Clearwater Paper Corporation

CLEARWATER PAPER 

2010 ANNUAL REPORT 

Facilities Map

Spokane
(headquarters)

Lewiston

Ladysmith

Neenah

Menominee

Elwood

St. Catharines, ON

Natural Dam

WA

NV

ID

MI

WI

MI

N Y

C T

OK

AR

IL

MS

East Hartford

Long Island

Shelby
(under construction)

Alpharetta

Thomaston

N C

GA

Las Vegas

Oklahoma City

Cypress Bend

Wiggins

corporate and administrative

papermaking (tissue)

pulp and paperboard

tissue converting

lumber

foam

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Dear Stockholders,

Clearwater Paper is now officially two years old. Our early years
have been defined as a time when we were evaluating our
operations, improving efficiencies and capturing new opportunities,
positioning the company for continued advancement.

We have been measured as much on following through on
commitments made to stockholders and the marketplace as on
our performance. And we have delivered—both on promises
following through,
and on execution. That
coupled with our strategic plans for growth, established a
foundation upon which Clearwater Paper continues to build.

reputation for

Looking back to our first year, 2009 was a time of transition. We determined we needed to
undergo an intensive evaluation of people and assets, setting the bar to run our businesses at a
high level of effectiveness and efficiency. This is what we committed to in 2009 and that is what
we accomplished.

In 2010, our second year, we placed a strong focus on understanding our competitive strengths
and on our customers’ needs. This work resulted in a commitment
to our stockholders to
develop an overall business strategy characterized by taking action and executing major
decisions to grow the company, build capability and provide positive business results. I am
pleased to report that we have successfully followed through on this commitment as well, and
today Clearwater Paper is not only a larger company but is also stronger and well-positioned to
compete in the markets in which we choose to operate.

Our Strategy in Action

In June 2010, we announced we would build our new through-air-dried (TAD) tissue machine
and converting facility at Shelby, North Carolina. The new production and distribution
capabilities of the facility will increase our ultra and premium offerings to existing southern and
East Coast customers and create new opportunities to expand our private label consumer tissue
business to other retail grocery chains in the region.

We are pleased to report that construction of the facility is on schedule and on budget. We
believe our decision to build the Shelby facility was a good one. Our customers praised our
actions and look forward to seeing the first converting production in the second half of this year
and paper machine production in the second half of 2012. Additionally, I would like to express
our sincere gratitude for the support provided from the local, regional and state agencies and
officials in North Carolina. Their assistance has reinforced our belief that Shelby was the right
place to locate the facility.

On September 16, 2010, we announced plans to acquire Cellu Tissue Holdings, Inc., and we
completed the transaction in December. The acquisition immediately expanded our tissue
manufacturing footprint and created a much stronger operational scale to better serve private
label tissue customers. This acquisition, coupled with the Shelby facility, is expected to provide
both short- and long-term value to stockholders. Prior to the acquisition, we had a national sales
footprint but limited East Coast converting capabilities. Today, we have a national
manufacturing presence and are focused on increasing service to our existing customers while
expanding into new private label channels. The integration of the Cellu Tissue operations is
moving forward as planned.

2010 Performance

Our Pulp and Paperboard and Consumer Products businesses performed very well throughout
the year. In the midst of significant company change, as well as continued uncertainty in the
global economy, our core businesses broke records and excelled in their segments.

Pulp and Paperboard had an outstanding year overall. The division benefited from a positive
market in 2010 along with significant improvements in productivity and shipments. Paperboard
production was up 10 percent from 2009 and paperboard shipments were up 5 percent from
2009. External pulp shipments also increased 18 percent from 2009.

Consumer Products reached many new milestones in 2010, including achieving record sales
and a record year for converting production. Also of special note, our Las Vegas facility reached
its all-time high in papermaking, and our Elwood facility broke its standing converting record.

Going Forward

Our primary goals and commitments for 2011 are threefold:

(1) Deliver a successful build and start-up of Shelby’s first phase. We intend to complete the
converting, warehouse and distribution facilities on time, within budget and to our quality
standards.

(2) Integrate Cellu Tissue into the Clearwater Paper family. We intend to successfully integrate
the combined company’s operations,
logistics and information technology systems and
processes. We are actively working toward a smooth and positive transition for our customers,
employees, vendors and communities.

(3) Lastly, as an engine to drive shareholder value, ensure and foster business continuity. We
intend to maintain the success and customer focus of our existing businesses while also
growing those businesses through the new opportunities provided by the assets and operations
we added in the past year.

We thank our stockholders, employees, customers and all stakeholders for your support in
making 2010 a successful second year of operation. We look forward to a successful 2011.

Sincerely,

Gordon L. Jones
Chairman, President and CEO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K

(Mark One)

È

‘

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from

to

.

Commission File Number 001-34146

CLEARWATER PAPER CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
601 W. Riverside Avenue, Suite 1100
Spokane, Washington
(Address of principal executive offices)

20-3594554
(IRS Employer Identification No.)

99201
(Zip Code)

Registrant’s telephone number, including area code: (509) 344-5900

Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
Common Stock ($0.0001 par value per share)

NAME OF EACH EXCHANGE ON WHICH REGISTERED
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. È Yes ‘ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ‘ Yes È No
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. È Yes ‘ 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). ‘ Yes ‘ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
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 filer ‘
Non-accelerated filer ‘ (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 Act). ‘ Yes È No
As of June 30, 2010 (the last business day of the registrant’s most recently completed second quarter), the aggregate
market value of the common stock held by non-affiliates of the registrant was $622.8 million. Shares of common stock
beneficially held by each officer and director and by each person who owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
As of February 28, 2011, 11,518,604 shares of the registrant’s common stock were outstanding.

Accelerated filer È
Smaller reporting company ‘

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed on or about March 25, 2011, with the Securities and Exchange
Commission in connection with the registrant’s 2011 annual meeting of stockholders are incorporated by reference in
Part III hereof.

CLEARWATER PAPER CORPORATION
Index to 2010 Form 10-K

ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.

ITEM 5.

ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.

ITEM 10.
ITEM 11.
ITEM 12.

ITEM 13.
ITEM 14.

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
[Removed and Reserved]

PART I

PART II

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

PART III

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

PART IV

Exhibits, Financial Statement Schedules

ITEM 15.
SIGNATURES
EXHIBIT INDEX

PAGE
NUMBER

2-10
11-19
19
20
21
21

22
22-23
23-42
42-43
44-82
82
82-83
83

84
84

84-85
85
85

86
87
88-91

Part I

C A U T I O N A R Y S T A T E M E N T R E G A R D I N G F O R W A R D - L O O K I N G I N F O R M A T I O N

information, certain forward-looking statements within the meaning of

Our disclosure and analysis in this report and in our Annual Report to Shareholders contains, in addition to
historical
the Private Securities
Litigation Reform Act of 1995,
including statements regarding the acquisition of Cellu Tissue, our
construction of additional converting and paper making capacity, the cost and timing to complete new
facilities, future growth opportunities, future revenues, cash flows, capital expenditures, energy costs, wood
fiber costs, manufacturing output, liquidity, the payment of dividends, benefit plan funding levels, the effect of
recent accounting standards on our financial condition and results of operations and the tax treatment of the
alternative fuels and cellulosic biofuels tax credits. 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 Item 1A of this report, including the following:

▪ an inability to successfully implement our expansion strategies;
▪ difficulties with the integration process or the realization of the benefits expected from the acquisition

of Cellu Tissue;

▪ difficulties with completion of our new tissue manufacturing and converting facilities;
▪

the Cellu Tissue acquisition may expose our operations to unidentified liabilities;

▪ changes in the cost and availability of wood fiber used in the production of our products;
▪ changes in freight costs and disruptions in transportation services;
▪ changes in raw material costs and energy availability and costs;
▪ changes in customer product preferences and competitors’ product offerings;
▪ changes in the United States and international economies and in general economic conditions in the

regions and industries in which we operate;

▪ cyclical industry conditions;
▪

the loss of business from any of our three largest Consumer Products segment customers or a large
Pulp and Paperboard segment customer;

▪ competitive pricing pressures for our products;
▪

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

▪ 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;

▪ unforeseen environmental liabilities or expenditures;
▪ unanticipated manufacturing or operating disruptions, including equipment malfunction and damage

to our manufacturing facilitates caused by fire or weather-related events and IT system failures;

▪ 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 our products;

▪ changes in expenses and required contributions associated with our pension plans;
▪ an inability to fund our debt obligations;
▪

restrictions on our business from debt covenants and terms;

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1

▪ changes in laws, regulations or industry standards affecting our business; and
▪ changes in exchange rates between the U.S. dollar and other currencies.

Forward-looking statements contained in this report present management’s views only as of the date of this
report. We undertake no obligation to publicly update forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult any further disclosures we
make on related subjects in our 10-Q and 8-K reports filed with the Securities and Exchange Commission, or
SEC.

ITEM 1. Business

G E N E R A L

Clearwater Paper Corporation manufactures quality consumer tissue, away-from-home tissue, parent roll
tissue, machine-glazed tissue, foam, bleached paperboard, pulp and wood products at 13 manufacturing
locations in the U.S. and one in Canada. Our products primarily utilize pulp made from wood fiber. Our
private label tissue products, such as facial and bath tissue, paper towels and napkins, are used at-home
and are principally sold to major retailers and wholesale distributors. These include grocery, drug, mass
merchants 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. We produce a significant amount of the pulp required in our tissue and paperboard
businesses. We also manufacture wood products, including quality cedar used for its attractive appearance,
and lumber products for construction.

H i s t o r y

Our facility in Lewiston, Idaho was established in 1927. Excluding the acquisition of Cellu Tissue Holdings
Inc., or Cellu Tissue, our businesses were owned directly or indirectly by Potlatch Corporation, which we
refer to in this report as Potlatch, until our spin-off on December 16, 2008, which we refer to in this report as
the “spin-off.” In the spin-off, Potlatch distributed 100% of the issued and outstanding shares of our common
stock to the holders of Potlatch common stock.

Unless the context otherwise requires or unless otherwise indicates, references in this report to “Clearwater
Paper Corporation,” “we,” “our,” “the company” and “us” refer:

▪

▪

for all periods prior to the spin-off, to the Consumer Products, Pulp and Paperboard and Wood
Products businesses separated from Potlatch Corporation in the spin-off; and

for all periods following the spin-off, to Clearwater Paper Corporation and its subsidiaries.

On December 27, 2010, we acquired Cellu Tissue. Cellu Tissue’s customers include consumer retailers and
away-from-home, or AFH, distributors of tissue products, and vertically integrated manufacturers and third-
party converters serving the tissue, foam and machine-glazed tissue sectors. The Cellu Tissue operations
manufacture large rolls of tissue, which we refer to as parent rolls, from purchased pulp and recycled fiber.
In 2010, a majority of these parent rolls were converted into finished and packaged tissue products, and the
remainder were sold to third-party converters of tissue products.

Cellu Tissue has ten strategically located manufacturing and converting facilities in Connecticut, Georgia,
Michigan, Mississippi, New York, Oklahoma, Wisconsin and Ontario, Canada. It recently added a new
tissue converting facility in Oklahoma City, Oklahoma, which began producing
323,000 square foot
converted tissue products with two lines in June 2010. Six of Cellu Tissue’s facilities manufacture parent
rolls for internal conversion and external parent roll sales, two of these facilities produce converted tissue
products and two facilities are integrated parent roll manufacturing and converting sites. Cellu Tissue grew
its annual parent roll production capacity from approximately 264,000 tons, as of February 28, 2006, to
approximately 333,000 tons as of December 31, 2010. In response to market demand for its converted
tissue products, Cellu Tissue grew its annual converting capacity from approximately 85,000 tons as of
February 28, 2006, to approximately 241,000 tons as of December 31, 2010. For the fiscal year ended
February 28, 2010, Cellu Tissue had net sales of $511.3 million and net earnings of $3.8 million.

2

S t r a t e g y

Our long-term strategy is to grow the size and scope of our Consumer Products segment. In the near term,
our focus is on maximizing the strategic and financial benefits of the acquisition of Cellu Tissue and our
construction of new through-air-dried, or TAD, tissue manufacturing and converting facilities in Shelby, North
Carolina. We also plan to optimize the operating efficiencies and cost effectiveness of our premium
bleached paperboard production.

▪ Grow Our Consumer Products Business. Our strategy is to grow our capacity and product
offerings in the private label tissue market. As part of this strategy, in 2010 we expanded our tissue
manufacturing footprint and began construction of additional converting and papermaking capacity.
The Cellu Tissue acquisition, which provides us a national manufacturing footprint, will enable us to
better and more cost effectively service a diverse customer base. Our ongoing construction of new
TAD manufacturing and converting facilities in Shelby, North Carolina, will enable us to offer our
customers competitive products in the growing ultra-tissue market segment.

▪ Optimize our Pulp and Paperboard Business. We intend to continue improving our product
quality and the mix of paperboard customers. We also plan to be a low cost provider of high quality
paperboard by improving the efficiency of our operations and managing the cost of raw materials
and energy. We will continue to invest in opportunities with the goal to optimize our manufacturing
processes and reduce our overall operating expenses.

O R G A N I Z A T I O N

Our businesses are organized into two reportable operating segments: Consumer Products and Pulp and
Paperboard. Commencing January 1, 2010, the wood products operating results have been consolidated
into the Pulp and Paperboard segment. The Consumer Products business includes the Cellu Tissue
operations we acquired on December 27, 2010. Additional information relating to the amounts of net sales,
operating income (loss), depreciation and amortization,
identifiable assets and capital expenditures
attributable to each of our operating segments for 2008-2010, as well as geographic information regarding
our net sales, is set forth in Note 18 to our consolidated financial statements included in Item 8 of Part II of
this report.

C o n s u m e r P r o d u c t s S e g m e n t

Our Consumer Products segment manufactures and markets consumer private label tissue products in each
tissue category, including bathroom tissue, household paper towels, napkins and facial tissue. As a result of
the acquisition of Cellu Tissue, we also manufacture AFH bath and towel tissue, machine-glazed tissue,
absorbent paper products and foam products. Our integrated manufacturing and converting operations and
geographic footprint enable us to deliver a broad range of cost-competitive products with brand-like quality
to our consumer products customers. A description of our Consumer Products segment facilities is included
under Item 2 of Part I of this report. In 2010, our Consumer Products segment had net sales of $570.1
million.

T i s s u e I n d u s t r y O v e r v i e w

Consumer Tissue Products. Our Consumer Products segment competes primarily in the at-home portion of
the U.S. tissue market. The U.S. tissue market can be divided into two market segments: the at-home or
consumer retail purchase segment, which represents approximately two-thirds of U.S. tissue sales; and the
AFH segment (commercial and industrial venue tissue use), which represents the remainder of U.S. tissue
market sales.

The United States at-home tissue segment consists of bath, towel, facial and napkin products segments.
Each category is further distinguished according to quality segments: ultra, premium, value and economy.
As a result of process improvements and consumer demand, the majority of at-home tissue sold in the
United States is premium and ultra quality.

At-home tissue producers are comprised of companies that manufacture branded tissue products, private
label tissue products, or both. Branded tissue suppliers manufacture, market and sell tissue products under

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their own nationally branded labels. Private label tissue producers sell tissue products to retailers who in turn
sell the tissue to consumers under the retailers’ private label brand. Some manufacturers sell both branded
and private label tissue products.

In the United States, at-home tissue is primarily sold through grocery stores, mass merchants, warehouse
clubs, drug stores and dollar stores. Tissue has historically been one of the strongest segments of the paper
and forest products industry due to its steady demand growth and the absence of severe supply imbalances
that occur in a number of other paper segments. In addition to economic and demographic drivers, tissue
demand is affected by product innovations and shifts in distribution channels.

The tissue making process starts with pulp made from wood chips and sawdust. The pulp is mixed in a
blending chest until it reaches a consistency of 96% water and 4% pulp. This mixture is sprayed onto a large
rotating porous screen on the paper machine, where the tissue sheet is formed. From this point, the sheet
travels through numerous pressure rolls to remove excess water and finally over a large heated drum for
drying. The dry sheet is wound into parent rolls weighing several tons, which are placed into storage until the
tissue paper is converted into final products or sold to third-party converters. During the converting process,
the parent rolls are placed on a converting line where the paper is rewound onto a smaller core for bathroom
tissue or household towels, or folded for facial tissue or napkins. Once the product is rewound or folded, it
goes through a packaging process and is then shipped to customers.

Machine-Glazed Tissue. Machine-glazed tissue has a glazed coating and, in some cases, other moisture
and grease-resistant coatings. Machine-glazed tissue is converted into products such as fast food and
commercial food wrappers, gum wrappers, coffee filters, cigarette pack liner paper, wax paper and butter
wraps.

O u r C o n s u m e r P r o d u c t s B u s i n e s s

Our Consumer Products segment manufactures and sells a complete line of at-home products in each
tissue category. In bathroom tissue, the majority of our sales are high quality two-ply ultra and premium
products. In household paper towels, we produce and sell high-end ultra quality TAD towels as well as
premium and value towels. In the facial category, we sell ultra-lotion three-ply facial tissue and a complete
line of two-ply premium products as well as value and economy facial tissue. In napkins, we manufacture
ultra two- and three-ply dinner napkins, as well as premium and value one-ply luncheon napkins. Recycled
fiber value grade products are also available to customers who wish to further diversify their product
portfolio. Tissue parent rolls that we manufacture but do not convert are sold to third-party converters, after
being manufactured to their requested specifications, for use in various end products, including bath and
facial tissue, assorted paper towels and napkins.

We manufacture and sell a line of AFH products to customers with commercial and industrial business
tissue needs. Products include conventional one- and two-ply bath tissue, two-ply paper towels, hard wound
towels and dispenser napkins.

foam products and absorbent paper products.
We also manufacture and sell machine-glazed tissue,
Machine- glazed tissue is sold in a variety of weights, widths and surface characteristics. We sell machine-
glazed tissue parent rolls to third-party converters of a variety of products. We also convert a limited amount
of our machine-glazed tissue parent rolls into rolls for retail food wrappers. We manufacture foam products,
primarily foam plates, as a private branded product to a single customer. Absorbent products we produce
feminine care products, surgical waddings and other medical and sanitary
include liners for diapers,
disposable products.

Our consumer products are manufactured on 14 paper machines in our facilities located throughout the
United States and in Ontario, Canada. Parent rolls from these paper machines are then converted and
packaged at designated converting facilities located across the United States. In addition to conventional
paper making capabilities, two of our paper machines, located in Las Vegas, Nevada and St. Catharines,
Ontario, produce TAD tissue that we convert into national brand quality ultra quality paper towels. In 2010,
we announced the initiation of construction of a third TAD tissue machine we expect to complete in the

4

fourth quarter of 2012 located in Shelby, North Carolina. This new machine will be capable of producing ultra
quality bath tissue and paper towels.

We are a significant producer of private label household tissue products in the United States. In 2010, we
produced approximately 57% of the total private label tissue products sold in grocery stores in the United
States. In the 11 western states, we produced approximately 91% of the total private label tissue products
sold in grocery stores in 2010. We compete with at least three other companies that are much larger than us
who sell national brand tissue products, as well as commercial, industrial and private label products. We
also compete with other companies that sell commercial,
industrial, private label and regional brand
retail chains, wholesalers and
products. Our household tissue products are packaged to order
cooperative buying organizations throughout the United States and, to a lesser extent, Canada. These
products are sold to consumers under the retailer’s own brand. In 2010, excluding Cellu Tissue, we sold a
majority of our tissue products to the Kroger Company and two other national grocery store chains, which
the Consumer Products segment sales. The Kroger Company
accounted for approximately 61% of
accounted for 11% of our total net sales in each of 2009 and 2010. Although we believe we have strong
long-term relationships with our grocery chain customers and have successfully integrated ourselves within
their strategic decision making processes, the loss of one or more of these customers would have a material
adverse effect upon the operating results of our Consumer Products segment. The average tenure of our top
ten Consumer Products customers in 2010 was approximately 19 years.

for

We believe that we are the only U.S. consumer tissue manufacturer that solely produces a full line of quality
private label tissue products for large retail channels of trade. Most U.S. tissue producers manufacture only
branded products, or both branded and private label products. Branded producers generally manufacture their
private label products at a quality grade or two below their branded products so as not to impair sales of the
branded products. Because we do not produce and market branded tissue products, we are able to offer
products that match the quality of leading national brands at lower prices. We are committed to maintaining a
high level of quality for our products that matches the quality of the leading national brands, and we utilize
independent companies to routinely test our product quality.

We sell private label tissue products through our own sales force to grocery, mass merchant, drug and
discount channel stores. We compete based on product quality, customer service and price. We deliver
customer-focused business solutions by assisting in managing product assortment, category management,
and pricing and promotion optimization.

P u l p a n d P a p e r b o a r d S e g m e n t

Our Pulp and Paperboard segment manufactures and markets bleached paperboard for the high-end
segment of the packaging industry and is a leading producer of solid bleach sulfate, or SBS paperboard.
This segment also produces softwood market pulp, which is used as the basis for many paper products, and
slush pulp, which it supplies to our Consumer Products segment. This segment also includes a wood
products operation consisting of a lumber mill
in Lewiston, Idaho that produces dimensional lumber and
supplies wood chips to the adjacent pulp and paperboard facility. A description of our pulp and paperboard
facilities is included under Item 2 of Part I of this report. In 2010, our Pulp and Paperboard segment had net
sales of $879.9 million, which included $77.0 million of intersegment pulp sales to our Consumer Products
segment.

P u l p a n d P a p e r b o a r d I n d u s t r y O v e r v i e w

liquid
SBS is a premium paperboard grade that
packaging, cups and plates, and commercial printing items. SBS is used to make these products because it
is manufactured using virgin fiber produced in a kraft bleaching process, which results in superior stiffness
and cleanliness. SBS is often coated with a clay surface in order to provide superior surface printing
qualities. SBS can also be coated with a plastic film to provide a moisture barrier for some uses.

frequently used to produce folding cartons,

is most

In general, the process of making paperboard begins by chemically cooking wood chips and sawdust to
make pulp. The pulp is bleached to provide a white, bright pulp, which is formed using our three paperboard
machines. Bleached pulp that we supply as market pulp is dried and baled on a pulp drying machine,
bypassing the paperboard machines. The various grades of paperboard may be coated with starch and clay,

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5

and are wound into rolls for shipment to customers for converting to final end uses. For liquid paperboard
packaging, a polyethylene or plastic coating is applied by a separate operation to create a barrier that is
water resistant and durable.

Folding Cartons Segment. Folding carton is the largest portion of the SBS segment of the paperboard
industry. Within the folding carton segment there are varying qualities of SBS. The high end of the folding
carton category in general requires a premium print surface and includes uses such as packaging for
pharmaceuticals, cosmetics and other premium retail goods. SBS is also used in the packaging of
commodity frozen foods, beverages and baked goods.

Liquid Packaging and Cup Segment. SBS liquid packaging is primarily used in the United States for the
packaging of juices. In Japan and other Asian countries, SBS liquid packaging is primarily used for the
packaging of milk, juice and other liquid items.

The cup segment of the market consists primarily of cold and hot drink cups and is largely characterized by
highly commoditized, lower margin uses that place less emphasis on printability or brightness. Since this
segment
low-margin
strategy.

tends to attract producers employing a high-volume,

is mostly commoditized,

it

Commercial Printing Segment. Commercial printing applications use light-weight bleached bristols, which
are heavyweight paper grades,
to produce postcards, signage, sales literature, and cover stock for
publications such as brochures, presentation folders and paperback book covers, among other things. The
customers in this segment are accustomed to high-quality paper grades, which possess superior printability
and brightness compared to most paperboard grades.

Market Pulp. The majority of the pulp manufactured worldwide is integrated with paper and paperboard
production, usually at the same mill. In those cases where a paper mill does not produce its own pulp, it
must purchase it on the open market. Market pulp is defined as pulp produced for sale to these customers
and it excludes tonnage consumed by the producing mill or shipped to any of its affiliated mills within the
same country.

O u r P u l p a n d P a p e r b o a r d B u s i n e s s

Our Pulp and Paperboard segment operates facilities in Idaho and Arkansas. As of December 31, 2010, we
were one of the five largest producers with approximately 11% of the available bleached paperboard
capacity in North America.

Our bleached paperboard is converted by our customers into a variety of end products, including packaging
for liquids, food products, pharmaceuticals, cosmetics, paper cups and plates and other consumable goods.
We also manufacture lightweight bleached bristols. Our overall pulp and paperboard production consists
primarily of folding carton, plate, liquid packaging, cup, softwood pulp, and commercial printing grades.

Folding carton board used in pharmaceuticals, cosmetics and other premium packaging, such as those that
incorporate foil and holographic lamination, account for the largest portion of our total paperboard sales. We
focus on high-end folding carton applications where the heightened focus on product quality provides for
differentiation among suppliers, resulting in margins that are more attractive than in lower grade packaging.

Our liquid carton paperboard is known for its cleanliness and printability, and is engineered for long-lived
performance due to its three-ply, 100% softwood construction. Our reputation for producing liquid packaging
meeting the most demanding standards for paperboard quality and cleanliness has resulted in meaningful
sales in Japan, where consumers have a particular tendency to associate blemish-free, vibrant packaging
with the cleanliness, quality, and freshness of the liquids contained inside.

We also sell paperboard for use in food service products. A majority of our sales in this area are used for
high-end food packaging, such as premium ice cream.

Our Pulp and Paperboard segment also sells products for commercial printing applications. The commercial
print market requires a premium print surface that typically exceeds the demands of high-end folding carton
converters. Further, a supplier must be able to deliver small volumes, often within 24 hours. We have
achieved growth in this market through investing in improvements in print surface quality at both of our

6

paperboard mills and by focusing sales and marketing efforts on printers and regional paper merchants. We
also offer a product line consisting of lighter weight paper grades favored by the commercial print segments
and a coated two-side product offering called Ancora.

We have long-standing customer relationships with our paperboard customers. Our top ten customers
accounted for approximately 40% of our total paperboard revenues in each of the last four years. Although
most of our contracts are annual agreements that can be terminated without penalty, our relationships
extend over many years with our top 10 customers.

We do not produce paperboard end-products, so we are not simultaneously a supplier of, and a competitor
to, our customers. For example, of the five largest SBS producers in the United States, we are the only
producer that does not also convert SBS into end products. We believe our position as a non-integrated
supplier has resulted in a diverse group of loyal customers, as they do not have to worry that, in the event of
decreased market availability of SBS, we will redirect production to meet internal conversion requirements.

At our Lewiston, Idaho facility we produce bleached softwood pulp, both for internal use and for sale to
external customers.
internal sales to our
In 2010, approximately 65% of our pulp sales consisted of
Consumer Products segment and the remaining approximately 35% represented pulp sales to external
customers, with the majority of these external sales shipped to customers in Asia.

Of the segment’s $879.9 million of net sales in 2010, $676.7 million, or 77%, was derived from sales of our
paperboard products, $42.0 million, or 5%, was derived from the sale to third parties of pulp produced at our
facilities, $77.0 million, or 9%, was derived from internal pulp sales to our Consumer Products segment,
$83.3 million, or 9%, was derived from the sale of our wood products and $0.9 million was derived from the
sale of other paperboard related products.
the Pulp and Paperboard
segment’s net sales to external customers were generated from sales to international customers, mainly
located in Japan, Taiwan, Mexico, China and Canada. As a result of the acquisition of Cellu Tissue, which
relied entirely on purchased pulp, we expect to eliminate external sales of pulp produced by our Pulp and
Paperboard segment over time and instead utilize that pulp in our Consumer Products segment.

In 2010, approximately 16% of

We utilize various methods for the sale and distribution of our paperboard and softwood pulp. The majority
of our paperboard is sold to packaging converters domestically through sales offices located throughout the
United States, while a growing percentage is channeled through distribution to commercial printers. The
majority of our international paperboard sales, as well as our softwood market pulp, are conducted through
sales agents. Our principal methods of competing are product quality, customer service and price.

Our Pulp and Paperboard group also includes a single lumber mill located on the same site as our pulp and
paperboard manufacturing facilities in Lewiston, Idaho. A description of this manufacturing facility is included
under Item 2 of Part I of this report. The lumber mill produces and markets appearance grade cedar and
dimensional
framing lumber products for building products end-users. Our cedar products include
appearance grade boards, siding and trim. Our dimensional lumber business includes two-inch dimensional
framing lumber, industrial timbers and railroad ties. The lumber mill also supplies wood chips to the adjacent
pulp and paperboard facility.

R A W M A T E R I A L S A N D I N P U T C O S T S

For our manufacturing operations, the principal raw material used is wood fiber. During 2010, wood fiber
costs, excluding internal pulp purchases, accounted for approximately 27% of our cost of sales. Our
Consumer Products segment purchases several varieties of pulp from third parties, in addition to pulp
provided by our Pulp and Paperboard segment, for use in manufacturing tissue products. Our Pulp and
Paperboard segment purchases a substantial amount of wood chips and sawdust
from third parties,
including Potlatch pursuant to supply agreements we entered into in connection with the spin-off, for use in
the production of pulp. Additionally, our wood products operation purchased approximately 62% of its 2010
log needs from Potlatch pursuant to a supply agreement.

We consume substantial amounts of energy, such as electricity, natural gas, hog fuel, and a modest amount
of fuel oil. During 2010, energy costs accounted for approximately 8% of our cost of sales. We purchase
substantial portions of our natural gas and electricity under supply contracts, most of which are between a

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specific plant and a specific local provider. Under most of these contracts, the providers are bound to
provide us with our requirements for a particular type of energy at a specific facility. Most of these contracts
have pricing mechanisms that adjust or set prices based on current market prices. In addition, we have used
firm-price contracts to mitigate price risk for certain of our energy requirements.

to our customers. Fuel prices largely
Transportation is another important
determine our transportation costs for delivery of raw materials to our manufacturing facilities and delivery of
our finished products to customers. Our total transportation costs were 10% of our cost of sales in 2010.

in getting our product

input

including caustic,
We utilize a significant amount of chemicals in the production of pulp and paper,
polyethylene, starch, sodium chlorate, latex and specialty process paper chemicals. During 2010, chemical
costs accounted for approximately 11% of our cost of sales. Many of our chemicals are purchased under
long-term contracts, which provide more stability than open-market purchases. However, many of these
the
contracts have pricing mechanisms that adjust with published price indices.
chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-
based or are impacted by petroleum prices.

In addition, many of

S E A S O N A L I T Y

Our Consumer Products and Pulp and Paperboard segments are generally not affected by seasonal
changes, although a number of our paperboard contracts are subject to renewal at the beginning of each
calendar year. Demand for our wood products typically decreases in the winter months when construction
activity is slower, and increases in the spring, summer and fall when construction activity is generally higher.

E N V I R O N M E N T A L

Information regarding environmental matters is included under Part II, Item 7—“Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of this report, and is incorporated herein by
reference.

W E B S I T E

Interested parties may access our periodic and current reports filed with the SEC, at no charge, by visiting
our website, www.clearwaterpaper.com. In the menu select “Investor Relations,” then select “Financial
Information & SEC Filings.” Information on our website is not part of this report.

E M P L O Y E E S

As of December 31, 2010, we had approximately 3,830 employees, of which approximately 2,320 were
employed by our Consumer Products segment, approximately 1,370 were employed by our Pulp and
Paperboard segment and approximately 140 were corporate administration employees. This workforce
consisted of approximately 920 salaried and fixed rate employees and approximately 2,910 hourly
employees. As of December 31, 2010, approximately 50% of the workforce was covered under collective
bargaining agreements.

8

Unions represent hourly employees at seven of our manufacturing sites. There are no hourly union labor
contracts expiring in 2011. The union contracts that have expired and are currently being negotiated are set
forth below:

CONTRACT
EXPIRATION
DATE

DIVISION AND LOCATION

UNION

November 1, 2009

Consumer Products Division—

United Steel Workers (USW)

Gouverneur, New York

December 13, 2009

Consumer Products Division—

United Steel Workers (USW)

APPROXIMATE
NUMBER OF
HOURLY
EMPLOYEES

75

94

August 31, 2010

Menominee, Michigan

Consumer Products & Pulp &
Paperboard Divisions—
Lewiston, Idaho

United Steel Workers (USW)

1,000

August 31, 2010

Consumer Products & Pulp and

Paperboard Divisions—
Lewiston, Idaho

International Brotherhood of
Electrical Workers (IBEW)

August 31, 2010

Consumer Products Division—

Independent Paperworkers

St. Catharines, Ontario

of Canada

54

95

E X E C U T I V E O F F I C E R S O F T H E R E G I S T R A N T

The following individuals are deemed our “executive officers” under the Securities Exchange Act of 1934.
The term of office of the officers of the company expires at the annual meeting of our board, and each officer
holds office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s death,
resignation, retirement, removal by the board or as otherwise provided in our bylaws. There are no
arrangements or understandings between any of our executive officers and any other persons pursuant to
which they were selected as officers. No family relationships exist among any of our executive officers.

Gordon L. Jones (age 61) has served as President and Chief Executive Officer, and a director of the
company since December 2008 and as Chairman since May 2010. From July 2008 to December 2008,
Mr. Jones served as a Vice President of Potlatch Corporation, pending completion of
the spin-off of
Clearwater Paper Corporation. From 2001 to 2010, Mr. Jones has served as the President and Managing
Member of Jones Investment Group LLC, an investment company. Prior to that, Mr. Jones served from May
1999 to November 2000 as President, Chief Executive Officer, and Director of Blue Ridge Paper Products,
Inc., a manufacturer of paperboard and packaging products. From 1983 to 1999, Mr. Jones served in a
variety of executive positions with Smurfit-Stone Container Corporation and predecessor companies.
Preceding 1983, Mr. Jones served in several management roles at Procter & Gamble.

Linda K. Massman (age 44) has served as Vice President, Finance and Chief Financial Officer since
December 2008. From September 2008 to December 2008, Ms. Massman served as a Vice President of
Potlatch Corporation, pending completion of the spin-off of Clearwater Paper Corporation. From May 2002
to August 2008, Ms. Massman served as the Group Vice President, Finance and Corporate Planning for
SUPERVALU Inc., a grocery retail company. Prior to that, Ms. Massman served from 1999 to 2001 as Vice
President, Business Planning and Operations for Viquity Corporation, an enterprise software company.

Thomas H. Carter (age 62) has served as Vice President of Human Resources since December 2008. From
August 2008 to December 2008, Mr. Carter served as a Vice President of Potlatch Corporation, pending
completion of the spin-off of Clearwater Paper Corporation. From February 2005 to August 2008, Mr. Carter
was retired. From February 2003 to February 2005, Mr. Carter served as Vice President, Human Resources
of Sara Lee Coffee & Tea, North America, a division of Sara Lee Corporation. Prior to that, Mr. Carter
served from 2002 to 2003 as Senior Director, Employee Relations for Sara Lee Bakery Group, a division of
Sara Lee Corporation. From 1999 to 2001, Mr. Carter served as Vice President, Human Resources and
Corporate Secretary for Blue Ridge Paper Products, Inc.

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Robert P. DeVleming (age 58) has served as Vice President of Consumer Products since December 2008.
Prior to December 2008, he was employed by Potlatch Corporation for 30 years. Mr. DeVleming served as
Vice President, Consumer Products of Potlatch from October 2004 to December 2008. From May 2003
through October 2004, Mr. DeVleming was Vice President, Sales, Consumer Products of Potlatch
Corporation.

Michael S. Gadd (age 46) has served as Vice President, General Counsel and Corporate Secretary since
December 2008. From March 2006 to December 2008, Mr. Gadd served as Associate General Counsel of
Potlatch Corporation, and served as Corporate Secretary of Potlatch from July 2007 to December 2008.
From 2001 to January 2006, Mr. Gadd was an attorney with Perkins Coie, LLP in Portland, Oregon.

Thomas A. Colgrove (age 59) has served as Vice President of Pulp and Paperboard since May
2009. Mr. Colgrove also has responsibility for the company’s wood products business. Prior to May 2009, he
was employed by Kimberly-Clark Corporation from 1984 to 2009, in various manufacturing management
positions. From September 2006 to April 2009, Mr. Colgrove was the Senior Director—North America
Product Supply at Kimberly-Clark and was responsible for seven North American tissue facilities. Prior to
that, Mr. Colgrove held a series of Plant Manager positions at five facilities across the U.S.

10

ITEM 1A. Risk Factors

financial condition, results of operations and liquidity are subject

Our business,
to various risks and
uncertainties, including those described below, and as a result, the trading price of our common stock could
decline.

The expansion of our business through the acquisition of Cellu Tissue, other potential acquisitions
and construction of new paper making and converting facilities may not proceed as anticipated.

in both size and
Our long-term growth strategy involves expanding our Consumer Products segment
geographic reach.
In December 2010, we acquired Cellu Tissue, which operates manufacturing and
converting facilities primarily located on the East Coast and Midwest. Concurrently with our integration of
Cellu Tissue, we are building a new TAD paper machine and converting facilities in Shelby, North Carolina.
In the future, we may build other converting and papermaking facilities, pursue acquisitions of existing
facilities, or both. Building new, or acquiring and modifying existing, manufacturing facilities entails numerous
risks, including difficulties in completing such projects on time due to construction and permitting issues,
financing the project, completing the project within budget and integrating new operations and personnel.
For example, the facilities under construction in Shelby, North Carolina, are highly complex and costly and
the paper machine can be manufactured by only a few companies in the world. As a result, the purchase
and installation of this paper machine would be delayed in the event the manufacturer is not able to meet
our timelines, and we do not expect that we would be able to find a replacement without significant
additional cost and delay.

We may be unable to identify future suitable building locations or acquisition targets. In addition, we may be
unable to achieve anticipated benefits or cost savings from construction projects or acquisitions in the
timeframe we anticipate, or at all. Any inability by us to integrate and manage any new or acquired facilities
or businesses in a timely and efficient manner, any inability to achieve anticipated cost savings or other
anticipated benefits from these projects or acquisitions in the time frame we anticipate or any unanticipated
financial
required increases in promotional or capital spending could adversely affect our business,
condition, results of operations or liquidity. Large construction projects or acquisitions can result
in a
decrease in our cash, an increase in our indebtedness, or both, and also may limit our ability to access
additional capital when needed and divert management’s attention from other business concerns.

We may not realize the expected benefits of the acquisition of Cellu Tissue because of integration
difficulties and other challenges.

We may not be able to maintain the levels of revenue, earnings or operating efficiency that each of
Clearwater Paper and Cellu Tissue had achieved or might have achieved separately. In addition, the
success of the acquisition will depend, in part, on our ability to realize the anticipated benefits from the
acquisition, including anticipated synergies and costs savings. The integration process will be complex,
costly and time-consuming. The potential risks associated with our efforts to integrate the operations of Cellu
Tissue’s business include, among others:

▪

failure to implement effectively our business plan for the combined business;

▪ unanticipated issues in integrating financial, manufacturing, logistics, information, communications

▪

▪

▪

and other systems;

failure to retain key employees;

failure to retain key customers;

inconsistencies in standards, controls, procedures and policies,
regulatory requirements under the Sarbanes-Oxley Act of 2002; and

including internal control and

▪ unanticipated issues, expenses and liabilities.

Further, the integration of the Cellu Tissue businesses requires the focused attention of our management
team, including a significant commitment of their time and resources. The need for our management to focus
on integration matters could have a material and adverse impact on our sales and operating results.

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Changes in the cost and availability of wood fiber used in production of our products may adversely
affect our results of operations and cash flow.

Wood fiber, primarily wood chips and sawdust, is the principal raw material used in our pulp and paperboard
products and the manufacturing of our consumer products. Pulp is subject to significant price fluctuations
due to the cyclical nature of wood fiber markets. The average per ton price of pulp purchased by our
Consumer Products segment, excluding Cellu Tissue, was approximately 47% higher in 2010 compared to
2009. Increases in pulp prices could adversely affect our earnings if we are unable to pass these cost
increases on to our customers or if the timing of any price increases for our products significantly trail the
increases in pulp prices. We have not hedged to manage these risks.

Our Consumer Products segment has historically sourced a portion of its wood pulp supply from our Pulp
and Paperboard segment, while the Cellu Tissue operations we acquired have historically relied entirely on
external suppliers for wood pulp. Consequently, we will have a much greater percentage of our total wood
pulp requirements sourced from external suppliers, creating greater exposure to fluctuations in prices for
wood pulp.

the wood fiber we use in our pulp manufacturing process is the by-product of

Much of
lumber mill
operations, particularly in Lewiston, Idaho. As a result, the price of these residual wood fibers is affected by
operating levels in the lumber industry. The significant reduction in home building over the past three years
resulted in the closure or curtailment of operations at many lumber mills. The price of wood fiber is expected
to remain volatile until the housing market recovers and lumber mill operations increase. Additionally, the
supply and price of wood fiber can be negatively affected by weather and other events.

The effects on market prices for wood fiber resulting from various governmental programs involving tax
credits or payments related to biomass and other renewable energy projects are uncertain and could result
in a reduction in the supply of wood fiber available for our pulp and paperboard manufacturing operations. If
we and our pulp suppliers are unable to obtain wood fiber at favorable prices or at all, our results and
operations may be materially adversely affected.

Increases in our transportation costs or disruptions in our transportation services could have a
material adverse effect on our business.

Our business, particularly our Consumer Products business, is dependent on transportation services to
deliver our products to our customers and to deliver raw materials to us. In 2010, our transportation costs
were 10% of our cost of sales. The costs of these transportation services are affected by the volatility in fuel
prices, such as those caused by recent geopolitical and economic events. We have not been in the past,
and may not be in the future, able to pass along part or all of any fuel price increases to customers. If we are
unable to increase our prices as a result of increased fuel costs charged to us by transportation providers,
our gross margins may be materially adversely affected.

If any transportation providers fail to deliver raw materials to us in a timely manner, we may be unable to
manufacture products on a timely basis. Shipments of products and raw materials may be delayed due to
weather conditions, strikes or other events. Any failure of a third-party transportation provider to deliver raw
materials or products in a timely manner could harm our reputation, negatively affect our customer
relationships and have a material adverse effect on our business, financial condition and results of operations.

The cost of chemicals and energy needed for our manufacturing processes significantly affects our
business.

We use a variety of chemicals in our manufacturing processes, including latex and polyethylene, many of
which are petroleum-based chemicals. Prices of chemicals that we purchase were approximately 7% higher
in 2010 compared to 2009. Prices for these chemicals have been and are expected to remain volatile. In
addition, chemical suppliers that use petroleum-based products in the manufacture of their chemicals may,
due to supply shortages and cost increases, ration the amount of chemicals available to us, and therefore
we may not be able to obtain at favorable prices the chemicals we need to operate our business, if we are
able to obtain them at all. Further, certain specialty chemicals that we purchase are available only from a
small number of suppliers. If any of these suppliers were to cease operations or cease doing business with
us, we may be unable to obtain such chemicals at favorable prices, if at all.

12

Our manufacturing operations utilize large amounts of electricity and natural gas. Energy costs were 8% of
our cost of sales in 2010, or $92 million. Energy prices have fluctuated widely over the past decade, which in
turn affects cost of sales. Our energy expenses were 5% lower in 2010 than in 2009. We purchase on the
open market a substantial portion of the natural gas necessary to produce our products, and, as a result, the
price and other terms of those purchases are subject to change based on factors such as worldwide supply
and demand, geopolitical events, government regulation, and natural disasters. To help mitigate the
exposure to market risk for changes in natural gas commodity pricing, we have used firm-price contracts to
supply a portion of our natural gas requirements. We have also taken steps to reduce our energy usage
through conservation and increasing our internal energy production at our Lewiston, Idaho cogeneration
facility, as has Cellu Tissue at its Menominee, Michigan and East Hartford, Connecticut cogeneration
facilities. 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 reducing
energy usage.

Any significant energy shortage or significant increase in our energy costs in circumstances where we
cannot raise the price of our products could have a material adverse effect on our business, financial
condition and results of operations. Any disruption in the supply of energy could also affect our ability to
meet customer demand in a timely manner and could harm our reputation.

Changes in demand for certain products could adversely affect our financial results.

Our ability to compete successfully depends on our ability to adjust to increases and decreases in demand.
If we are unable to respond to increases in demand, we may need to limit deliveries of some orders for
existing customers, which could harm our reputation and our long-term relationships with these customers.
Currently, we are unable to meet all of the demand from existing and potential customers for bathroom
tissue due to very high demand. Alternatively, if we experience a decrease in demand for certain products,
we may incur significant costs in revising our manufacturing plan. If we are not able to respond to changes in
demand for our products in a timely manner, our financial position and results of operations may be
adversely affected.

Branded products and increased competition over TAD products could have an adverse effect on
our financial results.

Our consumer products compete with well-known, branded products, as well as other private label products.
Inherent risks in our competitive strategy include whether our products will receive direct and retail customer
acceptance, new product offerings by competitors, the effects of consolidation within retailer and distribution
channels, and price competition from companies that may have greater financial resources than we do. In
addition, some of our private label competitors have built or announced plans to build new papermaking
facilities that will produce TAD paper used to produce high-end consumer products that compete with
high-end branded products. We currently produce TAD paper used for paper towels at only two facilities,
Las Vegas and the recently acquired Cellu Tissue St. Catharine’s, Ontario facility, and we currently do not
produce TAD bathroom tissue.
If we are unable to offer our existing customers, or new customers,
comparable consumer products and in sufficient quantities, we may lose business, not be able to grow our
existing business and be forced to sell
lower-margin products, all of which could negatively affect our
financial condition and results of operations.

Cyclical industry conditions have in the past affected and may continue to adversely affect the
operating results and cash flow of our Pulp and Paperboard business.

Our Pulp and Paperboard business is particularly affected by cyclical market conditions. We may be unable
to sustain pricing in the face of weaker demand, and weaker demand may in turn cause us to take
production downtime. In addition to lost revenue from lower shipment volumes, production downtime causes
unabsorbed fixed manufacturing costs due to lower production levels. Our results of operations and cash
flows may be materially affected in a period of prolonged and significant market weakness. We are not able
to predict market conditions or our ability to sustain pricing and production levels during periods of weak
demand.

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The loss of, or a significant reduction in, orders from, or changes in prices in regards to, any of our
large customers could adversely affect our operating results and financial condition.

In 2010, excluding Cellu Tissue, our Consumer Products segment derived approximately 61% of its net
sales, and we derived approximately 25% of our total net sales, from the Kroger Company and two other
customers. The Kroger Company accounted for 11% of our total net sales in each of 2009 and 2010. Sales
to these three customers have represented nearly 60% of segment net sales in each of the last three fiscal
years. We have experienced increased price and promotion competition for our consumer products
customers, which can decrease our gross margins and adversely affect our financial condition. Some of the
Cellu Tissue customers have the capability to produce the parent rolls or products themselves that they
previously purchased from Cellu Tissue. Our Pulp and Paperboard segment sells its products to a large
number of customers, although certain customers have historically purchased a significant amount of our
pulp or paperboard products.

We do not have long-term contracts with any of our customers that ensure a continuing level of business
from them. In addition, our agreements with our customers are not exclusive and generally do not contain
minimum volume purchase commitments.

Our relationship with our large customers will depend on our ability to continue to meet their needs for
quality products at competitive prices. If we lose one of these customers or if we experience a significant
decline in the level of purchases by any of them, we may not be able to quickly replace the lost business
volume and our operating results and business could be harmed. In addition, our focus on these large
accounts could affect our ability to serve our smaller accounts, particularly when product supply is tight and
we are not able to fully satisfy orders for these smaller accounts.

We rely on a limited number of third-party suppliers for certain raw materials required for the
production of our products. Furthermore, in some cases we rely on a single supplier.

Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we
may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over
pricing, availability, quality, and delivery schedules. We cannot be certain that our current suppliers will
continue to provide us with the quantities of these raw materials that we require or will continue to satisfy our
anticipated specifications and quality requirements. Any supply interruption in limited or sole-sourced raw
materials could materially harm our ability to manufacture our products until a new source of supply, if any,
could be identified and qualified. Although we believe there are other suppliers of these raw materials, we
in a reasonable time or on commercially
may be unable to find a sufficient alternative supply channel
reasonable terms. Any performance failure on the part of our suppliers could interrupt production of our
products, which would have a material adverse effect on our business.

United States and global economic conditions could have adverse effects on the demand for our
products and financial results.

U.S. and global economic conditions have negatively affected and may continue to negatively affect our
business and financial results. In particular, the away-from-home consumer paper products market has
experienced a decline because of the slowdown in the travel and restaurant industries as a result of the
current economic downturn. Recessed economic conditions affect our business in a number of ways,
including causing (i) increased pressure for price concessions from customers; (ii) declines in domestic and
global demand for paperboard; (iii) shifts in customer purchases that affect the mix of our product sales;
(iv) decreased or low housing starts, which increase production costs due to lower wood fiber supplies and
extend the slump in demand for our wood products; and (v) financial distress or insolvency for certain
customers which could affect our sales volumes or our ability to collect accounts receivable on a timely basis
from those customers.

Larger competitors have operational and other advantages over our operations.

The markets for our products are highly competitive, and companies that have substantially greater financial
resources compete with us in each market. Some of our competitors will have advantages over us, including
lower raw material and labor costs and better access to the inputs of our products.

14

Our Consumer Products business faces competition from companies that produce the same type of
products that we produce or that produce alternative products that customers may use instead of our
products. Our Consumer Products business competes with the branded tissue products producers, such as
Procter & Gamble, and branded label producers who manufacture branded and private label products, such
as Georgia-Pacific and Kimberly-Clark. These companies are far larger than us, have much greater sales,
marketing and research and development resources than we do, and enjoy significant cost advantages due
to economies of scale. Historically, pure branded tissue producers have not produced private label tissue
products. The greater scope and scale of operations enjoyed at our major Consumer Products competitors
would allow them to produce greater quantities of private label tissue at lower costs than we incur. In
addition, because of their size and resources, these companies may foresee market trends more accurately
than we do and develop new technologies that render our products less attractive or obsolete.

Our ability to successfully compete in the pulp and paperboard industry is influenced by a number of factors,
including manufacturing capacity, general economic conditions and the availability and demand for
paperboard substitutes. Our Pulp and Paperboard business competes with International Paper,
MeadWestvaco, Georgia-Pacific, RockTenn and international producers, most of whom are much larger
than us. Any increase in manufacturing capacity by any of
in
overcapacity in the pulp and paperboard industry, which could cause downward pressure on pricing. In
addition, customers could choose to use types of paperboard that we do not produce or could rely on
alternative materials, such as plastic, for their products. An increased supply of any of these products could
cause us to lower our prices or lose sales to competitors, either of which could have a material adverse
effect on our business, financial condition and results of operations.

these or other producers could result

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 are uncertain.

In 2009, we 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 was equal to $0.50 per gallon of alternative fuel mixture used.
This tax credit expired on December 31, 2009. In 2009, we recorded income of $170.6 million related to the
Alternative Fuel Mixture Tax Credit, or AFMTC. We did not record any income in 2010 relating to the
AFMTC.

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.

We are also registered with the Internal Revenue Service, or IRS, as a cellulosic biofuel producer, which
enables us to claim the $1.01 per gallon Cellulosic Biofuel Producer Credit, or CBPC, in regards to black
liquor produced and used as a fuel by us at our pulp mills in 2009. We have changed, and may in the future
make additional changes in, our position as to some or all of the credits we claimed under the AFMTC on
our 2009 federal income tax form, provided we believe we will have sufficient future federal taxable earnings
to enable us to carry forward the credits potentially available under the CBPC. There can be no assurance
that we will be able to fully utilize the CBPC.

Our business and financial performance may be harmed by future labor disruptions.

Approximately 50% of our full-time employees are represented by unions under collective bargaining
agreements. As these agreements expire, we may not be able to negotiate extensions or replacement
agreements on terms acceptable to us. We currently have five collective bargaining agreements under
negotiation. Any failure to reach an agreement with one of the unions may result in strikes, lockouts or other
labor actions. Any such labor actions, including work slowdowns or stoppages, could have a material
adverse effect on our operations and financial results.

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We are subject to significant environmental regulation and environmental compliance expenditures,
which could increase our costs and subject us to liabilities.

We are subject to various federal, state and foreign environmental laws and regulations concerning, among
other
things, water discharges, air emissions, hazardous material and waste management and
environmental cleanup. Environmental laws and regulations continue to evolve and we may become subject
to increasingly stringent environmental standards in the future, particularly under air quality and water quality
laws and standards related to climate change issues, such as reporting of greenhouse gas emissions.
Increased regulatory activity at the state, federal and international level is possible regarding climate change
as well as other emerging environmental issues associated with our manufacturing sites. Compliance with
regulations that implement new public policy in these areas might require significant expenditures on our
part.

We are required to comply with environmental laws and the terms and conditions of multiple environmental
permits. In particular, the pulp and paper industry in the United States is subject to several performance
based rules associated with effluent and air emissions as a result of certain of its manufacturing processes.
Federal, state and local laws and regulations require us to routinely obtain authorizations from and comply
with the evolving standards of the appropriate governmental authorities, which have considerable discretion
over the terms of permits. Failure to comply with environmental laws and permit requirements could result in
civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or
curtailing our operations or requiring us to take corrective measures, install pollution control equipment, or
take other remedial actions, product recalls or labeling changes. We also may be required to make
additional expenditures, which could be significant, relating to environmental matters on an ongoing basis.

We own properties, conduct or have conducted operations at properties, and have assumed indemnity
obligations in connection with our spin-off from Potlatch for properties or operations, where hazardous
materials have been or were used for many years, including during periods before careful management of
these materials was required or generally believed to be necessary. Consequently, we will continue to be
subject
releases of hazardous
substances. There can be no assurance that future environmental permits will be granted or that we will be
able to maintain and renew existing permits, and the failure to do so could have a material adverse effect on
our results of operations and financial condition.

to risks under environmental

impose liability for historical

laws that

We incur significant expenses to maintain our manufacturing equipment and any interruption in the
operations of our facilities may harm our operating performance.

We regularly incur significant expenses to maintain our manufacturing equipment and facilities. The machines
and equipment that we use to produce our products are complex, have many parts and some are run on a
continuous basis. We must perform routine maintenance on our equipment and will have to periodically replace
a variety of parts such as motors, pumps, pipes and electrical parts. In addition, our pulp and paperboard
facilities require periodic shutdowns to perform major maintenance. These scheduled shutdowns of facilities
result in decreased sales and increased costs in the periods in which the shutdown occurs.

Unexpected production disruptions could cause us to shut down or curtail operations at any of our facilities.
For example, we curtailed operations at our Lewiston Pulp and Paperboard facility in early 2010 as the result
of a blow tank collapse and curtailed operations at our Wiggins, Mississippi consumer products facility in
early 2011 as the result of a fire. Disruptions could occur due to any number of circumstances, including
prolonged power outages, mechanical or process failures, shortages of raw materials, natural catastrophes,
disruptions in the availability of transportation, labor disputes, terrorism, changes in or non-compliance with
environmental or safety laws and the lack of availability of services from any of our facility’s key sole
suppliers. Any facility shutdowns may be followed by prolonged startup periods, regardless of the reason for
the shutdown. Those startup periods could range from several days to several weeks, depending on the
reason for the shutdown and other factors. Any prolonged disruption in operations at any of our facilities
could cause significant lost production, which would have a material adverse effect on our business,
financial condition and results of operations.

16

Our wood products business, which is part of our Pulp and Paperboard segment, is highly sensitive
to downturns in the housing market.

Our wood products business is a commodity business, which is closely tied to the demand for, and supply
of, housing. The home building industry is influenced by numerous factors, including economic changes
nationally and locally, mortgage and other interest rates, consumer confidence, job formation, demographic
trends, tax incentives, and the availability of credit. The current depressed conditions in the housing market
resulting from, among other factors, excess unsold home inventory levels and lack of availability of credit for
lenders, builders and homebuyers, have materially adversely affected our wood products business. A
continuing and prolonged downturn in the housing market could have a significant adverse effect on the
future results of operations of our Pulp and Paperboard segment.

Our pension plans are currently underfunded, and over time we will be required to make cash
payments to the plans, reducing cash available for our business.

We have company-sponsored pension plans covering our salaried and hourly employees. The significant
decline in the securities markets beginning in 2008 and resulting substantial decline in the value of equity
and fixed income investments held by the plans caused these pension plans to be underfunded because our
projected benefit obligation exceeds the aggregate fair value of plan assets. As a result, we are required to
make contributions to our qualified pension plans. In 2010, we contributed $15.1 million to these pension
plans, which covered all of our 2009 and 2010 tax year requirements as well as made an additional $10.0
million voluntary contribution. The required cash contribution to our qualified pension plans for 2011 is
expected to be approximately $8.7 million plus interest payable by September 2011 and we expect to be
required to contribute approximately $8.0 million plus interest payable by September 2012. We may be
required to make increased annual contributions to our pension plans in future years, which would reduce
the cash available for business and other needs.

Our pension and health care costs are subject to numerous factors which could cause these costs
to change.

In addition to our pension plans, we provide retiree health care benefits to certain of our current and former
U.S. salaried and hourly employees. Our retiree health care costs vary with changes in health care costs
generally, which have significantly exceeded general economic inflation rates for many years. Our pension
costs are dependent upon numerous factors resulting from actual plan experience and assumptions about
future investment
returns. Pension plan assets are primarily made up of equity and fixed income
investments. Fluctuations in actual equity market returns as well as changes in general interest rates may
result in increased pension costs in future periods. Likewise, changes in assumptions regarding current
discount rates and expected rates of return on plan assets could also increase pension costs. Significant
changes in any of these factors may adversely impact our cash flows, financial condition and results of
operations.

We rely on information technology in critical areas of our operations, and a disruption relating to
such technology could harm our financial condition.

We use information technology, or IT, systems in various aspects of our operations, including enterprise
resource planning, management of inventories and customer sales. Some of these systems have been in
place for long periods of time. Additionally, with the acquisition of Cellu Tissue, we have different legacy IT
systems which we need to integrate. If one of these systems was to fail, or if we decide to change these
systems or hire outside parties to provide these systems, we may suffer disruptions, which could have a
material adverse effect on our
In addition, we may
results of operations and financial condition.
underestimate the costs and expenses of developing and implementing new systems.

We have incurred substantial indebtedness in order to finance the acquisition of Cellu Tissue, which
could adversely affect our business and limit our ability to plan for or respond to changes in our
business.

In order to finance the acquisition of Cellu Tissue, we incurred debt of $375 million through the sale of notes,
and assumed approximately $16 million of existing debt issued by a subsidiary of Cellu Tissue. Additionally,

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we have outstanding indebtedness of $150 million under notes we issued in 2009. These substantial debt
obligations could have important consequences to our business. For example:

▪ we may not be able to generate sufficient cash flow to meet our substantial debt service obligations;
▪ we may be required to dedicate a substantial portion of our cash flows from operations to payments
on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including
business development efforts, capital expenditures or strategic acquisitions; and

▪ our flexibility in planning for, or reacting to, changes in our business and industry may be limited,
thereby placing us at a competitive disadvantage compared to our competitors that have less
indebtedness.

Our ability to make payments on and to refinance our debt obligations and to fund planned capital
expenditures depends on our ability to generate cash from our future operations. This, to a certain extent, is
subject to financial, competitive, legislative, regulatory and other factors that are beyond our control. In
addition, if we cannot service our indebtedness, we may have to take actions such as selling assets, seeking
additional equity or reducing or delaying capital expenditures, strategic acquisitions,
investments and
alliances, any of which could impede the implementation of our business strategy or prevent us from
entering into transactions that would otherwise benefit our business. We may not be able to refinance our
indebtedness or take such other actions, if necessary, on commercially reasonable terms, or at all.

The indentures for our notes, and our senior secured revolving credit facility, contain various
covenants that limit our discretion in the operation of our business and our failure to comply could
result in an event of default that could cause repayment of the debt to be accelerated.

The indentures governing the notes we issued in 2009 and 2010, and our senior secured revolving credit
facility contain various provisions that limit our discretion in the operation of our business by restricting our
ability to:

▪ undergo a change in control;
▪ sell assets;
▪ pay dividends and make other distributions;
▪ make investments and other restricted payments;
▪

redeem or repurchase our capital stock;

▪

incur additional debt and issue preferred stock;

▪ create liens;
▪ consolidate, merge, or sell substantially all of our assets;
▪ enter into certain transactions with our affiliates;
▪ engage in new lines of business; and
▪ enter into sale and lease-back transactions.

These restrictions on our ability to operate our business at our discretion could seriously harm our business
by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other
corporate opportunities. In addition, our senior secured revolving credit facility requires, among other things,
that we maintain a minimum fixed charge coverage ratio of at least 1.0-to-1.0 when availability falls below
$50 million or an event of default exists. Events beyond our control could affect our ability to meet this
financial test.

If we are not able to comply with the covenants and other requirements contained in the indentures
governing our notes, our secured revolving credit facility or other debt instruments, an event of default under
the relevant debt instrument could occur. If an event of default does occur, it could trigger a cross default
under our other debt instruments, prohibit us from accessing additional borrowings, and permit the holders
of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and
payable. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding
debt instruments. In addition, we may not be able to refinance or restructure the payments on the applicable
debt. Even if we were able to secure additional financing, it may not be available on favorable terms.

18

Certain provisions of our certificate of incorporation and bylaws and Delaware law may make it
difficult for stockholders to change the composition of our board of directors and may discourage
hostile takeover attempts that some of our stockholders may consider to be beneficial.

Certain provisions of our certificate of incorporation and bylaws, Delaware law and our stockholder rights
plan may have the effect of delaying or preventing changes in control if our board of directors determines
that such changes in control are not in the best interests of us and our stockholders. The provisions in our
certificate of incorporation and bylaws include, among other things, the following:

▪ a classified board of directors with three-year staggered terms;
▪

the ability of our board of directors to issue shares of preferred stock and to determine the price and
other terms, including preferences and voting rights, of those shares without stockholder approval;

▪ stockholder action can only be taken at a special or regular meeting and not by written consent;
▪ advance notice procedures for nominating candidates to our board of directors or presenting matters

at stockholder meetings;

▪

removal of directors only for cause;

▪ allowing only our board of directors to fill vacancies on our board of directors; and
▪ supermajority voting requirements to amend our bylaws and certain provisions of our certificate of

incorporation.

While these provisions have the effect of encouraging persons seeking to acquire control of the company to
negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a
transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that
case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject
to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business
combination with a significant stockholder unless specific conditions are met.

ITEM 1B. Unresolved Staff Comments

None.

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ITEM 2. Properties

F A C I L I T I E S

We own and operate facilities located throughout the United States and one in Canada. The following table
lists each of our facilities and its location, use, capacity and production. Cellu Tissue was acquired on
December 27, 2010:

USE

LEASED OR OWNED

CAPACITY

PRODUCTIONA

CONSUMER PRODUCTS
Tissue manufacturing facilities:

Lewiston, Idaho
Las Vegas, Nevada
Neenah, Wisconsin
Ladysmith, Wisconsin
Gouverneur, New York
East Hartford, Connecticut
St. Catharines, Ontario

Wiggins, Mississippi

Menominee, Michigan
Shelby, North Carolina
Tissue converting facilities:

Lewiston, Idaho
Elwood, IllinoisB
Las Vegas, Nevada
Neenah, Wisconsin
Central Islip, New YorkB
Oklahoma City, OklahomaB
Thomaston, GeorgiaB
Menominee, Michigan

Shelby, North Carolina

PULP AND PAPERBOARD
Pulp Mills:

Cypress Bend, Arkansas
Lewiston, Idaho

Bleached Paperboard Mills:
Cypress Bend, Arkansas
Lewiston, Idaho

Sawmill:

Lewiston, Idaho

CORPORATE

Spokane, Washington

Alpharetta, Georgia

Tissue
TAD tissue
Tissue
Tissue
Tissue
Tissue
TAD tissue
Machine-glazed tissue
Tissue
Machine-glazed tissue
Machine-glazed tissue
TAD tissue

Tissue converting
Tissue converting
Tissue converting
Tissue converting
Tissue converting
Tissue converting
Tissue converting
Machine-glazed tissue
converting
Tissue converting

Owned
Owned
Owned
Owned
Owned
Owned
Owned

Owned

Owned
Under construction

Owned
Leased
Owned
Owned
Leased
Leased
Leased
Owned

189,000 tons 186,000 tons
38,000 tons
80,000 tons
54,500 tons
33,000 tons
27,000 tons
24,000 tons
21,000 tons
24,000 tons
32,000 tons
32,000 tons
N/A

38,000 tons
85,000 tons
55,000 tons
33,000 tons
29,000 tons
24,000 tons
22,000 tons
24,000 tons
33,000 tons
32,000 tons
N/A

102,000 tons
68,000 tons
51,000 tons
99,000 tons
38,000 tons
19,000 tons
58,000 tons
27,000 tons

92,000 tons
66,000 tons
51,000 tons
52,500 tons
28,500 tons
2,500 tons
24,500 tons
5,500 tons

Under construction

N/A

N/A

Pulp
Pulp

Paperboard
Paperboard

Lumber

Corporate
headquarters
Operations and
administration

Owned
Owned

Owned
Owned

305,000 tons 288,000 tons
540,000 tons 516,000 tons

330,000 tons 317,000 tons
435,000 tons 423,000 tons

Owned

215,000 MBFC 215,000 MBFC

Leased

Owned/LeasedD

N/A

N/A

N/A

N/A

A

B

Production amounts are approximations for full year 2010.

The building located at this facility is leased by Clearwater Paper or a subsidiary, and the operating equipment located within the
building is owned by Clearwater Paper or a subsidiary.

C MBF stands for thousand board feet.

D

Two office suites are owned by Cellu Tissue and seven are leased.

20

ITEM 3. Legal Proceedings

We believe there is no pending litigation that would have a material adverse effect on our financial position,
operations or liquidity.

ITEM 4. [Removed and Reserved]

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Part II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities

M A R K E T F O R O U R C O M M O N S T O C K

Our common stock is traded on the New York Stock Exchange. The following table sets forth, for each
period indicated, the high and low sales prices of our common stock during our two most recent years.

Year Ended December 31, 2010

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

Year Ended December 31, 2009

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

H O L D E R S

Common Stock Price

High

Low

$85.25
77.13
66.02
58.19

$59.90
51.20
27.25
13.00

$75.63
49.91
48.40
42.71

$37.35
25.00
7.27
5.93

On February 28, 2011, the last reported sale price for our common stock on the New York Stock Exchange
was $79.30 per share. As of February 28, 2011, there were approximately 1,155 registered holders of our
common stock.

D I V I D E N D S

We have not paid any dividends since our spin-off from Potlatch and do not anticipate paying a cash
dividend in 2011. We will continue to review whether payment of a cash dividend on our common stock in
the future best serves the company and our stockholders. The declaration and amount of any dividends,
however, will be determined by our board of directors and will depend on our earnings, our compliance with
the terms of our notes and revolving credit facility that contain certain restrictions on our ability to pay
dividends, and any other factors that our board of directors believes are relevant.

S E C U R I T I E S A U T H O R I Z E D F O R I S S U A N C E U N D E R E Q U I T Y C O M P E N S A T I O N
P L A N S

Please see Part III, Item 12 of this report for information relating to our equity compensation plans.

I S S U E R P U R C H A S E S O F E Q U I T Y S E C U R I T I E S

There are currently no authorized repurchase programs in effect under which we may repurchase shares of
our outstanding common stock.

ITEM 6. Selected Financial Data

Prior to our spin-off from Potlatch Corporation on December 16, 2008, we were a wholly-owned subsidiary of
Potlatch Corporation. On December 16, 2008, Potlatch distributed 100% of the issued and outstanding
shares of our common stock to the holders of Potlatch common stock.

22

During the period from December 16, 2008 through December 31, 2010, we operated as and were
accounted for as a separate public company. Our results of operations and financial condition reflected in
the table below cover periods prior to the spin-off and related transactions. The historical financial and other
data for periods prior to the spin-off were prepared on a combined basis from Potlatch’s consolidated
financial statements using the historical results of operations and basis of the assets and liabilities of
Potlatch’s Consumer Products and Pulp and Paperboard businesses and its wood products operation at
Lewiston, Idaho, and give effect to allocations of expenses from Potlatch. The statement of financial position
data as of December 31, 2006 is unaudited. All other data has been derived from our audited financial
statements. Our historical financial and other data is not necessarily indicative of our future performance nor
do they necessarily reflect what our financial position and results of operations would have been had we
operated as a separate, stand-alone entity prior to December 16, 2008. In addition, all amounts below for
2010 reflect the acquisition of Cellu Tissue on December 27, 2010, including four days of Cellu Tissue’s
operating results and incurrence of acquisition related expenses.

(In thousands, except
earnings per share amounts)

Net sales
Earnings before interest, debt retirement

costs and income taxes

Net earnings
Working capitalA
Note payable to Potlatch
Long-term debt
Stockholders’ equity/Potlatch’s net

investment

Capital expendituresB
Property, plant and equipment, net
Total assets
Basic net earnings per common share
Basic average common shares outstanding
Diluted net earnings per common share
Diluted average common shares outstanding

2010

2009

2008

2007

2006

$1,372,965 $1,250,069 $1,255,309 $1,183,032 $1,116,921

98,767
73,800
394,346
—
538,314

297,440
182,464
452,583

28,484
9,743
14,022
— 100,000
—

148,285

468,349
47,033
654,456
1,545,336

363,736
19,328
364,024
947,463

180,989
21,306
389,867
683,266

52,407
25,334
128,548
100,000
—

268,032
20,531
413,072
697,953

$

$

6.43 $

16.06 $

0.86 $

2.23 $

11,474

11,360

11,355

11,355

6.24 $

15.50 $

0.86 $

2.23 $

11,835

11,770

11,355

11,355

46,263
20,863
166,871
100,000
—

328,772
27,505
441,356
741,011
1.84
11,355
1.84
11,355

A Working capital is defined as our current assets less our current liabilities as presented on our Consolidated Balance Sheets in

Item 8.

B

Capital expenditures in 2010 include $19.4 million of expenditures related to our new tissue manufacturing and converting facility in
Shelby, North Carolina, of which $0.5 million is associated with capitalized interest expense.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The following discussion and analysis should be read in conjunction with our audited consolidated financial
statements and notes thereto that appear elsewhere in this report. This discussion contains forward-looking
statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ
materially from those discussed in these forward-looking statements due to a number of factors, including
those set forth in the section entitled “Risk Factors” and elsewhere in this report.

O V E R V I E W

We were a subsidiary of Potlatch Corporation, which we refer to as Potlatch, until our spin-off on
December 16, 2008. Unless the context otherwise requires or unless otherwise indicated, references in this
report to “Clearwater Paper Corporation,” “we,” “our,” “the company” and “us” refer:

▪

▪

for all periods prior to the spin-off, to the Consumer Products and Pulp and Paperboard segments
and its wood products operations at Lewiston, Idaho separated from Potlatch in the spin-off; and

for all periods following the spin-off, to Clearwater Paper Corporation and its subsidiaries.

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On December 27, 2010, we acquired Cellu Tissue Holdings, Inc., or Cellu Tissue. The results discussed
below include Cellu Tissue operating results for the period December 28, 2010 through December 31, 2010.

H i g h l i g h t s

Acquisition of Cellu Tissue Holdings, Inc.

On December 27, 2010, we completed our acquisition of Cellu Tissue for $247.0 million in cash.
In
connection with the acquisition of Cellu Tissue, we retired Cellu Tissue’s outstanding senior secured notes
for $272.2 million and repaid $32.5 million outstanding under its revolving credit facility. The Cellu Tissue
operations include nine consumer products manufacturing facilities located in the Southern, Midwestern and
Eastern United States and one site in Canada. Cellu Tissue reported $511.3 million in net sales for the fiscal
year ended February 28, 2010. We believe the acquisition allows us to better serve existing private label
grocery customers by creating a national manufacturing footprint and provides us with the capability to
expand into new private label channels.

2010 Notes Offering

On October 22, 2010, we sold $375 million aggregate principal amount of senior unsecured notes, which we
refer to as the 2010 Notes. The net proceeds from the issuance of the 2010 Notes were used to finance in
part our acquisition of Cellu Tissue, to refinance certain existing indebtedness of Cellu Tissue, and to pay
fees and expenses incurred as part of the Cellu Tissue acquisition.

The 2010 Notes mature on November 1, 2018, and have an interest rate of 7.125% payable semi-annually
in arrears on May 1 and November 1, commencing on May 1, 2011. The 2010 Notes are guaranteed by
certain of our existing and future domestic direct and indirect subsidiaries.

Cellulosic Biofuel Producer Credit

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 “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, 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 made it clear we could convert previously claimed gallons from the AFMTC to the CBPC. We have
amended our 2009 corporate income tax return and claimed approximately 25.3 million gallons of fuel under
the CBPC for that portion of black liquor produced in 2009 for which we did not claim the AFMTC. This
income tax credit of $25.5 million, which was recognized in the fourth
equated to an additional federal
quarter of 2010. Additionally, we are amending our 2009 corporate income tax return to convert
approximately 39.8 million gallons of fuel under the AFMTC to the CBPC. This equated to an additional
federal income tax credit of $20.3 million, which was recognized in the fourth quarter of 2010. The CBPC is
a non-refundable income tax credit which is deemed to be taxable income in the year the benefit is received.
Thus the CBPC benefit was reduced by the related corporate income tax obligation, resulting in an
incremental, after tax benefit of $27.1 million during the fourth quarter of 2010, which is included in the
income tax provision on our Consolidated Statements of Operations.

Consumer Products Expansion in Shelby, North Carolina

In June 2010, we announced our decision to build new tissue manufacturing and converting facilities in Shelby,
North Carolina as part of our plans to expand our Consumer Products segment in the Eastern United States.
This site will include a through-air-dried, or TAD, paper machine and is currently expected to have seven

24

converting lines capable of producing ultra grades of private label tissue products. We have estimated the
project will cost approximately $260 - $280 million. We incurred $18.9 million of project costs in 2010 and
expect to incur an additional $133 million in 2011. Substantially all of the remaining amounts are expected to
be spent in 2012.

B u s i n e s s

Clearwater Paper Corporation is a leading producer of private label tissue and paperboard products. Our
products are primarily pulp-based and manufactured in the United States.

As of December 31, 2010, our business was organized into two reporting segments:

▪ Our Consumer Products segment manufactures tissue products sold on a private label basis
primarily to major grocery store chains, and as a result of the Cellu Tissue acquisition, leading
discount and mass merchant retailers and away-from-home distributors. Prior to the acquisition of
Cellu Tissue, we operated two tissue mills with related converting facilities in Idaho and Nevada, and
an additional converting facility located in Illinois. As a result of the Cellu Tissue acquisition, we now
have additional manufacturing and converting facilities in Connecticut, Georgia, Michigan,
Mississippi, New York, Wisconsin, Oklahoma, and Ontario, Canada. The segment’s net sales were
$570.1 million in 2010, representing approximately 39% of our net sales, before elimination of
intersegment net sales. Intersegment net sales were $0.1 million in 2010. Our 2010 segment net
sales include Cellu Tissue net sales of $7.3 million from December 28, 2010 through December 31,
2010.

▪ Our Pulp and Paperboard segment manufactures bleached paperboard and bleached softwood
pulp. Commencing January 1, 2010, our wood products operation, which produces dimensional
framing lumber and appearance grade cedar products at our mill in Idaho, was consolidated into the
Pulp and Paperboard segment. We operate two pulp and paperboard mills, one located in Arkansas
and one in Idaho. In 2010, approximately 85% of our pulp production was used in the manufacture
of our paperboard products or transferred to our Consumer Products segment
for use in the
production of tissue products. The segment’s net sales were $879.9 million in 2010, representing
approximately 61% of our net sales, before elimination of intersegment net sales. Intersegment net
sales, consisting of the sale of pulp to our Consumer Products segment, were $77.0 million in 2010.

D e v e l o p m e n t s a n d T r e n d s i n o u r B u s i n e s s

Our operating results have been and will continue to be influenced by a variety of factors, including the
the efficiency and level of capacity
cyclical nature of
utilization of our manufacturing operations, changes in our principal expenses such as for wood fiber and
energy, and other factors.

the pulp and paperboard industry, competition,

Net Sales

Prices for our consumer tissue products are affected by competitive conditions and the prices of branded
tissue products. Demand and pricing for our pulp and paperboard products are largely determined by
general global market conditions. Market conditions for pulp improved significantly during 2010. Sales price
realization for pulp for 2010 increased 45.2% compared to 2009 due to continued strong pulp pricing partly
as result of a pulp shortage attributable to the decrease in South American pulp production following the
earthquake in Chile in February 2010. Paperboard prices improved in 2010 compared to prior years.
Demand for our wood products is largely related to the U.S. housing market, which continues to be in a
prolonged downturn.

Our businesses experience cyclical market conditions and, as a result, historical prices for our products and
sales volumes have been volatile. Product pricing is significantly affected by the relationship between supply
and demand for our products. Product supply in the industries in which we operate is influenced primarily by
fluctuations in available manufacturing capacity. Capacity in these industries tends to increase during
periods when prices remain strong. In addition, currency exchange rates affect U.S. supplies of paperboard,
as non-U.S. manufacturers are attracted to the U.S. market when the dollar is relatively strong. Our
paperboard business, through exports, has benefited significantly from weakness in the U.S. dollar over the
past few years.

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Demand for our paperboard products is related to the state of the North American economy in general, as
well as, in the case of our paperboard products, the economies of East Asia. The demand for our wood
products is affected by the level of new residential construction activity and, to a lesser extent, home repair
and remodeling activity, which are subject to fluctuations due to changes in economic conditions, interest
rates, population growth and other factors.

The markets for our products are highly competitive and companies that have substantially greater financial
resources than we do compete with us in each of our markets. In addition, our industry is capital intensive,
which leads to high fixed costs, large capital outlays and generally results in continued production as long as
to cover variable costs. These conditions have contributed to substantial price
prices are sufficient
competition, particularly during periods of reduced demand. Some of our competitors have lower production
costs, greater buying power and, as a result, these competitors may be less adversely affected than we are
by price decreases.

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.

Operating Costs

(Dollars in thousands)

Wood fiber1
Chemicals
Transportation
Energy
Maintenance and repairs2

1

2

Excluding intersegment amounts.

Excluding related labor costs.

2010

Percentage of
Cost of Sales

Cost

Year Ended December 31,

2009

Percentage of
Cost of Sales

Cost

2008

Percentage of
Cost of Sales

Cost

$314,263
132,263
117,316
91,977
82,368

26.8% $269,683
123,194
11.3
100,267
10.0
97,304
7.8
69,919
7.0

25.6% $325,353
142,983
11.7
123,187
9.5
114,664
9.2
61,890
6.6

27.6%
12.1
10.4
9.7
5.2

Our principal operating cost items are wood fiber, chemicals, transportation, energy and maintenance and
repairs. Prices for these items are volatile and directly affect our results of operations. In 2010, the price of
pulp increased significantly compared to 2009 partially attributable to a temporary imbalance in global pulp
markets resulting from the Chilean earthquake. As economic conditions continue to improve, we expect at
least some upward pressure on these operating costs. Competitive market conditions can limit our ability to
pass cost increases through to our customers.

Wood fiber. We are a large net buyer of pulp and as a result of our acquisition of Cellu Tissue, we have
become a significantly larger net buyer. We have supply agreements with various pulp suppliers covering
2011 under which we expect to purchase approximately 36% of our anticipated pulp requirements in 2011.
These supply agreements permit us to purchase pulp at prices that are discounted from published list prices.
As a larger net buyer of pulp, we expect to obtain more favorable pulp pricing in the future. The balance of
our pulp requirements is produced internally and purchased on the spot market.

Our most significant operating cost is the cost of wood fiber needed to supply our manufacturing facilities.
Both wood chips and sawdust are used in the process of making pulp. We rely on residual wood fibers, such
as wood chips and sawdust generated by lumber mill operations and wood chips specifically produced for us
by contract wood chipping operations. Prices for this wood fiber can fluctuate greatly. Overall
lumber
production in Idaho increased in 2010 compared to 2009, creating more residual chips and sawdust and
decreasing the dependency on higher priced whole log chips. In 2010, we acquired a significant portion of
our wood fiber requirements from Potlatch under agreements entered into at the time of spin-off, with the
remainder purchased from other suppliers pursuant to short-term contracts and in the spot market.

Chemicals. We consume a significant amount of chemicals in the production of pulp and paperboard.
Important chemicals we use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper
process chemicals. Many of our chemicals are purchased under long-term contracts, which provide more

26

stability than open-market purchases. However, many of these contracts have pricing mechanisms that
adjust with published price indices. In addition, many of the chemicals used in our manufacturing processes,
particularly in the pulp-making process, are petroleum-based and impacted by petroleum prices.

Transportation. Petroleum prices also impact our operating results. High fuel prices result in increased
inventory
transportation costs related to delivery of raw materials to our manufacturing facilities, internal
transfers and delivery of our finished products to customers. Rising fuel prices particularly affect our margins
for consumer products because we supply customers throughout
the United States and we transport
unconverted parent rolls from our tissue mills to our tissue converting facilities.

Energy. Energy is another significant manufacturing cost. We use energy in the form of electricity, hog fuel,
steam and natural gas. The Cellu Tissue operations also use a minimal amount of coal. Energy prices have
fluctuated widely over the past decade. In 2010, excluding Cellu tissue, we experienced lower energy costs
than in 2009. We have taken steps to reduce our exposure to volatile energy prices through conservation
and by increasing our internal electrical production at our cogeneration facility that produces steam and
electricity in Idaho. In addition, to help mitigate our exposure to volatility in natural gas prices, we have used
firm-price contracts to supply a portion of our natural gas requirements. However, as of December 31, 2010,
these contracts only covered approximately 2% of our expected average monthly natural gas requirements
for 2011 as we expect the near-term natural gas markets to be more stable given recent supply that has and
is expected to become available. Prior to being acquired, Cellu Tissue had developed initiatives to reduce
energy costs, including a third-party steam project at the Wiggins, Mississippi plant to replace a portion of its
natural gas-fired steam generation and cogeneration facilities at
the East Hartford, Connecticut and
Menominee, Michigan facilities to reduce electrical consumption. 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 reducing energy usage.

Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. The
machines and equipment that we use to produce our products are complex, have many parts and most are
run on a continuous basis. We perform routine maintenance on our machines and periodically replace a
variety of parts such as motors, pumps, pipes and electrical parts. In 2010, equipment maintenance and
repair expenses, excluding labor costs and Cellu Tissue operations, were $14.7 million in our Consumer
Products segment and $67.7 million in our Pulp and Paperboard segment.

Major equipment maintenance and repair in our Pulp and Paperboard segment also requires maintenance
shutdowns generally lasting up to one week per year at our Idaho facility and up to one week approximately
every 18 months at our Arkansas facility, which increases costs and may reduce net sales in the quarters in
which the maintenance shutdowns occur. Periodically, major equipment shutdowns extend beyond one
week in duration for large scale maintenance, such as extensive boiler repairs. Major maintenance and
repair costs for 2011 are expected to be approximately $18 million, with $13 million of these costs expected
to be incurred in the first quarter.

In addition to ongoing maintenance and repair costs, we make capital expenditures to add capacity,
increase our operating efficiency, for safety reasons and to comply with environmental
laws. In 2010,
excluding $18.9 million spent on our North Carolina expansion, we spent $28.1 million on capital
expenditures. Our estimated capital expenditures for 2011 are expected to be $175 - $180 million, including
an estimated $133 million for our North Carolina expansion.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $100.4 million primarily consist of compensation and
associated costs for sales and administrative personnel, as well as commission expenses related to sales of
our products. In the short term, we expect our selling, general and administrative costs to increase as we
integrate Cellu Tissue into our administrative functions.

Interest expense.

Interest expense is generally comprised of interest on our $150.0 million aggregate principal amount of
unsecured senior notes, or 2009 Notes, issued by us in June 2009, our 2010 Notes issued by us in October
Interest expense also includes
2010 and any outstanding amounts under our revolving credit

facility.

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amortization of deferred finance costs associated with our 2009 Notes, 2010 Notes and credit facility and
capital lease amounts. As part of our acquisition of Cellu Tissue, we also assumed $15.6 million of industrial
revenue bonds, or IRBs, associated with the facility in Ladysmith, Wisconsin. We expect future gross
interest expense to increase significantly as a result of a full year of interest expense on the 2010 Notes and
to a smaller extent the IRBs. Interest expense will be partially offset by the capitalization of interest during
the construction phase of our North Carolina papermaking and converting facilities.

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 enacted tax rates. In 2010, our
effective rate was 3.1%. Excluding the benefits of the CBPC and AFMTC, the effective tax rate was 38.7%
for 2010. The estimated annual effective tax rate for 2011, excluding discrete items, is approximately 34.0%.

C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M A T E S

Our accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States, which require management to make estimates that affect
the amounts of net sales, expenses, assets and liabilities reported. The following are critical accounting
matters which are both very important to the portrayal of our financial condition and results of operations and
require some of management’s most difficult, subjective and complex judgments. The accounting for these
matters involves forming estimates based on current
in
management’s judgment, could change in a manner that would materially affect management’s future
estimates with respect to such matters and, accordingly, could cause our future reported financial condition
and results of operations to differ materially from financial results reported based on management’s current
estimates. Changes in these estimates are recorded periodically based on updated information. Our
significant accounting policies are discussed in Note 2 of our consolidated financial statements in Item 8.

facts, circumstances and assumptions which,

Long-lived assets. A significant portion of our total assets are invested in our manufacturing facilities. Also,
the cyclical patterns of our businesses cause cash flows to fluctuate by varying degrees from period to
period. As a result, long-lived assets are a material component of our financial position with the potential for
material change in valuation if assets are determined to be impaired. We account for impairment of long-
lived assets in accordance with guidance provided by the Financial Accounting Standards Board, or FASB,
regarding impairment or disposal of long-lived assets. This guidance requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, as measured by its undiscounted estimated future cash flows.

We use our operational budgets to estimate future cash flows. Budgets are inherently uncertain estimates of
future performance due to the fact that all inputs, including net sales, costs and capital spending, are subject
to frequent change for many different
the
reasons. Because of
interrelationship between the variables and the long-term nature of the impairment measurement, sensitivity
analysis of individual variables is not practical. Budget estimates are adjusted periodically to reflect changing
business conditions, and operations are reviewed, as appropriate, for impairment using the most current
data available.

the number of variables involved,

We believe we have adequate support for the carrying value of all of our assets based on anticipated cash
flows that will result from our estimates of future demand, pricing, and production costs, assuming certain
levels of capital expenditures.

Pension and postretirement employee benefits. The determination of pension plan expense and the
requirements for funding our pension plans are based on a number of actuarial assumptions. Two critical
assumptions are the discount rate applied to pension plan obligations and the rate of return on plan assets.
For other postretirement employee benefit, or OPEB, plans, which provide certain health care and life
insurance benefits to qualified retired employees, critical assumptions in determining OPEB expense are the
discount rate applied to benefit obligations and the assumed health care cost trend rates used in the
calculation of benefit obligations.

28

the three years ended
Note 11 to our consolidated financial statements includes information for
December 31, 2010, 2009 and 2008, on the components of pension and OPEB expense and the underlying
actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and
OPEB plans as of December 31, 2010 and 2009.

The discount rate used in the determination of pension benefit obligations and pension expense is
determined based on a review of
long-term high-grade bonds and management’s expectations. At
December 31, 2010, we calculated obligations using a 5.70% discount rate. The discount rates used at
December 31, 2009 and 2008 were 5.75% and 6.15%, respectively. To determine the expected long-term
rate of return on pension assets, we employ a process that analyzes historical long-term returns for various
investment categories, as measured by appropriate indices. These indices are weighted based upon the
extent to which plan assets are invested in the particular categories in arriving at our determination of a
composite expected return. The long-term rates of return used at December 31, 2010, 2009, and 2008 were
8.0%, 8.5% and 9.0%, respectively.

Total periodic pension plan expense in 2010 was $14.1 million. An increase in the discount rate or the rate
of expected return on plan assets, all other assumptions remaining the same, would decrease pension plan
expense, and conversely, a decrease in either of these measures would increase plan expense. As an
indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point
change in the discount rate would affect annual plan expense by approximately $0.7 million. A 25 basis point
change in the assumption for expected return on plan assets would affect annual plan expense by
approximately $0.6 million. The actual rates of return on plan assets may vary significantly from the
assumptions used because of unanticipated changes in financial markets.

Our company-sponsored pension plans were underfunded by $55.4 million at December 31, 2010 compared
to $95.9 million at December 31, 2009. As a result of the underfunded status, we are required to make
estimated contributions of $16.7 million (plus interest) to our qualified pension plans for the 2011 plan year,
payable by September 2012. Approximately $8.7 million of these contributions are required to be paid in
2011, with the remainder not
total
approximately $0.3 million in 2011 to our non-qualified pension plan. We do not anticipate funding our OPEB
plans in 2010 except to pay benefit costs as incurred during the year by plan participants.

In addition, we estimate contributions will

required until 2012.

For our OPEB plans, expense for 2010 was $9.0 million. The discount rate used to calculate OPEB
obligations, which was determined using the same methodology we used for our pension plans, was 5.60%,
5.75% and 6.15% at December 31, 2010, 2009 and 2008, respectively. The assumed health care cost trend
rates used to calculate OPEB obligations and expense was 6.20% and 6.50%, respectively, in 2010, grading
to 5.00% over approximately 60 years.

As an indication of the sensitivity that OPEB expense has to the discount rate assumption, a 25 basis point
change in the discount rate would affect plan expense by approximately $0.4 million. A 1% change in the
assumption for health care cost trend rates would have affected 2010 plan expense by approximately $0.8
to $0.9 million and the total postretirement employee obligation by approximately $11.6 to $13.6 million. The
actual rates of health care cost increases may vary significantly from the assumption used because of
unanticipated changes in health care costs.

Periodic pension and OPEB expenses are included in “Cost of sales” and “Selling, general and
administrative expenses” in the Consolidated Statements of Operations. The expense is allocated to all
business segments. In accordance with current accounting guidance governing defined benefit pension and
other postretirement plans, at December 31, 2010 and 2009, long-term assets are recorded for overfunded
plans and liabilities are recorded for underfunded plans. The funded status of a benefit plan is measured as
the difference between plan assets at fair value and the projected benefit obligation. For underfunded plans,
the estimated liability to be payable in the next twelve months is recorded as a current liability, with the
remaining portion recorded as a long-term liability.

Effective December 15, 2010, the salaried pension plan was frozen to new entrants and commencing
December 31, 2011, the salaried pension plan will cease accruing further benefits. In 2010, we recorded a
loss of $0.2 million related to the plan freeze. In addition, we recorded a $14.2 million decrease in our
pension liability.

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Income taxes. The conclusion that deferred tax assets are realizable is subject to certain assessments,
projections and judgments made by management. In assessing whether deferred tax assets are realizable,
the standard we use is whether it is more likely than not that some or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income
during the periods in which those temporary differences are deductible. We consider the scheduled reversal
of deferred tax liabilities (including the impact of available carryforward periods), projected taxable income,
and amounts of taxable income we would have generated historically if we had been a stand-alone company
in making this assessment. In order to fully realize the deferred tax asset, we will need to generate future
taxable income before the expiration of the deferred tax assets governed by the tax code.

Based on existing deferred tax liabilities and projected taxable income over the periods for which the
deferred tax assets are deductible, we believe that it is more likely than not that we will realize the benefits of
these future deductible differences, excluding items for which we have already recorded a valuation
allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period are reduced.

The company has tax jurisdictions located in many areas of the United States and Canada and is subject to
audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to
resolve. In the preparation of the company’s consolidated financial statements, management exercises
judgment in estimating the potential exposure to unresolved tax matters and applies the guidance pursuant
to uncertain tax positions which employs a more likely than not criteria approach for recording tax benefits
related to uncertain tax positions. While actual results could vary, in management’s judgment, the company
has adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters.

Purchase Accounting and Goodwill. Our recent acquisition of Cellu Tissue was accounted for using the
purchase method of accounting as prescribed by applicable accounting guidance. In accordance with the
accounting guidance, we revalued the assets and liabilities acquired at their respective fair values on the
acquisition date. Changes in assumptions and estimates during the allocation period affecting the acquisition
date fair value of acquired assets and liabilities would result in changes to the recorded values, resulting in
an offsetting change to the goodwill balance associated with the business acquired. Significant changes in
assumptions and estimates subsequent to completing the allocation of purchase price to the assets and
liabilities acquired, as well as differences in actual results versus estimates, could have a material impact on
our earnings.

Goodwill from an acquisition represents the excess of the cost of a business acquired over the net of the
amounts assigned to assets acquired, including identifiable intangible assets and liabilities assumed. As a
result of our acquisition of Cellu Tissue, we recorded $229.5 million of goodwill on our Consolidated Balance
Sheet as of December 31, 2010. Goodwill is not amortized but tested for impairment annually and at any
time when events suggest impairment may have occurred. Our goodwill impairment test will be performed
by comparing the fair value of the reporting unit to its carrying value. We incorporate assumptions involving
future growth rates, discount rates and tax rates in projecting the future cash flows. In the event the carrying
value exceeds the fair value of the reporting unit, an impairment loss would be recognized to the extent the
carrying amount of the reporting unit’s goodwill exceeds its implied fair value.

R E S U L T S O F O P E R A T I O N S

During the period from December 16, 2008 through December 31, 2010, we have operated as and were
accounted for as a separate public company. Our results of operations and financial condition discussed
below cover periods prior to our spin-off from Potlatch and related transactions on December 16, 2008. The
historical financial and other data for periods prior to the spin-off were prepared on a combined basis from
Potlatch’s consolidated financial statements using the historical results of operations and bases of the
assets and liabilities of Potlatch’s Consumer Products and Pulp and Paperboard segments and its wood
to allocations of expenses from Potlatch. Our
products operation at Lewiston,
historical financial and other data are not necessarily indicative of our future performance, nor do they
necessarily reflect what our financial position and results of operations would have been had we operated as
a separate, stand-alone entity prior to the spin-off. The results discussed below include Cellu Tissue
operating results for the period December 28, 2010 through December 31, 2010.

Idaho, and give effect

30

At December 31, 2010, our business was organized into two reporting segments: Consumer Products and
Pulp and Paperboard. Commencing on January 1, 2010,
the wood products operating results were
consolidated into the Pulp and Paperboard segment in order to conform to our new management structure
beginning in 2010. We have reclassified applicable segment data of the prior period to reflect this segment
change. Sales or transfers between segments are recorded as intersegment net sales based on prevailing
market prices. Starting in 2011, sales between segments will be recorded at cost.

In the period-to-period discussion of our results of operations below, when we discuss our net sales,
contributions by each of the segments to our net sales are reported after elimination of intersegment net
sales. In the “Discussion of Business Segments” sections below, each segment’s net sales are presented
before elimination of intersegment net sales.

Y E A R E N D E D D E C E M B E R 3 1 , 2 0 1 0 C O M P A R E D T O Y E A R E N D E D
D E C E M B E R 3 1 , 2 0 0 9

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

(Dollars in thousands)

Net sales
Costs and expenses:

Cost of sales
Selling, general and administrative expenses

Total operating costs and expenses

Alternative fuel mixture tax credit

Earnings before interest, debt retirement costs and income

taxes

Interest expense, net
Debt retirement costs

Earnings before income taxes
Income tax provision

Net earnings

Years Ended December 31,

2010

2009

$ 1,372,965

100.0% $ 1,250,069

100.0%

(1,173,804)
(100,394)

(1,274,198)

—

98,767
(22,571)
—

76,196
(2,396)

$

73,800

(85.5)
(7.3)

(92.8)

—

7.1
(1.6)
—

5.5
(0.2)

5.4

(1,052,151)
(71,125)

(1,123,276)

170,647

297,440
(15,505)
(6,250)

275,685
(93,221)

$

182,464

(84.2)
(5.7)

(89.9)

13.7

23.8
(1.2)
(0.5)

22.1
(7.5)

14.6

Net sales—Excluding $7.3 million of net sales from Cellu Tissue operations, net sales increased $115.6
million, or 9.2%, in 2010 compared to 2009, primarily due to a 15% increase in Pulp and Paperboard net
sales. As discussed in detail below under Discussion of Business Segments, the increase in net sales was
driven by higher pricing for our pulp and paperboard products as well as increased shipment volumes in all
our segments.

Cost of sales—Cost of sales increased 1.2% as a percentage of sales in 2010 compared to 2009. The
increase in the cost of sales of $121.7 million was mostly due to higher pulp costs.

Selling, general and administrative expenses—Selling, general and administrative expenses increased 1.6%
as a percentage of cost of sales in 2010 compared to 2009. The increase was mostly attributable to
transaction expenses and the development of our North Carolina papermaking and converting facilities.

Alternative fuel mixture tax credit—In 2009, we recorded $170.6 million of pre-tax income related to the
AFMTC for the period from late January 2009 through December 2009.

Interest expense, net—Interest expense, net increased $7.1 million, or 46% in 2010 compared to 2009. The
increase is due to the issuance of the 2010 Notes partially offset by $0.6 million in interest income and $0.5
million of capitalized interest associated with the construction of our North Carolina facilities.

Income tax provision—Our income tax provision decreased $90.8 million in 2010 compared to 2009,
primarily due to benefits from the CBPC and reductions in our provision for uncertain tax positions relating to

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the AFMTC. Excluding the benefits of CBPC and AFMTC, the effective tax rate was 38.7% for 2010,
compared to an effective tax rate of 37.4% for 2009. The primary reason for the increased rate, net of the
CBPC and AFMTC, was due to acquisition costs relating to the acquisition of Cellu Tissue that are required
to be capitalized for U.S. federal and state income tax purposes that are non-deductible.

D I S C U S S I O N O F B U S I N E S S S E G M E N T S

Consumer Products

(Dollars in thousands)

Net sales (before intersegment net sales eliminations)
Operating income

Percent of net sales

Years Ended December 31,

2010

2009

$570,129
63,749

$554,034
122,117

11.2%

22.0%

Excluding net sales of $7.3 million and an operating loss of $6.3 million associated with Cellu Tissue, the
Consumer Products segment reported an $8.8 million, or 1.6%, increase in net sales and a $52.1 million
decrease in operating income for 2010 compared to 2009. This increase in net sales was due to a 3.3%
increase in shipment volumes, offset by 1.7% lower net selling prices resulting primarily from increased
promotional activity. The decrease in operating income was primarily due to a $43.9 million, or 43%,
increase in pulp costs in 2010 compared to 2009 due to a worldwide shortage of pulp, as well as a $4.1
million increase in wages and a $3.0 million increase in transportation costs, partially offset by a decrease in
costs for chemicals and operating supplies.

Pulp and Paperboard

(Dollars in thousands)

Net sales (before intersegment net sales eliminations)
Operating income

Percent of net sales

Years Ended December 31,

2010

2009

$879,889
81,911

$749,544
191,894

9.3%

25.6%

Net sales for the Pulp and Paperboard segment were $130.3 million, or 17.4% higher in 2010 compared to
2009. The increase in net sales over 2009 was largely due to an increase of 45.2% in pulp prices associated
with a worldwide shortage of pulp, a 5.6% increase in paperboard pricing, and increases in paperboard,
pulp, and wood products shipments.

Excluding the AFMTC of $170.6 million recorded in 2009, operating income increased $60.7 million in 2010
compared to the same period in 2009. The increase in operating income was largely attributable to higher
net sales and was partially offset by a $25.4 million increase in wood fiber costs, a $13.8 million increase in
transportation costs, an $11.1 million increase in maintenance costs and a $9.6 million increase in chemical
costs. These cost increases were partially offset by a $4.7 million decrease in energy costs compared to
2009.

32

Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 9 C O M P A R E D T O Y E A R E N D E D
D E C E M B E R 3 1 , 2 0 0 8

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

(Dollars in thousands)

Net sales
Costs and expenses:

Cost of sales
Selling, general and administrative expenses

Total operating costs and expenses

Alternative Fuel Mixture Tax Credit

Earnings before interest, debt retirement costs and

income taxes

Interest expense, net
Debt retirement costs

Earnings before income taxes
Income tax provision

Net earnings

Years Ended December 31,

2009

2008

$ 1,250,069

100.0% $ 1,255,309

100.0%

(1,052,151)
(71,125)

(1,123,276)

170,647

297,440
(15,505)
(6,250)

275,685
(93,221)

$

182,464

(84.2)
(5.7)

(89.9)

13.7

23.8
(1.2)
(0.5)

22.1
(7.5)

14.6

(1,179,397)
(47,428)

(1,226,825)

—

28,484
(13,147)
—

15,337
(5,594)

$

9,743

(94.0)
(3.8)

(97.8)

—

2.2
(1.0)
—

1.2
(0.4)

0.8

Net sales—Total net sales decreased $5.2 million, or nearly 1%, in 2009 compared to 2008, primarily due to
a 6% decrease in pulp and paperboard net sales and a 20% decrease in net sales of our wood products,
mostly offset by an increase of 10% in Consumer Products net sales. As discussed in detail below under
Discussion of Business Segments,
the decrease in net sales was driven by lower volumes for our
paperboard products which were partially offset by modest price increases. Our lumber and pulp shipments
to external parties increased in 2009 but were more than offset by lower prices. Our Consumer Products
volumes and prices were both up 5% from 2008.

Cost of sales—Cost of sales decreased $127.2 million, or 11%, from 2008 to 2009 primarily due to two
factors: (i) an overall decrease in wood fiber costs due to the significant decline in the price of logs caused
by the poor housing market and (ii) a decrease in petroleum and petroleum based product costs due to the
general economic decline, which resulted in lower natural gas prices, lower transportation costs and a
reduction in the costs of petroleum based chemicals used in our production processes.

Selling, general and administrative expenses—Selling, general and administrative expenses increased
$23.7 million in 2009 compared to 2008. The increase was primarily due to higher annual incentive-based
compensation related expenses and the costs associated with additional director fees recorded in 2009 as a
result of an increase in the value of equity based awards. The increase is also due to additional corporate
administration expenses associated with being a new, independent, publicly traded company, such as audit
fees, relocation costs and consulting costs associated with hiring new executives and the consolidation of
our corporate functions in a new headquarters. Selling, general and administrative expenses for 2008 were
favorably affected by approximately $2.0 million of income from legal settlements.

Alternative Fuel Mixture Tax Credit—In 2009, we recorded $170.6 million of pre-tax income related to the
AFMTC for the period from late January 2009 through December 2009. The credit was not available in 2008.

Interest expense, net—Interest expense, net increased $2.4 million, or 18% in 2009 compared to 2008.
Interest expense on a $100.0 million note payable to Potlatch was $5.2 million in 2009, compared to $13.0
million in 2008. In June 2009 we issued $150.0 million of senior notes, or the 2009 Notes, and used a
portion of the proceeds to satisfy our $100.0 million note payable obligation to Potlatch. Interest expense on
the 2009 Notes was $9.3 million in 2009. In 2009, we also incurred approximately $1.3 million of interest
expense related to our credit facility. Partially offsetting the interest expense was $0.3 million in interest
income we recorded in 2009.

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Debt retirement costs—We recorded approximately $6.3 million of expenses in 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 represented the remaining interest obligation due to holders of the
debentures on December 1, 2009, the maturity date of the credit sensitive debentures.

Income tax provision—Our income tax provision increased $87.6 million in 2009 compared to 2008, primarily
due to increased operating earnings. The recognition of federal renewable energy tax credits of $9.9 million
partially offset the higher income tax provision. Excluding the renewable energy tax credits, the effective tax
rate was 37.4% for 2009, compared to an effective tax rate of 36.5% for 2008. The tax provision for 2008
was calculated primarily on a “carve-out” accounting basis since our businesses were part of Potlatch for the
majority of that period, whereas the 2009 tax provision is reflective of the company’s operations and tax
attributes as a stand-alone entity.

D I S C U S S I O N O F B U S I N E S S S E G M E N T S

Consumer Products

(Dollars in thousands)

Net sales (before intersegment net sales eliminations)
Operating income

Percent of net sales

Years Ended December 31,

2009

2008

$554,034
122,117

$504,597
37,321

22.0%

7.4%

increased $49.4 million, or 10%,

in 2009 from 2008.
Net sales for our Consumer Products segment
Operating income for the segment increased $84.8 million, or 227%, in 2009 compared to 2008, primarily
due to approximately $24.8 million in higher net selling prices and approximately $24.6 million related to
increased shipments. The higher net selling prices were driven by the increased sales of premium and ultra
quality tissue products. Segment expenses decreased $35.3 million in 2009. The decrease was primarily the
result of decreased transportation costs of approximately $14.2 million, energy costs of approximately $4.5
million, pulp costs of approximately $27.1 million and packaging costs of approximately $1.9 million. This
was partially offset by increased usage of purchased paper of approximately $10.1 million and other costs
due to higher volumes.

Pulp and Paperboard

(Dollars in thousands)

Net sales (before intersegment net sales eliminations)
Operating income

Percent of net sales

Years Ended December 31,

2009

2008

$749,544
191,894

$816,147
4,437

25.6%

0.5%

Net sales for our Pulp and Paperboard segment were $749.5 million in 2009 or 8% lower than 2008 net
sales of $816.1 million. Operating income for the segment increased $187.5 million in 2009 over 2008 due
primarily to $170.6 million of pre-tax income related to the AFMTC for the period from late January 2009
through December 2009. Paperboard net sales decreased $31.6 million, or 5%, in 2009 over 2008. Lower
paperboard shipments accounted for approximately $47.1 million of the net sales decrease, while higher
paperboard prices offset this decrease by approximately $15.5 million. Pulp net sales decreased $18.4
million from 2008 to 2009 driven primarily by lower pricing. Net sales of our lumber products decreased
$18.7 million primarily due to a 23% decrease in net selling prices in 2009. Expenses for the segment
decreased approximately $83.4 million in 2009 primarily due to lower costs for wood fiber, chemicals and
energy. The decreased wood fiber costs were largely attributable to lower chip and sawdust prices for our
Idaho pulp and paperboard operation in 2009 compared to 2008. The lower chip and sawdust prices were
primarily the result of increased availability of residuals throughout 2009 as compared to 2008.

34

E A R N I N G S B E F O R E I N T E R E S T , T A X , D E P R E C I A T I O N A N D A M O R T I Z A T I O N
( E B I T D A ) A N D A D J U S T E D E B I T D A

We use earnings before interest, tax, depreciation and amortization, or EBITDA, and EBITDA excluding
certain items identified in the table below, or Adjusted EBITDA, as supplemental performance measures,
that are not required by, or presented in accordance with generally accepted accounting principles, or
GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings, operating
income or any other performance measure derived in accordance with GAAP, or as alternatives to cash
flows from operating activities or a measure of our liquidity or profitability. In addition, our calculation of
EBITDA and Adjusted EBITDA may or may not be comparable to similarly titled measures of other
companies. Adjusted EBITDA represents EBITDA adjusted by eliminating certain non-recurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation,
or as a substitute for any of our results as reported under GAAP. Some of these limitations are:

▪ EBITDA and Adjusted EBITDA do not reflect our cash expenditures for capital assets;
▪ EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working

capital requirements;

▪ EBITDA and Adjusted EBITDA do not include cash pension payments;
▪ EBITDA and Adjusted EBITDA do not reflect

the interest expense, or the cash requirements

necessary to service interest or principal payments on our indebtedness;

▪ although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not
reflect cash requirements for such replacements; and

▪ other companies,

including other companies in our
differently than we do, limiting their usefulness as a comparative measure.

industry, may calculate these measures

We present EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in
comparing our performance across reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance. In addition, we use EBITDA and Adjusted EBITDA:
(i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to
evaluate the effectiveness of our business strategies and (iii) because our credit agreement and the
indentures governing the 2009 Notes and 2010 Notes use measures similar to EBITDA to measure our
compliance with certain covenants.

The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a
reconciliation to net earnings:

(Dollars in thousands)

Net earnings

Interest expense, net of interest income
Income tax provision
Depreciation and amortization expense

EBITDA

Cellu Tissue acquisition related expenses
Alternative Fuel Mixture Tax Credit
Debt retirement costs

Adjusted EBITDA

2010

2009

2008

$ 73,800
22,571
2,396
47,728

$ 182,464
15,505
93,221
47,418

$ 9,743
13,147
5,594
46,954

$146,495

$ 338,608

$75,438

20,354
—
—

—
(170,647)
6,250

—
—
—

$166,849

$ 174,211

$75,438

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L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S

The following table presents information regarding our cash flows for the years ended December 31, 2010,
2009 and 2008.

C a s h F l o w s S u m m a r y

(Dollars in thousands)

Net cash provided by operating activities
Net cash used for investing activities
Net cash provided by (used for) financing activities

Increase (decrease) in cash
Balance at beginning of period

Balance at end of period

YEARS ENDED DECEMBER 31,

2010

2009

2008

$ 185,591
(227,938)
58,451

$ 224,764
(196,387)
(28,771)

$ 42,058
(31,531)
(7,318)

16,104
2,824

(394)
3,218

3,209
9

$ 18,928

$

2,824

$ 3,218

Operating Activities—For 2010, net cash provided by operating activities decreased 17.4% compared to
2009. The decrease was primarily attributable to lower earnings and cash contributions of $25.1 million
made to our qualified pension plans in 2010. Earnings for 2010 included expenses related to the acquisition
of Cellu Tissue, while 2009 earnings included $170.6 million of pre-tax income from the AFMTC. These
decreases were offset by receipt of $101.4 million in cash from the Federal Government during 2010
primarily related to the AFMTC claimed with respect to 2009.

The increase in cash provided by operating activities of $182.7 million for 2009 compared to 2008 was
attributable to higher net earnings, which were due to the recognition of income from the AFMTC and
increased operating income. Offsetting the 2009 operating cash flows was the recording of $101.3 million in
taxes receivable associated with the AFMTC. For the last five months of 2009, we elected to defer receiving
payments for the AFMTC and instead elected to claim the credit on our 2009 income tax return. The
increase in taxes receivable was partially offset by the establishment of $73.5 million in non-current accrued
taxes associated with the accounting for uncertain tax positions.

Investing Activities—Net cash used in investing activities increased 16.1% from 2009 to 2010. The
increased use of cash was largely due to our acquisition of Cellu Tissue for $247.0 million, offset by cash
acquired of $3.2 million, as well as increased cash spent on additions to plant and equipment in 2010. These
increased uses of cash were partially offset by converting $61.9 million in short-term investments into cash.
Cash spent on additions to plant and equipment increased $26.8 million in 2010 compared to 2009 due
primarily to capital spending on our new tissue manufacturing and converting facilities in Shelby, North
Carolina as well as other capital improvement projects.

The $164.9 million increase in cash used for investing activities from 2008 to 2009 was due to the addition of
$177.1 million of short-term investments reflecting the investment of our cash assets,
including cash
generated from the AFMTC, a portion of the proceeds from our $150.0 million senior note offering, and cash
from operations. The majority of our capital expenditures in 2009 were spent on various discretionary, high-
return projects for the Consumer Products and Pulp and Paperboard segments, as well as various routine
general replacement projects for each of our segments.

Financing Activities—Net cash provided by financing activities was $58.5 million in 2010, compared to cash
used for financing activities of $28.8 million in 2009. In 2010 we received net proceeds of $367.5 million from
the 2010 Notes, which were used to partially fund the acquisition of Cellu Tissue and related expenses. This
increase in cash was offset by the retirement of $272.2 million of Cellu Tissue notes and the repayment of
$32.5 million outstanding under Cellu Tissue’s revolving line of credit at the completion of the acquisition.

Net cash used for financing activities was $28.8 million in 2009, compared to $7.3 million in 2008. The
increase in 2009 compared to 2008 primarily consisted of the repayment of (i) the note payable to Potlatch
and related debt retirement costs of $106.3 million, (ii) payables to Potlatch of $16.5 million, (iii) and the
repayment of $50.0 million in borrowings under our revolving credit facility. These were partially offset by net
proceeds from long-term debt of $145.2 million.

36

C a p i t a l R e s o u r c e s

Due to an environment of economic uncertainty, as well as the competitive and cyclical nature of the
markets in which we operate, there is uncertainty regarding the amount of cash flows we will generate
during the next twelve months. However, we believe that our cash flows from operations as well as our cash
on hand and available borrowing capacity under our credit facility will be adequate to fund debt service
requirements and provide cash required to support our ongoing operations, capital expenditures, and
working capital needs for the next twelve months.

We cannot be certain, however, that our business will generate sufficient cash flow from operations or that
future borrowing will be available to us under our revolving credit facility in an amount sufficient to enable us
to pay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion
of our indebtedness on or before maturity. We cannot be certain that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. As of December 31, 2010, our short-term
investments are not restricted and are invested in time or demand deposits, certificates of deposit and U.S.
Treasury and U.S. government agency obligations, all of which have very short maturity periods.

At December 31, 2010, our financial position included debt of $539.1 million, compared to the balance of
$148.3 million at December 31, 2009. Stockholders’ equity at December 31, 2010, was $468.3 million,
compared to the December 31, 2009 balance of $363.7 million. Our total debt to total capitalization,
excluding accumulated other comprehensive loss, was 48.8% at December 31, 2010, compared to 23.2% at
December 31, 2009.

Debt Arrangements

2010 Notes

On October 22, 2010, we sold $375 million aggregate principal amount of senior notes. The 2010 Notes
mature on November 1, 2018, have an interest rate of 7.125% and were issued at their face value. The
issuance of these notes generated net proceeds of $367.5 million after deducting offering expenses.

The 2010 Notes are guaranteed by certain of our existing and future direct and indirect domestic
subsidiaries. The 2010 Notes are equal in right of payment with all existing and future unsecured senior
indebtedness and are senior in right of payment to any future subordinated indebtedness. The 2010 Notes
are effectively subordinated to all of our existing and future secured indebtedness, including borrowings
under our secured revolving credit facility, which is secured by all accounts receivable, inventory and cash.

Prior to November 1, 2013, we may redeem up to 35% of the 2010 Notes at a redemption price equal to
107.125% of the principal amount plus accrued and unpaid interest with the proceeds from one or more
qualified equity offerings. We have the option to redeem all or a portion of the 2010 Notes at any time before
November 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid
interest and a “make whole” premium. On or after November 1, 2014, we may redeem all or a portion of the
2010 Notes at specified redemption prices plus accrued and unpaid interest. In addition, we may be required
to make an offer to purchase the 2010 Notes upon the sale of certain assets and upon a change of control.

In connection with the issuance of the 2010 Notes, we entered into a registration rights agreement dated as
to the registration rights
of October 22, 2010 with the initial purchaser of
agreement, we have agreed to file a registration statement with the SEC pursuant to which we will offer to
exchange the 2010 Notes for notes with substantially similar terms that are registered under the Securities
Act. In certain circumstances, including if applicable interpretations of the staff of the SEC do not permit us
to effect the exchange of the Notes, we will be required to make available an effective shelf registration
statement registering the resale of the 2010 Notes. If we default on certain obligations under the Registration
Rights Agreement, we will be required to pay additional interest on the 2010 Notes with respect to which
such default exists until the default is cured.

the 2010 Notes. Pursuant

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The terms of the 2010 Notes limit our ability to pay dividends or repurchase equity interests from our
stockholders; borrow money; incur liens; make investments; sell assets; create restrictions on the payment
of dividends or other amounts to us from any restricted subsidiaries; enter into sale and lease-back
transactions; and consolidate, merge or sell all or substantially all of our assets.

Our expected debt service obligation related to the 2010 Notes, consisting of cash payments for interest, is
estimated to be approximately $27.4 million for 2011.

2009 Notes

On June 11, 2009, we sold $150 million aggregate principal amount of senior notes. The 2009 Notes are
due on June 15, 2016, have an interest rate of 10.625% and were issued at a price equal to 98.792% of
their face value. The issuance of these notes generated net proceeds of $145.2 million after deducting
discounts and offering expenses.

We transferred approximately $107 million of these proceeds to a trustee in satisfaction of our obligation
related to the indenture under which $100 million principal amount of credit sensitive debentures due
December 1, 2009, were originally issued by an affiliate of Potlatch. The obligation to repay the credit
sensitive debentures and all interest through maturity was retained by us prior to our spin-off from Potlatch.
The $107 million consisted of the $100 million principal amount underlying the credit sensitive debentures,
plus $6.3 million recorded as “Debt retirement costs” on our 2009 Consolidated Statement of Operations,
representing our
the debentures on December 1, 2009, plus
approximately $0.7 million included as “Restricted cash” on our Consolidated Balance Sheet. The $0.7
million of restricted cash represented the difference between the current estimate of the interest payment
due to holders of the debentures on December 1, 2009, and the interest payment that would be owed on
December 1, 2009, if the maximum interest rate applicable to the credit sensitive debentures were to have
applied. The $0.7 million was returned to us during the fourth quarter of 2009 after payment of the $100.0
million principal amount and accrued interest on December 1, 2009, and thus was no longer included as
restricted cash as of December 31, 2009.

interest obligation due to holders of

In our 2009 Consolidated Statement of Cash Flows as presented in prior filings, we previously reflected the
proceeds from the debt issuance on a net basis. In the accompanying Consolidated Statements of Cash
Flows, we have reclassified such 2009 amounts to reflect the proceeds on a gross basis rather than a net
basis. Such reclassification had no effect on net cash used for financing activities.

The 2009 Notes are general unsecured obligations. They are equal in right of payment with all existing and
future unsecured senior indebtedness and are senior in right of payment
to any future subordinated
indebtedness. The 2009 Notes are effectively subordinated to all of our existing and future secured
indebtedness, including borrowings under our secured revolving credit facility, which is secured by all
accounts receivable, inventory and cash. The 2009 Notes are guaranteed by certain of our existing and
future direct and indirect domestic subsidiaries.

Prior to June 15, 2012, we may redeem, at any time at our option, up to 35% of the aggregate principal
amount of the 2009 Notes with the net proceeds of qualified equity offerings at a redemption price equal to
110.625% of the principal amount thereof plus accrued and unpaid interest. We have the option to redeem
all or a portion of the 2009 Notes at any time prior to June 15, 2013 at a redemption price equal to 100% of
the principal amount thereof plus a “make whole” premium and accrued and unpaid interest. We have the
right to redeem all or a portion of the 2009 Notes on or after June 15, 2013 at stated redemption prices plus
accrued and unpaid interest.

The terms of the 2009 Notes limit our ability and the ability of any restricted subsidiaries to borrow money;
pay dividends; redeem or repurchase capital stock; make investments; sell assets; create restrictions on the
payment of dividends or other amounts to us from any restricted subsidiaries; enter into transactions with
affiliates; enter into sale and lease-back transactions; create liens; and consolidate, merge or sell all or
substantially all of our assets.

Our expected debt service obligation, consisting of cash payments for interest related to our 2009 Notes, is
estimated to be approximately $15.9 million for 2011.

38

CityForest Industrial Bonds

Prior to our acquisition of Cellu Tissue, Cellu Tissue CityForest LLC, or CityForest, a wholly-owned
subsidiary of Cellu Tissue, was party to a loan agreement, dated as of March 1, 1998, with the City of
Ladysmith, Wisconsin. Pursuant to this agreement the City of Ladysmith loaned the proceeds of its Variable
Rate Demand Solid Waste Disposal Facility Revenue Bonds, Series 1998, or IRBs, to CityForest to finance
the construction by CityForest of a solid waste disposal facility. As the result of our acquisition of Cellu
Tissue, we have assumed the IRBs. Approximately $16 million in aggregate principal face amount of the
IRBs is outstanding at December 31, 2010. The IRBs have scheduled semi-annual payments of principal,
with the balance payable at maturity on March 1, 2028. The variable interest rate on the IRBs was 2.6% and
2.5% as of December 31, 2010 and 2009, respectively. The IRBs are guaranteed by Cellu Tissue and
contain various customary covenants and events of default.

CityForest is required, under the terms of the Indenture of Trust governing the IRBs, to provide a letter of
credit in favor of the trustee. CityForest previously entered into the Amended and Restated Reimbursement
Agreement, dated as of March 21, 2007, by and between CityForest and Associated Bank, National
Association, or Associated Bank, pursuant to which Associated Bank provided a letter of credit to the
trustee.

In connection with our acquisition of Cellu Tissue, CityForest entered into a Second Amended and Restated
Reimbursement Agreement, dated as of December 27, 2010, with Associated Bank amending and restating
the original Reimbursement Agreement. The trustee is permitted to draw upon the letter of credit to pay
principal and interest due on the IRBs, and to provide liquidity to purchase IRBs put to CityForest by
bondholders and not remarketed; and CityForest is obligated under the Second Amended and Restated
Reimbursement Agreement to reimburse Associated Bank for any such draws. The expiration date of the
letter of credit is February 15, 2012. Under the terms of the Second Amended and Restated Reimbursement
Agreement, CityForest is required, on or before September 30, 2011, to cause the letter of credit to be
replaced with a substitute letter of credit from a third-party bank. CityForest’s failure to cause the letter of
credit to be replaced by September 30, 2011 will constitute an event of default under the Second Amended
and Restated Reimbursement Agreement.

The Second Amended and Restated Reimbursement Agreement contains customary events of default,
including payment defaults; breaches of representations and warranties; covenant defaults; cross-defaults to
certain other debt; certain events of bankruptcy and insolvency; judgment defaults; certain defaults related to
the Employee Retirement Income Security Act of 1974, as amended; and a change of control of Clearwater
Paper.

indebtedness;

The Second Amended and Restated Reimbursement Agreement also contains various customary negative
covenants including limitations on:
liens; acquisitions, mergers and consolidations;
investments; guarantees; asset sales; sale and leaseback transactions; dividends and distributions;
transactions with affiliates; capital expenditures; and changes to the status of the IRBs. CityForest is also
required to comply on a quarterly basis with a maximum leverage covenant and a minimum fixed charge
coverage covenant. The maximum permitted Leverage Ratio is 2.5 to 1. As of December 31, 2010, the
Leverage Ratio was 1 to 1. The minimum permitted Fixed Charge Coverage Ratio is 1.2 to 1. As of
December 31, 2010, the Fixed Charge Coverage Ratio was 4.5 to 1.

Clearwater Paper has guaranteed all of the obligations of CityForest under the Second Amended and
Restated Reimbursement Agreement, pursuant to a Guaranty, dated as of December 27, 2010 executed in
favor of Associated Bank.

In addition, the Reimbursement Agreement provides that in certain circumstances where Cellu Tissue incurs
indebtedness, as defined, in excess of amounts currently permitted under the CityForest Indenture or
refinances the indebtedness issued under the CityForest Indenture, CityForest may be required to repay all
of its obligations under the revolving credit facility and either cause the bonds to be redeemed or to replace
the revolving credit facility and provide a new letter of credit from another lender. In connection with these
CityForest credit facilities, we had $1.3 million of restricted cash as of December 31, 2010 and 2009, which
is included in other assets on the Consolidated Balance Sheet.

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Credit Arrangements

On November 26, 2008, we entered into a four-year $125 million revolving credit facility with certain financial
institutions. During 2010, the terms of our revolving credit facility were amended to (i) permit our acquisition
of Cellu Tissue, (ii) permit the construction of our new manufacturing facilities in Shelby, North Carolina,
(iii) increase our ability to acquire capital and (iv) modify the factors used in the minimum fixed charge
coverage ratio. These amendments resulted in the removal of a $10 million borrowing capacity reserve
previously required. The amount available to us under the revolving credit facility is based on the lesser of
85% of our eligible accounts receivable plus approximately 65% of our eligible inventory, or $125 million.

As of December 31, 2010, there were no borrowings outstanding under the credit facility, but approximately
$3.5 million of the credit facility was being used to support outstanding standby letters of credit. Loans under
the credit facility bear interest at LIBOR plus between 2.25% and 2.75% for LIBOR loans, and a base rate
effectively equal to the agent bank’s prime rate plus between 0.75% and 1.25% for other loans. The
percentage margin on all loans is based on our fixed charge coverage ratio for the last twelve months, which
is recalculated on a quarterly basis. As of December 31, 2010, we would have been permitted to draw $121
million under the credit facility at LIBOR plus 2.50%.

A minimum fixed charge coverage ratio is the only financial covenant requirement under our credit facility
and is triggered when an event of default exists or when availability falls below 20%, at which time the
minimum fixed charge coverage ratio must be at least 1.0 to 1.0. As of December 31, 2010, the fixed charge
coverage ratio for the last twelve months was 1.6 to 1.0.

Our obligations under the revolving credit facility are secured by all accounts receivable, inventory and cash.
The credit facility agreement contains various provisions that limit our discretion in the operation of our
business by restricting our ability to, among other things:

▪ pay dividends or repurchase equity interests from our stockholders;
▪ create, incur or guarantee certain debt;
▪

incur liens on certain properties;

▪ make capital expenditures in amounts in excess of those permitted under the revolving credit

agreement;

▪ enter into certain affiliate transactions;
▪ enter into certain hedging arrangements; and
▪ consolidate with or merge with another entity.

Shelf Registration

On January 5, 2010, 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.

40

C O N T R A C T U A L O B L I G A T I O N S

The following table summarizes our contractual obligations as of December 31, 2010. Portions of the
amounts shown are reflected in our financial statements and accompanying notes, as required by GAAP.
See the footnotes following the table for information regarding the amounts presented and for references to
relevant financial statement notes that include a detailed discussion of the item.

(Dollars in thousands)

Long-term debt1
Interest on long-term debt1
Supply and related agreements with

Potlatch2
Capital lease3
Operating leases3
Purchase obligations4
Other obligations5,6

Total

PAYMENTS DUE BY PERIOD

TOTAL

$ 540,595
306,795

59,272
50,924
61,248
416,506
337,627

LESS
THAN 1 YEAR

$

760
43,772

42,424
1,747
16,960
345,712
145,983

1-3 YEARS

3-5 YEARS

$ 1,520
86,158

$ 1,520
86,066

16,848
4,303
23,397
49,012
48,319

—
4,478
10,094
9,446
47,805

MORE THAN
5 YEARS

$536,795
90,799

—
40,396
10,797
12,336
95,520

$1,772,967

$597,358

$229,557

$159,409

$786,643

1

2

3

4

5

6

For more information regarding specific terms of our long-term debt, see the discussion under the heading “Debt Arrangements,”
and Note 10, “Notes Payable,” in the notes to the consolidated financial statements.”

Represents payment obligations under the Log Supply and St. Maries Residuals Sales agreements entered into in connection with
the spin-off. Amounts shown in the table for these agreements use applicable market prices from December 2010 where specific
fixed prices are not contained in the agreement. For purposes of the amounts shown in the table, we have assumed that each of
these agreements will expire at the end of their initial term and will not be renewed by the parties.

Capital lease consists of a lease entered into in 2010 for our new tissue and converting facility in Shelby, NC and includes both
principal and interest. See Note 15, “Commitments and Contingencies,” in the notes to the consolidated financial statements.

Purchase obligations consist primarily of trade accounts payable as of December 31, 2010, contracts for equipment purchases,
contracts for the purchase of raw materials (primarily pulp) from third parties other than Potlatch, contracts for outside wood
chipping, contracts with railroads and contracts with natural gas and electricity providers.

Included in other obligations are accrued liabilities and accounts payable (other than trade accounts payable) as of December 31,
2010, as well as payments on qualified pension and postretirement employee benefit plans. Since pension contributions are
determined by factors that are subject to change each year, estimated payments on qualified pension plans included above are
only for years 1-5 and are based on current estimates of minimum required contributions.

Total excludes $72.0 million of unrecognized tax benefits due to the uncertainty of timing of payment. See Note 8, “Income Taxes,”
in the notes to the consolidated financial statements.

O F F - B A L A N C E S H E E T A R R A N G E M E N T S

We currently are not a party to any off-balance sheet arrangements that would require disclosure under this
section.

E N V I R O N M E N T A L

Our operating facilities are subject to rigorous federal and state environmental regulation governing air
emissions, wastewater discharges, and solid and hazardous waste management. Our goal is continuous
compliance with all environmental regulations and we regularly monitor our activities to ensure compliance
with all pertinent rules and requirements. Compliance with environmental regulations is a significant factor in
our business and requires capital expenditures as well as additional operating costs.

Of our 14 manufacturing sites, six were audited for environmental compliance by independent auditors in
2010. No material issues were identified during these audits. Seven audits will occur in 2011 with a goal of
every facility undergoing a detailed environmental audit by third parties at least once every three years.

During the next three to five years, our tissue manufacturing and converting facility located in Neenah,
Wisconsin will become regulated under a reduced waste water discharge limit associated with a total
maximum daily limit promulgated for the Lower Fox River. The specific requirements of this new regulation
are presently unknown.

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A new federal standard for hazardous air pollutants from boiler and process heaters was proposed and
subsequently delayed in 2010 by the U.S. Environmental Protection Agency, or EPA. The most recent
communication from the EPA is that this new standard will become effective in 2012. Our sites at Lewiston,
Idaho and Menominee, Michigan are expected to be impacted by this new rule, although the specific
requirements of this new rule remain uncertain.

The EPA is also currently reviewing the risks associated with hazardous air pollutants from kraft paper mills.
Any changes to these rules would impact our operations in Lewiston, Idaho and Cypress Bend, Arkansas.

Concern over climate change, including the impact of global warming, has led to significant regulatory and
legislative initiatives to limit greenhouse gas emissions. In 2007 the United States Supreme Court ruled that
the EPA was authorized to regulate carbon dioxide under the Clean Air Act. As a consequence, the EPA
initiated a series of regulatory efforts aimed at addressing greenhouse gases as pollutants, including finding
that greenhouse gas emissions endanger public health, implementing mandatory greenhouse gas emission
reporting requirements applicable to some of our manufacturing operations, and promulgating rules to limit
the growth in greenhouse gases from new projects at certain types of facilities applicable to some of our
manufacturing sites. It is unclear what the overall effect of EPA greenhouse gas regulation will have on our
operations until final rules are promulgated.

Legislation has also been proposed to address greenhouse gas emissions and global climate change,
including “cap and trade” programs, and some form of federal climate change legislation or additional federal
regulation is possible. It is not yet known when and to what extent these and other federal, state and
international legislative and policy activities may come into force; how they may relate to each other in the
future; or how they may affect our operations.

Our facilities are currently in substantial compliance with applicable environmental laws and regulations. We
cannot be certain, however, that situations that may give rise to material environmental liabilities will not be
discovered or that the enactment of new environmental laws or regulations or changes in existing laws or
regulations will not require significant expenditures by us.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Risk

Our exposure to market risks on financial instruments includes fair value risk on our fixed rate debt and
interest rate risk on our secured revolving credit facility as well as the IRBs assumed by us upon our
acquisition of Cellu Tissue.

Revolving Credit Facility

As of December 31, 2010, there were no borrowings outstanding under our revolving credit facility. The
interest rates applied to borrowings under the revolving credit facility are adjusted often and therefore react
quickly to any movement in the general trend of market interest rates. For example, a 1% increase or
decrease in interest rates, based on assumed outstanding credit facility borrowings of $10.0 million, would
have a $0.1 million annual effect on interest expense. We currently do not attempt to mitigate the effects of
short-term interest rate fluctuations on our credit facility borrowings through the use of derivative financial
instruments.

Industrial Revenue Bonds

As of December 31, 2010, there was $15.6 million outstanding under the IRBs. The interest rate applicable
to the IRBs adjusts on a weekly basis. A 1% increase or decrease in interest rates, based on the current
outstanding balance of $15.6 million, would have a $0.2 million annual effect on interest expense. We
currently do not attempt to mitigate the effects of short-term interest rate fluctuations on the IRBs through
the use of derivative financial instruments.

42

Commodity Risk

We are exposed to market risk for changes in natural gas commodity pricing, which we have historically
partially mitigated through the use of firm price contracts for a portion of our natural gas requirements for our
manufacturing facilities. As of December 31, 2010,
these contracts covered approximately 2% of our
expected average monthly natural gas requirements for 2011.

We are also subject to commodity price risk associated with pulp costs and take advantage of spot prices on
pulp to minimize market risk arising from changes in pulp costs. We have agreements with pulp vendors to
purchase pulp over the next year. These commitments require purchases of pulp up to approximately
282,000 tons per year at pulp prices below published list prices and allow us to shift a portion of our pulp
purchases to the spot market to take advantage of spot market prices when such prices fall. We believe that
our current commitment under these arrangements or their equivalent approximates 36% of our current
budgeted pulp needs in 2011.

Foreign Currency Risk

Virtually all of our non-U.S. sales are denominated in U.S. dollars and accordingly we are not subject to
currency exchange risks associated with the receipt of payments in foreign currencies. However, we are
currently subject to foreign exchange currency risks associated with overseas purchases of equipment for
our North Carolina tissue converting facility. As part of our risk management strategy, we may use derivative
financial instruments to mitigate this foreign currency risk. In the latter half of 2010, we began entering into
foreign exchange forward contracts, not designated for hedge accounting, with the intent to reduce foreign
exchange exposure associated with these equipment purchases. As of December 31, 2010, the notional
amount of our outstanding forward contracts ranged from less than $0.1 million to $1.0 million, offsetting our
exposures to the euro. The total notional amount as of December 31, 2010 was $2.4 million. We use
derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative
contracts for trading or speculative purposes.

Quantitative Information about Market Risks

(Dollars in thousands)

2011

2012

2013

2014

2015

THEREAFTER

TOTAL

EXPECTED MATURITY DATE

Long-term debt:
Fixed rate
Average interest rate
Variable rate
Average interest rate

Fair value at 12/31/10

$ — $ —

$ —

$ —

$ —

$525,000

$525,000

—%

—%

—%

—%

—%

8.1%

8.1%

$760

$760

$760

$760

$760

$ 11,795

$ 15,595

2.6%

2.6%

2.6%

2.6%

2.6%

2.6%

2.6%

$571,158

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ITEM 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Schedules

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2010, 2009

and 2008

Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm

Schedules:

II. Valuation and Qualifying Accounts

All other schedules are omitted because they are not required, not applicable or the required information
is given in the financial statements.

PAGE
NUMBER

45
46
47
48

49
50-79
80-81

82

44

CLEARWATER PAPER CORPORATION
Consolidated Statements of Operations
(Dollars in thousands – except per-share amounts)

Net sales

Costs and expenses:
Cost of sales
Selling, general and administrative expenses

Alternative Fuel Mixture Tax Credit

Earnings before interest, debt retirement costs and

income taxes

Interest expense, net
Debt retirement costs

Earnings before income taxes
Income tax provision

Net earnings

Net earnings per common share:

Basic
Diluted

FOR THE YEARS ENDED DECEMBER 31,

2010

2009

2008

$ 1,372,965

$ 1,250,069

$ 1,255,309

(1,173,804)
(100,394)

(1,052,151)
(71,125)

(1,179,397)
(47,428)

(1,274,198)

(1,123,276)

(1,226,825)

—

170,647

—

98,767
(22,571)
—

76,196
(2,396)

73,800

6.43
6.24

297,440
(15,505)
(6,250)

275,685
(93,221)

182,464

16.06
15.50

$

$

28,484
(13,147)
—

15,337
(5,594)

9,743

0.86
0.86

$

$

$

$

The accompanying notes are an integral part of these consolidated financial statements.

C L E A R W A T E R P A P E R C O R P O R A T I O N 2 0 1 0 F O R M 1 0 - K

45

CLEARWATER PAPER CORPORATION
Consolidated Balance Sheets
(Dollars in thousands – except share data)

ASSETS
Current assets:

Cash
Restricted cash
Short-term investments
Receivables, net
Taxes receivable
Inventories
Deferred tax assets
Prepaid expenses

Total current assets

Property, plant and equipment, net
Goodwill
Intangible assets
Other assets

AT DECEMBER 31,

2010

2009

$

18,928
3,637
126,095
153,335
10,354
228,321
37,374
11,415

589,459

654,456
229,533
56,400
15,488

$

2,824
—
187,926
94,458
101,343
169,761
12,926
3,053

572,291

364,024
—
—
11,148

$1,545,336

$ 947,463

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable and accrued liabilities
Current liability for pensions and other postretirement employee benefits
Current portion of long-term debt

$ 184,604
9,749
760

$ 109,775
9,933
—

Total current liabilities

Long-term debt
Liability for pensions and other postretirement employee benefits
Other long-term obligations
Accrued taxes
Deferred taxes
Stockholders’ equity:

Preferred stock, par value $0.0001 per share, 5,000,000 authorized

shares, no shares issued

Common stock, par value $0.0001 per share, 100,000,000 authorized

shares, 11,478,909 and 11,366,129 shares issued

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax

Total stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

195,113

538,314
187,116
23,369
72,011
61,064

119,708

148,285
236,422
5,825
73,487
—

—

—

1
310,821
255,879
(98,352)

468,349

1
308,618
182,079
(126,962)

363,736

$1,545,336

$ 947,463

46

CLEARWATER PAPER CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)

CASH FLOWS FROM OPERATIONS
Net earnings
Adjustments to reconcile net earnings to net operating cash flows:

Depreciation and amortization
Debt retirement costs
Deferred taxes
Equity-based compensation expense
Employee benefit plans

Change in working capital, net of acquisition
Decrease (increase) in taxes receivable
Increase in other assets
Excess tax benefit from equity-based payment arrangements
Change in non-current accrued taxes
Funding of qualified pension plans
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING
Change in short-term investments
Additions to plant and equipment
Acquisition of Cellu Tissue, net of cash acquired
Other, net
Net cash used for investing activities
CASH FLOWS FROM FINANCING
Change in book overdrafts
Net proceeds from long-term debt
Repayment of Cellu Tissue debt
Deferred loan fees
Excess tax benefit from equity-based payment arrangements
Payment of employee restricted stock tax withholdings
(Decrease) increase in notes payable
Repayment of note payable to Potlatch
Change in payable to Potlatch
Net payments to Potlatch
Other, net
Net cash provided by (used for) financing activities
Increase (decrease) in cash
Balance at beginning of period
Balance at end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW

INFORMATION:
Cash paid for interest
Cash paid for income taxes
Cash received from income tax refunds

FOR THE YEARS ENDED DECEMBER 31,

2010

2009

2008

$ 73,800

$ 182,464

$ 9,743

47,728
—
(14,991)
8,518
15,011
(5,304)
93,754
79
(855)
(4,271)
(25,100)
(2,778)
185,591

61,926
(46,086)
(243,778)
—
(227,938)

(429)
367,500
(304,667)
(1,313)
855
(3,470)
—
—
—
—
(25)
58,451
16,104
2,824
$ 18,928

47,418
6,250
(4,597)
5,589
14,160
1,768
(101,343)
(474)
(64)
73,487
—
106
224,764

(177,126)
(19,328)
—
67
(196,387)

13
145,188
—
(1,232)
64
—
(50,000)
(106,250)
(16,529)
—
(25)
(28,771)
(394)
3,218
2,824

$

46,954
—
4,934
2,322
1,084
(21,190)
—
(1,576)
—
—
—
(213)
42,058

(10,800)
(21,306)
—
575
(31,531)

8,846
—
—
(2,753)
—
—
50,000
—
16,529
(79,882)
(58)
(7,318)
3,209
9
$ 3,218

$ 15,938
28,596
101,393

$ 15,063
41,264
—

$

—
—
—

We paid no interest or income taxes, nor did we receive any income tax refunds in 2008 due to Potlatch’s
to the spin-off. Certain 2009 amounts have been
centralized approach to cash management prior
reclassified to conform to the 2010 presentation.
In 2010, non-cash increases in property, plant and
equipment were $12.9 million, of which $0.9 million were included in accounts payable and accrued
liabilities, and $12.0 million was included in other long-term obligations.

The accompanying notes are an integral part of these consolidated financial statements.

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CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
(In thousands)

Balance, December 31, 2007

Net earnings
Restricted stock unit awards
Pension and OPEB, net of tax

of $(49,192)

Net transactions with Potlatch

Corporation

Spin-off from Potlatch

Corporation

Balance, December 31, 2008

Net earnings
Performance share and

restricted stock unit awards
Pension and OPEB, net of tax

of $(519)

Spin-off from Potlatch

Corporation

Balance, December 31, 2009

Net Earnings
Performance share and

restricted stock unit awards
Pension and OPEB, net of tax

of $15,223

Recognition of deferred taxes
related to actuarial gain on
other postretirement
employee benefit
obligations

COMMON STOCK

SHARES AMOUNT

ADDITIONAL
PAID-IN
CAPITAL

RETAINED
EARNINGS
(DEFICIT)

POTLATCH’S
NET
INVESTMENT

ACCUMULATED
OTHER
COMPREHENSIVE
LOSS

TOTAL
STOCKHOLDERS’
EQUITY

— $— $
—
—

—
—

— $
—
172

— $ 317,240
10,128
—

(385)
—

$ (49,208)
—
—

$268,032
9,743
172

—

—

—

—

—

—

— (20,017)

—

—

(76,941)

(76,941)

1 307,350

— (307,351)

$ 1 $307,522 $

(385) $

— 182,464

— $(126,149)
—
—

$180,989
182,464

—

—

(20,017)

—

11,355

11,355
—

11

—

—

—

—

—

2,929

—

— (1,833)

—

—

—

—

—

—

—

2,929

(813)

(813)

—

(1,833)

11,366
—

113

—

$ 1 $308,618 $182,079 $

—

—

—

— 73,800

2,203

—

—

—

— $(126,962)
—
—

$363,736
73,800

—

—

—

2,203

23,811

23,811

—

—

—

—

—

4,799

4,799

Balance, December 31, 2010

11,479

$ 1 $310,821 $255,879 $

— $ (98,352)

$468,349

The accompanying notes are an integral part of these consolidated financial statements.

48

CLEARWATER PAPER CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)

Net earnings

Other comprehensive income (loss), net of tax:

Defined benefit pension and other postretirement employee

benefits:
Net gain (loss) arising during the period, net of tax (expense)

FOR THE YEARS ENDED DECEMBER 31,

2010

2009

2008

$ 73,800

$182,464

$ 9,743

benefit of $(11,188), $4,312, and $48,685

17,499

(6,746)

(76,149)

Prior service credit (cost) arising during the period, net of tax

(expense) benefit of $(71), $ -, and $1,183

112

—

(1,851)

Amortization of actuarial loss included in net periodic cost, net

of tax expense of $(4,194), $(4,053), and $(1,264)

6,560

6,339

1,977

Amortization of prior service credit included in net periodic

cost, net of tax benefit of $230, $260, and $588

Recognition of deferred taxes related to actuarial gain on other

postretirement employee benefit obligations

Other comprehensive income (loss), net of tax

Comprehensive income (loss)

(360)

(406)

(918)

4,799

28,610

—

—

(813)

(76,941)

$102,410

$181,651

$(67,198)

The accompanying notes are an integral part of these consolidated financial statements.

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CLEARWATER PAPER CORPORATION
Notes to Consolidated Financial Statements

NOTE 1 Nature of Operations and Basis of Presentation

On December 16, 2008, Potlatch Corporation, which we refer to in this report as Potlatch, distributed 100%
of the issued and outstanding shares of our common stock to the holders of record of Potlatch common
stock in a tax-free spin-off. Unless the context otherwise requires or unless otherwise indicates, references
in this report to “Clearwater Paper Corporation,” “we,” “our,” “the company” and “us” refer:

▪

▪

for all periods prior to the spin-off, to the Consumer Products and Pulp and Paperboard businesses
separated from Potlatch Corporation in the spin-off; and

for all periods following the spin-off, to Clearwater Paper Corporation and its subsidiaries.

P O T L A T C H ’ S N E T I N V E S T M E N T

Prior to the spin-off, investments by and advances from Potlatch represented Potlatch’s interest in our
recorded net assets. Potlatch used a centralized approach to cash management and the financing of our
operations. As a result, none of Potlatch’s cash or cash equivalents were allocated to us in the financial
statements, except for one local bank account. Except for amounts shown as a note payable to Potlatch, all
transactions between Potlatch and us, including those involving shared assets and liabilities, flowed through
Potlatch’s net investment account. Balances related to purchases and sales between Potlatch and us were
also reflected in Potlatch’s net investment, with the net changes in this account reflected as financing
activities in the accompanying Consolidated Statements of Cash Flows for periods prior to the spin-off.

A C Q U I S I T I O N O F C E L L U T I S S U E H O L D I N G S ,

I N C .

On December 27, 2010, we acquired Cellu Tissue Holdings, Inc., or Cellu Tissue, for 247.0 million in cash.
In connection with the acquisition of Cellu Tissue, we retired Cellu Tissue’s outstanding 11.50% senior
secured notes for $272.2 million and repaid Cellu Tissue’s credit facility of $32.5 million. Cellu Tissue is an
Alpharetta, Georgia-based integrated manufacturer of
tissue products. Cellu Tissue’s beginning
consolidated balance sheet, and four days of its operations, are reflected in our 2010 consolidated financial
statements. See Note 4 for additional information regarding the acquisition.

B A S I S O F P R E S E N T A T I O N O F C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

These consolidated financial statements include the financial condition and results of operations of
intercompany transactions and
Clearwater Paper Corporation and its wholly-owned subsidiaries. All
balances between operations within the company have been eliminated. The consolidated financial
statements and information in this report for periods prior to the spin-off were derived from the historical
accounting records of Potlatch on a carve-out basis. Our historical operating results and cash flows for
periods prior to the spin-off may not be indicative of what they would have been had we been a stand-alone
entity, nor are they necessarily indicative of what our operating results and cash flows may be in the future.

Our Consolidated Statements of Operations include allocations, prior to the spin-off, of certain costs from
Potlatch directly related to our operations, including: medical costs for hourly and salaried active and retired
employees, hourly employees’ pension, worker’s compensation, general
liability and property insurance,
salaried payroll costs (payroll taxes, pension and other payroll-related costs), equity-based compensation,
management performance award and annual
incentive plan, and a pro-rata share of direct corporate
administration expense for accounting, information systems, accounts payable and accounts receivable. The
direct costs were charged to us based on the weighted average of the underlying employee base performing
the function and payroll or invoices processed, depending on the nature of the cost. In addition to the direct
costs associated with our operations, indirect corporate overhead costs were allocated to us based on an
apportionment factor using relative revenues and assets. Selling and administration costs for Potlatch’s

50

Wood Products segment were allocated to us based on the relative revenues of our wood products
operations in relation to Potlatch’s entire Wood Products segment. Management believes the methodologies
applied for the allocation of costs were reasonable in relation to the historical reporting of Potlatch, but may
not be indicative of costs had we been a stand-alone entity, nor what they may be in the future.

Except for our note payable to Potlatch and related interest expense, no long-term debt or current debt and
related interest costs were allocated to us by Potlatch.

We evaluated all subsequent events through the date these consolidated financial statements are being filed
with the SEC. There were no events or transactions occurring during this subsequent event reporting period
that require disclosure in the notes to the consolidated financial statements.

NOTE 2 Summary of Significant Accounting Policies

S I G N I F I C A N T E S T I M A T E S

The preparation of financial statements in conformity with accounting principles generally accepted in the
to make
United States of America, which we refer to in this report as GAAP, requires management
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales
and expenses during the reporting period. Significant areas requiring the use of estimates and measurement
of uncertainty include the allocations of assets, liabilities and costs for periods prior to the spin-off described
above, determination of net realizable value for deferred tax assets, assessment of impairment, assessment
of environmental matters, allocation of purchase price and fair value estimates for business combinations,
equity-based compensation and pension and postretirement obligation assumptions. Actual results could
differ from those estimates and assumptions.

C A S H , R E S T R I C T E D C A S H A N D S H O R T - T E R M I N V E S T M E N T S

We consider all highly liquid investments with a remaining maturity of three months or less at the date of
purchase to be cash equivalents. Cash and cash equivalents that serve as collateral
financial
instruments such as letters of credit are classified as restricted cash. Restricted cash in which the underlying
instrument has a term of greater than twelve months from the balance sheet date is classified as non-current
and is included in “Other assets” on our Consolidated Balance Sheet. Our short-term investments are
invested in time or demand deposits, certificates of deposit and U.S. Treasury and U.S. government agency
obligations, all of which have very short maturity periods, and they therefore earn an interest rate
commensurate with low-risk instruments. We do not attempt to hedge our exposure to interest rate risk for
our short-term investments.

for

T R A D E A C C O U N T S R E C E I V A B L E

Trade accounts receivable are stated at the amount we expect to collect. Trade accounts receivable do not
bear interest. The allowance for doubtful accounts is our best estimate of the losses we expect will result
from the inability of our customers to make required payments. We generally determine the allowance based
on a combination of actual historical write-off experience and an analysis of specific customer accounts. We
periodically review our allowance for doubtful accounts, and adjustments to the valuation allowance are
charged to income. Trade accounts receivable balances that remain outstanding after we have used
reasonable collection efforts are written off through a charge to the valuation allowance and a credit to
accounts receivable. As of December 31, 2010 and 2009, we had an allowance for doubtful accounts of $1.0
million based on our estimates of the collectability of outstanding receivables as of those dates.

I N V E N T O R I E S

Inventories are stated at the lower of market or current average cost using the average cost method, except
that the last-in, first-out, or LIFO, method is used to determine cost of logs, chips, sawdust and the majority
of our lumber.

C L E A R W A T E R P A P E R C O R P O R A T I O N 2 0 1 0 F O R M 1 0 - K

51

P R O P E R T I E S

Property, plant and equipment are stated at cost, including any interest costs capitalized, less accumulated
depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the
straight-line method. Estimated useful lives generally range from 10 to 30 years for land improvements; 10
to 40 years for buildings and improvements; 5 to 25 years for machinery and equipment; and 2 to 15 years
for office and other equipment. Assets we acquire through business combinations have estimated lives that
are typically shorter than the assets we construct or buy new.

L O N G - L I V E D A S S E T S

Impairments of long-lived assets are accounted for in accordance with guidance provided by the Financial
Accounting Standards Board, or FASB,
long-lived assets. An
impairment of long-lived assets exists when the carrying value of an asset exceeds its fair value and when
the carrying value is not recoverable through future undiscounted cash flows from operations. We review the
carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable.

regarding impairment or disposal of

G O O D W I L L A N D I N T A N G I B L E S

Goodwill and intangible assets have resulted from our acquisition of Cellu Tissue. We use estimates in
determining and assigning the fair value of goodwill and intangible assets, including estimates of useful lives
of intangible assets, the amount and timing of related future cash flows, and fair values of the related
operations. Our intangible assets have finite lives, are amortized over their estimated useful lives and are
tested for impairment when events or changes in circumstances indicate the carrying value may not be
recoverable.

Goodwill from an acquisition represents the excess of the cost of a business acquired over the net of the
amounts assigned to assets acquired, including identifiable intangible assets and liabilities assumed. As a
result of our acquisition of Cellu Tissue, we recorded $229.5 million of goodwill on our Consolidated Balance
Sheet as of December 31, 2010. Goodwill is not amortized but is tested for impairment annually at year-end,
and at any time when events suggest impairment may have occurred. Our goodwill impairment testing will
be performed by comparing the fair value of the reporting unit to its carrying value. In the event the carrying
value exceeds the fair value of the reporting unit, an impairment loss would be recognized to the extent the
carrying amount of the reporting unit’s goodwill exceeds its implied fair value.

I N C O M E T A X E S

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Prior to the spin-off, we were part of Potlatch and for the purposes of U.S. federal and state income taxes
were not directly subject to income taxes, but our business segments were included in the income tax
returns filed under our name, Potlatch Forest Products Corporation, as a taxable real estate investment
trust, or REIT, subsidiary of Potlatch. Our provision for income taxes through the spin-off was determined on
a separate return basis and based on earnings reported in our Consolidated Statements of Operations.

R E V E N U E R E C O G N I T I O N

We recognize revenue when there is persuasive evidence of a sales agreement, the price to the customer is
fixed and determinable, collection is reasonably assured, and title and the risk of loss passes to the
customer. Shipping terms generally indicate when title and the risk of loss have passed. Revenue is
recognized at shipment for sales when shipping terms are FOB (free on board) shipping point. For sales

52

where shipping terms are FOB destination, revenue is recognized when the goods are received by the
customer. Revenue from both domestic and foreign sales of our products can involve shipping terms of
either FOB shipping point or FOB destination or other shipping terms, depending upon the sales agreement
with the customer.

In 2010 and 2009, we had a single customer in the Consumer Products segment, the Kroger Company,
which accounted for approximately $153.7 million and $141.4 million, respectively, or 11%, of our total net
sales in each year. In 2008, we did not have any customer above 10%. Our Consumer Products segment
sells a majority of its products to three national grocery store chains, which combined, accounted for
the Consumer Products segment’s net sales, excluding Cellu Tissue, and
approximately 61% of
approximately 25% of our total net sales in 2010.

We provide for trade promotions, customer cash discounts, customer returns and other deductions as
reductions to revenues in the same period as the related revenues are recognized. Provisions for these
items are determined based on historical experience or specific customer arrangements. The following table
summarizes the total amount of trade promotions, customer cash discounts, customer returns and other
deductions as a percentage of gross billings by business segment
the years ended
December 31, 2010, 2009 and 2008. The majority of the Consumer Products segment’s deductions are
related to trade promotions.

for each of

Consumer Products
Pulp and Paperboard

2010

2009

2008

24% 23% 23%
3%
3%

2%

Revenue is recognized net of any sales taxes collected. Sales taxes, when collected, are recorded as a
current liability and remitted to the appropriate governmental entities.

S H I P P I N G A N D H A N D L I N G C O S T S

Costs for shipping and handling of manufactured goods are included in cost of sales in our Consolidated
Statements of Operations.

E N V I R O N M E N T A L

As part of our corporate policy, we have an ongoing process to monitor, report on and comply with
environmental requirements. Based on this ongoing process, accruals for environmental liabilities that are
not within the scope of specific FASB guidance related to accounting for asset retirement obligations or
conditional asset retirement obligations are established in accordance with guidance related to accounting
for contingencies. We estimate our environmental liabilities based on various assumptions and judgments,
the specific nature of which varies in light of the particular facts and circumstances surrounding each
environmental
liability. These estimates typically reflect assumptions and judgments as to the probable
nature, magnitude and timing of required investigation, remediation and monitoring activities and the
probable cost of these activities. Currently, we are not aware of any material environmental liabilities and
have accrued for only specific environmental remediation costs that we have determined are probable and
for which an amount can be reasonably estimated. Fees for professional services associated with
environmental and legal issues are expensed as incurred.

E M P L O Y E E S

As of December 31, 2010, we had approximately 3,830 employees, of which approximately 2,320 were
employed by our Consumer Products segment, approximately 1,370 were employed by our Pulp and
Paperboard segment and approximately 140 were corporate administration employees. This workforce
consisted of approximately 920 salaried and fixed rate employees and approximately 2,910 hourly
employees. As of December 31, 2010, approximately 50% of the workforce was covered under collective
bargaining agreements.

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Unions represent hourly employees at seven of our manufacturing sites. There are no hourly union labor
contracts expiring in 2011. The union contracts that have expired and are currently being negotiated are set
forth below:

CONTRACT
EXPIRATION
DATE

DIVISION AND LOCATION

UNION

November 1, 2009

Consumer Products Division—

United Steel Workers (USW)

Gouverneur, New York

December 13, 2009 Consumer Products Division—

United Steel Workers (USW)

Menominee, Michigan

APPROXIMATE
NUMBER OF
HOURLY
EMPLOYEES

75

94

August 31, 2010

Consumer Products & Pulp &

United Steel Workers (USW)

1,000

Paperboard Divisions—Lewiston,
Idaho

August 31, 2010

Consumer Products & Pulp and

Paperboard Divisions—Lewiston,
Idaho

International Brotherhood of
Electrical Workers (IBEW)

August 31, 2010

Consumer Products Division—St.

Independent Paperworkers of

Catharines, Ontario

Canada

54

95

H E D G I N G I N S T R U M E N T S

We use derivative financial
instruments to hedge certain foreign currency exposures. These financial
instruments, specifically foreign exchange forward contracts, are not designated as hedges under
accounting guidance. We do not use derivatives for speculative purposes. We recognize these derivative
instruments as either assets or liabilities in our Consolidated Balance Sheets and measure the instruments
at fair value. See Note 17 for a full description of our derivative financial instrument activities and related
accounting policies.

NOTE 3 Recently Adopted Accounting Standards

R E C E N T L Y A D O P T E D A C C O U N T I N G S T A N D A R D S

Business Combinations. During 2010, we applied the new FASB guidance on business combinations that
became effective in 2009. The new guidance on business combinations retains the underlying concepts of
the previously issued standard in that the acquirer of a business is required to account for the business
combination at fair value. As with previous guidance, the assets and liabilities of the acquired business are
recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated
fair values are recorded as goodwill. The new pronouncement results in some changes to the method of
applying the acquisition method of accounting for business combinations in a number of significant aspects.
Under the new guidance, all acquisition costs are expensed as incurred and in-process research and
development costs are recorded at fair value as an indefinite-lived intangible asset. Prior to the adoption,
in-process research and development costs were immediately expensed and acquisition costs were
capitalized. Further, the new guidance generally requires restructuring charges associated with a business
combination to be expensed subsequent to the acquisition date.

54

NOTE 4 Business Combinations

On December 27, 2010, we acquired Cellu Tissue. Cellu Tissue is a private label and specialty tissue
manufacturer with ten sites in the South, Eastern and Midwestern United States and Canada. We acquired
Cellu Tissue to allow us to better serve existing private label grocery customers and expand into new private
label channels by increasing our national manufacturing footprint.

Cellu Tissue was acquired for total equity consideration of $247.0 million, as follows:

▪ $242.2 million cash payment for 100% of the issued and outstanding common stock of Cellu Tissue.

▪ $4.8 million cash payment to the holders of Cellu Tissue stock options and restricted stock, which

represents $12 per share less each option’s exercise price.

We financed the acquisition with existing cash and proceeds from the issuance of $375 million of 7.125%
Senior Notes due 2018 (see Note 10).

The acquisition of Cellu Tissue has resulted in the recognition of goodwill of $229.5 million, which is
attributable to our Consumer Products segment and will not be deductible for tax purposes. Goodwill is the
excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and
liabilities assumed. Goodwill represents the future earnings and cash flow potential of the acquired business
in excess of fair values that are assigned to all other identifiable assets and liabilities. Goodwill arises
because the purchase price paid reflects factors including the strategic fit and expected synergies this
business brings to our existing operations. The expected benefits from synergies relate to new and existing
customer growth,
increased through-air-dried tissue capacity and shipping and transportation logistical
improvements.

We have allocated the purchase price to the net assets of Cellu Tissue acquired in the acquisition based on
our estimates of the fair value of assets and liabilities as follows:

(In thousands)

Current assets
Property, plant and equipment
Goodwill
Intangibles
Other assets

Assets acquired

Current liabilities
Long-term debt, less current portion
Deferred income taxes
Other liabilities

Liabilities assumed

Net assets acquired

Amount

$128,079
276,499
229,533
56,400
1,500

692,011

97,071
287,002
60,221
732

445,026

$246,985

We have estimated the fair value of the assets and liabilities of Cellu Tissue utilizing information available at
the time of acquisition. We considered outside third-party appraisals of the tangible and intangible assets to
determine the applicable fair market values. Intangible assets are being amortized on a straight-line basis
over ten years for trade names and trademarks, nine years for customer relationships and 2.5 years for
non-compete agreements.

Long-term debt includes the fair value of Cellu Tissue’s senior subordinated notes as of December 27, 2010,
which were retired concurrently with the acquisition. We also repaid Cellu Tissue’s credit facility of $32.5
million. We assumed Cellu Tissue’s industrial revenue bonds of $15.6 million.

All costs associated with advisory, legal and other due diligence-related services performed in connection
with acquisition-related activity are expensed as incurred. These costs were $20.4 million for 2010 and are
recorded as selling, general and administrative expenses on the Consolidated Statements of Operations.

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The consolidated results of operations of Cellu Tissue have been included in our Consolidated Statements
of Operations and Cash Flows starting on December 28, 2010, as well as within our Consumer Products
segment 2010 results discussed in Note 18. The consolidated results of operations for 2010 include $7.3
million of net sales and $6.3 million of operating losses from the Cellu Tissue operations after the
December 27, 2010 acquisition date, including approximately $6.1 million of pre-tax employee severance
expenses.

The following unaudited pro forma financial information presents the combined results of operations as if
Cellu Tissue had been combined with us as of the beginning of 2009. The pro forma financial information
includes the accounting effects of the business combination, including the adjustment of amortization of
interest expense and elimination of
intangible assets, depreciation of property, plant and equipment,
intercompany sales, as if Cellu Tissue were actually combined with us as of
the beginning of 2009.
However, the information does not reflect the costs of any integration activities. The pro forma results
include estimates and assumptions, which management believes are reasonable. The unaudited pro forma
financial information below is not necessarily indicative of either future results of operations or results that
might have been achieved had Cellu Tissue been combined with us as of the beginning of 2009.

(In thousands; Unaudited)

Pro forma net sales
Pro forma net earnings

NOTE 5 Inventories

(In thousands)

Logs, pulpwood, chips and sawdust
Lumber
Pulp, paperboard and tissue products
Materials and supplies

Valued at lower of cost or market:

LIFO basis
Average cost basis

2010

2009

$1,902,579
88,713

$1,761,350
191,514

2010

2009

$ 19,901
13,065
139,404
55,951

$ 24,120
12,068
92,293
41,280

$228,321

$169,761

$ 32,472
195,849

$ 35,637
134,124

$228,321

$169,761

Inventories are stated at the lower of market or current average cost using the average cost method, except
that the last-in, first-out, or LIFO, method is used to determine cost of logs, chips, sawdust and the majority
of our lumber. If the LIFO inventory had been priced at lower of current average cost or market, the values
would have been approximately $12.9 million and $13.8 million higher at December 31, 2010 and 2009,
respectively. Reductions in quantities of LIFO inventories valued at costs prevailing in prior years had the
effect of decreasing earnings, net of income taxes, by less than $0.1 million in 2010, and increasing
earnings, net of income taxes, by $1.0 million and $0.4 million in 2009 and 2008, respectively.

56

NOTE 6 Property, Plant and Equipment

(In thousands)

Land
Land improvements
Buildings and improvements
Machinery and equipment
Office and other equipment
Construction in progress

Less accumulated depreciation

2010

2009

$

11,818
51,017
238,031
1,576,932
5,787
60,932

$

4,729
45,505
180,731
1,375,195
3,027
6,094

$ 1,944,517
(1,290,061)

$ 1,615,281
(1,251,257)

$

654,456

$

364,024

Depreciation expense totaled $46.2 million, $46.4 million and $46.9 million in 2010, 2009 and 2008,
respectively. For the year ended December 31, 2010, we capitalized $0.5 million of interest expense
associated with the construction of our new manufacturing facilities in Shelby, North Carolina. There was no
interest expense capitalized for the years ended December 31, 2009 and 2008.

NOTE 7 Goodwill and Intangible Assets

We account for goodwill and intangible assets in accordance with the applicable accounting guidance.
Goodwill represents the excess of the purchase price in a business combination over the fair value of net
tangible and intangible assets acquired. Intangible asset amounts represent the acquisition date fair values
of identifiable intangible assets acquired. The fair values of the intangible assets are determined by using
the income approach, discounting projected future cash flows based on management’s expectations of the
current and future operating environment. The rates used to discount projected future cash flows reflect a
weighted average cost of capital based on our industry, capital structure and risk premiums including those
reflected in the current market capitalization. Definite-lived intangible assets are amortized over their useful
lives, which range from 2.5 to 10 years.

these assets are periodically reviewed for impairment (at

The carrying amounts of
least annually for
goodwill) and whenever events or changes in circumstances indicate that the carrying value of these assets
may not be recoverable. We did not recognize any goodwill or intangible asset impairment during 2010. We
also review intangible assets subject to amortization to determine if any adverse conditions exist or a
change in circumstances has occurred that would indicate a change in the remaining useful life.

Additions to goodwill and intangible assets during 2010 relate to the acquisition of Cellu Tissue as discussed
in Note 4 above.

Intangible assets are comprised of the following at December 31, 2010 (in thousands, except useful lives):

(Dollars in thousands)

Customer relationships
Trade names and trademarks
Non-compete agreements

Total intangible assets

Useful
Life

9.0
10.0
2.5

Historical
Cost

$50,000
5,300
1,100

$56,400

Accumulated
Amortization

Net
Balance

$— $50,000
5,300
1,100

—
—

$— $56,400

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As of December 31, 2010, estimated future amortization expense related to intangible assets is as follows
(in thousands):

Years ending December 31,

2011
2012
2013
2014
2015
Thereafter

Total

Amount

$ 6,526
6,526
6,306
6,086
6,086
24,870

$56,400

NOTE 8 Income Taxes
The provision (benefit) for income taxes was as follows:

(In thousands)

Current

Federal
State
Foreign
Deferred
Federal
State
Foreign

Income tax provision

2010

2009

2008

$ 12,331
5,056
—

$87,543
10,804
—

$

592
68
—

(16,371)
1,380
—

(5,095)
(31)
—

4,428
506
—

$ 2,396

$93,221

$ 5,594

The income tax provision differs from the amount computed by applying the statutory federal income tax
rate of 35.0% to earnings before income taxes due to the following:

(In thousands)

Computed expected tax provision
State and local taxes, net of federal income tax impact
State investment tax credits
Federal credits
Federal manufacturing deduction
Uncertain tax positions
Patient Protection and Affordable Care Act
Non-Deductible Acquisition Costs
Other

Income tax provision

Effective tax rate

2010

2009

2008

$ 26,668
4,157
(1,649)
(25,153)
(2,993)
(3,796)
3,290
1,263
609

$96,490
6,035
958
(9,922)
(2,373)
—
—
—
2,033

$ 5,368
613
(1,010)
—
—
—
—
—
623

$ 2,396

$93,221

$ 5,594

3.1%

33.8%

36.5%

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 “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, 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

58

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. We have
amended our 2009 corporate income tax return and claimed approximately 25.3 million gallons of fuel under
the CBPC for that portion of black liquor produced in 2009 for which we did not claim the AFMTC. This
equated to an additional federal
income tax credit of $25.5 million, which was recognized in the fourth
quarter of 2010. Additionally, we are amending our 2009 corporate income tax return to convert
approximately 39.8 million gallons of fuel under the AFMTC to the CBPC. This equated to an additional
federal income tax credit of $20.3 million, which was recognized in the fourth quarter of 2010. The CBPC is
a non-refundable income tax credit which is deemed to be taxable income in the year the benefit is received.
Thus the CBPC benefit was reduced by the related corporate income tax obligation, resulting in an
incremental, after tax benefit of $27.1 million during the fourth quarter of 2010, which is included in the
income tax provision on our Consolidated Statements of Operations.

As a result of the March 2010 enactment of the Patient Protection and Affordable Care Act of 2010, as
modified by the Health Care and Education Reconciliation Act of 2010, we were required to reverse deferred
tax assets of $4.4 million through the tax provision as a result of the elimination of the income tax deduction
related to prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree
drug subsidy beginning in January 2013.

temporary differences creating deferred tax assets and liabilities at

The tax effects of significant
December 31 were:

(In thousands)

Deferred tax assets:
Employee benefits
Postretirement employee benefits
Incentive compensation
Pensions
Federal and state credit carryforward
Net operating loss carryforward
Federal benefit from state taxes resulting from uncertain tax positions
Other

Total deferred tax assets
Valuation allowance

Deferred tax assets, net of valuation allowance

Deferred tax liabilities:
Plant and equipment
Intangible assets
Inventories
Accrued liabilities

Total deferred tax liabilities

Net deferred tax assets (liabilities)

Net deferred tax assets (liabilities) consist of:

(In thousands)

Current deferred tax assets
Current deferred tax liability

Net current deferred tax assets

Non-current deferred tax assets
Non-current deferred tax liabilities

Net noncurrent deferred tax assets (liabilities)

Net deferred tax assets (liabilities)

2010

2009

$ 11,599
55,186
2,835
22,067
45,238
21,444
5,595
3,146

$

7,964
58,667
1,974
37,412
5,184
—
6,071
5,906

167,110
(5,229)

123,178
—

$ 161,881

$ 123,178

$(168,572)
(13,238)
(3,350)
(411)

$(101,505)
—
(2,353)
(2,190)

(185,571)

(106,048)

$ (23,690)

$ 17,130

2010

2009

$ 37,374
—

$ 15,116
(2,190)

37,374

12,926

124,507
(185,571)

(61,064)

108,062
(103,858)

4,204

$ (23,690)

$ 17,130

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As a result of our acquisition of Cellu Tissue, there were a number of new tax attributes added to the
summary of deferred tax assets and liabilities. Cellu Tissue had federal net operating losses, or NOL, of
approximately $50.2 million. Pursuant to Internal Revenue Code section 382, the amount of NOL that we
can utilize in a tax year is limited. This carryforward will expire in 2025. Additionally, Cellu Tissue had state
NOL carryforwards of approximately $78.5 million as of December 31, 2010. These carryforwards expire at
various dates from 2023 through 2025. These net operating losses have been added to the summary of
deferred tax assets. Cellu Tissue also had foreign income tax credit carryforwards associated with its
Canadian operations, Interlake Acquisition Corporation, of approximately $3.2 million that expire at various
dates from 2021 through 2024. As part of the acquisition, Cellu Tissue’s assets and liabilities were adjusted
to fair value for financial reporting purposes; however, for tax purposes, these items are recorded based on
Cellu Tissue’s tax basis prior to the acquisition. This fair value adjustment results in a large increase in the
deferred tax liability when comparing December 31, 2009 to December 31, 2010.

A valuation allowance has been created for certain state tax credits and net operating loss carryforwards
due to uncertainty of sufficient state taxable income prior to expiration of available carryover periods in
separate filing jurisdictions resulting from the Cellu Tissue acquisition. Additionally, a valuation allowance
has been created for foreign tax credits relating to Canadian operations due to uncertainty of sufficient
foreign source income prior to expiration of available carryover periods.

We believe it is more likely than not that we will have sufficient future taxable income to realize our deferred
tax assets. In assessing whether deferred tax assets are realizable, we consider whether it is more likely
than not that some or all of the deferred tax assets will be realized. The ultimate realization of deferred tax
assets depends on the generation of future taxable income during the periods in which those temporary
differences are deductible. We consider the scheduled reversal of deferred tax liabilities (including the
impact of available carryforward periods), projected taxable income and amounts of
taxable income
generated historically in making this assessment. In considering such factors, including our overall net
deferred tax liability as of December 31, 2010, these items will create sufficient taxable income to utilize the
deferred tax assets, except those previously noted as requiring a valuation allowance.

Tax years subject to examination by major taxing jurisdictions are as follows:

Jurisdiction

United States
Canada
Arkansas
California
Idaho
Illinois
Wisconsin

Years

2006 – 2010
2007 – 2010
2006 – 2010
2006 – 2010
2006 – 2010
2006 – 2010
2009 – 2010

As of December 31, 2010 there were no undistributed earnings relating to our Canadian subsidiary, Interlake
Acquisition Corporation as all earnings were repatriated under Cellu Tissue Holdings ownership.
Management’s intention is to reinvest future earnings indefinitely.

60

A review of our uncertain income tax positions at December 31, 2010 indicates that liabilities are required to
be recorded for gross unrecognized tax benefits. The following presents a roll forward of our unrecognized
tax benefits and associated interest and penalties included in the balance sheet.

(In thousands)

Balance at January 1, 2010
Changes in prior year tax positions
Increase in current year tax positions
Reductions as a result of a lapse of the applicable statute of

limitations

Balance at December 31, 2010

Gross
Unrecognized
Tax Benefits,
Excluding
Interest and
Penalties

$73,487
(5,116)
1,262

Interest
and
Penalties

$ —
2,378
—

Total Gross
Unrecognized
Tax Benefits

$73,487
(2,738)
1,262

—

—

—

$69,633

$2,378

$72,011

At December 31, 2010, all of the gross unrecognized tax benefits were included in the non-current portion of
our income tax liabilities because the settlement period cannot be determined; however, it is not expected to
be within the next twelve months.

Unrecognized tax benefits at December 31, 2010, if recognized, would favorably impact our effective tax
rate by decreasing our tax provision by $66.4 million.

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income tax.
For the year ended December 31, 2010, we accrued $2.4 million of interest and no penalties in our income
tax provision. For the years ended December 31, 2009 and 2008, we recognized no interest or penalties in
our income tax provision and we had no amounts accrued for the payment of interest.

We entered into a tax sharing agreement with Potlatch Corporation upon the spin-off that will generally
govern each party’s rights, responsibilities and obligations with respect to taxes, including ordinary course of
business taxes and taxes, if any, incurred as a result of any failure of the spin-off to be tax free. Under the
tax sharing agreement, we expect that, with certain exceptions, we will be responsible for the payment of all
income and non-income taxes attributable to our operations. The tax sharing agreement also sets forth our
rights and responsibilities for tax obligations and refunds attributable to tax periods prior to the spin-off date.

Under the tax sharing agreement, we will be responsible for any taxes imposed on Potlatch that arise from
the failure of the spin-off, together with certain related transactions, to qualify as a tax-free distribution for
U.S. federal income tax purposes, including any tax that would result if Potlatch were to fail to qualify as a
REIT as a result of income recognized by Potlatch if the spin-off were determined to be taxable, to the extent
such failure to qualify is attributable to actions, events or transactions relating to our stock, assets or
business, or a breach of the relevant representations or covenants we made in the tax sharing agreement.
The tax sharing agreement imposes restrictions on our and Potlatch’s ability to engage in certain actions
following the spin-off and sets forth the respective obligations of each party with respect to the filing of tax
returns, the administration of tax contests, assistance and cooperation and other matters.

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NOTE 9 Accounts Payable and Accrued Liabilities

(In thousands)

Trade accounts payable
Accrued wages, salaries and employee benefits
Accrued taxes other than income taxes payable
Accrued utilities
Book overdrafts
Accrued interest
Accrued discounts and allowances
Accrued transportation
Accrued commissions
Other

2010

2009

$ 91,688
42,066
10,249
8,514
8,430
5,977
4,981
3,337
1,686
7,676

$ 40,715
26,758
10,980
5,091
8,859
819
10,861
1,636
1,054
3,002

$184,604

$109,775

NOTE 10 Notes Payable

$ 3 7 5 M I L L I O N S E N I O R N O T E S D U E 2 0 1 8

On October 22, 2010, we sold $375 million aggregate principal amount of senior notes. The 2010 Notes
mature on November 1, 2018, have an interest rate of 7.125% and were issued at their face value. The
issuance of these notes generated net proceeds of $367.5 million after deducting offering expenses.

The 2010 Notes are guaranteed by our subsidiary, Cellu Tissue, and each of our existing and future direct
and indirect domestic subsidiaries. The 2010 Notes are equal in right of payment with all existing and future
unsecured senior indebtedness and are senior in right of payment to any future subordinated indebtedness.
The 2010 Notes are effectively subordinated to all of our existing and future secured indebtedness, including
borrowings under our secured revolving credit facility, which is secured by all accounts receivable, inventory
and cash.

Prior to November 1, 2013, we may redeem up to 35% of the 2010 Notes at a redemption price equal to
107.125% of the principal amount plus accrued and unpaid interest with the proceeds from one or more
qualified equity offerings. We have the option to redeem all or a portion of the 2010 Notes at any time before
November 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid
interest and a “make whole” premium. On or after November 1, 2014, we may redeem all or a portion of the
2010 Notes at specified redemption prices plus accrued and unpaid interest. In addition, we may be required
to make an offer to purchase the 2010 Notes upon the sale of certain assets and upon a change of control.

In connection with the issuance of the 2010 Notes, we entered into a registration rights agreement dated as
of October 22, 2010 with the initial purchaser of
to the registration rights
agreement, we have agreed to file a registration statement with the SEC pursuant to which we will offer to
exchange the 2010 Notes for notes with substantially similar terms that are registered under the Securities
Act. In certain circumstances, including if applicable interpretations of the staff of the SEC do not permit us
to effect the exchange of the Notes, we will be required to make available an effective shelf registration
statement
If we default on certain obligations under
the Registration Rights Agreement, we will be required to pay additional interest on the 2010 Notes with
respect to which such default exists until the default is cured.

the 2010 Notes. Pursuant

registering the resale of

the 2010 Notes.

The terms of the 2010 Notes limit our ability to pay dividends or repurchase equity interests from our
stockholders; borrow money; incur liens; make investments; sell assets; create restrictions on the payment
of dividends or other amounts to us from any restricted subsidiaries; enter into sale and lease-back
transactions; and consolidate, merge or sell all or substantially all of our assets.

62

$ 1 5 0 M I L L I O N S E N I O R N O T E S D U E 2 0 1 6

On June 11, 2009, we sold $150 million aggregate principal amount of senior notes. The 2009 Notes are
due on June 15, 2016, have an interest rate of 10.625% and were issued at a price equal to 98.792% of
their face value. The issuance of these notes generated net proceeds of $145.2 million after deducting
discounts and offering expenses.

We transferred approximately $107 million of these proceeds to a trustee in satisfaction of our obligation
related to the indenture under which $100 million principal amount of credit sensitive debentures due
December 1, 2009, were originally issued by an affiliate of Potlatch. The obligation to repay the credit
sensitive debentures and all interest through maturity was retained by us prior to our spin-off from Potlatch.
The $107 million consisted of the $100 million principal amount underlying the credit sensitive debentures,
plus $6.3 million recorded as “Debt retirement costs” on our 2009 Consolidated Statement of Operations,
the debentures on December 1, 2009, plus
representing our
approximately $0.7 million included as “Restricted cash” on our Consolidated Balance Sheet. The $0.7
million of restricted cash represented the difference between the current estimate of the interest payment
due to holders of the debentures on December 1, 2009, and the interest payment that would be owed on
December 1, 2009, if the maximum interest rate applicable to the credit sensitive debentures were to have
applied. The $0.7 million was returned to us during the fourth quarter of 2009 after payment of the $100.0
million principal amount and accrued interest on December 1, 2009, and thus was no longer included as
restricted cash as of December 31, 2009.

interest obligation due to holders of

In our 2009 Consolidated Statement of Cash Flows as presented in prior filings, we previously reflected the
proceeds from the debt issuance on a net basis. In the accompanying Consolidated Statements of Cash
Flows, we have reclassified such 2009 amounts to reflect the proceeds on a gross basis rather than a net
basis. Such reclassification had no effect on net cash used for financing activities.

The 2009 Notes are general unsecured obligations. They are equal in right of payment with all existing and
future unsecured senior indebtedness and are senior in right of payment
to any future subordinated
indebtedness. The 2009 Notes are effectively subordinated to all of our existing and future secured
indebtedness, including borrowings under our secured revolving credit facility, which is secured by all
accounts receivable, inventory and cash. The 2009 Notes are guaranteed by certain of our existing and
future direct and indirect domestic subsidiaries.

Prior to June 15, 2012, we may redeem, at any time at our option, up to 35% of the aggregate principal
amount of the 2009 Notes with the net proceeds of qualified equity offerings at a redemption price equal to
110.625% of the principal amount thereof plus accrued and unpaid interest. We have the option to redeem
all or a portion of the 2009 Notes at any time prior to June 15, 2013 at a redemption price equal to 100% of
the principal amount thereof plus a “make whole” premium and accrued and unpaid interest. We have the
right to redeem all or a portion of the 2009 Notes on or after June 15, 2013 at stated redemption prices plus
accrued and unpaid interest.

The terms of the 2009 Notes limit our ability and the ability of any restricted subsidiaries to borrow money;
pay dividends; redeem or repurchase capital stock; make investments; sell assets; create restrictions on the
payment of dividends or other amounts to us from any restricted subsidiaries; enter into transactions with
affiliates; enter into sale and lease-back transactions; create liens; and consolidate, merge or sell all or
substantially all of our assets.

C I T Y F O R E S T I N D U S T R I A L B O N D S

Prior to our acquisition of Cellu Tissue, Cellu Tissue-CityForest LLC, or CityForest, a wholly-owned
subsidiary of Cellu Tissue, was party to a loan agreement, dated as of March 1, 1998, with the City of
Ladysmith, Wisconsin. Pursuant to this agreement the City of Ladysmith loaned the proceeds of its Variable
Rate Demand Solid Waste Disposal Facility Revenue Bonds, Series 1998, or IRBs, to CityForest to finance
the construction by CityForest of a solid waste disposal facility. As the result of our acquisition of Cellu
Tissue, we have assumed the IRBs. $15.6 million in aggregate principal face amount of the IRBs is

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outstanding at December 31, 2010. The IRBs have scheduled semi-annual payments of principal, with the
balance payable at maturity on March 1, 2028. The variable interest rate on the IRBs was 2.6% and 2.5% as
of December 31, 2010 and 2009, respectively. The IRBs are guaranteed by Cellu Tissue and contain
various customary covenants and events of default.

CityForest is required, under the terms of the Indenture of Trust governing the IRBs, to provide a letter of
credit in favor of the trustee. CityForest previously entered into the Amended and Restated Reimbursement
Agreement, dated as of March 21, 2007, by and between CityForest and Associated Bank, National
Association, or Associated Bank, pursuant to which Associated Bank provided a letter of credit to the
trustee.

In connection with our acquisition of Cellu Tissue, CityForest entered into a Second Amended and Restated
Reimbursement Agreement, dated as of December 27, 2010, with Associated Bank amending and restating
the original Reimbursement Agreement. The trustee is permitted to draw upon the letter of credit to pay
principal and interest due on the IRBs, and to provide liquidity to purchase IRBs put to CityForest by
bondholders and not remarketed; and CityForest is obligated under the Second Amended and Restated
Reimbursement Agreement to reimburse Associated Bank for any such draws. The expiration date of the
letter of credit is February 15, 2012. Under the terms of the Second Amended and Restated Reimbursement
Agreement, CityForest is required, on or before September 30, 2011, to cause the letter of credit to be
replaced with a substitute letter of credit from a third-party bank. CityForest’s failure to cause the letter of
credit to be replaced by September 30, 2011 will constitute an event of default under the Second Amended
and Restated Reimbursement Agreement.

The Second Amended and Restated Reimbursement Agreement contains customary events of default,
including payment defaults; breaches of representations and warranties; covenant defaults; cross-defaults to
certain other debt; certain events of bankruptcy and insolvency; judgment defaults; certain defaults related to
the Employee Retirement Income Security Act of 1974, as amended; and a change of control of Clearwater
Paper.

indebtedness;

The Second Amended and Restated Reimbursement Agreement also contains various customary negative
covenants including limitations on:
liens; acquisitions, mergers and consolidations;
investments; guarantees; asset sales; sale and leaseback transactions; dividends and distributions;
transactions with affiliates; capital expenditures; and changes to the status of the IRBs. CityForest is also
required to comply on a quarterly basis with a maximum leverage covenant and a minimum fixed charge
coverage covenant. The maximum permitted Leverage Ratio is 2.5 to 1. As of December 31, 2010, the
Leverage Ratio was 1 to 1. The minimum permitted Fixed Charge Coverage Ratio is 1.2 to 1. As of
December 31, 2010, the Fixed Charge Coverage Ratio was 4.5 to 1.

Clearwater Paper has guaranteed all of the obligations of CityForest under the Second Amended and
Restated Reimbursement Agreement, pursuant to a Guaranty, dated as of December 27, 2010 executed in
favor of Associated Bank.

In addition, the Reimbursement Agreement provides that in certain circumstances where Cellu Tissue incurs
indebtedness, as defined, in excess of amounts currently permitted under the CityForest Indenture or
refinances the indebtedness issued under the CityForest Indenture, CityForest may be required to repay all
of its obligations under the revolving credit facility and either cause the bonds to be redeemed or to replace
the revolving credit facility and provide a new letter of credit from another lender. In connection with these
CityForest credit facilities, we had $1.3 million of restricted cash as of December 31, 2010 and 2009, which
is included in other assets on the Consolidated Balance Sheet.

R E V O L V I N G C R E D I T F A C I L I T Y

On November 26, 2008, we entered into a four-year $125 million revolving credit facility with certain financial
institutions. During 2010, the terms of our revolving credit facility were amended to (i) permit our acquisition
of Cellu Tissue, (ii) permit the construction of our new manufacturing facilities in Shelby, North Carolina,
(iii) increase our ability to acquire capital and (iv) modify the factors used in the minimum fixed charge
coverage ratio. These amendments resulted in the removal of a $10 million borrowing capacity reserve
previously required. The amount available to us under the revolving credit facility is based on the lesser of
85% of our eligible accounts receivable plus approximately 65% of our eligible inventory, or $125 million.

64

As of December 31, 2010, there were no borrowings outstanding under the credit facility, but approximately
$3.5 million of the credit facility was being used to support outstanding standby letters of credit. Loans under
the credit facility bear interest at LIBOR plus between 2.25% and 2.75% for LIBOR loans, and a base rate
effectively equal to the agent bank’s prime rate plus between 0.75% and 1.25% for other loans. The
percentage margin on all loans is based on our fixed charge coverage ratio for the last twelve months, which
is recalculated on a quarterly basis. As of December 31, 2010, we would have been permitted to draw $121
million under the credit facility at LIBOR plus 2.50%.

A minimum fixed charge coverage ratio is the only financial covenant requirement under our credit facility
and is triggered when an event of default exists or when availability falls below 20%, at which time the
minimum fixed charge coverage ratio must be at least 1.0 to 1.0. As of December 31, 2010, the fixed charge
coverage ratio for the last twelve months was 1.6 to 1.0.

Our obligations under the revolving credit facility are secured by all accounts receivable, inventory and cash.
The credit facility agreement contains various provisions that limit our discretion in the operation of our
business by restricting our ability to, among other things:

▪ pay dividends or repurchase equity interests from our stockholders;
▪ create, incur or guarantee certain debt;
▪

incur liens on certain properties;

▪ make capital expenditures in amounts in excess of those permitted under the revolving credit

agreement;

▪ enter into certain affiliate transactions;
▪ enter into certain hedging arrangements; and
▪ consolidate with or merge with another entity.

NOTE 11 Savings, Pension and Other Postretirement Employee Benefit

Plans

Certain of our employees are eligible to participate in defined contribution savings and defined benefit
postretirement plans. These include 401(k) savings plans, defined benefit pension plans and Other
Postretirement Employee Benefit, or OPEB, plans, each of which is discussed below.

401(k) Savings Plans

Substantially all of our employees are eligible to participate in 401(k) savings plans, which include a
company match component. In association with the salaried pension plan amendment discussed below, the
company contribution to the Clearwater Paper Corporation Salaried 401(k) Plan will be increased in 2012 in
order to compensate for the amendment of the pension plan. In 2010, 2009 and 2008, excluding Cellu
Tissue, we made matching 401(k) contributions on behalf of employees of $5.7 million, $5.5 million and $5.0
million, respectively.

Defined Benefit Pension Plans

All of our salaried employees and a portion of our hourly employees are covered by company-sponsored
noncontributory defined benefit pension plans. As a result of the spin-off, we retained the salaried pension
plan and the hourly pension plan, which previously covered participants of both Potlatch and Clearwater
Paper. Potlatch established its own salaried and hourly pension plans to cover its participants. The
sponsorship of the existing Clearwater Paper hourly non-represented pension plan was transferred to
Potlatch in connection with the spin-off, and Potlatch assumed all liabilities relating to such plan.

Hourly employees at two of our manufacturing facilities participate in multi-employer defined benefit pension
plans: the Paper Industry Union Management Pension Fund, which is managed by United Steelworkers, or
USW, Benefits; and the International Association of Machinist & Aerospace Workers National Pension Fund.

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We make contributions to these plans, as well as make contributions to a trust fund established to provide
retiree medical benefits for a portion of these employees, which is also managed by USW Benefits. Included
in our expenses for 2010, 2009 and 2008 are contributions we made to these plans in the amount of $8.5
million, $8.2 million and $8.5 million, respectively.

Effective December 15, 2010, the salaried pension plan was closed to new entrants and commencing
December 31, 2011, the salaried pension plan will be frozen and cease accruing further benefits. In 2010,
we recorded a loss of $0.2 million related to the plan changes in Net Periodic Benefit Cost, and a
corresponding decrease in Other Comprehensive Income. In addition, we recorded a $14.2 million decrease
in our pension liability with a corresponding decrease in Accumulated Other Comprehensive Loss.

OPEB Plans

We also provide benefits under company-sponsored defined benefit retiree health care and life insurance
plans, which cover certain salaried and hourly employees. Most of the retiree health care plans require
retiree contributions and contain other cost-sharing features. The retiree life insurance plans are primarily
noncontributory. After the spin-off, we assumed and became solely responsible for these OPEB obligations
relating to current Clearwater Paper employees and former Potlatch employees who were associated with
Clearwater Paper operations.

As required by current standards governing the accounting for defined benefit pension and other
postretirement plans, we recognized the funded status of our plans on our Consolidated Balance Sheets at
December 31, 2010 and 2009. The funded status is measured as the difference between plan assets at fair
value (with limited exceptions) and the benefit obligation. For a pension plan, the benefit obligation is the
projected benefit obligation; for any other postretirement employee benefit plan, such as a retiree health
care plan, the benefit obligation is the accumulated postretirement employee benefit obligation.

We use a December 31 measurement date for our benefit plans.

The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit
plans as of December 31 are as follows:

(In thousands)

Benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial losses (gains)
Medicare Part D subsidies received
Benefits paid

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

2010

2009

2010

2009

$278,405
8,018
15,374
(14,175)
(590)
—
(15,020)

$250,354
7,043
15,331
—
19,061
—
(13,384)

$ 150,441
995
7,712
—
(9,468)
697
(8,858)

$ 139,495
972
8,442
—
8,658
737
(7,863)

Benefit obligation at end of year

272,012

278,405

141,519

150,441

Fair value of plan assets at beginning of year
Spin-off adjustment
Actual return on plan assets
Employer contribution
Benefits paid

182,477
(628)
24,470
25,351
(15,020)

159,114
3,023
33,507
217
(13,384)

Fair value of plan assets at end of year

216,650

182,477

14
2
—
—
—

16

—
14
—
—
—

14

Funded status at end of year

$ (55,362)

$ (95,928)

$(141,503)

$(150,427)

Amounts recognized in the Consolidated Balance Sheets:

Current liabilities
Noncurrent liabilities

Net amount recognized

66

$

(254)
(55,108)

$

(176)
(95,752)

$ (9,495)
(132,008)

$ (9,757)
(140,670)

$(55,362)

$(95,928)

$(141,503)

$(150,427)

Amounts recognized (pre-tax) in Accumulated Other Comprehensive Loss consist of:

(In thousands)

Net loss
Prior service cost (credit)

Net amount recognized

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

2010

2009

2010

2009

$141,614
6,494

$169,500
7,882

$26,693
(5,701)

$38,247
(7,496)

$148,108

$177,382

$20,992

$30,751

The accumulated benefit obligation for all defined benefit pension plans was $269.5 million and $260.5
million at December 31, 2010, and 2009, respectively.

Information as of December 31 for certain pension plans included above with accumulated benefit
obligations in excess of plan assets were as follows:

(In thousands)

Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets

2010

2009

$272,012
269,456
216,650

$278,405
260,464
182,477

Pre-tax components of Net Periodic Cost (Benefit) and other amounts recognized in Other Comprehensive
Income (Loss) were as follows:

Net Periodic Cost (Benefit):

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

(Dollars in thousands)

2010

2009

2008

2010

2009

2008

Service Cost
Interest Cost
Expected return on plan

assets

Amortization of prior service

cost (credit)

Amortization of actuarial loss
Curtailments

$ 8,018
15,375

$ 7,043
15,331

$ 6,221
14,689

$

995
7,712

$

972
8,442

$ 1,109
8,196

(19,391)

(19,881)

(24,255)

—

—

—

1,205
8,671
183

1,446
6,843
—

1,281
1,181
165

(1,795)
2,083
—

(2,112)
3,549
—

(2,787)
2,060
—

Net periodic cost (benefit)

$ 14,061

$ 10,782

$

(718)

$ 8,995

$10,851

$ 8,578

Other amounts recognized in Other Comprehensive Income (Loss) were as follows:

(Dollars in thousands)

2010

2009

2008

2010

2009

2008

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

Net loss (gain)
Prior service cost (credit)
Amortization of prior service

(cost) credit

Amortization of actuarial loss

Total recognized in other
comprehensive loss
(income)

Total recognized in net

periodic cost (benefit) and
other comprehensive loss
(income)

$(19,216)
(183)

$ 2,413
—

$125,065
3,034

$(9,471)
—

$ 8,645
—

$ (231)
—

(1,205)
(8,671)

(1,446)
(6,843)

(1,281)
(1,181)

1,795
(2,083)

2,112
(3,549)

2,787
(2,060)

$(29,275)

$(5,876)

$125,637

$(9,759)

$ 7,208

$

496

$(15,214)

$ 4,906

$124,919

$ (764)

$18,059

$ 9,074

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The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized
from accumulated other comprehensive loss into net periodic cost (benefit) over the next fiscal year are $8.2
million and $1.2 million, respectively. The estimated net loss and prior service credit for the OPEB plans that
will be amortized from accumulated other comprehensive loss into net periodic cost (benefit) over the next
fiscal year are $2.1 million and $(1.8) million, respectively.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced a drug benefit
under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide an
equivalent benefit. Our actuaries determined that certain benefits provided under our plans are actuarially
equivalent to the Medicare Part D standard plan and are eligible for the employer subsidy. During 2010 and
2009, we received subsidy payments totaling $0.7 million for each respective year.

Weighted average assumptions used to determine the benefit obligation as of December 31 were:

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

2010

2009

2008

2010

2009

2008

Discount rate
Rate of salaried compensation increase

5.70% 5.75% 6.15% 5.60% 5.75% 6.15%
4.00

4.00

4.00

—

—

—

Weighted average assumptions used to determine the net periodic cost (benefit) for the years ended
December 31 were:

PENSION BENEFIT PLANS

OTHER POSTRETIREMENT
EMPLOYEE BENEFIT PLANS

2010

2009

2008

2010

2009

2008

Discount rate
Expected return on plan assets
Rate of salaried compensation increase

5.75% 6.15% 6.40% 5.75% 6.15% 6.40%
8.50
4.00

9.00
4.00

8.50
4.00

—
—

—
—

—
—

The discount rate used in the determination of pension benefit obligations and pension expense was
determined based on a review of long-term high-grade bonds as well as management’s expectations. The
discount rate used to calculate OPEB obligations was determined using the same methodology we used for
our pension plans.

The expected return on plan assets assumption is based upon an analysis of historical long-term returns for
various investment categories, as measured by appropriate indices. These indices are weighted based upon
the extent to which plan assets are invested in the particular categories in arriving at our determination of a
composite expected return.

The assumed health care cost trend rate used to calculate OPEB obligations and expense was 6.2% and
6.5%, respectively, in 2010, grading to 5.0% over approximately 60 years. This assumption has a significant
effect on the amounts reported. A one percentage point change in the health care cost trend rates would
have the following effects:

(In thousands)

Effect on total of service and interest cost components
Effect on postretirement employee benefit obligation

1% INCREASE

1% DECREASE

$

904
13,629

$

(767)
(11,625)

The investments of our defined benefit pension plans are held in a Master Trust. The assets of our OPEB
plans are held within an Internal Revenue Code section 401(h) account for the payment of retiree medical
benefits within the Master Trust.

The Master Trust has a securities lending agreement. The agreement authorizes the lending agent to loan
securities owned by the Master Trust to an approved list of borrowers. Under the agreement, the lending
agent is responsible for negotiating each loan for an unspecified term while retaining the power to terminate
the loan at any time. At the time each loan is made, the lending agent requires collateral equal to, but not
less than, 102% of the market value of the loaned securities and accrued interest. The Master Trust directs
the agent as to the type of investment pool in which to invest the borrower’s collateral based on established

68

policy with specific limits; accordingly, the right to receive the collateral and obligation to return it are
disclosed as a component of Master Trust investments. While the securities are loaned, the Master Trust
retains all rights of ownership, except it waives its right to vote such securities. Securities loaned subject to
this securities lending agreement totaled $9.8 million at December 31, 2010. These securities are principally
corporate common stocks.

Current accounting rules governing fair value measurement establish a framework for measuring fair value,
which provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy are described below:

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets that the plans have the ability
to access.

Level 2

Inputs to the valuation methodology include:

• Quoted prices for similar assets or liabilities in active markets;

• Quoted prices for identical or similar assets or liabilities in inactive

markets;

•

•

Inputs other than quoted prices that are observable for the asset or
liability; and

Inputs that are derived principally from or corroborated by observable
market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input
must be observable for substantially the full term of the asset or liability.

Level 3

Inputs to the valuation methodology are unobservable and significant to
the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest
level of any input that is significant to the fair value measurement. Valuation techniques used need to
maximize the use of observable inputs and minimize the use of unobservable inputs.

Securities in the Master Trust are stated at fair value. Fair value is based upon quotations obtained from
national securities exchanges,
the
recorded amount represents estimated fair value. Many factors are considered in arriving at that fair market
value. Following is a description of the valuation methodologies used for assets measured at fair value.
There have been no changes in the methodologies used during 2010.

if available. Where securities do not have a quoted market price,

▪ U. S. government and Corporate debt securities: In general, U. S. government securities and
corporate bonds are valued based on yields currently available on comparable securities of issuers
with similar credit ratings.

▪ Corporate common and preferred stock: Investments in domestic equities are valued at quoted

market prices of the issuer’s stock.

▪ Common and collective trust: The investment in common and collective trusts is based on the fair

value of the underlying assets and is expressed in units.

The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while management believes the valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different fair value
measurement at the reporting date.

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The following tables set forth by level, within the fair value hierarchy, the investments at fair value for our
company sponsored pension benefit plans:

(In thousands)

Cash and cash equivalents
Common and collective trusts:

International small cap
Global/International equity
Domestic equity – small/mid cap
International equity emerging markets

Common stocks:
Industrials
Energy
Consumer
Healthcare
Finance
Utilities
Information technology
Foreign
Mutual funds:

Foreign large blend
Long-term bond fund
Corporate debt securities

December 31, 2010

Level 1

Level 2

Level 3

Total

$ 12,631

$

—

$— $ 12,631

—
—
—
—

11,706
15,488
18,744
17,333

7,439
8,888
9,775
5,718
11,527
5,269
8,309
5,299

16,674
70,695
—

—
—
—
—
—
—
—
—

—
—
1,290

—
—
—
—

—
—
—
—
—
—
—
—

—
—
—

11,706
15,488
18,744
17,333

7,439
8,888
9,775
5,718
11,527
5,269
8,309
5,299

16,674
70,695
1,290

Subtotal
Payable held under securities lending agreement

Total investments at fair value

$162,224

$64,561

$— $226,785
(10,135)

$216,650

70

(In thousands)

Cash and cash equivalents
Common and collective trusts:

International funds
Growth funds
Index funds
Common stocks:
Industrials
Energy
Consumer
Healthcare
Finance
Utilities
Information technology
Foreign

Corporate debt securities:

AAA
AA
A
BBB
BB
B

U.S. government securities
Limited partnerships
Preferred stock

December 31, 2009

Level 1

Level 2

Level 3

Total

$ 9,187

$

—

$— $ 9,187

—
—
—

3,076
8,277
5,198
5,800
6,210
2,808
5,564
3,500

—
—
—
—
—
—
—
—
5,103

17,056
14,402
32,313

—
—
—
—
—
—
—
—

3,364
2,985
14,801
12,793
1,028
6,019
15,906
15,077
—

—
—
—

—
—
—
—
—
—
—
—

—
—
—
—
—
—
—
—
—

17,056
14,402
32,313

3,076
8,277
5,198
5,800
6,210
2,808
5,564
3,500

3,364
2,985
14,801
12,793
1,028
6,019
15,906
15,077
5,103

Subtotal
Payable held under securities lending agreement

Total investments at fair value

$54,723

$135,744

$— $190,467
(7,990)

$182,477

The Company’s OPEB plan had approximately $16,000 held in cash and equivalents at December 31, 2010,
which were level 1.

investment policy guidelines for our company-sponsored plans.
In 2010, we established our own formal
These guidelines were set by our benefits committee, which is comprised of members of our management
and has been assigned its fiduciary authority over management of the plan assets by our board of directors.
The committee’s duties include periodically reviewing and modifying those investment policy guidelines as
necessary and insuring that the policy is adhered to and the investment objectives are met.

The investment policy limits the investment in Clearwater Paper stock and includes specific guidelines for
specific categories of
fixed income and convertible securities. Assets are managed by professional
investment managers who are expected to achieve a reasonable rate of return over a market cycle. Long-
term performance is a fundamental tenet of the policy.

The general policy states that plan assets would be invested to seek the greatest return consistent with the
fiduciary character of the pension funds and to allow the plans to meet the need for timely pension benefit
payments. The specific investment guidelines stipulate that management is to maintain adequate liquidity for
meeting expected benefit payments by reviewing, on a timely basis, contribution and benefit payment levels

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71

and appropriately revising long-term and short-term asset allocations. Management takes reasonable and
prudent steps to preserve the value of pension fund assets and to avoid the risk of large losses. Major steps
taken to provide this protection included:

▪ Assets are diversified among various asset classes, such as domestic equities, global equities, fixed
income, convertible securities, venture capital and liquid reserves. The long-term asset allocation
ranges are as follows:

Domestic equities
International equities, including emerging markets
Corporate bonds
Liquid reserves

20%-25%
20%-25%
50%-60%
0%-1%

During 2010, we implemented a transition plan to better align the assets of the plan with the
expected future payments and based upon this plan transitioned a portion of equity into corporate
bonds since the liabilities of
the pension plans are long-term in nature. Periodic reviews of
allocations within these ranges were made to determine what adjustments should be made based
on changing economic and market conditions and specific liquidity requirements.

▪ Assets were managed by professional investment managers and could be invested in separately

managed accounts or commingled funds.

▪ Assets were not invested in securities rated below BBB- by S&P or Baa3 by Moody’s.

The investment guidelines also required that the individual investment managers were expected to achieve
a reasonable rate of return over a market cycle. Emphasis was placed on long-term performance versus
short-term market aberrations. Factors considered in determining reasonable rates of return included
performance achieved by a diverse cross section of other investment managers, performance of commonly
used benchmarks (e.g., S&P 500 Index, MSCI World Index, Merrill Lynch Investment Grade Convertibles
Index), actuarial assumptions for return on plan investments and specific performance guidelines given to
individual investment managers.

At December 31, 2010, eleven active investment managers managed substantially all of the pension funds,
each of whom had responsibility for managing a specific portion of
these assets. Plan assets were
diversified among the various asset classes within the allocation ranges approved by the committee.

Our company-sponsored pension plans were underfunded by $55.4 million at December 31, 2010 and $95.9
million at December 31, 2009. In 2010 we contributed $15.1 million to these pension plans, which covered
all of the 2009 and 2010 tax year requirements as well as made an additional $10.0 million voluntary
contribution. We expect our required contributions for the 2011 plan year to be an additional $16.7 million
(plus interest), payable by September 2012. Approximately $8.7 million of these contributions are required to
be paid in 2011, with the remainder not required until 2012. In addition, we estimate contributions will total
approximately $0.3 million in 2011 to our non-qualified pension plan. We do not anticipate funding our OPEB
plans in 2010 except to pay benefit costs as incurred during the year by plan participants.

Estimated future benefit payments, which reflect expected future service and expected Medicare
prescription subsidy receipts, are as follows for the years indicated:

(In thousands)

2011
2012
2013
2014
2015
2016–2019

72

PENSION BENEFIT PLANS

$ 14,823
15,690
16,292
17,081
18,109
104,725

OTHER
POSTRETIREMENT
EMPLOYEE
BENEFIT PLANS

$10,095
10,466
10,775
11,331
11,795
60,204

EXPECTED
MEDICARE
SUBSIDY

$ 584
611
642
666
691
3,866

NOTE 12 Earnings Per Share

Earnings per common share are computed by dividing net earnings by the weighted average number of
common shares outstanding in accordance with accounting guidance related to earnings per share. The
following table reconciles the number of common shares used in calculating the basic and diluted net
earnings per share:

Basic average common shares outstanding
Incremental shares due to:
Restricted stock units
Performance shares

2010

2009

2008

11,473,700

11,360,307

11,354,542

178,024
183,252

300,716
109,040

—
—

Diluted average common shares outstanding

11,834,976

11,770,063

11,354,542

Basic net earnings per common share
Diluted net earnings per common share

Anti-dilutive shares excluded from calculation

$

6.43
6.24

—

$

16.06
15.50

11,969

$

0.86
0.86

282,469

Common share amounts shown as outstanding for 2008 use the basic average common shares outstanding
as of the spin-off date.

NOTE 13 Equity-Based Compensation Plans

The Clearwater Paper Corporation 2008 Stock Incentive Plan, or Stock Plan, which has been approved by
our stockholders, provides for equity-based awards in the form of restricted shares, restricted stock units, or
RSUs, performance shares, stock options, or stock appreciation rights to selected employees, outside
directors, and consultants of the company. The Stock Plan became effective on December 16, 2008. Under
the Stock Plan, we are authorized to issue up to approximately 2.1 million shares, which includes
approximately 0.4 million additional shares authorized in connection with our acquisition of Cellu Tissue that
are available for issuance as equity-based awards only to any employees, outside directors, or consultants
who were not employed on December 26, 2010 by Clearwater Paper Corporation or any of its subsidiaries.
At December 31, 2010, approximately 1.0 million shares were available for future issuance under the Stock
Plan.

As of the spin-off date, the performance share and RSU awards previously granted to our employees by
Potlatch were automatically cancelled, per the terms of the awards, as a result of the spin-off. Under the
employee matters agreement we entered into with Potlatch in connection with the spin-off, we agreed to
issue new equity awards of equivalent value to replace the equity awards previously received from Potlatch.
Replacement awards were granted in the form of RSU grants. The awards accrue dividend equivalents, if
any are paid, based on dividends paid during the RSU vesting period. The dividend equivalents are
converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they
relate. The terms of the awards state that the awards vest after a set period of time has passed, which
approximates the remaining vesting or settlement period associated with the cancelled Potlatch equity
awards.

As required by accounting guidance on stock compensation, we prepared a calculation as of the date of the
spin-off to determine whether any additional compensation cost existed for any excess of the fair value of
the modified replacement awards granted by us over the fair value of the original Potlatch performance
share and RSU awards. The resulting additional expense of $0.4 million was recognized over the vesting
period of the replacement grants.

We record employee equity-based compensation expense for awards of RSUs and performance shares. We
expense equity-based compensation using the straight-line method, generally over the vesting requirement
period. The equity-based compensation expense and related tax benefit we recorded through December 16,
2008 was allocated to us by Potlatch.

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73

Employee equity-based compensation expense was recognized as follows:

(Dollars in thousands)

Restricted stock units
Performance shares

Total employee equity-based compensation

Related tax benefit

R E S T R I C T E D S T O C K U N I T S

Year Ended

2010

2009

2008

$1,544
3,275

$4,819

$2,218
794

$3,012

$ 130
2,193

$2,323

$1,582

$1,018

$ 906

RSUs granted under our Stock Plan are generally subject to a vesting period of one to three years. RSU
awards will accrue dividend equivalents based on dividends paid, if any, during the RSU vesting period. The
dividend equivalents will be converted into additional RSUs that will vest in the same manner as the
underlying RSUs to which they relate.

A summary of the status of outstanding RSU awards as of December 31, 2010 and 2009, and changes
during those years, is presented below:

2010
Weighted
Average
Grant Date
Fair Value

Aggregate
Intrinsic Value
(In thousands)

Shares

Unvested shares outstanding at January 1
Granted
Vested
Forfeited

424,756
16,214
(212,778)
(9,556)

$14.07
48.45
16.84
14.28

Aggregate
Intrinsic Value
(In thousands)

2009
Weighted
Average
Grant Date
Fair Value

$17.25
9.90
15.04
13.85

Shares

282,469
214,361
(18,347)
(53,727)

Unvested shares outstanding at

December 31

218,636

13.91

$17,119

424,756

14.07

$23,349

For RSU awards granted during 2010, the fair value of each share was estimated on the date of grant using
the grant date market price of our common stock. The total fair value of share awards that vested during
2010 was $3.6 million.

As of December 31, 2010, there was $1.0 million of total unrecognized compensation cost related to
outstanding RSU awards. The cost is expected to be recognized over a weighted average period of 1.1
years.

P E R F O R M A N C E S H A R E S

Performance share awards granted under our Stock Plan have a three-year performance period, and shares
are issued after the end of the period if the performance measure is met. The performance measure is a
comparison of the percentile ranking of our total stockholder return compared to the total stockholder return
performance of a selected peer group. The number of shares actually issued, as a percentage of the amount
subject to the performance share award, could range from 0% - 200%. Performance share awards granted
under our Stock Plan do not represent common stock, and therefore the holders do not have voting rights
unless and until shares are issued upon settlement. During the performance period, dividend equivalents
accrue based on dividends paid, if any, and are converted into additional performance shares, which vest or
are forfeited in the same manner as the underlying performance shares to which they relate.

The fair value of performance share awards is estimated using a Monte Carlo simulation model. For
performance shares granted in 2010, the following assumptions were used in our Monte Carlo model:

Closing price of stock on date of grant
Risk free rate
Measurement period
Volatility

74

$ 48.32
1.30%
3 years
105%

In addition to the above assumptions, the dividend yields for all companies were assumed to be zero since
dividends are included in the definition of total shareholder return.

A summary of the status of outstanding performance share awards as of December 31, 2010 and 2009, and
changes during those years, is presented below:

Outstanding at January 1
Granted
Vested
Forfeited

2010

Weighted
Average
Grant Date
Fair Value

$11.27
78.71
—
16.28

Shares

262,294
70,761
—
(13,620)

Aggregate
Intrinsic Value
(In thousands)

Shares

2009
Weighted
Average
Grant
Date Fair
Value

Aggregate
Intrinsic Value
(In thousands)

— $ —
11.18
—
9.87

281,091
—
(18,797)

Outstanding at December 31

319,435

26.00

$25,012

262,294

11.27

$14,418

As of December 31, 2010 there was $4.0 million of unrecognized compensation cost related to outstanding
performance share awards. The cost is expected to be recognized over a weighted average period of 1.1
years.

D I R E C T O R A W A R D S

In connection with joining our board of directors, in January 2009 our outside directors were granted an
award of phantom common stock units, which were credited to an account established on behalf of each
director and vest ratably over a three-year period. In May 2009 and 2010, our outside directors were granted
equity awards in the form of phantom common stock units as part of their annual compensation, which were
credited to their accounts. Certain of the awards granted vest ratably over a one-year period. These
accounts will be credited with additional phantom common stock units equal in value to dividends paid, if
any, on the same amount of common stock. Upon separation from service as a director, the vested portion
of the phantom common stock units held by the director in a stock unit account are converted to cash based
upon the then market price of the common stock and paid to the director. Due to the cash-settlement feature
of the awards, we recognize equity-based compensation expense or income at the end of each reporting
period based on the portion of the award that is vested and the increase or decrease in the value of our
common stock. We recorded director equity-based compensation expense totaling $3.7 million and $2.6
million for the years ended December 31, 2010, and 2009, respectively. We were a wholly-owned subsidiary
of Potlatch prior to our spin-off, and thus there was no director equity-based compensation expense for the
year ended December 31, 2008.

NOTE 14 Fair Value Measurements

The estimated fair values of our financial instruments at the dates presented below are as follows:

(In thousands)

2010

2009

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Cash, restricted cash and short-term investments (Level 1)
Foreign exchange forward contracts (Level 2)
Long-term debt (Level 1)

$148,660
95
539,074

$148,660
95
571,158

$190,750
—
148,285

$190,750
—
166,500

The fair value accounting guidance establishes a framework for measuring fair value, which provides a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, or
“Level 1” measurements, and the lowest priority to unobservable inputs, or “Level 3” measurements.

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The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest
level of any input that is significant to the fair value measurement. Valuation techniques used need to
maximize the use of observable inputs and minimize the use of unobservable inputs.

Foreign exchange forward contracts and cash and short-term investments are the only items measured at
fair value on a recurring basis. The carrying amount of our short-term investments approximates fair value
due to their very short maturity periods, and such investments are at or near market yields. For a description
of our methods and assumptions used in determining the fair value of our foreign exchange forward
contracts, see Note 17.

NOTE 15 Commitments and Contingencies

L E A S E S

We have operating leases covering manufacturing, office, warehouse and distribution space, equipment and
vehicles expiring at various dates through 2018. As leases expire, it can be expected that, in the normal
course of business, certain leases will be renewed or replaced.

We entered into a capital lease for our Shelby, North Carolina facility in 2010 with payments extending until
2021. At December 31, 2010, we recorded an asset of $11.4 million, consisting of construction costs
accumulated to date, within Property, plant, and equipment and a corresponding capital lease obligation
within other long-term obligations of our Consolidated Balance Sheet associated with this capital lease. At
December 31, 2010, the facility related to this capital lease had not been place in service and therefore had
no accumulated depreciation associated with it.

As of December 31, 2010, under current operating and capital
lease payments as follows:

lease contracts, we had future minimum

(In thousands)

2011
2012
2013
2014
2015
2016 and later years

Total

Capital

Operating

$ 1,747
2,131
2,172
2,217
2,261
40,396

$16,960
13,541
9,856
5,788
4,306
10,797

$50,924

$61,248

Rent expense was $10.0 million, $10.2 million and $11.3 million for the years ended December 31, 2010,
2009 and 2008, respectively.

NOTE 16 Business Interruption and Insurance Recovery

Following the scheduled major maintenance at our Idaho pulp and paperboard mill on March 22, 2010, a
fiberline blow tank collapsed causing a portion of this mill to cease operations for a period of 14 days. We
maintain business interruption insurance and filed a claim with our insurance provider to recover costs of the
damaged plant and equipment and estimated lost profits due to the disruption of operations during the repair
period. In addition to repair and asset replacement costs, we also incurred various other costs, including
incremental natural gas costs, and
lost electrical generation,
incremental pulp replacement costs,
incremental chip storage and handling costs with our external chip suppliers. All costs and insurance
recoveries were recorded through the cost of sales line item in our Consolidated Statements of Operations.
The insurance claim for this event totaled $7.8 million, net of the policy deductible of $1.0 million, and was
settled and paid in its entirety in 2010.

76

NOTE 17 Foreign Exchange Hedging Activities

As part of the construction of our North Carolina tissue facilities, we entered into contracts to purchase
equipment denominated in the euro. In accordance with our risk management strategy, we use derivative
foreign
instruments to hedge certain foreign currency exposures. During 2010, we entered into eight
exchange forward transactions with notional amounts ranging from less than $0.1 million to $1.0 million and
maturing at various dates over the next six months. The total notional amount as of December 31, 2010 was
$2.4 million. The fair values of our foreign exchange contracts are determined using the income approach
and significant other observable inputs (also known as “Level 2”), as defined by the accounting standards.
The key inputs used at December 31, 2010 included foreign exchange spot and forward rates, which are
available in an active market. We have not designated our foreign exchange forward contracts as hedging
instruments, therefore any gain or loss that arises from the exchange rate fluctuations are included in the
Consolidated Statements of Operations within “Interest expense, net.” We classify cash flows from our
in the Consolidated
derivative programs as cash flows from operating activities within “Other, net”
Statements of Cash Flows. The fair values of our foreign exchange hedging contracts at December 31, 2010
were $0.1 million. These foreign exchange contracts are recorded on the Consolidated Balance Sheets
within “Short-term investments.” We had no foreign exchange hedging activities during 2009 or 2008.

NOTE 18 Segment Information

As of December 31, 2010, we were organized into two reportable operating segments: Consumer Products
and Pulp and Paperboard. The Wood Products operating results have been consolidated into the Pulp and
Paperboard segment in order to conform to our new management structure beginning in 2010. We have
reclassified applicable segment data of the prior periods to reflect this segment change.

The reporting segments follow the same accounting policies used for our financial statements, as described
in the summary of significant accounting policies, with the exception of the valuation of inventories. All
segment inventories are reported using the average cost method and the LIFO reserve is recorded at the
corporate level. Management evaluates a segment’s performance based upon profit or loss from operations
before income taxes. Intersegment sales or transfers are recorded based on prevailing market prices.

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Following is a tabular presentation of business segment information for each of the past three years.
Corporate information is included to reconcile segment data to the financial statements.

(In thousands)

Segment net sales:

Consumer Products
Pulp and Paperboard

Elimination of intersegment net sales

Total segment net sales

Intersegment net sales or transfers1:

Consumer Products
Pulp and Paperboard

Total intersegment net sales or transfers

Operating income (loss):
Consumer Products
Pulp and Paperboard1

Corporate and eliminations

Earnings before interest, debt retirement costs, and income

taxes

Depreciation and amortization:

Consumer Products
Pulp and Paperboard
Corporate

2010

2009

2008

$ 570,129
879,889

$ 554,034
749,544

$ 504,597
816,147

1,450,018
(77,053)

1,303,578
(53,509)

1,320,744
(65,435)

$1,372,965

$1,250,069

$1,255,309

$

$

$

$

$

82
76,971

77,053

$

$

75
53,434

53,509

63,749
81,911

145,660
(46,893)

$ 122,117
191,894

314,011
(16,571)

98,767

$ 297,440

16,994
28,658
2,076

$

16,022
29,857
1,539

$

$

$

$

$

109
65,326

65,435

37,321
4,437

41,758
(13,274)

28,484

15,653
30,840
461

Total depreciation and amortization

$

47,728

$

47,418

$

46,954

Assets:

Consumer Products
Pulp and Paperboard

Corporate

Total Assets

Capital Expenditures:
Consumer Products
Pulp and Paperboard

Corporate

Total Capital Expenditures

$ 969,450
377,674

1,347,124
198,212

$ 256,927
386,748

$ 251,999
425,032

643,675
303,788

677,031
6,235

$1,545,336

$ 947,463

$ 683,266

$

33,902
10,208

44,110
2,923

$

14,182
4,362

18,544
784

$

10,100
10,529

20,629
677

$

47,033

$

19,328

$

21,306

Intersegment sales for 2008-2010, which were based on prevailing market prices, consisted largely of pulp from our Pulp and
Paperboard segment sold to our Consumer Products segment.

Operating income for the year ended December 31, 2009,
associated with the AFMTC.

for the Pulp and Paperboard segment

included $170.6 million

1

2

78

Our manufacturing facilities and all other assets are located within the continental United States, except for
one production facility in St. Catharines, Ontario, Canada. We sell and ship our products to customers in
many foreign countries. Geographic information regarding our net sales is summarized as follows:

(In thousands)

United States
Japan
Canada
Taiwan
Mexico
China
Korea
Australia
Vietnam
Netherlands
India
Germany
Great Britain
Poland
Other foreign countries

Total Net Sales

2010

2009

2008

$1,236,400
53,390
15,060
12,257
9,843
9,128
6,258
6,173
4,523
4,181
2,856
2,729
271
—
9,896

$1,134,831
39,765
13,523
7,730
7,932
14,424
9,290
7,838
944
627
304
979
2,827
393
8,662

$1,107,712
51,158
11,630
17,466
3,973
18,306
1,838
9,647
1,609
14,090
—
874
2,757
5,436
8,813

$1,372,965

$1,250,069

$1,255,309

NOTE 19 Financial Results by Quarter (Unaudited)

March 31

June 30

September 30

December 31

Three Months Ended

(In thousands—except
per-share amounts)

2010

2009

2010

2009

2010

2009

2010

2009

Net Sales

$330,621 $286,700 $343,860 $316,905 $352,927 $331,484 $345,557 $314,980

Costs and expenses:
Cost of sales
Selling, general and
administrative
expenses

301,964 245,645 286,415 267,022 303,542 282,485 281,883 256,999

18,093

15,830

20,145

18,198

20,886

18,627

41,270

18,470

320,057 261,475 306,560 285,220 324,428 301,112 323,153 275,469

Alternative Fuel Mixture

Tax
Credit

Earnings before
interest, debt
retirement costs and
income taxes

Net earnings

Net earnings per
common share

Basic
Diluted

$

$

—

—

— 76,373

— 47,137

— 47,137

10,564

25,225

37,300 108,058

28,499

77,509

22,404

86,648

458 $ 13,647 $ 20,568 $ 75,448 $ 14,988 $ 46,209 $ 37,786 $ 47,160

0.04 $
0.04

1.20 $
1.19

1.79 $
1.75

6.64 $
6.43

1.31 $
1.27

4.07 $
3.92

3.29 $
3.19

4.15
4.01

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

The Board of Directors and Stockholders
Clearwater Paper Corporation:

We have audited the accompanying consolidated balance sheets of Clearwater Paper Corporation and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations,
cash flows, stockholders’ equity and comprehensive income (loss) for each of the years in the three-year
period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule lI. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial statement schedule based
on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Clearwater Paper Corporation and subsidiaries as of December 31, 2010 and 2009,
and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Clearwater Paper Corporation’s internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2011
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting. This report includes a paragraph stating that management excluded from its assessment of the
effectiveness of Clearwater Paper Corporation and subsidiaries’ internal control over financial reporting as of
December 31, 2010, Cellu Tissue Holdings, Inc.’s internal control over financial reporting associated with
total assets of approximately $692.0 million as of December 31, 2010 and total revenues of approximately
$7.3 million for the year ended December 31, 2010.

/s/ KPMG LLP

Seattle, Washington
March 11, 2011

80

financial

included obtaining an understanding of

financial reporting and the preparation of

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders
Clearwater Paper Corporation:
We have audited Clearwater Paper Corporation’s internal control over
reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Clearwater Paper
Corporation’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit
internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
financial statements for external
regarding the reliability of
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
transactions are recorded as necessary to permit
company; (2) provide reasonable assurance that
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Clearwater Paper Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Inc. on December 27, 2010, and
Clearwater Paper Corporation acquired Cellu Tissue Holdings,
management excluded from its assessment of the effectiveness of Clearwater Paper Corporation’s internal
control over financial reporting as of December 31, 2010, Cellu Tissue Holdings, Inc.’s internal control over
financial reporting associated with total assets of approximately $692.0 million and total revenues of
approximately $7.3 million included in the consolidated financial statements of Clearwater Paper Corporation
and subsidiaries as of and for the year ended December 31, 2010. Our audit of internal control over financial
reporting of Clearwater Paper Corporation also excluded an evaluation of the internal control over financial
reporting of Cellu Tissue Holdings, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Clearwater Paper Corporation and subsidiaries as of
December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows,
stockholders’ equity and comprehensive income (loss) for each of the years in the three-year period ended
December 31, 2010, and our report dated March 11, 2011 expressed an unqualified opinion on those
consolidated financial statements.

its inherent

limitations,

/s/ KPMG LLP
Seattle, Washington
March 11, 2011

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CLEARWATER PAPER CORPORATION

Valuation and Qualifying Accounts
F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 1 0 , 2 0 0 9 A N D 2 0 0 8

(In thousands)

SCHEDULE II

DESCRIPTION

Reserve deducted from related assets:

Doubtful accounts—Accounts receivable
Year ended December 31, 2010
Year ended December 31, 2009
Year ended December 31, 2008

1

accounts written off, net of recoveries.

BALANCE AT
BEGINNING
OF YEAR

AMOUNTS
CHARGED
(CREDITED)
TO COSTS
AND EXPENSES

DEDUCTIONS1

BALANCE
AT END
OF YEAR

$ 966
1,121
760

$ 89
678
561

$ (51)
(833)
(200)

$1,004
966
1,121

ITEM 9. Changes in and Disagreements with Accountants on Accounting

and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

E v a l u a t i o n o f C o n t r o l s a n d P r o c e d u r e s

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the
Securities and Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that
the disclosure controls and
in designing disclosure controls and procedures, our management
procedures are met. Additionally,
necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of disclosure controls and procedures is also based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.

the objectives of

Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has
evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the
end of
the fiscal year covered by this annual report on Form 10-K. Management excluded from this
evaluation an assessment of those disclosure controls and procedures of Cellu Tissue that are subsumed by
internal control over financial reporting (see below under “Management Report on Internal Control Over
Financial Reporting”).

Based on that evaluation, the CEO and CFO have concluded that, as of such date, our disclosure controls
and procedures are effective to meet the objective for which they were designed and operate at the
reasonable assurance level.

82

C h a n g e s i n I n t e r n a l C o n t r o l s

On December 27, 2010, we completed the acquisition of Cellu Tissue. We are in the process of integrating
Cellu Tissue. Our management is analyzing, evaluating and, where necessary, will implement changes in
controls and procedures relating to the Cellu Tissue business as integration proceeds. As a result, this
process may result in additions or changes to our internal control over financial reporting. Otherwise, there
was no change in our internal control over financial reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

M a n a g e m e n t R e p o r t o n I n t e r n a l C o n t r o l O v e r F i n a n c i a l R e p o r t i n g

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rules 13a-15(f) of the Exchange Act).

Under the supervision of and with the participation of our CEO and our CFO, our management conducted an
assessment of the effectiveness of our internal control over financial reporting based on the framework and
criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

Our management appropriately excluded Cellu Tissue from the scope of its assessment of our internal
control over financial reporting. We acquired Cellu Tissue on December 27, 2010, as discussed in Note 4 of
the notes to our Consolidated Financial Statements included in Item 8 of this Annual Report. Cellu Tissue’s
total assets represented 45% of our consolidated total assets as of December 31, 2010. Cellu Tissue’s net
earnings were immaterial to our total consolidated net earnings in 2010 due to the fact that Cellu Tissue’s
operations were only included in four days of our consolidated results in 2010.

Based on this assessment, our management has concluded that as of December 31, 2010 our internal
control over financial reporting was effective. The effectiveness of our internal control over financial reporting
as of December 31, 2010 has been audited by KPMG LLP, our independent registered public accounting
firm, as stated in its report which is included in this Annual Report on Form 10-K.

ITEM 9B. Other Information

None.

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Part III

ITEM 10. Directors, Executive Officers and Corporate Governance

Information regarding our directors is set forth under the heading “Board of Directors” in our definitive proxy
statement, to be filed on or about March 25, 2011, for the 2011 annual meeting of stockholders, referred to
in this report as the 2011 Proxy Statement, which information is incorporated herein by reference.
Information concerning Executive Officers is included in Part I of this report in Item 1. Information regarding
reporting compliance with Section 16(a) for directors, officers or other parties is set forth under the heading
“Section 16(a) Beneficial Ownership Reporting Compliance”
in the 2011 Proxy Statement and is
incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to all directors and employees. You
can find it on our website by going to the following address: www.clearwaterpaper.com, selecting “Investor
Relations” and “Corporate Governance,” then selecting the link for “Code of Business Conduct and Ethics.”
We will post any amendments, as well as any waivers that are required to be disclosed by the rules of either
the SEC or the New York Stock Exchange, on our website. To date, no waivers of the Code of Business
Conduct and Ethics have been considered or granted.

Our board of directors has adopted corporate governance guidelines and charters for the board of directors’
Audit Committee, Compensation Committee, and Nominating and Governance Committee. You can find
these documents on our website by going to the following address: www.clearwaterpaper.com, selecting
“Investor Relations” and “Corporate Governance,” then selecting the appropriate link.

You can also obtain a printed copy of any of the materials referred to above by contacting us at the following
address:

Clearwater Paper Corporation
Attention: Corporate Secretary
601 W. Riverside Avenue, Suite 1100
Spokane, Washington 99201
Telephone: (509) 344-5921

The Audit Committee of our board of directors is an “audit committee” for purposes of Section 3(a)(58) of the
Exchange Act. As of December 31, 2010, the members of that committee were Boh A. Dickey (Chair),
William D. Larsson and William T. Weyerhaeuser. The board of directors has determined that Messrs.
Dickey and Larsson are each an “audit committee financial expert” and that they and Mr. Weyerhaeuser are
“independent” as defined under the applicable rules and regulations of the SEC and the listing standards of
the New York Stock Exchange.

ITEM 11. Executive Compensation

Information required by Item 11 of Part III is included under the heading “Compensation Discussion and
Analysis” in our 2011 Proxy Statement, to be filed on or about March 25, 2011, relating to our 2011 Annual
Meeting of Shareholders and is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

Information required by Item 12 of Part III is included in our 2011 Proxy Statement, to be filed on or about
March 25, 2011, relating to our 2011 Annual Meeting of Shareholders and is incorporated herein by
reference.

84

The following table provides certain information as of December 31, 2010, with respect to our equity
compensation plans:

PLAN CATEGORY

Equity compensation plans approved

by security holders

Equity compensation plans not
approved by security holders

Total

NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS1

WEIGHTED AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS2

NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION PLANS

895,594

—

895,594

—

—

—

1,041,570

1,041,570

1

2

Includes 638,870 performance shares and 256,724 restricted stock units, or RSUs, which are the maximum number of shares that
could be awarded under the performance share and RSU programs, not including future dividend equivalents, if any are paid.

Performance shares and RSUs do not have exercise prices and therefore are not included in the weighted average exercise price
calculation.

ITEM 13. Certain Relationships and Related Transactions, and Director

Independence

Information required by Item 13 of Part III is included under the heading “Transactions with Related Persons”
in our 2011 Proxy Statement, to be filed on or about March 25, 2011, relating to our 2011 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 14. Principal Accounting Fees and Services

Information required by Item 14 of Part
is included under the heading “Fees Paid to Independent
Registered Public Accounting Firm” in our 2011 Proxy Statement, to be filed on or about March 25, 2011,
relating to our 2011 Annual Meeting of Shareholders and is incorporated herein by reference.

III

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85

PART IV

ITEM 15. Exhibits, Financial Statement Schedules

F I N A N C I A L S T A T E M E N T S

Our consolidated financial statements are listed in the Index to Financial Statements and Schedules on page
41 of this report.

F I N A N C I A L S T A T E M E N T S C H E D U L E S

Our consolidated financial statement schedules are listed in the Index to Financial Statements and
Schedules on page 41 of this report.

E X H I B I T S

Exhibits are listed in the Exhibit Index on pages 85-88 of this report.

86

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

CLEARWATER PAPER CORPORATION

(Registrant)

By

/S/ GORDON L. JONES

Gordon L. Jones
Chairman, President
and Chief Executive Officer

Date: March 11, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.

BY

BY

/S/ GORDON L. JONES
Gordon L. Jones

/S/ LINDA K. MASSMAN
Linda K. Massman

Chairman, President and Chief
Executive Officer (Principal
Executive Officer)

Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)

BY

/S/

JOHNATHAN D. HUNTER
Johnathan D. Hunter

Corporate Controller (Principal
Accounting Officer)

*

Frederic W. Corrigan

*

Boh A. Dickey

*

William D. Larsson

*

Michael T. Riordan

*

Dr. William T. Weyerhaeuser

Director

Director

Director

Director

Director

Date

March 11, 2011

March 11, 2011

March 11, 2011

March 11, 2011

March 11, 2011

March 11, 2011

March 11, 2011

March 11, 2011

*By

/S/ MICHAEL S. GADD
Michael S. Gadd
(Attorney-in-fact)

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Exhibit Index

EXHIBIT
NUMBER

2.1*

2.2*

3.1*

3.2*

4.1*

4.2*

4.3*

4.4*

4.5*

10.1*

10.2*

10.3*

DESCRIPTION

Separation and Distribution Agreement, dated December 15, 2008, between Clearwater Paper
Corporation (the “Company”) and Potlatch Corporation (incorporated by reference to Exhibit 2.1
to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission (the “Commission”) on December 18, 2008).

Agreement and Plan of Merger, dated as of September 15, 2010, by and among the Company,
Cellu Tissue Holdings, Inc., and Sand Dollar Acquisition Corporation (incorporated by reference
to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on
September 21, 2010).

Restated Certificate of Incorporation of the Company, effective as of December 16, 2008, as filed
with the Secretary of State of the State of Delaware (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K filed with the Commission on December 18, 2008).

Amended and Restated Bylaws of the Company, effective as of December 16, 2008
(incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with
the Commission on December 18, 2008).

Indenture dated as of June 11, 2009, between the Company and U.S. Bank National Association,
as trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed by
the Company with the Commission on June 12, 2009).

Form of 10 5/8% Senior Notes due 2016 (incorporated by reference to Exhibit A to the Indenture
filed as Exhibit 4.2 to the Current Report on Form 8-K filed by the Company with the Commission
on June 12, 2009).

Indenture, dated as of October 22, 2010, between the Company and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed by the Company with the Commission on October 27, 2010).

Form of 7 1/8% Senior Notes due 2018 (incorporated by reference to Exhibit A to the Indenture
filed as Exhibit 4.1 to the Current Report on Form 8-K filed by the Company with the Commission
on October 27, 2010).

Registration Rights Agreement, dated as of October 22, 2010, between Clearwater Paper
Corporation and Banc of America Securities LLC (incorporated by reference to Exhibit 4.3 to the
Current Report on Form 8-K filed by the Company with the Commission on October 27, 2010).

Employee Matters Agreement, dated December 15, 2008, between the Company and Potlatch
Corporation (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q filed for the quarter ended September 30, 2010).

Tax Sharing Agreement, dated December 15, 2008, among the Company, Potlatch Corporation,
Potlatch Forest Holdings, Inc. and Potlatch Land & Lumber, LLC (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on
December 18, 2008).

Loan and Security Agreement, dated as of November 26, 2008, by and among the Company and
Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on December 3, 2008).

10.3(i)* First Amendment to Loan and Security Agreement, dated as of September 15, 2010, by and

among the financial institutions signatory thereto, Bank of America, N.A. and the Company
(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with
the Commission on September 21, 2010).

88

EXHIBIT
NUMBER

DESCRIPTION

10.3(ii)* Second Amendment to Loan and Security Agreement, dated as of October 22, 2010, by and

among the financial institutions signatory thereto, Bank of America, N.A. and the Company
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on October 27, 2010).

10.3(iii) Third Amendment to Loan and Security Agreement, dated as of February 7, 2011, by and among

the financial institutions signatory thereto, Bank of America, N.A. and the Company.

10.3(iv) Fourth Amendment to Loan and Security Agreement, dated as of March 2, 2011, by and among
the financial institutions signatory thereto, Bank of America, N.A. and the Company.

10.4*1

Form of Indemnification Agreement entered into between the Company and each of its directors
and executive officers (incorporated by reference to Exhibit 10.15 to Amendment No. 4 to the
Company’s Registration Statement on Form 10 filed with the Commission on November 19,
2008).

10.5*1

Employment Agreement between Gordon L. Jones and the Company (incorporated by reference
to Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on Form 10 filed
with the Commission on October 10, 2008).

10.5(i)*1 Addendum to Employment Agreement with Gordon L. Jones, dated effective January 1, 2009

(incorporated by reference to Exhibit 10.7(i) to the Company’s Current Report on Form 8-K filed
with the Commission on March 9, 2009).

10.5(ii)*1 Amendment to Employment Agreement between Gordon L. Jones and the Company, dated
effective September 22, 2009 (incorporated by reference to Exhibit 10.7(ii) to the Company’s
Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2009).

10.6*1

10.7*1

10.8*1

Offer Letter with Linda K. Massman (incorporated by reference to Exhibit 10.11 to Amendment
No. 2 to the Company’s Registration Statement on Form 10 filed with the Commission on
October 10, 2008).

Offer Letter with Thomas H. Carter (incorporated by reference to Exhibit 10.12 to Amendment
No. 2 to the Company’s Registration Statement on Form 10 filed with the Commission on
October 10, 2008).

Clearwater Paper Corporation 2008 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on
December 19, 2008).

10.8(i)*1 Amendment No. 1 to Clearwater Paper Corporation 2008 Stock Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the
Commission on December 28, 2010).

10.9*1

Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Performance Share Award
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the Commission on December 19, 2008).

10.9(i)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Amendment to Performance

Share Awards, effective March 2, 2009 (incorporated by reference to Exhibit 10.11(i) to the
Company’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2009).

10.9(ii)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Performance Share Award,

as amended and restated May 12, 2009, to be used for performance share awards approved
subsequent to May 12, 2009, (incorporated by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2010).

C L E A R W A T E R P A P E R C O R P O R A T I O N 2 0 1 0 F O R M 1 0 - K

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EXHIBIT
NUMBER

DESCRIPTION

10.9(iii)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Performance Share Award,
as amended and restated December 1, 2009, to be used for annual performance share awards
approved subsequent to December 31, 2009 (incorporated by reference to Exhibit 10.7 to the
Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2010).

10.10*1

Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Restricted Stock Unit Award
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
with the Commission on December 19, 2008).

10.10(i)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Restricted Stock Unit Award,

as amended and restated May 12, 2009, to be used for restricted stock unit awards approved
subsequent to May 12, 2009 (incorporated by reference to Exhibit 10.12(i) to the Company’s
Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2009).

10.10(ii)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Restricted Stock Unit Award,
as amended and restated December 1, 2009, to be used for annual restricted stock unit awards
approved subsequent to December 31, 2009, filed as Exhibit 10.12(ii) to the Current Report on
Form 8-K filed by the Registrant on December 4, 2009.

10.11*1

Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed
with the Commission on December 19, 2008).

10.11(i)*1 Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Stock Option Agreement

(incorporated by reference to Exhibit 10.13(i) to the Company’s Quarterly Report on Form 10-Q
filed for the quarter ended June 30, 2009).

10.12*1

10.13*1

Clearwater Paper Corporation Annual Incentive Plan (incorporated by reference to
Exhibit 10.14(i) to the Company’s Current Report on Form 8-K filed with the Commission on
May 14, 2010).

Clearwater Paper Corporation Management Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the
Commission on December 19, 2008).

10.13(i)*1 Amendment to Clearwater Paper Corporation Management Deferred Compensation Plan, dated
April 27, 2010 (incorporated by reference to Exhibit 10.15(i) to the Company’s Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 2010).

10.14*1

Clearwater Paper Corporation Severance Program for Executive Employees (incorporated by
reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the
Commission on December 19, 2008).

10.14(i)*1 Amendment to the Clearwater Paper Corporation Severance Program for Executive Employees,

dated May 6, 2009 (incorporated by reference to Exhibit 10.16(i) to the Company’s Quarterly
Report on Form 10-Q filed for the quarter ended June 30, 2009).

10.15*1

Clearwater Paper Corporation Salaried Supplemental Benefit Plan (incorporated by reference to
Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the Commission on
December 19, 2008).

10.15(i)*1 Addendum to the Clearwater Paper Corporation Salaried Supplemental Benefit Plan, dated

May 12, 2009 (incorporated by reference to Exhibit 10.17(i) to the Company’s Quarterly Report
on Form 10-Q filed for the quarter ended June 30, 2009).

10.16*1

Clearwater Paper Corporation Benefits Protection Trust Agreement (incorporated by reference to
Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed for the year ended
December 31, 2008).

90

EXHIBIT
NUMBER

10.17*1

10.18*1

10.19*

10.20*

10.21*

10.22*

(12)

(21)

(23)

(24)

(31)

(32)

DESCRIPTION

Clearwater Paper Corporation Deferred Compensation Plan for Directors (incorporated by
reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the
Commission on December 19, 2008).

Letter Agreement, dated April 29, 2009, between the Company and Harry D. Seamans
(incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q
filed for the quarter ended June 30, 2009).

Second Amended and Restated Reimbursement Agreement dated as of December 27, 2010, by
and between Cellu Tissue-CityForest LLC and Associated Bank, National Association
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on December 28, 2010).

Guaranty dated as of December 27, 2010 by the Company in favor of Associated Bank, National
Association (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed with the Commission on December 28, 2010).

Voting Agreement, dated as of September 15, 2010, by and among the Company, Weston
Presidio V, L.P., Russell C. Taylor, Chipping Wood Fund, LLC and Taylor Investment Partners
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on September 21, 2010).

Commitment Letter, dated as of September 15, 2010, signed by Banc of America Bridge LLC and
Banc of America Securities LLC in favor of the Company (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on
September 21, 2010).

Computation of Ratio of Earnings to Fixed Charges.

Clearwater Paper Corporation Subsidiaries.

Consent of Independent Registered Public Accounting Firm.

Powers of Attorney.

Rule 13a-14(a)/15d-14(a) Certifications.

Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C.
Section 1350.

*

Incorporated by reference.

1 Management contract or compensatory plan, contract or arrangement.

C L E A R W A T E R P A P E R C O R P O R A T I O N 2 0 1 0 F O R M 1 0 - K

91

P e r f o r m a n c e G r a p h

The below graph compares the cumulative total stockholder return of our common stock for the period
beginning December 5, 2008, when our stock began trading on the New York Stock Exchange, and
ending December 31, 2010, with the cumulative total return during such period of the Russell 2000
Index and the group of peer companies listed below. The comparison assumes $100 was invested on
December 5, 2008, in our common stock and in the index and peer group and assumes dividends were
reinvested. The stock performance shown on the below graph represents historical stock performance
and is not necessarily indicative of future stock price performance.

Boise, Inc.
Buckeye Technologies, Inc.
Graphic Packaging Holding Company
Greif, Inc.
International Paper Company
Kimberly-Clark Corporation
MeadWestvaco Corporation
Neenah Paper, Inc.
Packaging Corporation of America

Peer Group

P.H. Glatfelter Company
Rock-Tenn Company
Schweitzer-Mauduit International, Inc.
Sonoco Products Company
Temple-Inland, Inc.
Verso Paper Corporation
Wausau Paper Corporation
Weyerhaeuser Company

Comparison of Cumulative Total Return 

$400

$300

$200

$100

$0

12/5/08

12/31/08

12/31/09

12/31/10

Clearwater Paper Corporation

Russell 2000 Index

Peer Group

Corporate Information

MANAGEMENT

Gordon L. Jones
Chairman, President and Chief Executive Offi cer

Linda K. Massman
Vice President and Chief Financial Offi cer

Thomas H. Carter
Vice President, Human Resources

Thomas A. Colgrove
Vice President, Pulp and Paperboard

Robert P. DeVleming
Vice President, Consumer Products

Michael S. Gadd
Vice President, General Counsel and Corporate Secretary

Johnathan D. Hunter 
Corporate Controller

EXECUTIVE OFFICES

601 West Riverside Avenue
Suite 1100
Spokane, WA 99201
Phone: 509.344.5900

STOCK LISTING

Clearwater Paper common stock is listed under the 
symbol CLW on the New York Stock Exchange.

BOARD OF DIRECTORS

Boh A. Dickey
Vice Chair of the Board 
Director since 2008

Fredric W. Corrigan
Director since 2009

Gordon L. Jones
Chairman, President and Chief Executive Offi cer 
Director since 2008

William D. Larsson
Director since 2008

Michael T. Riordan
Director since 2008

William T. Weyerhaeuser
Director since 2008

TRANSFER AGENT

BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252
Toll-free Number: 866.205.6799
Outside the U.S.: 201.680.6578
Hearing Impaired: 800.231.5469
TDD International Shareholders: 201.680.6610
www.bnymellon.com/shareowner/isd

ANNUAL MEETING

The 2011 Annual Meeting of Stockholders will be held on 
Monday, May 9, 2011, at 9:00 a.m. (Pacifi c Time). The meeting 
will be held at the Grand Hyatt Seattle, 721 Pine Street, 
Seattle, Washington 98101.

ADDITIONAL INFORMATION

Copies of the company’s fi lings with the Securities and Exchange 
Commission, the company’s Corporate Governance Guidelines, 
Corporate Conduct and Ethics Code and Charters of the 
Committees of the Board of Directors are available free of 
charge at the company’s website, www.clearwaterpaper.com.

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, including statements regarding our growth strategy, enhancement of product offerings, 
increased production, completion of new facilities, enhancement of stockholder value, integration of our recent acquisition, our 
customer relationships, our performance, and expansion of business and customer opportunities. 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 discussed in the “Risk Factors” and 
“Components and Trends in Our Business” sections contained in our Annual Report on Form 10-K for the year ended December 31, 
2010, which is in this report. Forward-looking statements contained in this report present management’s views only as of the date 
of this report. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, 
future events or otherwise.

Clearwater Paper Corporation
601 West Riverside Avenue, Suite 1100
Spokane, WA 99201
www.clearwaterpaper.com

Cover printed on Clearwater Paper’s 10 pt. Ancora® C2S manufactured from FSC-mixed sources.