FORWARD-LOOKING STATEMENTS

This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, including without limitation, statements regarding liquidity and future growth opportunities, future revenues, cash flows, energy costs, wood fiber costs, manufacturing output, additional corporate overhead and administrative expenses associated with being a stand-alone company, benefit plan funding levels, the effect of recent accounting standards on our financial condition and results of operations, our expectation that we will receive substantial alternative fuel mixture tax credits and the tax treatment of the credits, our expectation regarding the need to periodically draw upon our credit facility to meet cash requirements and capital expenditures. Words such as "anticipate," "expect," "will," "intend," "plan," "target," "project," "believe," "seek," "schedule," "estimate," "could," "can," "may," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management's current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include the risk factors described in Item 1A of Part II of this Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2008, as well as the following:

• changes in the United States and international economies;

• cyclical industry conditions;

• changes in raw material costs and energy availability and costs;

• changes in the alternative fuel mixture tax credit regulations, our eligibility for such credits and the tax treatment associated with receipt of such credits;

• unanticipated manufacturing disruptions;

• the loss of business from any of our three largest Consumer Products segment customers;

• changes in freight costs and disruptions in transportation services;

• our inability to implement our strategies;

• changes in exchange rates between the U.S. dollar and other currencies;

• competitive pricing pressures for our products;

• changes in the relationship between supply and demand in the forest products industry, including the amount of available manufacturing capacity and wood fiber used in manufacturing products;

• changes in the level of construction activity;

• our inability to refinance or pay indebtedness;

• changes in laws, regulations or industry standards affecting our business;

• labor disruptions;

• unforeseen environmental liabilities or expenditures; and

• damage to our manufacturing facilities caused by fire or weather related events.

Forward-looking statements contained in this report present management's views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management's views to reflect events or circumstances occurring after the date of this report.

OVERVIEW

Background

Clearwater Paper is principally engaged in the manufacturing and selling of pulp-based products. We are a leading producer of private label tissue products sold in grocery stores in the United States, and we manufacture and market bleached paperboard for the high-end segment of the packaging industry. We also manufacture and market bleached pulp and wood products, including appearance grade cedar and dimensional framing lumber products.

Our businesses were owned by, and we were a subsidiary of, Potlatch Corporation until our spin-off on December 16, 2008.

Recent Developments

Alternative Fuel Mixture Tax Credits

We are registered with the Internal Revenue Service, or IRS, as an alternative fuel mixer and have received refundable tax credit payments in connection with our use of "black liquor," a by-product of the pulp manufacturing process, in an alternative fuel mixture to produce energy at our pulp mills. The amount of the refundable tax credit is equal to $0.50 per gallon of alternative fuel mixture used. The alternative fuel mixture tax credit is currently set to expire on December 31, 2009.

For the three months and nine months ended September 30, 2009, we recorded income of $47.1 million and $123.5 million, respectively, in our financial statements related to the alternative fuel mixture tax credit. Through September 30, 2009 we had received payments of $87.4 million related to the alternative fuel mixture tax credit.

Beginning in the third quarter of 2009, we elected not to continue our prior practice of making periodic requests for payments related to the alternative fuel mixture tax credit and instead elected to claim the credit on our 2009 income tax return. The amount of credits we have recorded related to the third quarter of 2009 that we expect to claim on our 2009 income tax return is $36.1 million, which are included in "Taxes receivable" on our Condensed Balance Sheet.

We believe there is a reasonable basis to exclude the $123.5 million of alternative fuel mixture tax credits recorded in the nine months ended September 30, 2009 from taxable income. However, in accordance with guidance relating to accounting for uncertainty in income taxes, we have established a liability of $52.3 million, which is classified as non-current "Accrued taxes" on our Condensed Balance Sheet.

The future amount of credits for which we ultimately file for, receive, and recognize as income is dependent on, among other things, our future production levels, tax legislation and regulation, and income recognition criteria under generally accepted accounting principles, or GAAP. We do not know whether the U.S. government will amend the tax credit to eliminate or reduce its benefits for pulp and paper companies, but there is the possibility that such action may be taken. Any such amendment of the tax credit could have a material effect on our financial position, results of operations, and cash flows.

Liquidity

As a result of funds from operations and funds from the receipt of alternative fuel mixture tax credits, our balance sheet and liquidity are currently in a strong position. At September 30, 2009, we had $149.4 million of cash, restricted cash and short-term investments. This puts us at a virtually net debt-free position, which we believe will enhance our ability to pursue growth opportunities.

Shelf Registration

On October 29, 2009, we filed a registration statement on Form S-3 to register up to an aggregate of $250 million of debt and equity securities, which is designed to allow us to issue such securities in the future should we elect to do so. This shelf was put in place as part of our overall capital structure planning strategy and could be used, among other things, to allow us to pursue growth opportunities should they arise.

Components and Trends in our Business

Net sales. Net sales consist of sales of consumer tissue, pulp and paperboard and wood products, net of discounts, returns and allowances and any sales taxes collected. Sales taxes, when collected, are recorded as a current liability until remitted to the appropriate governmental entities. We set our prices based on the best interests of our company and our customers. However, prices for our consumer tissue products primarily tend to follow the prices of branded tissue products. Demand and pricing for our pulp and paperboard products is largely determined by general global market conditions. Markets have been relatively stable for paperboard in 2009, while market conditions for pulp, although still weak, have improved slightly from early 2009. Demand for our wood products is largely related to the U.S. housing market, which continues to be in a prolonged downturn.

Cost of sales. Cost of sales expenses consist primarily of personnel costs; the cost of raw materials, including wood fiber, energy and chemicals; depreciation and repair and maintenance expenses related to our facilities; and freight associated with customer shipments. Input costs for several of our larger cost elements, mainly wood fiber, freight, energy and chemicals, have decreased significantly in 2009 compared to 2008 largely in relation to the overall state of the U.S. and global economies. As economic conditions improve, we would expect to see at least some upward pressure on these costs.

Selling, general and administrative expenses. Selling, general and administrative expenses primarily consist of compensation and associated costs for sales and administrative personnel, as well as commission expenses related to sales of our products. We expect our selling, general and administrative costs to fluctuate as we continue to properly staff our administrative functions and implement additional cost controls and procedures.

Interest expense. Interest expense is the interest related to the $100.0 million note payable to Potlatch in connection with our retained obligation agreement, prior to the satisfaction of that obligation in June 2009, as well as interest associated with $150.0 million of senior notes issued by us in June 2009 and with our revolving credit facility. We expect future interest expense to remain relatively consistent with the amounts recorded for the quarter ended September 30, 2009.

Income taxes. Income taxes are based on reported earnings and tax rates in the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We expect our effective income tax rate to remain fairly constant, but it could fluctuate due to changes to the Internal Revenue Code.

RESULTS OF OPERATIONS

Our results of operations and financial condition discussed below for the quarter and nine months ended September 30, 2008, were prepared on a combined basis from Potlatch's financial statements. The historical results of operations and book value of the assets and liabilities of Potlatch's Consumer Products and Pulp and Paperboard business and its Wood Products operations at Lewiston, Idaho, were used and give effect to allocations of expenses from Potlatch. This information is not necessarily indicative of what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the quarter and nine months ended September 30, 2008.

At September 30, 2009, our business was organized into three reporting segments:
Consumer Products, Pulp and Paperboard, and Wood Products. Sales or transfers between segments are recorded as intersegment net sales based on prevailing market prices.

Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008

The following table sets forth period-to-period changes in items included in our
Condensed Statements of Operations for the quarters ended September 30, 2009 and
2008.



                                                                    Quarter Ended
                                                                    September 30,
(Dollars in thousands)                                   2009           2008          Change
Net sales                                              $ 331,484      $ 328,697      $   2,787
Costs and expenses:
Cost of sales                                            282,485        314,216        (31,731 )
Selling, general and administrative expenses              18,627         10,060          8,567

                                                         301,112        324,276        (23,164 )

Alternative fuel mixture tax credits                      47,137             -          47,137

Earnings before interest, debt retirement costs and
income taxes                                              77,509          4,421         73,088
Interest expense, net                                     (4,277 )       (3,250 )       (1,027 )

Earnings before income taxes                              73,232          1,171         72,061
Income tax provision                                      27,023            309         26,714

Net earnings                                           $  46,209      $     862      $  45,347

Net sales-We experienced increased shipments of our consumer tissue, pulp and lumber products and higher net selling prices for our consumer tissue products in the third quarter of 2009, compared to the same period in 2008. These improvements were largely offset by lower net selling prices for paperboard, pulp and lumber. These items are discussed further below under "Business Segment Discussion."

Cost of sales-Cost of sales was 85.2% of net sales for the quarter ended September 30, 2009, and 95.6% of net sales for the same period in 2008. The decrease of $31.7 million, or 10.1%, in the 2009 period compared to 2008 was primarily due to lower input costs for wood fiber, freight, chemicals and energy.

Selling, general and administrative expenses-Selling, general and administrative expenses increased 85.2% for the quarter ended September 30, 2009 compared to the same period in 2008. The increase was primarily due to additional corporate administration expenses associated with being an independent, publicly traded company, as well as higher incentive compensation related expenses recorded in the third quarter of 2009. Selling, general and administrative expenses for the third quarter of 2008 were favorably affected by approximately $2.0 million of income from legal settlements.

Alternative fuel mixture tax credits-For the quarter ended September 30, 2009, we recorded $47.1 million of income related to alternative fuel mixture tax credits. We began receiving the alternative fuel mixture tax credits in early 2009, therefore no amounts are recorded for the 2008 period.

Interest expense-Interest expense increased 31.6% in the third quarter of 2009 compared to the third quarter of 2008. Interest expense for the third quarter of 2009 was associated with the $150.0 million of senior notes we issued in June 2009. Interest expense for the third quarter of 2008 was associated with our $100.0 million note payable obligation to Potlatch, which was satisfied in June 2009 with proceeds from the issuance of $150.0 million senior notes.

Income tax provision-Our income tax provision increased $26.7 million for the quarter ended September 30, 2009, compared to the same period in 2008, due to increased earnings from operations and additional tax expense resulting from the establishment of a liability for uncertain tax positions related to the alternative fuel mixture tax credit. The effective tax rate was 36.9% for the third quarter of 2009, compared to an effective tax rate of 26.4% for the third quarter of 2008. The tax provision for the third quarter of 2008 was calculated on a "carve-out" accounting basis since our businesses were part of Potlatch during those periods, whereas the 2009 tax provision is reflective of the company's operations and tax attributes as a stand-alone entity.

BUSINESS SEGMENT DISCUSSION

Consumer Products



                                                                Quarter Ended
                                                                September 30,
  (Dollars in thousands)                                     2009           2008
  Net sales (before intersegment net sales eliminations)   $ 140,190      $ 130,633
  Operating income                                            32,080         11,067
  Percent of net sales                                          22.9 %          8.5 %

The Consumer Products segment reported a $9.6 million, or 7.3%, increase in net sales (before intersegment net sales eliminations) and a $21.0 million increase in operating income for the third quarter of 2009 compared to the third quarter of 2008. The significant increase in operating income was due to the combination of increased net sales and decreased costs. The increased net sales were attributable to increased shipments and higher net selling prices. Average net selling prices for the third quarter of 2009 were 2.4% higher than the average for the third quarter of 2008 due to higher overall pricing. Shipment volumes were 4.8% higher in the third quarter of 2009 compared to the same period in 2008 due largely to increased production at our tissue converting facilities.

Operating costs for the segment were $11.5 million lower in the third quarter of 2009 versus the same period in 2008, or a 9.6% decrease. The decrease was due primarily to lower freight, pulp, packaging supply and energy costs.

Pulp and Paperboard



                                                                Quarter Ended
                                                                September 30,
  (Dollars in thousands)                                     2009           2008
  Net sales (before intersegment net sales eliminations)   $ 185,462      $ 196,279
  Operating income                                            57,706            350
  Percent of net sales                                          31.1 %          0.2 %

Net sales for the Pulp and Paperboard segment, before intersegment net sales eliminations, were $10.8 million or 5.5% lower in the third quarter of 2009 compared to the third quarter of 2008. The decrease in net sales was due to significantly lower net selling prices for pulp, slightly lower paperboard net selling prices and a slight decrease in paperboard shipments, partially offset by increased shipments of pulp to external customers and our Consumer Products segment. The lower pulp net selling prices were largely due to the weakening of pulp markets beginning in the third quarter of 2008 and continuing through the middle of 2009.

Operating income increased $57.4 million in the third quarter of 2009 compared to the third quarter of 2008. The significant increase in income for the segment was due to the recording of $47.1 million of pre-tax income in the third quarter of 2009 associated with the alternative fuel mixture tax credit, as previously discussed. Excluding the alternative fuel mixture tax credit income, operating income for the segment was $10.6 million, or 5.7% of net sales before intersegment net sales eliminations, in the third quarter of 2009, which was $10.2 million higher than the operating income for the third quarter of 2008. Results for the third quarter of 2008 included approximately $2.0 million of income from legal settlements.

Excluding the income from the alternative fuel mixture tax credit, the increase in operating income was due to a $21.0 million decrease in operating expenses for the segment in the third quarter of 2009 resulting from lower input costs for wood fiber, chemicals, maintenance, freight and energy. Cost levels for wood chips to supply our Lewiston, Idaho, pulp and paperboard mill have moderated some in 2009 but remain at historically high levels, due largely to the limited supplies resulting from the slowdown or shutdown of operations of many lumber mills in response to the continued U.S. economic and home construction market downturn.

Wood Products



                                                                Quarter Ended
                                                                September 30,
   (Dollars in thousands)                                     2009          2008
   Net sales (before intersegment net sales eliminations)   $ 21,344      $ 23,340
   Operating loss                                             (4,244 )      (1,574 )
   Percent of net sales                                          N/A           N/A

The Wood Products segment reported an operating loss of $4.2 million for the third quarter of 2009, compared to an operating loss of $1.6 million recorded in the same period of 2008. The continued and prolonged downturn in the housing market had a significant negative effect on the results in both quarters. The larger loss for the segment in the 2009 period was due to a decrease in net sales, before intersegment net sales eliminations, which was attributable to 30.6% lower average net selling prices, partially offset by a 31.9% increase in shipments. The lower average net selling prices were due to unfavorable pricing and a lower percentage of higher-value cedar product sales.

Wood Products segment expenses in the third quarter of 2009 were $0.7 million higher than the third quarter of 2008, due primarily to higher overall costs associated with the increased lumber shipments, which were partially offset by lower log costs.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

The following table sets forth period-to-period changes in items included in our Condensed Statements of Operations for the nine months ended September 30, 2009 and 2008.

                                                                 Nine Months Ended
                                                                   September 30,
(Dollars in thousands)                                  2009           2008           Change
Net sales                                             $ 935,089      $ 952,122      $  (17,033 )
Costs and expenses:
Cost of sales                                           795,152        896,169        (101,017 )
Selling, general and administrative expenses             52,655         33,992          18,663

                                                        847,807        930,161         (82,354 )

Alternative fuel mixture tax credits                    123,510             -          123,510

Earnings before interest, debt retirement costs and
income taxes                                            210,792         21,961         188,831
Interest expense, net                                   (11,271 )       (9,750 )        (1,521 )
Debt retirement costs                                    (6,250 )           -           (6,250 )

Earnings before income taxes                            193,271         12,211         181,060
Income tax provision                                     57,967          4,127          53,840

Net earnings                                          $ 135,304      $   8,084      $  127,220

Net sales-Net sales for the nine months ended September 30, 2009 were favorably affected by higher net selling prices for our consumer tissue and paperboard products and increased tissue shipments, compared to the same period in 2008. However, we reported an overall 1.8% period-to-period decrease in net sales primarily due to lower selling prices for pulp and lumber. These items are discussed further below under "Business Segment Discussion."

Cost of sales-Cost of sales was 85.0% of net sales for the nine months ended September 30, 2009, and 94.1% of net sales for the same period in 2008. The decrease of $101.0 million, or 11.3%, in the 2009 period compared to 2008 was primarily due to lower input costs for wood fiber, freight, energy and chemicals.

Selling, general and administrative expenses-Selling, general and administrative expenses increased 54.9% for the nine months ended September 30, 2009 compared to the same period in 2008. The increase was primarily due to additional corporate administration expenses associated with being an independent, publicly traded company, as well as higher incentive compensation related expenses recorded in the first nine months of 2009. Selling, general and administrative expenses for the first nine months of 2008 were favorably affected by approximately $2.0 million of income from legal settlements.

Alternative fuel mixture tax credits-For the nine months ended September 30, 2009, we recorded $123.5 million of pre-tax income related to alternative fuel mixture tax credits for the period from late January 2009 through September 2009. We began receiving the alternative fuel mixture tax credits in early 2009, therefore no amounts are recorded for the 2008 period.

Interest expense-Interest expense increased 15.6% in the first nine months of 2009 compared to the first nine months of 2008. Interest expense on the note payable to Potlatch was $5.2 million in the first nine months of 2009, compared to $9.8 million in the first nine months of 2008. As discussed previously, in June 2009 we issued $150 million of senior notes and used a portion of the proceeds to satisfy our $100 million note payable obligation to Potlatch. Interest expense on the $150 million senior notes was $5.1 million in the first nine months of 2009. In the first nine months of 2009, we also incurred approximately $1.0 million of interest expense related to our credit facility.

Debt retirement costs-We recorded $6.3 million of expenses in the first nine months of 2009 associated with the retirement of our $100.0 million note payable obligation to Potlatch. The $100.0 million note payable represented the principal amount of credit sensitive debentures originally issued by an affiliate of Potlatch. Prior to our spin-off, we agreed to retain the obligation to pay all amounts due to the holders of these debentures. The $6.3 million expense represents our estimate of the interest payment that will be required on the December 1, 2009, maturity date of the credit sensitive debentures.

Income tax provision-Our income tax provision increased $53.8 million for the nine months ended September 30, 2009, compared to the same period in 2008, primarily due to increased operating earnings and additional tax expense resulting from the establishment of a liability for uncertain tax positions related to the alternative fuel mixture tax credit. The recognition of federal renewable energy tax credits of $9.8 million and the reduction of a valuation allowance of $3.6 million previously established with respect to state investment credit carryovers, partially offset the higher income tax provision. Excluding the renewable energy tax credits, the reduction in the valuation allowance and the tax expense related to the liability for uncertain tax positions, the effective tax rate was 36.9% for the first nine months of 2009, compared to an effective tax rate of 33.8% for the first nine months of 2008. The tax provision for the first nine months of 2008 was calculated on a "carve-out" accounting basis since our businesses were part of Potlatch during those periods, whereas the 2009 tax provision is reflective of the company's operations and tax attributes as a stand-alone entity.

BUSINESS SEGMENT DISCUSSION

Consumer Products



                                                              Nine Months Ended
                                                                September 30,
  (Dollars in thousands)                                     2009           2008
  Net sales (before intersegment net sales eliminations)   $ 415,692      $ 376,529
. . .