FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our construction of additional converting and paper making capacity and the cost and timing to complete new facilities, including our facilities in Shelby, North Carolina, the cost and timing to upgrade existing paper making facilities, including those in Las Vegas, Nevada, the integration of and expected benefits from the former Cellu Tissue operations, including expected cost savings from synergies, future growth opportunities, the stock repurchase program, future revenues, cash flows, capital expenditures, tax rates, operating costs, manufacturing capability, liquidity, benefit plan funding levels, total selling, general and administrative costs, interest expenses, the tax treatment of the alternative fuels and cellulosic biofuels tax credits and the conversion of additional gallons of fuel from the Alternative Fuel Mixture Tax Credit to the Cellulosic Biofuel Producer Credit. Words such as "anticipate," "expect," "intend," "plan," "target," "project," "believe," "schedule," "estimate," "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 those risks discussed in the section entitled "Risk Factors" in our 2011 Form 10-K, as well as the following:

• difficulties with the integration process or the realization of the benefits expected from the acquisition of Cellu Tissue;

• difficulties with completion, or significant delays in the construction or upgrade of, our new and existing tissue manufacturing and converting facilities, including the completion of our new through-air-dried, or TAD, paper machine;

• changes in the cost and availability of wood fiber used in the production of our products;

• changes in transportation costs and disruptions in transportation services;

• changes in raw material and energy costs and availability;

• the loss of business from any large customer;

• changes in customer product preferences and competitors' product offerings;

• our qualification to retain, or ability to utilize, tax credits associated with alternative fuels or cellulosic biofuels and the tax treatment associated with receipt of such credits;

• labor disruptions;

• changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;

• changes in expenses and required contributions associated with our pension plans;

• cyclical industry conditions;

• competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing sites for consumer tissue products are constructed by our competitors;

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

• reliance on a limited number of third-party suppliers for raw materials;

• unforeseen environmental liabilities or expenditures;

• unanticipated manufacturing or operating disruptions, including equipment malfunction and damage to our manufacturing facilities caused by fire or weather-related events and IT system failures;

• an inability to fund our debt obligations;

• restrictions on our business from debt covenants and terms; and

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

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

We are engaged in the manufacturing and selling of pulp-based products. We currently manufacture quality consumer tissue, away-from-home tissue, parent roll tissue, machine-glazed tissue, bleached paperboard, and pulp at 15 manufacturing locations in the U.S. and Canada. Our private label tissue products, such as facial and bath tissue, paper towels and napkins, are used primarily at home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry and is ultimately used by our customers to make packaging for products ranging from liquids to pharmaceuticals to consumer goods packaging, all of which demand high quality construction and print surfaces for graphics. Our products primarily utilize pulp made from wood fiber. Other major cost categories include chemicals, transportation, energy, packaging, and costs associated with our manufacturing facilities.

Recent Developments

Consumer Products Expansion

In 2010, as part of our TAD tissue expansion project, or TAD project, we began construction of new tissue manufacturing and converting facilities in Shelby, North Carolina to expand our Consumer Products segment in the Eastern United States. This site will include a TAD paper machine capable of producing ultra grades of private label tissue products and is currently expected to have five converting lines and two print lines. The first two converting lines became operational during the second quarter of 2011. Two additional converting lines are expected to become operational late in the second half of 2012 and the fifth line in 2013. The new TAD paper machine is scheduled to start-up in the fourth quarter of 2012. Also as part of our TAD project, we are currently improving our TAD tissue manufacturing capabilities in Las Vegas, which we expect to be completed in the third quarter of 2012.

The TAD project will allow us to supply a full range of TAD products, including paper towels and bath tissue, to customers across the U.S., while minimizing transportation costs. We believe this project, along with our existing manufacturing capabilities, will establish us as the only private label tissue products company to offer a full line of products to our customers.

We estimate the TAD project will cost approximately $275 million, excluding capitalized interest. As of June 30, 2012, we have incurred a total of $191.9 million in TAD project costs, of which $43.0 million and $82.6 million were incurred in the three and six months ended June 30, 2012, respectively. We expect approximately $70 million will be spent during the second half of 2012, with the remaining approximately $15 million to be spent in 2013. We have capitalized $9.1 million of interest related to the TAD project to date, of which $2.8 million and $4.9 million were incurred in the three and six months ended June 30, 2012, respectively, and we estimate total capitalized interest for the project will be approximately $19 million.

In August 2011, First Quality Tissue SE, LLC, or First Quality, filed a lawsuit against Metso Paper, the company we contracted with to supply the TAD paper machine to our Shelby facility, seeking to enjoin Metso Paper from delivering the TAD paper machine based on First Quality's agreement with Metso Paper. On June 20, 2012, the United States District Court for the District of South Carolina ruled in favor of Clearwater Paper and Metso Paper and denied First Quality's claim to enjoin Metso Paper from delivering the TAD paper machine to us. See Item 1 of Part II of this Report for a description of this legal proceeding.

Integration of Cellu Tissue Holdings, Inc.

On December 27, 2010, we acquired Cellu Tissue, which owned nine tissue manufacturing facilities located in the Southern, Midwestern and Eastern United States and one facility in Eastern Canada. These facilities allow us to better serve existing private label grocery customers by creating a national manufacturing footprint and provide us with the capability to expand into new private label channels. We recognized $6.7 million of cost savings from synergies relating to the acquisition in the second quarter of 2012, and $12.0 million for the first half of 2012. We expect to achieve total net cost savings from synergies of approximately $28 million in 2012, and by the end of 2012 to be on track to achieve $35 to $40 million annually in cost savings from synergies in 2013.

Components and Trends in our Business

Net sales

Net sales consist of sales of consumer tissue and paperboard products, as well as pulp, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products primarily tend to be driven by the value of our products to our customers, and are generally priced relative to the prices of branded tissue products. Demand and pricing for our pulp and paperboard products are largely determined by general global market conditions and the demand for high quality paperboard.

Operating costs

                                              Three Months Ended June 30,
 (Dollars in thousands)                 2012                               2011
                                           Percentage of                      Percentage of
                              Cost         Cost of Sales         Cost         Cost of Sales
 Purchased pulp             $  60,660                15.2 %    $  71,487                16.5 %
 Chemicals                     46,994                11.8         44,321                10.2
 Chips, sawdust and logs       43,572                11.0         59,505                13.8
 Transportation1               41,813                10.5         48,154                11.1
 Energy                        26,348                 6.6         31,793                 7.3
 Maintenance and repairs2      21,960                 5.5         22,309                 5.1
 Packaging supplies            21,180                 5.3         23,915                 5.6

                            $ 262,527                65.9 %    $ 301,484                69.6 %

1 Includes internal and external transportation costs.

2 Excluding related labor costs.

Operating costs

                                               Six Months Ended June 30,
 (Dollars in thousands)                 2012                               2011
                                           Percentage of                      Percentage of
                              Cost         Cost of Sales         Cost         Cost of Sales
 Purchased pulp             $ 122,396                15.2 %    $ 149,421                17.6 %
 Chemicals                     92,864                11.6         82,885                 9.8
 Chips, sawdust and logs       83,920                10.5        102,871                12.2
 Transportation1               83,511                10.4         92,252                10.9
 Maintenance and repairs2      57,109                 7.1         51,207                 6.0
 Energy                        53,355                 6.7         65,461                 7.7
 Packaging supplies            43,337                 5.4         46,913                 5.5

                            $ 536,492                66.9 %    $ 591,010                69.7 %

1 Includes internal and external transportation costs.

2 Excluding related labor costs.

Purchased pulp. We purchase a significant amount of the pulp needed to supply our consumer products, and to a lesser extent our pulp and paperboard, manufacturing facilities from external suppliers. For both the three and six months ended June 30, 2012, total purchased pulp costs were 15.2% of our cost of sales, representing decreases of 1.3 percentage points and 2.4 percentage points, respectively, compared to the same periods in 2011. Our costs for purchased pulp, which escalated in 2011, continue to decrease due to lower average external pulp prices and a continued focus on internally sourced pulp.

Chemicals. We consume a significant amount of chemicals in the production of pulp and paperboard. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper process chemicals. A large portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based and are impacted by petroleum prices. Our chemical costs increased $2.7 million, or 1.6 percentage points, for the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Chemical costs for the six months ended June 30, 2012, increased $10.0 million, or 1.8 percentage points, over the 2011 comparable period. Costs increased during both the three and six month periods primarily as a result of higher caustic and sodium chlorate prices, as well as increased volumes at our Arkansas facility.

Chips, sawdust and logs. We purchase chips, sawdust and logs used to manufacture pulp. We source these residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Overall costs for chips, sawdust and logs for the three and six months ended June 30, 2012, decreased compared to the same 2011 periods, both in dollars and as a percentage of cost of sales, primarily due to the sale of our Lewiston, Idaho sawmill in November 2011. Excluding the effects of our former sawmill, the cost of chips, sawdust and logs increased compared to the prior year periods primarily due to supply limitations at our Arkansas pulp and paperboard mill caused by wet weather conditions.

Transportation. Fuel prices significantly impact transportation costs related to delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S., and we transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for the three and six months ended June 30, 2012, compared to the prior year periods, decreased as less fuel was used due to an overall decline in miles shipped as a result of synergies from the Cellu Tissue acquisition. In addition, the sale of our Lewiston, Idaho sawmill in November 2011 resulted in lower overall transportation costs for the second quarter and first half of 2012 compared to the same periods of 2011.

Energy. We use energy in the form of electricity, hog fuel, steam, natural gas and, to a much lesser extent, coal to operate our mills. Energy prices have fluctuated widely over the past decade. We have taken steps to reduce our exposure to volatile energy prices through conservation. In addition, cogeneration facilities that produce steam and electricity at our East Hartford, Connecticut, Lewiston, Idaho and Menominee, Michigan manufacturing sites help to lower our energy costs. To help mitigate our exposure to changes in natural gas prices, from time to time we have used firm-price contracts to supply a portion of our natural gas requirements. As of June 30, 2012, these contracts covered approximately 29% of our expected average monthly natural gas requirements for our manufacturing facilities for the remainder of 2012, plus lesser amounts for 2013. Energy costs for the three and six months ended June 30, 2012 were lower than the prior year period due to lower natural gas and electricity costs. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage.

Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.

Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns annually at our Idaho facility and approximately every 18 months at our Arkansas facility, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. In the first quarter of 2012, we had 17 combined days of scheduled machine downtime for the two paperboard machines at our Idaho pulp and paperboard mill and incurred approximately $15.5 million in major maintenance costs, excluding labor, compared to major maintenance costs of $11.4 million at the same mill in the first quarter of 2011. There was no major maintenance in the second quarters of 2012 and 2011. We expect to incur an additional $4.3 million of costs for planned major maintenance at our Arkansas facility during the fourth quarter of 2012.

In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, to improve our safety and to comply with environmental laws. Excluding $43.0 million and $82.6 million, respectively, of expenditures for our TAD project during the three and six months ended June 30, 2012, we spent $10.0 million and $20.6 million, respectively, on capital expenditures during the three and six months ended June 30, 2012, compared to $12.0 million and $24.1 million in the same periods in 2011. Capital expenditures for 2012 are expected to be between approximately $195 million and $200 million, which include an estimated $145 million to $150 million associated with our TAD project.

Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under these agreements, we incur expenses related to the unique packaging of our products for direct retail sale to consumers. For the three and six months ended June 30, 2012, packaging costs were lower than the same period in 2011 primarily due to procurement synergies resulting from the Cellu Tissue acquisition.

Other. Other costs not mentioned in the above table primarily consist of wage and benefit expenses and miscellaneous operating costs. Although period cut-offs and inventory levels can impact other cost of sales amounts, we would expect this amount to be relatively steady as a percentage of costs on a period-to-period basis.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products. Our second quarter selling, general and administrative expenses were $30.5 million in 2012 compared to $27.5 million in 2011. The increase was primarily a result of higher incentive compensation expense, legal expense of approximately $1.0 million related to the First Quality/Metso Paper litigation and additional expense associated with the integration of Cellu Tissue information systems.

Interest expense

Interest expense is mostly comprised of interest on our $375.0 million aggregate principal amount 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes, and our $150.0 million aggregate principal amount of 10.625% senior notes due 2016 issued in June 2009, which we refer to as the 2009 Notes. Interest expense also includes amortization of deferred finance costs associated with the 2009 Notes, 2010 Notes, and our revolving credit facility. Interest expense before reductions for capitalized interest in 2012 is expected to decrease slightly compared to 2011 as a result of the 2011 third quarter redemption of our industrial revenue bonds. Interest expense will also be partially offset by our continued capitalization of interest for our TAD project, which we estimate will be $13.9 million in 2012 and $19.0 million over the construction phase of the project.

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 generally expect our effective income tax rate, excluding discrete items, to remain fairly constant, but it could fluctuate due to changes in tax law.

We are registered with the Internal Revenue Service, or IRS, as both an alternative fuel mixer and a producer of cellulosic biofuel. During 2009 we received refundable tax credit payments in connection with our use of 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, or AFMTC, expired on December 31, 2009.

The Cellulosic Biofuel Producer Credit, or CBPC, enables us to claim $1.01 per gallon in regards to black liquor produced and used as a fuel by us at our pulp mills in 2009. During 2010, the IRS issued guidance clarifying the treatment of the CBPC and the AFMTC in regards to the production or use of black liquor at the same facility, in the same tax year. Under the guidance provided, both credits may be claimed in the same year as long as the credits are not claimed for the same gallons of fuel. Furthermore, the IRS guidance clarified the ability to convert previously claimed gallons from the AFMTC to the CBPC.

In the first quarter of 2012 Congress identified the elimination or modification of the CBPC in connection with black liquor as a possible revenue source. Such proposed legislative action, if enacted, could limit or eliminate our ability to convert AFMTC gallons to CBPC gallons and/or CBPC gallons to AFMTC gallons and, accordingly, limit or eliminate our ability to claim carry forward credits. Although provisions relating to CBPC and AFMTC were removed from the proposed Highway Investment, Job Creation and Economic Growth Act of 2012, the ultimate outcome of these provisions or future provisions could be adverse. As a result, we made the determination to convert all gallons relating to CBPC carryforwards back to AFMTC and as of June 30, 2012 we have no remaining CBPC carryforwards. As a result of this determination, we recorded net discrete expense of $5.5 million in the three months ended March 31, 2012 comprised of $2.5 million relating to the conversion back to the AFMTC and a resulting additional $3.0 million increase in our liabilities for uncertain tax positions. Although under current federal tax law we have the ability to convert gallons of AFMTC to CBPC until 2013, we do not currently intend to do so. See Note 5 "Income Taxes" for further discussion.

There is relatively little guidance regarding the AFMTC and the law governing the issue is complex. Accordingly, there remains uncertainty as to our qualification to receive the tax credit in 2009, as well as to whether we will be entitled to retain the amounts we received upon further review by the IRS. In addition, while it is our position that payments received or credits taken in relation to the AFMTC should not be subject to corporate income tax, there can be no assurance as to whether or not the amounts we have received will be subject to taxation.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

The following table sets forth data included in our Condensed Consolidated
Statements of Operations as a percentage of net sales.



                                                              Three Months Ended June 30,
(Dollars in thousands)                                     2012                         2011
Net sales                                         $  473,572        100.0 %    $  494,627        100.0 %
Costs and expenses:
Cost of sales                                       (398,546 )       84.2        (433,358 )       87.6
Selling, general and administrative expenses         (30,529 )        6.4         (27,476 )        5.6

Total operating costs and expenses                  (429,075 )       90.6        (460,834 )       93.2

Income from operations                                44,497          9.4          33,793          6.8
Interest expense, net                                 (9,147 )        1.9         (10,992 )        2.2
Other, net                                                -            -             (229 )        0.0

Earnings before income taxes                          35,350          7.5          22,572          4.6
Income tax provision                                 (13,861 )        2.9          (8,649 )        1.7

Net earnings                                      $   21,489          4.5      $   13,923          2.8

Net sales-Second quarter 2012 net sales decreased by $21.1 million, or 4.3%, compared to the second quarter of 2011, primarily due to the sale of our Lewiston, Idaho sawmill in November 2011. In addition, decreased paperboard and pulp shipments, as well as lower pulp net selling prices, contributed to the decrease in net sales. These unfavorable comparisons were partially offset by increased net selling prices and shipments in our Consumer Products segment. These items are discussed further below under "Business Segment Discussion."

Cost of sales-Cost of sales was 84.2% of net sales for the quarter ended June 30, 2012 and 87.6% of net sales for the same period in 2011. The favorable comparison was due primarily to the lower costs for purchased pulp, chips, sawdust, logs, transportation and energy, partially offset by higher chemical costs and a $1.0 million loss associated with the sale of legacy Cellu Tissue foam manufacturing assets.

Selling, general and administrative expenses-Selling, general and administrative expenses increased $3.1 million over the prior year period primarily due to higher incentive compensation expense, legal expense of approximately $1.0 million related to the First Quality/Metso Paper litigation and additional expense associated with the integration of Cellu Tissue information systems.

Interest expense-Interest expense decreased $1.8 million in the second quarter of 2012 compared to the same period in 2011. The decrease was attributable to second quarter 2012 capitalized interest of $2.8 million associated with our TAD project, compared to $1.0 million of capitalized interest for the second quarter of 2011. The increase in capitalized interest was due to a higher level of cumulative capital expenditures associated with the TAD project in the 2012 period.

Income tax expense-Our estimated annual effective tax rate for 2012 is 35.1%, compared with 35.2% for the comparable interim period in 2011. We recorded income tax expense of $13.9 million in the three months ended June 30, 2012, compared to $8.6 million in the three months ended June 30, 2011. The actual rate for the three months ended June 30, 2012 was 39.2%, compared to an actual rate of 38.3% for the same period of 2011. The higher actual rates were primarily due to interest accrued on uncertain tax positions in each reporting period.

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