contributions totaled $5.0 million, with
$3.8 million attributable to the 2009 plan year and $1.2 million attributable to
the 2008 plan year.  For the nine months ended September 30, 2008,
contributions totaled $7.3 million, with $4.3 million attributable to the 2008
plan year and $3.0 million attributable to the 2007 plan year. The Company
expects to make additional contributions of $1.9 million in 2009 related to the
2009 plan year.





13


The
expected return on plan assets assumption for 2009 will be 7.50%.  The
following table summarizes the components of net periodic expense:





Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Components
      of net periodic benefit cost:Service
      cost
              
              $
              1,591
              
              
              $
              1,494
              
              
              $
              4,775
              
              
              $
              4,482Interest
      cost
              
              
              380
              
              
              
              250
              
              
              
              1,142
              
              
              
              749Expected
      return on plan assets
              
              
              (308
              )
              
              
              (191
              )
              
              
              (926
              )
              
              
              (572
              )Amortization
      of prior service cost
              
              
              218
              
              
              
              218
              
              
              
              654
              
              
              
              654Actuarial
      loss
              
              
              81
              
              
              
              -
              
              
              
              239
              
              
              
              -Net
      periodic benefit cost
              
              $
              1,962
              
              
              $
              1,771
              
              
              $
              5,884
              
              
              $
              5,313


The
Company also sponsors a 401(k) plan to provide salaried and hourly employees an
opportunity to accumulate personal funds and to provide additional benefits for
retirement.  Contributions may be made on a before-tax basis to the
plan.  As determined by the provisions of the plan, the Company
matches the employees’ basic voluntary contributions; however, in response to
the challenging economic conditions, the Company suspended its matching
contributions to the 401(k) plan for exempt and non-exempt salaried employees
beginning April 3, 2009, which will reduce expense by approximately $3.0 million
on an annual basis.





In the
third quarter of 2009, the Company offered a voluntary early retirement program
to certain eligible employees. The offer was accepted by 71 employees. The
Company’s voluntary early retirement program resulted in a charge of $4.2
million to cost of products sold, consisting of separation and accrued medical
and dental benefits, and is expected to result in an annual cost savings of $7.1
million. The voluntary early retirement program is expected to be completed by
June 30, 2010.  The Company also initiated a reduction in workforce
resulting in the elimination of eight positions which is expected to be
completed by December 31, 2009. The reduction in workforce resulted in a charge
of $0.5 million to selling, general, and administrative expense, consisting of
separation and accrued medical and dental benefits, and is expected to result in
annual cost savings of $0.8 million.





7.  EQUITY
AWARDS





The Verso
Paper Corp. 2008 Incentive Award Plan, as amended, or the “Incentive Plan,”
authorizes the issuance of stock awards covering up to 4,250,000 shares of
common stock of Verso Paper Corp.  Under the Incentive Plan, stock
awards may be granted to employees and non-employee directors upon approval by
the board of directors.  Verso Paper Corp. has issued non-qualified
stock options to certain non-employee directors that vest upon grant and expire
10 years from the date of grant.  Verso Paper Corp. has also issued
both time-based and performance-based non-qualified stock options to officers
and management employees in 2009.  These time-based options vest one
to three years from the date of grant and expire seven years from the date of
grant.  The performance-based options vest one to three years from the
date of grant based on the achievement of certain performance criteria tied to
Verso’s calculation of Adjusted EBITDA and expire seven years from the date of
grant.  However, the performance period has not begun and performance
criteria have not been communicated to the participants for 41,998 of these
performance-based options, and thus no expense has been recognized related to
these options.





14


A summary
of stock option plan activity (including the performance-based options) for the
nine months ended September 30, 2009, is provided below:




Weighted
                
                
                WeightedAverage
                
                
                AverageOptions
                
                
                Exercise
                
                
                Fair
      ValueOutstanding
                
                
                Price
                
                
                at
      Grant DateJanuary
      1, 2009
                
                
                15,200
                
                
                $
                1.43
                
                
                $
                0.46Options
      granted
                
                
                1,083,202
                
                
                
                3.55
                
                
                
                2.37Performance
      options granted (1)
                
                
                83,998
                
                
                
                1.13
                
                
                
                1.33September
      30, 2009
                
                
                1,182,400
                
                
                
                3.35
                
                
                
                2.28Options
      exercisable
                
                
                30,400
                
                
                $
                1.07Options
      expected to vest
                
                
                1,130,996
                
                
                
                3.45
 ________________(1) 
       Performance-based grants for which the performance period has not
      begun are treated as variable awards, and the weighted average fair value
      is determined as of September 30,
2009.


The
Company used the Black-Scholes option pricing model to estimate the fair value
of stock options granted in 2009 with the following assumptions:




Expected
      weighted-average life of options granted
              
              5.0
      yearsRange
      of volatility rates based on historical industry
volatility
              
              
              31.82%
      - 69.29%Range
      of risk-free interest rates
              
              
              1.97%
      - 3.16%Expected
      dividend yield
              
              
              -
  Expected
lives of options granted are determined based on the vesting period and
contractual terms of the options.  Expected volatility is estimated
using historical industry volatility determined over the expected lives of the
options.





On
September 30, 2009, there was $2.7 million of unrecognized compensation cost
related to stock options which is expected to be recognized over a
weighted-average period of approximately 2.9 years.





Additionally,
on September 21, 2009, Verso Paper Corp. issued 328,000 restricted stock awards
to its executives and certain senior managers, which have a grant date fair
value of $3.69 per share.  The restrictions lapse in equal annual
installments on each of the first three anniversaries of the date of
grant.  As of September 30, 2009, there was $1.2 million of
unrecognized compensation cost related to restricted stock awards which is
expected to be recognized over a weighted-average period of approximately 3.0
years.  The restrictions on these shares automatically lapse in the
event of a change of control as defined in the Incentive Plan.





15


Simultaneously
with the consummation of the IPO, the limited partnership agreement of Verso
Paper Corp.’s parent, Verso Paper Management LP, or the “Partnership,” was
amended to, among other things, change its equity structure from multiple
classes of units representing limited partner interests in the Partnership to a
single class of units representing such interests.  The conversion
from the prior multiple-class unit structure, or the “Legacy Units,” to a new
single class of units in the Partnership was designed to correlate the equity
structure of the Partnership with the post-IPO equity structure of Verso Paper
Corp.





In
connection with the IPO and the amendment of the limited partnership agreement
of the Partnership, the Legacy Class C Units of the Partnership previously
granted to certain members of our management were vested as of May 20,
2008.  Prior to the amendment, the Legacy Class C Units were to vest
only if certain performance targets were met.  As a result of the
accelerated vesting of the Legacy Class C Units, the Company recognized $10.8
million of equity compensation expense. Assumptions applied under the
Black-Scholes option pricing model for the Legacy Class C Units were as
follows:  expected term of one year, volatility rate of 36.65% based
on historical industry volatility, expected dividend rate of 1%, and average
risk free rate of 2.0%.





Certain
members of our management were granted Legacy Class B Units, which vest over a
five-year period at the rate of 20% per year on each anniversary of the grant
date.  As of September 30, 2009, there was $0.5 million of
unrecognized compensation cost related to unvested Legacy Class B Units. This
cost is expected to be recognized over a weighted-average period of
approximately 1.8 years.





Certain of
our directors were granted Legacy Class D Units, which were vested upon
grant.  The fair value of Legacy Class D Units granted to directors in
the nine months ended September 30, 2008, was approximately $0.1
million.  The Company estimates the fair value of management equity
awards using the Black-Scholes valuation model.  Key input assumptions
applied under the Black-Scholes option pricing model for this grant were as
follows:  expected term of five years, volatility rate of 36.65% based
on historical industry volatility, no expected dividends and an average risk
free rate of 3.0%.





Equity
compensation expense pertaining to Legacy Class B Units, stock options and
restricted stock awards was $0.1 million and $0.3 million for the three-month
and nine-month periods ended September 30, 2009, respectively.  Equity
award expense for the three-month and nine-month periods ended September 30,
2008, was $0.1 million and $11.1 million, respectively, which for the nine-month
period included the $10.8 million related to the vesting of the Legacy Class C
Units.





8.  DERIVATIVE
INSTRUMENTS AND HEDGES





Effective
January 1, 2009, the Company adopted FASB ASC 815-10-50, which expands the
quarterly and annual disclosure requirements for derivative instruments and
hedging activities.





In the
normal course of business, the Company utilizes derivatives contracts as part of
its risk management strategy to manage its exposure to market fluctuations in
energy prices and interest rates.  These instruments are subject to
credit and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles.  Controls
and monitoring procedures for these instruments have been established and are
routinely reevaluated.  Credit risk represents the potential loss that
may occur because a party to a transaction fails to perform according to the
terms of the contract.  The measure of credit exposure is the
replacement cost of contracts with a positive fair value.  The Company
manages credit risk by entering into financial instrument transactions only
through approved counterparties.  Market risk represents the potential
loss due to the decrease in the value of a financial instrument caused primarily
by changes in commodity prices.  The Company manages market risk by
establishing and monitoring limits on the types and degree of risk that may be
undertaken.





16


Derivative
instruments are recorded on the balance sheet as other assets or other
liabilities measured at fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.  Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters.  Where
observable prices or inputs are not available, valuation models may be
applied.  For a cash flow hedge accounted for under FASB ASC 815,
Derivatives and
Hedging, changes in the fair value of the derivative instrument, to the
extent that it is effective, are recorded in Accumulated other comprehensive
income and subsequently reclassified to earnings as the hedged transaction
impacts net income.  Any ineffective portion of a cash flow hedge is
recognized currently in earnings.  Cash flows from derivative
contracts are reported as operating activities on the consolidated statements of
cash flows.


The
Company enters into short-term, fixed-price energy swaps as hedges designed to
mitigate the risk of changes in commodity prices for future purchase
commitments.  These fixed-price swaps involve the exchange of net cash
settlements, based on changes in the price of the underlying commodity index
compared to the fixed price offering, at specified intervals without the
exchange of any underlying principal.  The Company has designated its
energy hedging relationships as cash flow hedges under FASB ASC 815 with net
gains or losses attributable to effective hedging recorded in Accumulated other
comprehensive income and any ineffectiveness recognized in Cost of products
sold.  Amounts recorded in Accumulated other comprehensive income are
expected to be reclassified into cost of products sold in the period in which
the hedged cash flows affect earnings.





In
February 2008, the Company entered into a two-year, $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with the Company’s
outstanding floating rate notes that mature in 2014.  The notes pay
interest quarterly based on a three-month LIBOR.  The Company is
hedging the cash flow exposure on its quarterly variable-rate interest payments
due to changes in the benchmark interest rate (three-month LIBOR) and designated
the interest rate swap as a cash flow hedge under FASB ASC
815.  During the first nine months of 2009, the Company repurchased
$61.8 million of the hedged notes and de-designated the interest-rate swap
hedging the interest payments on the debt.  During the nine months
ended September 30, 2009, $1.3 million of losses have been recognized in Other
income, net on the condensed consolidated statement of operations.





The
following table presents information about the volume and fair value amounts of
the Company’s derivative instruments.




At
      September 30, 2009
              
              
              At
      December 31, 2008Fair
      Value Measurements
              
              
              
              
              Fair
      Value Measurements
              
              BalanceNotional
              
              
              Derivative
              
              
              Derivative
              
              Notional
              
              
              Derivative
              
              
              Derivative
              
              Sheet(dollars
      in thousands)
              
              Amount
              
              
              Asset
              
              
              Liability
              
              Amount
              
              
              Asset
              
              
              Liability
              
              LocationDerivatives
      designated as hedginginstruments under FASB ASC 815Short-term,
      fixed price energy swaps - MMBtu's
              
              
              4,607,109
              
              
              $
              585
              
              
              $
              5,937
              
              
              
              7,242,456
              
              
              $
              -
              
              
              $
              26,878
              
              Other
      assets/
                Accrued
      liabiltiesInterest
      rate swaps, receive-variable, pay-fixed
              
              $
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              250,000
              
              
              
              -
              
              
              
              3,677
              
              Other
      liabilitiesDerivatives
      not designated as hedginginstruments under FASB ASC 815Interest
      rate swaps, receive-variable, pay-fixed
              
              $
              250,000
              
              
              
              -
              
              
              
              2,997
              
              
              $
              -
              
              
              
              -
              
              
              
              -
              
              Other
      liabilities






17





The
following tables present information about the effect of the Company’s
derivative instruments on Accumulated other comprehensive income and the
condensed consolidated statements of operations.





Gain
      (Loss) Recognized
                
                Gain
      (Loss) Reclassifiedin
      Accumulated OCI
                
                from
      Accumulated OCI
                
                Location
      ofAt
                
                
                At
                
                
                Nine
      Months Ended
                
                Gain
      (Loss)September
      30,
                
                
                December
      31,
                
                
                September
      30,
                
                on
      Statements(dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                of
      OperationsDerivatives
      designated as hedginginstruments
      under FASB ASC 815Short-term,
      fixed price energy swaps (1)
                
                $
                (5,333
                )
                
                $
                (25,852
                )
                
                $
                (31,333
                )
                
                $
                5,493
                
                Cost
      of products soldInterest
      rate swaps, receive-variable, pay-fixed (1)
                
                
                (1,115
                )
                
                
                (3,859
                )
                
                
                (2,677
                )
                
                
                336
                
                Interest
      expense
  ________________(1)  
      Net
      losses at September 30, 2009, are expected to be reclassified from
      Accumulated other comprehensive income into earnings
      within the next 12 months. Gain
      (Loss) RecognizedGain
      (Loss) Recognized
                
                
                on
      Derivative
                
                Location
      ofon
      Derivative
                
                
                (Ineffective
      Portion)
                
                Gain
      (Loss)Nine
      Months Ended September 30,
                
                on
      Statements(dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                of
      OperationsDerivatives
      designated as hedginginstruments
      under FASB ASC 815Short-term,
      fixed price energy swaps
                
                $
                (3,683
                )
                
                $
                (4,086
                )
                
                $
                (54
                )
                
                $
                (45
                )
                Cost
      of products soldDerivatives
      not designated as hedginginstruments
      under FASB ASC 815Short-term,
      fixed price energy swaps
                
                
                -
                
                
                
                1,578
                
                
                
                -
                
                
                
                -
                
                Cost
      of products soldInterest
      rate swaps, receive-variable, pay-fixed
                
                
                (1,347
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                Other
      income







18


9.  FAIR
VALUE OF FINANCIAL INSTRUMENTS





FASB ASC
820 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  On January 1,
2008, the Company adopted FASB ASC 820 as it relates to financial assets and
liabilities and nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis, and
adopted FASB ASC 820 as it relates to nonfinancial assets and liabilities that
are not remeasured at fair value on a recurring basis as of January 1,
2009.  The adoption of these provisions of FASB ASC 820 did not have a
material impact on the Company’s financial condition, results of operations, or
cash flows.





The fair
value framework requires the categorization of assets and liabilities into three
levels based upon the assumptions used to value the assets or
liabilities.  Level 1 provides the most reliable measure of fair
value, whereas Level 3 generally requires significant management
judgment.  The three levels are defined as follows:




▪  Level
      1:
              Unadjusted
      quoted prices in active markets for identical assets or liabilities at the
      measurement date.▪  Level
      2:
              Observable
      inputs other than those included in Level 1.  For example,
      quoted prices for similar assets or liabilities in active markets or
      quoted prices for identical assets or liabilities in inactive
      markets.▪  Level
      3:
              Unobservable
      inputs reflecting management’s own assumption about the inputs used in
      pricing the asset or liability at the measurement
  date.





As of
September 30, 2009, the fair values of the Company’s assets and liabilities
measured at fair value on a recurring basis are categorized as
follows:





(In
      thousands of U.S. dollars)
                
                Total
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3ASSETSDeferred
      compensation assets
                
                $
                579
                
                
                $
                579
                
                
                $
                -
                
                
                $
                -Regional
      Greenhouse Gas Initiative carbon credits (a)
                
                
                274
                
                
                
                -
                
                
                
                274
                
                
                
                -Commodity
      swaps (a)
                
                
                585
                
                
                
                -
                
                
                
                585
                
                
                
                -Total
      assets at fair value on September 30, 2009
                
                $
                1,438
                
                
                $
                579
                
                
                $
                859
                
                
                $
                -LIABILITIESCommodity
      swaps (a)
                
                $
                5,937
                
                
                $
                -
                
                
                $
                5,937
                
                
                $
                -Interest
      rate swaps (b)
                
                
                2,997
                
                
                
                -
                
                
                
                2,997
                
                
                
                -Deferred
      compensation liabilities
                
                
                579
                
                
                
                579
                
                
                
                -
                
                
                
                -Total
      liabilities at fair value on September 30, 2009
                
                $
                9,513
                
                
                $
                579
                
                
                $
                8,934
                
                
                $
                -
  ________________(a)
      Based on observable market data.(b)
      Based on observable inputs for the liability (interest rates and yield
      curves observable at specific
intervals).




The
Company did not record any impairment charges on long-lived assets and no
significant events requiring non-financial assets and liabilities to be measured
at fair value occurred (subsequent to initial recognition) during the nine
months ended September 30, 2009.




19


10.  RELATED
PARTY TRANSACTIONS




The
Company had net sales to International Paper of $42.3 million and $95.7 million
for the three-month and nine-month periods ended September 30, 2009,
respectively, compared to $47.8 million and $128.4 million for the three-month
and nine-month periods ended September 30, 2008, respectively. The Company had
purchases from International Paper, included in cost of products sold, of $1.3
million and $3.4 million for the three-month and nine-month periods ended
September 30, 2009, respectively, compared to $1.4 million and $5.7 million for
the three-month and nine-month periods ended September 30, 2008,
respectively.





Subsequent
to the Acquisition, the Company entered into a management consulting agreement
with Apollo relating to the provision of certain financial and strategic
advisory services and consulting services.  Upon consummation of the
IPO in 2008, Apollo terminated the annual fee arrangement under the management
agreement for its consulting and advisory services in exchange for a one-time
fee of $23.1 million.  Although the annual fee arrangement was
terminated in connection with the IPO, the management consulting agreement
remains in effect and will expire on August 1, 2018.





Verso
Paper Finance Holdings LLC, or “Verso Finance,” of which the Company is a
wholly-owned subsidiary, has a senior unsecured term loan which matures on
February 1, 2013.  In May 2008, a portion of the net proceeds from the
IPO were used to repay $138 million of the outstanding principal of the term
loan and to pay a related $1.4 million prepayment penalty.  The
term loan allows Verso Finance to pay interest either in cash or in-kind through
the accumulation of the outstanding principal amount.  Verso Finance
has elected to exercise the PIK option for $8.0 million of interest payments due
in 2009.  The Company made distributions to Verso Finance of $3.3
million in the third quarter of 2008 and $17.3 million during the nine months
ended September 30, 2008.  the Company made negligible distributions
to Verso Finance during the nine months ended September 30,
2009.  Verso Finance has no independent operations; consequently, all
cash flows used to service its remaining debt obligation will need to be
received via distributiona from the Company.  The Company has no
obligation to make distributions to Verso Finance.  During 2009, the
Company contributed $11.0 million to Verso Paper Finance Holdings One LLC, or
“Verso Finance One,” the parent company of Verso Finance, to cover additional
repurchases of debt by Verso Finance One.  Through September 30, 2009,
Verso Finance One has purchased $41.4 million of the term loan for a total
purchase price of $10.2 million.





During the
first quarter of 2009, Verso Paper Corp. pushed down the assets, liabilities,
and equity of Verso Fiber Farm LLC to the Company using a carryover
basis.





11.
RESTRUCTURING AND OTHER CHARGES





Restructuring
and other charges are comprised of transition and other non-recurring costs
associated with the Acquisition and carve out of our operations from those of
International Paper, including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to us operating as a stand-alone business. The
charges for the three-month and nine-month periods ended September 30, 2009,
were $0.4 million and $0.7 million, compared to $1.1 million and $26.5 million
for the three-month and nine-month periods ended September 30, 2008,
respectively.  The charges in 2008 included the one-time fee of $23.1
million to terminate the annual fee arrangement under the management consulting
agreement with Apollo.





20


12.
COMMITMENTS AND CONTINGENCIES





Bucksport Energy
LLC —The
Company has a joint ownership interest with Bucksport Energy LLC, an unrelated
third party, in a cogeneration power plant producing steam and
electricity.  The plant was built in 2000 and is located at and
supports the Bucksport mill.  Each co-owner owns an undivided
proportional share of the plant’s assets.  The Company owns 28% of the
steam and electricity produced by the plant.  The Company may purchase
its remaining electrical needs from the plant at market rates.  The
Company is obligated to purchase the remaining 72% of the steam output from the
plant at fuel cost plus a contractually fixed fee per unit of
steam.  Power generation and operating expenses are divided on the
same basis as ownership.  The Company has cash which is restricted in
its use and may be used only to fund the ongoing energy operations of this
investment.  At September 30, 2009, the Company had $0.2 million of
restricted cash included in Other assets in the accompanying condensed
consolidated balancesheet.





Alternative Fuel
Tax Credit —The
U.S. government provides an excise tax credit for companies that use alternative
fuel mixtures in their businesses equal to $0.50 per gallon of alternative fuel
contained in the mixture.  In January and February 2009, the Internal
Revenue Service certified that the Company’s operations at its Androscoggin and
Quinnesec mills qualified for the alternative fuel mixture tax
credit.  Although there is some uncertainty as to the continued
existence and availability of the alternative fuel mixture tax credit, the
Company is reasonably assured that the tax credit for the alternative fuel
mixture used by the Company through September 30, 2009, has been earned and will
be collected from the U.S. government.  Accordingly, during the nine
months ended September 30, 2009, the Company recognized $189.1 million of
alternative fuel mixture tax credits for the period from September 2008 through
September 2009, including $10.7 million for claims pending at September 30,
2009.  These credits are recognized in Other income, net on the
condensed consolidated statement of operations, net of $1.5 million of
associated expenses.  The receivable for claims pending is recognized
in Accounts receivable – net on the condensed consolidated balance
sheets.




Thilmany, LLC
—In
connection with the Acquisition, the Company assumed a twelve-year supply
agreement with Thilmany, LLC, or “Thilmany,” for the specialty paper products
manufactured on paper machine no. 5 at the Androscoggin mill.  The
agreement requires Thilmany to pay the Company a variable charge for the paper
purchased and a fixed charge for the availability of the no. 5 paper
machine.  The Company is responsible for the no. 5 machine’s routine
maintenance and Thilmany is responsible for any capital expenditures specific to
the machine.  Thilmany has the right to terminate the agreement if
certain events occur.




In October
2009, Thilmany (together with its parent company, Packaging Dynamics
Corporation) served the Company with a lawsuit filed in circuit court in
Outagamie County, Wisconsin.  Thilmany alleges in the lawsuit that the
alternative fuel mixture tax credits that the Company has received from the
operation of the Androscoggin mill have the effect of reducing the Company’s
costs associated with operating the Androscoggin mill (including paper machine
no. 5) and producing the pulp that the Company uses to manufacture paper
products for Thilmany under the supply agreement between the
parties.  Thilmany seeks unspecified damages for the Company’s alleged
breach of contract for failing to provide Thilmany with a prorated share of the
purported cost savings attributable to the tax credits and a declaration that
Thilmany is entitled to a prorated share of any such future costs savings
attributable to the Company’s use of alternative fuel mixtures at the
Androscoggin mill.  The Company is evaluating the lawsuit and intends
to respond in the near future.





21


The
Company is involved in legal proceedings incidental to the conduct of its
business.  The Company does not believe that any liability that may
result from these proceedings will have a material adverse effect on its
financial statements.





13.  INFORMATION
BY INDUSTRY SEGMENT





The
Company operates in three operating segments: coated and supercalendered papers;
hardwood market pulp; and other, consisting of specialty paper. The Company
operates in one geographic segment, the United States. The Company’s core
business platform is as a producer of coated freesheet, coated groundwood, and
uncoated supercalendered papers. These products serve customers in the catalog,
magazine, inserts, and commercial print markets.





The
following table summarizes the industry segment data for the three-month and
nine-month periods ended September 30, 2009 and 2008:





Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      Sales:Coated
      and supercalendered
              
              $
              352,506
              
              
              $
              432,608
              
              
              $
              865,229
              
              
              $
              1,239,854Hardwood
      market pulp
              
              
              28,041
              
              
              
              41,019
              
              
              
              73,799
              
              
              
              118,861Other
              
              
              14,116
              
              
              
              11,796
              
              
              
              40,824
              
              
              
              32,217Total
              
              $
              394,663
              
              
              $
              485,423
              
              
              $
              979,852
              
              
              $
              1,390,932Operating
      Income (Loss):Coated
      and supercalendered
              
              $
              7,896
              
              
              $
              37,707
              
              
              $
              (49,088
              )
              
              $
              43,209Hardwood
      market pulp
              
              
              1,097
              
              
              
              9,857
              
              
              
              (17,652
              )
              
              
              27,140Other
              
              
              (1,560
              )
              
              
              (795
              )
              
              
              (5,857
              )
              
              
              (3,050
              )Total
              
              $
              7,433
              
              
              $
              46,769
              
              
              $
              (72,597
              )
              
              $
              67,299Depreciation,
      amortization, and depletion:Coated
      and supercalendered
              
              $
              27,458
              
              
              $
              27,920
              
              
              $
              83,856
              
              
              $
              84,386Hardwood
      market pulp
              
              
              4,682
              
              
              
              5,119
              
              
              
              13,551
              
              
              
              14,023Other
              
              
              1,089
              
              
              
              713
              
              
              
              3,177
              
              
              
              2,168Total
              
              $
              33,229
              
              
              $
              33,752
              
              
              $
              100,584
              
              
              $
              100,577Capital
      Spending:Coated
      and supercalendered
              
              $
              3,890
              
              
              $
              16,825
              
              
              $
              25,164
              
              
              $
              49,720Hardwood
      market pulp
              
              
              65
              
              
              
              1,138
              
              
              
              3,429
              
              
              
              8,033Other
              
              
              488
              
              
              
              277
              
              
              
              1,373
              
              
              
              1,879Total
              
              $
              4,443
              
              
              $
              18,240
              
              
              $
              29,966
              
              
              $
              59,632





22


14.  UNAUDITED
CONDENSED CONSOLIDATING FINANCIAL INFORMATION





Presented
below are the Company’s consolidating balance sheets, statements of operations,
and statements of cash flows, as required by Rule 3-10 of
Regulation S-X of the Securities Exchange Act of 1934, as
amended.  The consolidating financial statements have been prepared
from the Company’s financial information on the same basis of accounting as the
consolidated financial statements.  Investments in our subsidiaries
are accounted for under the equity method.  Accordingly, the entries
necessary to consolidate Verso Paper Holdings LLC’s subsidiaries that guaranteed
the obligations under the debt securities described below are reflected in the
Intercompany Eliminations column.





Verso
Paper Holdings LLC (“Parent Issuer”) and Verso Paper Inc., are the issuers of
111/2% senior
secured fixed rate notes due 2014, 91⁄8% second-priority senior secured fixed rate
notes due 2014, second-priority senior secured floating rate notes due 2014, and
113⁄8% senior subordinated notes due 2014 (collectively, the
“Notes”).  The Notes are jointly and severally guaranteed on a full
and unconditional basis by the Company’s 100% owned subsidiaries, excluding
Verso Paper Inc. and Bucksport Leasing LLC (collectively, the “Guarantor
Subsidiaries”).  All subsidiaries other than the Guarantor
Subsidiaries are minor.





Unaudited
      Condensed Consolidating Balance Sheetas
      of September 30, 2009Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assets
              
              $
              -
              
              
              $
              -
              
              
              $
              396,251
              
              
              $
              -
              
              
              $
              396,251Property,
      plant, and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,049,851
              
              
              
              -
              
              
              
              1,049,851Intercompany
      receivable
              
              
              1,223,915
              
              
              
              -
              
              
              
              -
              
              
              
              (1,223,915
              )
              
              
              -Investment
      in subsidiaries
              
              
              149,526
              
              
              
              -
              
              
              
              -
              
              
              
              (149,526
              )
              
              
              -Non-current
      assets
              
              
              -
              
              
              
              -
              
              
              
              116,606
              
              
              
              -
              
              
              
              116,606Total
      assets
              
              $
              1,373,441
              
              
              $
              -
              
              
              $
              1,562,708
              
              
              $
              (1,373,441
              )
              
              $
              1,562,708LIABILITIES
      AND MEMBER'S EQUITYCurrent
      liabilities
              
              $
              24,175
              
              
              $
              -
              
              
              $
              160,532
              
              
              $
              -
              
              
              $
              184,707Intercompany
      payable
              
              
              -
              
              
              
              -
              
              
              
              1,223,915
              
              
              
              (1,223,915
              )
              
              
              -Long-term
      debt
              
              
              1,170,336
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,170,336Other
      long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              28,735
              
              
              
              -
              
              
              
              28,735Member's
      equity
              
              
              178,930
              
              
              
              -
              
              
              
              149,526
              
              
              
              (149,526
              )
              
              
              178,930Total
      liabilities and member's equity
              
              $
              1,373,441
              
              
              $
              -
              
              
              $
              1,562,708
              
              
              $
              (1,373,441
              )
              
              $
              1,562,708




23




Unaudited
      Condensed Consolidating Balance Sheetas
      of December 31, 2008Parent
            
            
            Subsidiary
            
            
            Guarantor
            
            
            Intercompany(In
      thousands of U.S. dollars)
            
            Issuer
            
            
            Issuer
            
            
            Subsidiaries
            
            
            Eliminations
            
            
            ConsolidatedASSETSCurrent
      assets
            
            $
            -
            
            
            $
            -
            
            
            $
            401,011
            
            
            $
            -
            
            
            $
            401,011Property,
      plant, and equipment, net
            
            
            -
            
            
            
            -
            
            
            
            1,115,657
            
            
            
            -
            
            
            
            1,115,657Intercompany
      receivable
            
            
            1,307,503
            
            
            
            -
            
            
            
            -
            
            
            
            (1,307,503
            )
            
            
            -Investment
      in subsidiaries
            
            
            60,663
            
            
            
            
            
            
            
            
            
            
            
            (60,663
            )
            
            
            -Non-current
      assets
            
            
            -
            
            
            
            -
            
            
            
            97,404
            
            
            
            -
            
            
            
            97,404Total
      assets
            
            $
            1,368,166
            
            
            $
            -
            
            
            $
            1,614,072
            
            
            $
            (1,368,166
            )
            
            $
            1,614,072LIABILITIES
      AND MEMBER'S EQUITYCurrent
      liabilities
            
            $
            33,641
            
            
            $
            -
            
            
            $
            213,899
            
            
            $
            -
            
            
            $
            247,540Intercompany
      payable
            
            
            -
            
            
            
            -
            
            
            
            1,307,503
            
            
            
            (1,307,503
            )
            
            
            -Long-term
      debt
            
            
            1,242,821
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,242,821Other
      long-term liabilities
            
            
            -
            
            
            
            -
            
            
            
            32,007
            
            
            
            -
            
            
            
            32,007Member's
      equity
            
            
            91,704
            
            
            
            -
            
            
            
            60,663
            
            
            
            (60,663
            )
            
            
            91,704Total
      liabilities and member's equity
            
            $
            1,368,166
            
            
            $
            -
            
            
            $
            1,614,072
            
            
            $
            (1,368,166
            )
            
            $
            1,614,072




Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended September 30, 2009Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              394,663
              
              
              $
              -
              
              
              $
              394,663Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
              
              
              -
              
              
              
              -
              
              
              
              338,592
              
              
              
              -
              
              
              
              338,592Depreciation,
      amortization, and depletion
              
              
              -
              
              
              
              -
              
              
              
              33,229
              
              
              
              -
              
              
              
              33,229Selling,
      general, and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              15,040
              
              
              
              -
              
              
              
              15,040Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              369
              
              
              
              -
              
              
              
              369Interest
      and dividend income
              
              
              (31,301
              )
              
              
              -
              
              
              
              (71
              )
              
              
              31,301
              
              
              
              (71
              )Interest
      expense
              
              
              31,301
              
              
              
              -
              
              
              
              32,733
              
              
              
              (31,301
              )
              
              
              32,733Other
      income, net
              
              
              13,586
              
              
              
              -
              
              
              
              (60,344
              )
              
              
              (13,586
              )
              
              
              (60,344
              )Equity
      in net income of subsidiaries
              
              
              35,115
              
              
              
              -
              
              
              
              -
              
              
              
              (35,115
              )
              
              
              -Net
      income
              
              $
              21,529
              
              
              $
              -
              
              
              $
              35,115
              
              
              $
              (21,529
              )
              
              $
              35,115








24




Unaudited
      Condensed Consolidating Statements of OperationsNine
      Months Ended September 30, 2009Parent
              
              
              
              Subsidiary
              
              
              
              Guarantor
              
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              
              Issuer
              
              
              
              Issuer
              
              
              
              Subsidiaries
              
              
              
              Eliminations
              
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              979,852
              
              
              $
              -
              
              
              $
              979,852Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
              
              
              -
              
              
              
              -
              
              
              
              906,080
              
              
              
              -
              
              
              
              906,080Depreciation,
      amortization, and depletion
              
              
              -
              
              
              
              -
              
              
              
              100,584
              
              
              
              -
              
              
              
              100,584Selling,
      general, and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              45,142
              
              
              
              -
              
              
              
              45,142Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              643
              
              
              
              -
              
              
              
              643Interest
      and dividend income
              
              
              (82,135
              )
              
              
              -
              
              
              
              (150
              )
              
              
              82,135
              
              
              
              (150
              )Interest
      expense
              
              
              82,135
              
              
              
              -
              
              
              
              84,047
              
              
              
              (82,135
              )
              
              
              84,047Other
      income, net
              
              
              27,333
              
              
              
              -
              
              
              
              (219,862
              )
              
              
              (27,333
              )
              
              
              (219,862
              )Equity
      in net income of subsidiaries
              
              
              63,368
              
              
              
              -
              
              
              
              -
              
              
              
              (63,368
              )
              
              
              -Net
      income
              
              $
              36,035
              
              
              $
              -
              
              
              $
              63,368
              
              
              $
              (36,035
              )
              
              $
              63,368Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended September 30, 2008Parent
              
              
              
              Subsidiary
              
              
              
              Guarantor
              
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              
              Issuer
              
              
              
              Issuer
              
              
              
              Subsidiaries
              
              
              
              Eliminations
              
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              485,423
              
              
              $
              -
              
              
              $
              485,423Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
              
              
              -
              
              
              
              -
              
              
              
              385,560
              
              
              
              -
              
              
              
              385,560Depreciation,
      amortization, and depletion
              
              
              -
              
              
              
              -
              
              
              
              33,752
              
              
              
              -
              
              
              
              33,752Selling,
      general, and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              18,225
              
              
              
              -
              
              
              
              18,225Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              1,117
              
              
              
              -
              
              
              
              1,117Interest
      and dividend income
              
              
              (28,759
              )
              
              
              -
              
              
              
              (126
              )
              
              
              28,759
              
              
              
              (126
              )Interest
      expense
              
              
              25,416
              
              
              
              -
              
              
              
              25,036
              
              
              
              (25,416
              )
              
              
              25,036Equity
      in net income of subsidiaries
              
              
              21,859
              
              
              
              -
              
              
              
              -
              
              
              
              (21,859
              )
              
              
              -Net
      income
              
              $
              25,202
              
              
              $
              -
              
              
              $
              21,859
              
              
              $
              (25,202
              )
              
              $
              21,859




25




Unaudited
      Condensed Consolidating Statements of OperationsNine
      Months Ended September 30, 2008Parent
                
                
                Subsidiary
                
                
                Guarantor
                
                
                Intercompany(In
      thousands of U.S. dollars)
                
                Issuer
                
                
                Issuer
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                -
                
                
                $
                1,390,932
                
                
                $
                -
                
                
                $
                1,390,932Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
                
                
                -
                
                
                
                -
                
                
                
                1,137,859
                
                
                
                -
                
                
                
                1,137,859Depreciation,
      amortization, and depletion
                
                
                -
                
                
                
                -
                
                
                
                100,577
                
                
                
                -
                
                
                
                100,577Selling,
      general, and administrative expenses
                
                
                -
                
                
                
                -
                
                
                
                58,644
                
                
                
                -
                
                
                
                58,644Restructuring
      and other charges
                
                
                -
                
                
                
                -
                
                
                
                26,553
                
                
                
                -
                
                
                
                26,553Interest
      and dividend income
                
                
                (95,370
                )
                
                
                -
                
                
                
                (458
                )
                
                
                95,370
                
                
                
                (458
                )Interest
      expense
                
                
                78,062
                
                
                
                -
                
                
                
                76,577
                
                
                
                (78,062
                )
                
                
                76,577Equity
      in net loss of subsidiaries
                
                
                (8,820
                )
                
                
                -
                
                
                
                -
                
                
                
                8,820
                
                
                
                -Net
      loss
                
                $
                8,488
                
                
                $
                -
                
                
                $
                (8,820
                )
                
                $
                (8,488
                )
                
                $
                (8,820
                )
 
  Unaudited
      Condensed Consolidating Statements of Cash FlowsNine
      Months Ended September 30, 2009Parent
                
                
                Subsidiary
                
                
                Guarantor
                
                
                Intercompany(In
      thousands of U.S. dollars)
                
                Issuer
                
                
                Issuer
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      cash provided by operating activities
                
                $
                -
                
                
                $
                -
                
                
                $
                60,397
                
                
                $
                -
                
                
                $
                60,397Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
                
                
                -
                
                
                
                -
                
                
                
                83
                
                
                
                -
                
                
                
                83Capital
      expenditures
                
                
                -
                
                
                
                -
                
                
                
                (29,966
                )
                
                
                -
                
                
                
                (29,966
                )Investment
      in subsidiaries
                
                
                (36,425
                )
                
                
                -
                
                
                
                36,425
                
                
                
                -
                
                
                
                -Return
      of investment in subsidiaries
                
                
                12,157
                
                
                
                -
                
                
                
                (12,157
                )
                
                
                -
                
                
                
                -Net
      cash used in investing activities
                
                
                (24,268
                )
                
                
                -
                
                
                
                (5,615
                )
                
                
                -
                
                
                
                (29,883
                )Cash
      flows from financing activities:Equity
      distributions
                
                
                (12,157
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12,157
                )Debt
      issuance costs
                
                
                (10,097
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (10,097
                )Advances
      to subsidiaries
                
                
                (342,741
                )
                
                
                -
                
                
                
                342,741
                
                
                
                -
                
                
                
                -Repayment
      of advances to subsidiaries
                
                
                429,317
                
                
                
                -
                
                
                
                (429,317
                )
                
                
                -
                
                
                
                -Proceeds
      from long-term debt
                
                
                352,838
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                352,838Repayments
      of long-term debt
                
                
                (392,892
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (392,892
                )Net
      cash used in financing activities
                
                
                24,268
                
                
                
                -
                
                
                
                (86,576
                )
                
                
                -
                
                
                
                (62,308
                )Change
      in cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                (31,794
                )
                
                
                -
                
                
                
                (31,794
                )Cash
      and cash equivalents at beginning ofperiod
                
                
                -
                
                
                
                -
                
                
                
                119,520
                
                
                
                -
                
                
                
                119,520Cash
      and cash equivalents at end of period
                
                $
                -
                
                
                $
                -
                
                
                $
                87,726
                
                
                $
                -
                
                
                $
                87,726
   26
  Unaudited
      Condensed Consolidating Statements of Cash FlowsNine
      Months Ended September 30, 2008Parent
                
                
                Subsidiary
                
                
                Guarantor
                
                
                Intercompany(In
      thousands of U.S. dollars)
                
                Issuer
                
                
                Issuer
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      cash provided by operating activities
                
                $
                17,308
                
                
                $
                -
                
                
                $
                21,325
                
                
                $
                -
                
                
                $
                38,633Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
                
                
                -
                
                
                
                -
                
                
                
                108
                
                
                
                -
                
                
                
                108Capital
      expenditures
                
                
                -
                
                
                
                -
                
                
                
                (59,632
                )
                
                
                -
                
                
                
                (59,632
                )Return
      of investment in subsidiaries
                
                
                1,255
                
                
                
                -
                
                
                
                (1,255
                )
                
                
                -
                
                
                
                -Net
      cash used in investing activities
                
                
                1,255
                
                
                
                -
                
                
                
                (60,779
                )
                
                
                -
                
                
                
                (59,524
                )Cash
      flows from financing activities:Equity
      distributions
                
                
                (18,563
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (18,563
                )Repayment
      of advances tosubsidiaries
                
                
                2,138
                
                
                
                -
                
                
                
                (2,138
                )
                
                
                -
                
                
                
                -Payments
      on long-term debt
                
                
                
                
                
                
                
                
                
                
                .under
      credit agreement
                
                
                (2,138
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,138
                )Net
      cash used in financing activities
                
                
                (18,563
                )
                
                
                -
                
                
                
                (2,138
                )
                
                
                -
                
                
                
                (20,701
                )Change
      in cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                (41,592
                )
                
                
                -
                
                
                
                (41,592
                )Cash
      and cash equivalents at beginning ofperiod
                
                
                -
                
                
                
                -
                
                
                
                58,499
                
                
                
                -
                
                
                
                58,499Cash
      and cash equivalents at end of period
                
                $
                -
                
                
                $
                -
                
                
                $
                16,907
                
                
                $
                -
                
                
                $
                16,907
  15. SUBSEQUENT
EVENTS





On October
9, 2009, Walter Thomas Williams, III, an accounts payable employee of the
Company, was arrested on federal wire fraud charges for embezzling funds from
the Company.  An internal investigation has revealed that
Mr. Williams altered the processing of vendor payments to divert
approximately $10.2 million of funds to his and his wife’s bank accounts between
March 2008 and October 2009.  There is no evidence, however, that any
of the Company’s vendors was harmed as a result of Mr. Williams’
actions.  On October 12, 2009, the Company filed a civil lawsuit
against Mr. Williams and his wife in state court in DeSoto County,
Mississippi, seeking damages arising from the embezzlement and injunctive relief
to prevent the Williamses from transferring or diminishing their
assets.  The court promptly issued a temporary restraining order and
prejudgment attachment, and subsequently issued a permanent injunction, which
authorize the Company to seize the Williamses’ property and to have their bank
and other financial accounts frozen and held in trust for the Company’s
benefit.  Pursuant to these court orders, the Company has moved
aggressively to seize the Williamses’ assets, including cash, real estate, motor
vehicles, and assorted personal property.  On October 12, 2009,
the Company also filed a claim under its fidelity insurance policy, which
provides $10 million in insurance coverage after a $150,000
deductible.





Based on
the information currently known to the Company, the Company incurred
embezzlement losses of $1.3 million in 2008 and $0.7 million and $2.2 million in
the first and second quarters of 2009, respectively, and $6.0 million subsequent
to June 30, 2009. The financial statements presented for the three and nine
months ended September 30, 2009, include $150,000 in anticipated losses which
are included in Selling, general, and administrative expenses, net on the
condensed consolidated statement of operations.  A $10.0 million
receivable for funds that the Company believes are probable of recovery is
included in Other assets on the condensed consolidated balance sheet as of
September 30, 2009.  The effect of the embezzlement in prior periods
did not result in a material misstatement of the Company’s previously issued
financial statements.





27


The
Company has evaluated subsequent events for potential recognition and/or
disclosure through November 13, 2009, the date on which the unaudited condensed
consolidated financial statements included in this Quarterly Report on
Form 10-Q were issued.





ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Overview





We are a leading North American supplier of coated papers to catalog
and magazine publishers.  Coated paper is used primarily in media and
marketing applications, including catalogs, magazines, and commercial printing
applications such as high-end advertising brochures, annual reports, and direct
mail advertising.  We are North America’s second largest producer of
coated groundwood paper which is used primarily for catalogs and
magazines.  We are also a low cost producer of coated freesheet paper
which is used primarily for annual reports, brochures, and magazine
covers.  In addition, we have a growing presence in supercalendered
paper which is primarily used for retail inserts, but also increasingly for
catalogs and magazines.  We also produce and sell market kraft pulp
which is used to manufacture printing and writing paper grades and tissue
products.  We have recently expanded our product line of specialty
papers by introducing new specialty papers for applications in flexible
packaging.




Financial Summary





The economic downturn has presented a significant challenge for
manufacturers of coated paper as reduced spending on advertising and the overall
weak retail market significantly impacted our customers, especially magazine and
catalog publishers, resulting in unprecedented declines in demand for coated
papers in the first half of 2009.  Coated paper demand strengthened
during the third quarter of 2009 but was slightly below levels experienced in
the third quarter of 2008.  In addition to normal seasonal factors,
demand has increased as merchant and end-user coated paper inventories have
returned to more normal levels from the elevated levels accumulated during a
time of price increases in 2008.  Coated paper prices remained under
pressure from the peak levels reached in the second half of 2008. Improved
demand combined with market downtime, announced closures, and movements to other
grades serve to balance supply with demand.





Our net sales for the third quarter of 2009 decreased 18.7% year over
year as the average sales price fell 16.8% from the peak reached in the third
quarter of 2008.  Average sales prices for coated papers have
decreased steadily over the last three quarters in response to weak
demand.  While total sales volume was 2.3% lower than last year’s
level, on a sequential quarter basis volume increased 31.5%, reflecting an
increase in demand, which includes the effects of normal seasonality and low
customer inventory levels.


In response to the economic downturn, we continue to assess and
implement, as appropriate, various expense reduction initiatives.  Our
company-wide cost reduction program, which is expected to yield $72 million in
cost reductions, has produced approximately $43 million of savings during the
first nine months of 2009.  Management expects to achieve most of
these savings in 2009 and continues to search for and develop additional cost
savings measures.  Included in this program are material usage
reductions, energy usage reductions, labor cost savings, chemical substitution,
salary freezes, selling, general, and administrative expense reductions, and
workforce planning improvements.  Additionally, new product
initiatives have contributed to a 26.7% increase in net sales for our other
segment in the first nine months of 2009, reflecting the development of new
paper product offerings for our customers.





28


Also included in the results for 2009 are net benefits from
alternative fuel mixture tax credits provided by the U.S. government for our use
of black liquor in alternative fuel mixtures.  There is some
possibility that the U.S. government will amend the alternative fuel mixture tax
credit to eliminate or reduce its benefits for pulp and paper companies prior to
its scheduled expiration on December 31, 2009.  Any such amendment of
the tax credit could have a material adverse effect on our
results.




Three Months Ended
              
              
              Nine Months EndedSeptember 30,
              
              
              September 30,(In thousands of U.S. dollars)
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Net sales
              
              $
              394,663
              
              
              $
              485,423
              
              
              $
              979,852
              
              
              $
              1,390,932Costs and expenses:Cost of products sold - (exclusive ofdepreciation, amortization, and depletion)
              
              
              338,592
              
              
              
              385,560
              
              
              
              906,080
              
              
              
              1,137,859Depreciation, amortization, and depletion
              
              
              33,229
              
              
              
              33,752
              
              
              
              100,584
              
              
              
              100,577Selling, general, and administrative
    expenses
              
              
              15,040
              
              
              
              18,225
              
              
              
              45,142
              
              
              
              58,644Restructuring and other charges
              
              
              369
              
              
              
              1,117
              
              
              
              643
              
              
              
              26,553Operating income (loss)
              
              
              7,433
              
              
              
              46,769
              
              
              
              (72,597
              )
              
              
              67,299Interest income
              
              
              (71
              )
              
              
              (126
              )
              
              
              (150
              )
              
              
              (458
              )Interest expense
              
              
              32,733
              
              
              
              25,036
              
              
              
              84,047
              
              
              
              76,577Other income, net
              
              
              (60,344
              )
              
              
              -
              
              
              
              (219,862
              )
              
              
              -Net income (loss)
              
              $
              35,115
              
              
              $
              21,859
              
              
              $
              63,368
              
              
              $
              (8,820
              )
  Results of Operations – Third Quarter of 2009 Compared to Third
Quarter of 2008





Net
Sales.  Net sales for the third quarter of 2009 decreased 18.7%
to $394.7 million from $485.4 million in the third quarter of 2008 as the
average sales price per ton for all of our products fell 16.8% from the peak
reached in the third quarter of 2008.  Average sales prices for coated
papers decreased steadily over the last three quarters in response to weak
demand.  While total sales volume was 2.3% lower than last year’s
level, on a sequential quarter basis volume increased 31.5%, reflecting an
increase in demand which includes the effects of normal seasonality and low
customer inventory levels.





Net sales for our coated and supercalendered papers segment decreased
18.5% to $352.5 million in the third quarter of 2009 from $432.6 million in the
third quarter of 2008.  The decrease reflects a 16.0% decrease in
average paper sales price per ton and a 3.0% decrease in paper sales volume for
the third quarter of 2009 compared to the same period last
year.





Net sales for our market pulp segment decreased 31.6% to $28.0
million in the third quarter of 2009 from $41.0 million for the same period in
2008.  This decline was due to a 28.9% decrease in average sales price
per ton and a 3.9% decrease in sales volume compared to the third quarter of
2008.





29


Net sales for our other segment increased 19.7% to $14.2 million in
the third quarter of 2009 from $11.8 million in the third quarter of
2008.  The improvement in 2009 is due to a 29.5% increase in sales
volume, reflecting the development of new paper product offerings for our
customers.  Average sales price per ton decreased 7.6% compared to the
third quarter of 2008.





Cost of
sales.  Cost of sales, including depreciation, amortization,
and depletion, decreased 11.3% to $371.8 million from $419.3 million in the
third quarter of 2008, primarily reflecting lower input costs, which includes
the effects of our expense reduction initiatives, and the decline in sales
volume.  Our gross margin, excluding depreciation, amortization, and
depletion, was 14.2% for the third quarter of 2009 compared to 20.6% for the
third quarter of 2008, reflecting lower average sales prices during the third
quarter of 2009 and $5.3 million of unabsorbed costs resulting from almost
26,000 tons of market downtime taken in the third quarter of
2009.  Depreciation, amortization, and depletion expenses were $33.2
million in the third quarter of 2009 compared to $33.7 million in the third
quarter of 2008.





Selling, general,
and administrative.  Selling, general, and administrative
expenses were $15.1 million in the third quarter of 2009 compared to $18.2
million for the same period in 2008, reflecting the effect of our expense
reduction initiatives.





Interest
expense.Interest
expense for the third quarter of 2009 was $32.7 million compared to $25.0
million for the same period in 2008.  The increase in interest expense
was primarily due to higher interest rates on outstanding debt in the third
quarter of 2009.





Other
income.  Other income was $60.4 million for the third quarter
of 2009, which includes $45.7 million in net benefits from alternative fuel
mixture tax credits provided by the U.S. government for our use of black liquor
in alternative fuel mixtures and $13.6 million in net gains related to the early
retirement of debt.





Restructuring and
other charges.  Restructuring and other charges for the third
quarter of 2009 were $0.4 million compared to $1.1 million for the third quarter
of 2008.  Restructuring and other charges are comprised of transition and
other costs, including those associated with the Acquisition (i.e., technology
migration costs, consulting and legal fees, and other one-time
costs).




Results of Operations – First Nine Months of 2009 Compared to First
Nine Months of 2008





Net
Sales.  Net sales for the nine months ended September 30, 2009,
decreased 29.6% to $979.9 million from $1,390.9 million as total sales volume
decreased 20.8% compared to last year, reflecting lower demand for coated papers
and market pulp in a difficult economic environment and lower sales
prices.  The average sales price per ton for all of our products fell
11.1% in 2009 due to the weak demand.





Net sales for our coated and supercalendered papers segment decreased
30.2% to $865.2 million for the nine months ended September 30, 2009, from
$1,239.8 million for the nine months ended September 30, 2008.  The
decrease reflects a 24.4% decrease in paper sales volume and a 7.7% decrease in
average paper sales price per ton for the nine months ended September 30, 2009
compared to the same period last year.





Net sales for our market pulp segment decreased 37.9% to $73.8
million for the nine months ended September 30, 2009, from $118.9 million for
the same period in 2008.  This decline was due to a 33.7% decrease in
average sales price per ton combined with a 6.4% decrease in sales volume
compared to the nine months ended September 30, 2008.





30


Net sales for our other segment increased 26.7% to $40.9 million for
the nine months ended September 30, 2009, from $32.2 million for the nine months
ended September 30, 2008.  New product offerings contributed to the
improvement as sales volume increased 29.1% in 2009.  This was
partially offset by a 1.8% decrease in average sales price per ton compared to
the nine months ended September 30, 2008.





Cost of
sales.  Cost of sales, including depreciation, amortization,
and depletion, decreased 18.7% to $1,006.6 million for the nine months ended
September 30, 2009, compared to $1,238.5 million for the same period last year,
primarily reflecting the decline in sales volume and the effects of our expense
reduction initiatives.  Our gross margin, excluding depreciation,
amortization, and depletion, was 7.5% for the first nine months of 2009,
compared to 18.2% for the first nine months of 2008, reflecting lower average
sales prices in 2009 and $70.1 million of unabsorbed costs resulting from almost
320,000 tons of market downtime taken in the first nine months of 2009 as we
curtailed production in response to weak demand for coated
papers.  Depreciation, amortization, and depletion expenses were
$100.6 million for the nine months ended September 30, 2009, compared to $100.6
million for the same period in 2008.





Selling, general,
and administrative.  Selling, general, and administrative
expenses were $45.2 million for the nine months ended September 30, 2009,
compared to $58.6 million for the same period in 2008, reflecting the absence of
expenses associated with our IPO and the effect of our expense reduction
initiatives.





Interest
expense.Interest
expense for the nine months ended September 30, 2009 was $84.0 million compared
to $76.5 million for the same period in 2008.  The increase in
interest expense was primarily related higher interest rates on outstanding debt
in 2009.





Other
income.  Other income was $219.9 million for the nine months
ended September 30, 2009, which includes $189.1 million in net benefits from
alternative fuel mixture tax credits provided by the U.S. government for our use
of black liquor in alternative fuel mixtures and $27.3 million in net gains
related to the early retirement of debt.





Restructuring and
other charges.  Restructuring and other charges for the nine
months ended September 30, 2009, were $0.7 million compared to $26.5 million for
the same period in 2008.  Restructuring and other charges are
comprised of transition and other costs, including those associated with the
Acquisition (i.e., technology migration costs, consulting and legal fees, and
other one-time costs).  Subsequent to the Acquisition, we entered into
a management agreement with Apollo relating to the provision of certain
financial and strategic advisory services and consulting
services.  Upon consummation of the IPO, Apollo terminated the annual
fee arrangement under the management agreement for a one-time fee of $23.1
million.




Seasonality





We are exposed to fluctuations in quarterly net sales volumes and
expenses due to seasonal factors.  These seasonal factors are common
in the coated paper industry.  Typically, the first two quarters are
our slowest quarters due to lower demand for coated paper during this
period.  Our third quarter is generally our strongest quarter,
reflecting an increase in printing related to end-of-year magazines, increased
end-of-year direct mailings, and holiday season catalogs.  Our working
capital and accounts receivable generally peak in the third quarter, while
inventory generally peaks in the second quarter in anticipation of the third
quarter season.  We expect our seasonality trends to continue for the
foreseeable future.




31





Liquidity and Capital Resources





We rely primarily upon cash flow from operations and borrowings under
our revolving credit facility to finance operations, capital expenditures, and
fluctuations in debt service requirements.  We believe that our
ability to manage cash flow and working capital levels, particularly inventory
and accounts payable, will allow us to meet our current and future obligations,
pay scheduled principal and interest payments, and provide funds for working
capital, capital expenditures, and other needs of the business for at least the
next twelve months.  However, given the uncertainty of the current
economic environment, no assurance can be given that we will be able to generate
sufficient cash flows from operations or that future borrowings will be
available under our revolving credit facility in an amount sufficient to fund
our liquidity needs.  As of September 30, 2009, $106.5 million was
available for future borrowing under our revolving credit facility, after
reduction for $32.6 million in letters of credit and $45.0 million in
outstanding borrowings.  As we focus on managing our expenses and cash
flows, we continue to assess and implement, as appropriate, various earnings and
expense reduction initiatives.  Management has developed a
company-wide cost reduction program, which we expect to yield $72 million in
cost reductions.  Management expects to achieve most of the cost
reductions in 2009.





Net cash flows from
operating activities.  Net cash provided by operating
activities was $60.4 million for the nine months ended September 30, 2009,
compared to $38.6 million for the nine months ended September 30,
2008.  The increase in net cash provided by operating activities is
primarily due to improved performance with net income of $63.4 million for the
nine months ended September 30, 2009, compared to net losses of $8.8 million for
the nine months ended September 30, 2008.  This increase in earnings
includes $189.1 million in net benefits from alternative fuel mixture tax
credits provided by the U.S. government for our use of black liquor in
alternative fuel mixtures.  There is some possibility that the U.S.
government will amend the alternative fuel mixture tax credit to eliminate or
reduce its benefits for pulp and paper companies prior to its scheduled
expiration on December 31, 2009.  Any such amendment of the tax credit
could have a material adverse effect on our financial condition, results of
operations, and cash flows.  Partially offsetting this positive impact
on cash flows from operating activities was the negative impact of changes in
working capital in 2009, which included declines in accrued liabilities and
accounts payable, primarily due to lower input costs, and an increase in
accounts receivable, reflecting the recent improvement in sales and accruals for
alternative fuel mixture tax credits.





Net cash flows from
investing activities.For the nine months ended September 30,
2009 and 2008, we used $29.9 million and $59.5 million, respectively, of net
cash in investing activities due to investments in capital expenditures.
Management has significantly reduced expected annual capital expenditures from
$81 million in 2008 to a projected $33 million in 2009, the majority of which
were realized during the first half of the year while the mills were
experiencing significant market downtime.




Net cash flows from
financing activities.For the nine months ended September 30,
2009, financing activities used net cash of $62.3 million reflecting principal
payments of $291.9 million on long-term debt, $47.1 million in net payments on
our revolving credit facility and equity distributions of $12.2 million,
partially offset by $288.8 million in proceeds from the issuance of $325.0
million in senior secured notes net of discount, underwriting fees, and issuance
costs.  This compares to $20.7 million of net cash used in 2008
primarily due to principal payments on debt and distributions to Verso Paper
Finance Holdings LLC, or “Verso Finance,” to service interest
obligations.




Indebtedness.As
of September 30, 2009, our aggregate indebtedness was $1,170.3 million, net of
$25.0 million of unamortized discounts.





32


On September 30, 2009, we had a credit facility and outstanding debt
securities consisting of:




·
            $200 million revolving credit facility maturing in 2012, under
      which $45.0 million was outstanding, $32.6 million in letters of
      credit were issued, and $106.5 million was available for future borrowing
      on September 30, 2009.




·
            $325 million aggregate principal amount of 111⁄2% senior secured
      fixed rate notes due 2014;




·
            $337 million aggregate principal amount of 91⁄8% second priority
      senior secured fixed rate notes due
2014;




·
            $188 million aggregate principal amount of second priority
      senior secured floating rate notes due 2014;
  and




·
            $300 million aggregate principal amount of 113⁄8% senior
      subordinated fixed rate notes due
2016.




The revolving credit facility bears interest at a rate equal to LIBOR
plus 3.00% and/or Prime plus 2.00%, and the weighted average interest rate at
September 30, 2009, was 3.25%.  We are required to pay a commitment
fee to the lenders under the revolving credit facility in respect of unutilized
commitments at a rate equal to 0.50% per annum and customary letter of credit
and agency fees.  The revolving credit facility is secured by first
priority security interests in, and mortgages on, substantially all of our
tangible and intangible assets and substantially all the tangible and intangible
assets of each of our direct and indirect subsidiaries.  It is also
secured by first priority pledges of all the equity interests owned by us in our
subsidiaries.  The obligations under the revolving credit facility are
unconditionally guaranteed by Verso Finance, and, subject to certain exceptions,
each of its direct and indirect subsidiaries.  On June 3, 2009, the
credit agreement was amended and restated to provide for the issuance of the
senior secured notes due July 1, 2014 (see below).  The amendment
also, among other things, increased the applicable margin for the interest rate
on borrowings under the revolving credit facility to 3.0% for Eurodollar loans
and 2.0% for base rate loans and eliminated the requirement to maintain a net
first-lien secured debt to Adjusted EBITDA ratio.  The revolving
credit facility is secured on a ratable and pari passu basis with these senior
secured notes.





On June 11, 2009, we issued $325.0 million aggregate principal
amount of 11.5% senior secured notes due July 1, 2014.  These
fixed-rate notes pay interest semi-annually.  The notes are secured by
substantially all of our property and assets and those of each our direct and
indirect subsidiaries.  The notes are secured on a ratable and pari
passu basis with our senior secured credit facility.  The net proceeds
after deducting the discount, underwriting fees and issuance costs were $288.8
million, which funds were used to repay in full $252.9 million outstanding on
our first priority term loan and to temporarily reduce the debt outstanding
under the revolving credit facility by $35.0 million.  The write-off
of unamortized debt issuance costs related to the term loan resulted in a loss
of $5.9 million.





During the nine months ended September 30, 2009, we repurchased and
retired $12.9 million of the second priority senior secured fixed-rate notes due
on August 1, 2014, for a total purchase price of $7.9 million, which resulted in
a gain of $4.7 million, net of the write-off of unamortized debt issuance
costs.  During the nine months ended September 30, 2009, we
repurchased and retired $61.8 million of the second priority senior secured
floating-rate notes due on August 1, 2014, for a total purchase price of $30.1
million, which resulted in a gain of $30.2 million, net of the write-off of
unamortized debt issuance costs.  In addition, we de-designated the
interest rate swap hedging interest payments on these notes and recognized
losses of $1.3 million on the interest rate swap.  The second priority
senior secured fixed rate notes have a fixed interest rate of 9.125% and pay
interest semiannually.  The second priority senior secured floating
rate notes bear interest at a rate equal to LIBOR plus 3.75% and pay interest
quarterly.  At September 30, 2009, the interest rate was
4.23%.  The original principal amount of the senior subordinated notes
was outstanding at September 30, 2009.  These subordinated notes have
a fixed interest rate of 11.375% and pay interest semi-annually.  The
second priority senior secured fixed rate and floating rate notes have the
benefit of a second priority security interest in the collateral securing our
senior secured credit facility, while the subordinated notes are
unsecured.





33


We may elect to retire our outstanding debt in open market purchases,
privately negotiated transactions, or otherwise.  These repurchases
may be funded through available cash from operations and borrowings from our
credit facilities.  Such repurchases are dependent on prevailing
market conditions, our liquidity requirements, contractual restrictions, and
other factors.





Covenant Compliance





The credit agreement and the indentures governing Verso Holdings’
outstanding notes contain restrictive covenants that limit our ability to take
certain actions, such as incurring additional debt or making
acquisitions.  These covenants can result in limiting our long-term
growth prospects by hindering our ability to incur future indebtedness or grow
through acquisitions.  At September 30, 2009, we were in compliance in
all material respects with the covenants in our debt
agreements.





Critical Accounting Policies





Our accounting policies are fundamental to understanding management’s
discussion and analysis of financial condition and results of
operations.  Our consolidated condensed financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America and follow general practices within the industry in
which we operate.  The preparation of the financial statements
requires management to make certain judgments and assumptions in determining
accounting estimates.  Accounting estimates are considered critical if
the estimate requires management to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and different
estimates reasonably could have been used in the current period, or changes in
the accounting estimate are reasonably likely to occur from period to period,
that would have a material impact on the presentation of our financial
condition, changes in financial condition or results of
operations.





Management
believes the following critical accounting policies are both important to the
portrayal of our financial condition and results of operations and require
subjective or complex judgments.  These judgments about critical
accounting estimates are based on information available to us as of the date of
the financial statements.





Accounting standards whose application may have a significant effect
on the reported results of operations and financial position, and that can
require judgments by management that affect their application, include the
following: FASB ASC 450, Contingencies, FASB ASC 360,
Property, Plant, and
Equipment, FASB ASC 350, Intangibles – Goodwill and
Other, FASB ASC 715, Compensation – Retirement
Benefits.





Impairment of
long-lived assets and goodwill.  Long-lived assets are reviewed
for impairment upon the occurrence of events or changes in circumstances that
indicate that the carrying value of the assets may not be recoverable, as
measured by comparing their net book value to the estimated undiscounted future
cash flows generated by their use.





Goodwill and other intangible assets are accounted for in accordance
with FASB ASC 350.  Intangible assets primarily consist of trademarks,
customer-related intangible assets and patents obtained through business
acquisitions.  Impairment is the condition that exists when the
carrying amount of these assets exceed their implied fair value.  An
impairment evaluation of the carrying amount of goodwill and other intangible
assets with indefinite lives is conducted annually or more frequently if events
or changes in circumstances indicate that an asset might be
impaired.  The Company has identified the following trademarks as
intangible assets with an indefinite life: Influence®, Liberty®, and
Advocate®.  Goodwill is evaluated at the reporting unit level and has
been allocated to the “Coated” segment.  The valuation as of October
1, 2008, indicated no impairment of goodwill or trademarks assigned indefinite
lives.





34


The evaluation for impairment is performed by comparing the carrying
amount of these assets to their estimated fair value.  If impairment
is indicated, then an impairment charge is recorded to reduce the asset to its
estimated fair value.  The estimated fair value is generally
determined on the basis of discounted future cash flows.  Management
believes the accounting estimates associated with determining fair value as part
of the impairment test is a critical accounting estimate because estimates and
assumptions are made about the Company’s future performance and cash
flows.  While management uses the best information available to
estimate future performance and cash flows, future adjustments to management’s
projections may be necessary if economic conditions differ substantially from
the assumptions used in making the estimates.




Pension and
Postretirement Benefit Obligations.We offer various pension plans to
employees.  The calculation of the obligations and related expenses
under these plans requires the use of actuarial valuation methods and
assumptions, including the expected long-term rate of return on plan assets,
discount rates, projected future compensation increases, health care cost trend
rates, and mortality rates.  Actuarial valuations and assumptions used
in the determination of future values of plan assets and liabilities are subject
to management judgment and may differ significantly if different assumptions are
used.




Contingent
liabilities.A liability is contingent if the outcome or
amount is not presently known, but may become known in the future as a result of
the occurrence of some uncertain future event.  We estimate our
contingent liabilities based on management’s estimates about the probability of
outcomes and their ability to estimate the range of
exposure.  Accounting standards require that a liability be recorded
if management determines that it is probable that a loss has occurred and the
loss can be reasonably estimated.  In addition, it must be probable
that the loss will be confirmed by some future event.  As part of the
estimation process, management is required to make assumptions about matters
that are by their nature highly uncertain.





The assessment of contingent liabilities, including legal
contingencies, asset retirement obligations, and environ-mental costs and
obligations, involves the use of critical estimates, assumptions, and
judgments.  Management’s estimates are based on their belief that
future events will validate the current assumptions regarding the ultimate
outcome of these exposures.  However, there can be no assurance that
future events will not differ from management’s assessments.





Recent Accounting Developments





Measuring
Liabilities at Fair Value —In August 2009, the FASB issued Accounting
Standards Update, or “ASU,” 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value,which
amends FASB ASC 820 regarding the fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an
active market for the identical liabilities is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided
for in this update.  This ASU is effective for the first interim or
annual reporting period beginning after issuance, which for us will be the
fourth quarter of 2009. The adoption of this ASU is not expected to have a
material impact on our financial condition, results of operations, or cash
flows.





35


Postretirement
Benefit Plan Assets —FASB ASC 715-20-65 updates FASB ASC 715, Compensation – Retirement
Benefits, to require more detailed disclosures about employers’ pension
plan assets.  New disclosures will include more information on
investment strategies, major categories of plan assets, concentrations of risk
within plan assets and valuation techniques used to measure the fair value of
plan assets.  These provisions of FASB ASC 715 are effective for
fiscal years ending after December 15, 2009.  Since this update only
affects disclosure requirements, the adoption of these provisions under FASB ASC
715 will have no impact on our financial condition, results of operations, or
cash flows.





Forward-Looking Statements





In this quarterly report, all statements that are not purely
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.  Forward-looking statements may be identified by the words
“believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “intend” and
similar expressions.  Forward-looking statements are based on
currently available business, economic, financial and other information and
reflect management’s current beliefs, expectations and views with respect to
future developments and their potential effects on Verso.  Actual
results could vary materially depending on risks and uncertainties that may
affect Verso and its business.  For a discussion of such risks and
uncertainties, please refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and other sections of this
quarterly report and to Verso’s other filings with the Securities and Exchange
Commission.  Verso assumes no obligation to update any forward-looking
statement made in this quarterly report to reflect subsequent events or
circumstances or actual outcomes.





ITEM 3.   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





We are
exposed to market risk from fluctuations in our paper prices, interest rates,
energy prices, and commodity prices for our inputs.




Paper
Prices





Our sales,
which we report net of rebates, allowances, and discounts, are a function of the
number of tons of paper that we sell and the price at which we sell our
paper.  The coated paper industry is cyclical, which results in
changes in both volume and price.  Paper prices historically have been
a function of macro-economic factors, which influence supply and
demand.  Price has historically been substantially more variable than
volume and can change significantly over relatively short time
periods.





We are
primarily focused on serving two end-user segments: catalogs and
magazines.  Coated paper demand is primarily driven by advertising and
print media usage.  Advertising spending and magazine and catalog
circulation tend to correlate with GDP in the United States - they rise with a
strong economy and contract with a weak economy.





The
majority of our products are sold under contracts with our
customers.  Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract.  Our contracts generally specify the volumes to be sold to
the customer over the contract term, as well as the pricing parameters for those
sales.  Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year.  Typically, our
contracts provide for quarterly price adjustments based on market price
movements.  The large portion of contracted sales allows us to plan
our production runs well in advance, optimizing production over our integrated
mill system and thereby reducing costs and increasing overall
efficiency.





36


We reach
our end-users through several channels, including printers, brokers, paper
merchants, and direct sales to end-users.  We sell and market our
products to approximately 100 customers.  Through the third quarter of
2009, no single customer accounted for more than 10% of our total net
sales.





Interest
Rates





We issued
fixed- and floating-rate debt to finance the Acquisition in order to manage our
variability to cash flows from interest rates.  Borrowings under our
senior secured credit facilities and our floating-rate notes accrue interest at
variable rates, and a 100 basis point increase in quoted interest rates on our
debt balances outstanding as of September 30, 2009, under our first priority
revolving facility and our floating-rate notes would increase our annual
interest expense by $2.3 million.  While we may enter into agreements
limiting our exposure to higher interest rates, any such agreements may not
offer complete protection from this risk.





Derivatives





In the
normal course of business, we utilize derivatives contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices and interest rates.  These instruments are subject to credit
and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles.  Controls
and monitoring procedures for these instruments have been established and are
routinely reevaluated.  We have an Energy Risk Management Policy which
was adopted by our board of directors and is monitored by an Energy Risk
Management Committee composed of our senior management.  In addition,
we have an Interest Rate Risk Committee which was formed to monitor our Interest
Rate Risk Management Policy.  Credit risk represents the potential
loss that may occur because a party to a transaction fails to perform according
to the terms of the contract.  The measure of credit exposure is the
replacement cost of contracts with a positive fair value.  We manage
credit risk by entering into financial instrument transactions only through
approved counterparties.  Market risk represents the potential loss
due to the decrease in the value of a financial instrument caused primarily by
changes in commodity prices or interest rates.  We manage market risk
by establishing and monitoring limits on the types and degree of risk that may
be undertaken.





We do not
hedge the entire exposure of our operations from commodity price volatility for
a variety of reasons.  To the extent that we do not hedge against
commodity price volatility, our results of operations may be affected either
favorably or unfavorably by a shift in the future price curve.  As of
September 30, 2009, we had net unrealized losses of $5.4 million on open
commodity contracts with maturities of one to 18 months.  These
derivative instruments involve the exchange of net cash settlements, based on
changes in the price of the underlying commodity index compared to the fixed
price offering, at specified intervals without the exchange of any underlying
principal.  A 10% decrease in commodity prices would have a negative
impact of approximately $2.7 million on the fair value of such
instruments.  This quantification of exposure to market risk does not
take into account the offsetting impact of changes in prices on anticipated
future energy purchases.





In
February 2008, we entered into a two-year $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with our
outstanding floating rate notes that mature in 2014.  We are hedging
the cash flow exposure on our quarterly variable-rate interest payments due to
changes in the benchmark interest rate (three-month LIBOR).  During
the first nine months of 2009, we repurchased $61.8 million of the hedged notes
and de-designated the interest-rate swap hedging the interest payments on the
debt.  During the nine months ended September 30, 2009, $1.3 million
of losses have been recognized in Other income on the condensed consolidated
statement of operations.  On September 30, 2009, the fair value of
this swap was a loss of $3.0 million.  A 10% decrease in interest
rates would have a negative impact of approximately $0.1 million on the fair
value of this instrument.





37


Commodity
Prices





We are
subject to changes in our cost of sales caused by movements underlying commodity
prices.  The principal components of our cost of sales are chemicals,
wood, energy, labor, maintenance, and depreciation, amortization, and
depletion.  Costs for commodities, including chemicals, wood, and
energy, are the most variable component of our cost of sales because their
prices can fluctuate substantially, sometimes within a relatively short period
of time.  In addition, our aggregate commodity purchases fluctuate
based on the volume of paper that we produce.





Chemicals.Chemicals
utilized in the manufacturing of coated papers include latex, starch, calcium
carbonate, and titanium dioxide.  We purchase these chemicals from a
variety of suppliers and are not dependent on any single supplier to satisfy our
chemical needs.  In the near term, we expect the rate of inflation for
our total chemical costs to be lower than that experienced over the last two
years.  However, we expect imbalances in supply and demand will drive
higher prices for certain chemicals.





Wood.Our costs to
purchase wood are affected directly by market costs of wood in our regional
markets and indirectly by the effect of higher fuel costs on logging and
transportation of timber to our facilities.  While we have in place
fiber supply agreements that ensure a substantial portion of our wood
requirements, purchases under these agreements are typically at market
rates.  As we have begun to utilize wood harvested from our
23,000-acre hybrid poplar woodlands located near Alexandria, Minnesota, our
ongoing wood costs should be positively impacted.





Energy.We produce
a large portion of our energy requirements, historically producing approximately
50% of our energy needs for our coated paper mills from sources such as waste
wood and paper, hydroelectric facilities, chemicals from our pulping process
including black liquor, our own steam recovery boilers, and internal energy
cogeneration facilities.  Our external energy purchases vary across
each of our mills and include fuel oil, natural gas, coal, and
electricity.  While our internal energy production capacity mitigates
the volatility of our overall energy expenditures, we expect prices for energy
to remain volatile for the foreseeable future and our energy costs to increase
in a high energy cost environment.  As prices fluctuate, we have some
ability to switch between certain energy sources in order to minimize
costs.  We utilize derivatives contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices.




Off-Balance
Sheet Arrangements




None.





38


ITEM 4T.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in
reports that we file and submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.





There are
inherent limitations to the effectiveness of any disclosure controls and
procedures, including the possibility of human error or the circumvention or
overriding of the controls and procedures, and even effective disclosure
controls and procedures can provide only reasonable assurance of achieving their
objectives.  Ourdisclosure
controls and procedures are designed to provide reasonable assurance of
achieving their objectives.





Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of September 30,
2009.  Based upon this evaluation, for the reasons discussed below,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of September 30, 2009, certain disclosure controls and procedures were not
effective.





Management determined that as of September 30, 2009, we did not
maintain design or operating effectiveness of certain internal controls over
financial reporting relating to the cash disbursement process. Management has
concluded that as a result of these control deficiencies, a material weakness in
our internal control over financial reporting existed as of September 30, 2009.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of a company’s annual or interim
financial statements will not be prevented or detected on a timely basis. In
light of the material weakness indicated, we performed additional analysis to
ensure that the consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles. Accordingly, management
believes that the consolidated financial statements included in this Quarterly
Report on Form 10-Q fairly present, in all material respects, our financial
position, results of operations and cash flows for the periods
presented.





In connection with the material weakness in internal control
indicated above, remediation actions have been and continue to be implemented by
us to ensure the accuracy of our consolidated financial statements and prevent
or detect potential material misstatements on a timely basis. Management plans
to complete all of its remediation actions during the fourth quarter of 2009.
Management will continue to evaluate the design of these new controls and
procedures, and once placed in operation for a sufficient period of time, these
controls and procedures will be subject to appropriate testing in order to
determine whether they are operating effectively.





Changes in Internal Control Over Financial Reporting




There was no change in our internal control over financial reporting
during the fiscal quarter ended September 30, 2009, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




39





PART II.  OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





In October 2009, Thilmany, LLC (together with its parent company,
Packaging Dynamics Corporation) served us with a lawsuit filed in circuit court
in Outagamie County, Wisconsin.  Thilmany alleges in the lawsuit that
the alternative fuel mixture tax credits that we have received from the
operation of the Androscoggin mill have the effect of reducing our costs
associated with operating the Androscoggin mill (including paper machine
no. 5) and producing the pulp that we use to manufacture paper products for
Thilmany under a long-term supply agreement.  Thilmany seeks
unspecified damages for our alleged breach of contract for failing to provide
Thilmany with a prorated share of the purported cost savings attributable to the
tax credits and a declaration that Thilmany is entitled to a prorated share of
any such future costs savings attributable to our use of alternative fuel
mixtures at the Androscoggin mill.  We are evaluating the lawsuit and
intend to respond in the near future.





We are
involved in legal proceedings incidental to the conduct of our
business.  We do not believe that any liability that may result from
these proceedings will have a material adverse effect on our financial
statements.





ITEM
1A.   RISK FACTORS





For a
detailed discussion of risk factors affecting us, see “Part I – Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December
31, 2008 and “Part II – Item
1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009.





ITEM 2.   UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS





Not
applicable.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





Not applicable.





ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





Not
applicable.





ITEM 5.   OTHER INFORMATION





On October 9, 2009, Walter Thomas Williams, III, one of our
accounts payable employees, was arrested on federal wire fraud charges for
embezzling funds from us.  An internal investigation has revealed that
Mr. Williams altered the processing of vendor payments to divert approximately
$10.2 million of funds to his and his wife’s bank accounts between March 2008
and October 2009.  There is no evidence, however, that any of our
vendors was harmed as a result of Mr. Williams’ actions.  On
October 12, 2009, we filed a civil lawsuit against Mr. Williams and his
wife in state court in DeSoto County, Mississippi, seeking damages arising from
the embezzlement and injunctive relief to prevent the Williamses from
transferring or diminishing their assets.  The court promptly issued a
temporary restraining order and prejudgment attachment, and subsequently issued
a permanent injunction, which authorize us to seize the Williamses’ property and
to have their bank and other financial accounts frozen and held in trust for our
benefit.  Pursuant to these court orders, we have moved aggressively
to seize the Williamses’ assets, including cash, real estate, motor vehicles,
and assorted personal property.  On October 12, 2009, we also filed a
claim under our fidelity insurance policy, which provides $10 million in
insurance coverage after a $150,000 deductible.





40


Based on the information currently known to us, we incurred
embezzlement losses of $1.3 million in 2008 and $0.7 million and $2.2 million in
the first and second quarters of 2009, respectively, and $6.0 million subsequent
to June 30, 2009. The financial statements presented as of and for the three and
nine months ended September 30, 2009, include $150,000 in anticipated losses and
a $10.0 million receivable for funds we expect to recover.  The effect
of the embezzlement in prior periods did not result in a material misstatement
of our previously issued financial statements.





ITEM 6.   EXHIBITS





The
following exhibits are included with this report:




ExhibitNumber
              Description


3.1
            Certificate
      of Formation of Verso Paper Holdings LLC, filed June 6, 2006, as amended
      by Certificate of Amendment filed June 13, 2006, Certificate of Amendment
      filed June 23, 2006, and Certificate of Amendment filed June 26,
      2006.*





3.2
            Amended
      and Restated Limited Liability Company Agreement of Verso Paper Holdings
      LLC dated as of January 25, 2007.*





31.1
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.





31.2
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.





32.1
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
      States Code.





32.2
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
      States Code.





________________


*
            Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007, filed with the Securities and Exchange Commission on March 12,
      2008.





41


SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.





Date:  November 13, 2009VERSO PAPER HOLDINGS LLCBy:
            
            /s/ Michael A. JacksonMichael A. Jackson
              President and Chief Executive
  Officer





By:
            
            /s/ Robert P. MundyRobert P. Mundy
              Senior Vice President and Chief Financial
      Officer








42





EXHIBIT INDEX





The
following exhibits are included with this report:




ExhibitNumber
              Description


3.1
            Certificate
      of Formation of Verso Paper Holdings LLC, filed June 6, 2006, as amended
      by Certificate of Amendment filed June 13, 2006, Certificate of Amendment
      filed June 23, 2006, and Certificate of Amendment filed June 26,
      2006.(1)





3.2
            Amended
      and Restated Limited Liability Company Agreement of Verso Paper Holdings
      LLC dated as of January 25, 2007.
(1)





31.1
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.





31.2
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.





32.1
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
      States Code.





32.2
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
      States Code.








*
            Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007, filed with the Securities and Exchange Commission on March 12,
      2008.







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