a5540675.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q


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

For the quarterly period ended September 30, 2007

OR

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

Commission File Number 1-9035


POPE RESOURCES,
A DELAWARE LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
91-1313292
(IRS Employer
Identification Number)

 
19245 10th Avenue NE, Poulsbo, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant's telephone number including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  X         No_____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Securities and Exchange Act of 1934).
 
Large Accelerated Filer
Accelerated Filer  
X
Non Accelerated Filer

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

Partnership units outstanding at November 1, 2007: 4,688,277
 

Pope Resources
Index to Form 10-Q Filing
For the Quarter Ended September 30, 2007
 
Description
 
Page Number
   
     
   
 
 
 
 
     
 
     
 
     
 
     
   
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 

PART I – FINANCIAL INFORMATION

ITEM 1
 
 
3

 
Pope Resources
 
 
(unaudited, in thousands)
 
             
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $
3,940
    $
7,194
 
Short-term investments
   
27,000
     
25,000
 
Accounts receivable
   
2,133
     
1,074
 
Land held for sale at cost
   
4,624
     
2,813
 
Current portion of contracts receivable
   
4,571
     
4,547
 
Prepaid expenses and other
   
486
     
499
 
Total current assets
   
42,754
     
41,127
 
Properties and equipment at cost:
               
Land held for development
   
16,716
     
13,294
 
Land and land improvements
   
22,324
     
22,327
 
Roads and timber (net of accumulated
               
depletion of $47,787 and $43,461)
   
94,483
     
98,110
 
Buildings and equipment (net of accumulated
               
depreciation of $7,086 and $6,748)
   
3,622
     
3,405
 
     
137,145
     
137,136
 
Other assets:
               
Contracts receivable, net of current portion
   
1,275
     
1,161
 
Other
   
244
     
858
 
     
1,519
     
2,019
 
                 
Total assets
  $
181,418
    $
180,282
 
                 
Liabilities and Partners' Capital
               
Current liabilities:
               
Accounts payable
  $
1,479
    $
1,114
 
Accrued liabilities
   
1,438
     
3,083
 
Current portion of long-term debt
   
1,342
     
1,342
 
Deferred revenue
   
7,747
     
8,838
 
Environmental remediation
   
158
     
236
 
Minority interest - IPMB
   
3
     
77
 
Other current liabilities
   
97
     
85
 
Total current liabilities
   
12,264
     
14,775
 
                 
Long-term debt, net of current portion
   
29,490
     
30,866
 
Other long term liabilities
   
282
     
351
 
                 
Minority interest - ORM Timber Fund I, LP
   
45,969
     
46,685
 
                 
Partners' capital (units outstanding 4,688 and 4,647)
   
93,413
     
87,605
 
                 
Total liabilities and partners' capital
  $
181,418
    $
180,282
 
                 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 
Pope Resources
 
 
(thousands, except per unit data)
 
(unaudited)
 
                         
                         
   
Three Months Ended Sept 30,
   
Nine Months Ended Sept 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Revenues
  $
12,171
    $
18,024
    $
34,284
    $
49,717
 
Cost of timber and land sold
    (5,171 )     (6,198 )     (14,302 )     (21,037 )
Operating expenses
    (2,815 )     (2,448 )     (7,426 )     (7,476 )
Environmental remediation
   
-
      (114 )    
-
      (114 )
General and administrative expenses
    (957 )     (861 )     (3,688 )     (2,767 )
Income from operations
   
3,228
     
8,403
     
8,868
     
18,323
 
                                 
Other income (expense):
                         
Interest expense
    (637 )     (667 )     (1,939 )     (2,026 )
Capitalized interest
   
294
     
218
     
812
     
580
 
Interest income
   
453
     
334
     
1,264
     
805
 
     
110
      (115 )    
137
      (641 )
                                 
Income before income taxes and minority interest
   
3,338
     
8,288
     
9,005
     
17,682
 
                                 
Income tax provision
    (5 )     (16 )     (22 )     (453 )
                                 
Income before minority interest
   
3,333
     
8,272
     
8,983
     
17,229
 
                                 
Minority interest - IPMB
   
-
     
7
     
-
      (112 )
Minority interest - ORM Timber Fund I, LP
   
218
     
-
     
237
     
-
 
                                 
Net income
  $
3,551
    $
8,279
    $
9,220
    $
17,117
 
                                 
                                 
Allocable to general partners
  $
45
    $
107
    $
118
    $
221
 
Allocable to limited partners
   
3,506
     
8,172
     
9,102
     
16,896
 
                                 
Earnings per unit:
                               
Basic
  $
0.76
    $
1.78
    $
1.97
    $
3.69
 
Diluted
  $
0.74
    $
1.74
    $
1.91
    $
3.60
 
                                 
Weighted average units outstanding:
                         
Basic
   
4,687
     
4,645
     
4,679
     
4,641
 
Diluted
   
4,831
     
4,769
     
4,823
     
4,760
 
                                 
                                 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 Pope Resources
 
 
 (unauduted, in thousands)
 
     
Nine months ended September 30,
 
     
2007
   
2006
 
Cash flows provided by operating activities
             
Net income
    $
9,220
    $
17,117
 
Add back (deduct) non-cash charges (credits):
                 
Deferred revenue
      (1,091 )    
1,032
 
Depletion
     
4,179
     
5,970
 
Equity based compensation
     
492
     
346
 
Depreciation and amortization
     
604
     
534
 
Deferred taxes
     
45
      (11 )
Minority interest
      (237 )    
112
 
Cost of land sold
     
532
     
4,837
 
Change in working capital accounts:
                 
Accounts receivable
      (1,059 )    
-
 
Contracts receivable
      (138 )     (683 )
Other current assets
     
13
      (241 )
Accounts payable
     
365
     
72
 
Accrued liabilities
      (1,338 )     (678 )
Deposits
     
12
     
10
 
Environmental remediation
      (78 )     (23 )
Other long term liabilities
      (69 )    
106
 
Other long term assets
     
547
     
-
 
Other
      (5 )    
2
 
Net cash flows provided by operating activities
     
11,994
     
28,502
 
                   
Cash flows from investing activities:
                 
Capital expenditures
      (7,413 )     (8,999 )
Purchase of short-term investments
      (2,000 )     (14,000 )
                   
Net cash used in investing activities
      (9,413 )     (22,999 )
                   
Cash flows from financing activities:
                 
Option exercises
     
649
     
248
 
Excess tax benefit from equity based compensation
     
-
     
42
 
Minority interest distribution
      (75 )     (166 )
Repayment of long-term debt
      (1,377 )     (1,675 )
Unitholder distribution
      (5,032 )     (3,650 )
                   
Net cash used in financing activities
      (5,835 )     (5,201 )
                   
Net increase (decrease) in cash and cash equivalents
      (3,254 )    
302
 
Cash and cash equivalents at beginning of year
     
7,194
     
3,361
 
                   
Cash and cash equivalents at end of the period
    $
3,940
    $
3,663
 
                   
See accompanying notes to condensed consolidated financial statements.
 
 
6

Pope Resources
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2007

1.
The condensed consolidated financial statements as of September 30, 2007 and December 31, 2006 and for the three months (quarter) and nine-month periods ended September 30, 2007 and September 30, 2006 have been prepared by Pope Resources, A Delaware Limited Partnership (“the Partnership”) pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The condensed consolidated financial statements are unaudited, but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2006, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2006, and should be read in conjunction with such financial statements. The results of operations for the 2007 interim periods are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2007.
 
2.
The financial statements in the Partnership's 2006 Annual Report on Form 10-K include a summary of significant accounting policies of the Partnership and this Quarterly Report on Form 10-Q should be read in conjunction with those policies.
 
3.
Basic net earnings per unit are based on the weighted average number of units outstanding during the period.  Diluted net earnings per unit are based on the weighted average number of units and dilutive unit options outstanding at the end of the period.
 
   
Quarter Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Weighted average units outstanding (in thousands):
                       
 Basic
   
4,687
     
4,645
     
4,679
     
4,641
 
 Dilutive effect of unit options
   
144
     
124
     
144
     
119
 
 Diluted
   
4,831
     
4,769
     
4,823
     
4,760
 
 
Options to purchase 212,000 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of September 30, 2007.  For computing the dilutive effect of unit options for the quarter and nine months ended September 30, 2007, no options were anti-dilutive and thus all options were included in the calculation.
 
Options to purchase 254,000 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of September 30, 2006.  For computing the dilutive effect of unit options for the quarter and nine months ended September 30, 2006, options to purchase 1,100 units at prices ranging from $33.15 to $37.73 were not included in the calculation as they were anti-dilutive.
 
4.
In 2005, we adopted the 2005 Unit Incentive Plan.  Following adoption of this new plan the Board of Directors began issuing restricted units instead of unit options as its primary method of granting equity based compensation.

Restricted Units
The Partnership issues new units to those exercising partnership unit options and when granting partnership restricted units.  As of September 30, 2007, total compensation expense related to non-vested restricted unit awards not yet recognized was $1.3 million with a weighted average 31 months remaining to vest.  At September 30, 2007, there were 55,750 restricted units outstanding having an aggregate intrinsic value of approximately $2.4 million.
 
7

Unit Options
 
Unit options have not been granted since December 2005.  Units options granted prior to January 1, 2006 were non-qualified options granted at an exercise price not less than 100% of the fair value on the grant date.  Unit options granted to employees vested over four or five years.  Board members had the option of receiving their annual retainer in the form of unit options and those options vested immediately as they were granted monthly for services rendered during the month. Options granted generally have a life of ten years from the date of the grant.  As of September 30, 2007 there was $12,000 of unrecognized compensation cost related to unit options granted.

5.
The Partnership maintains a liability on its balance sheet to reflect our estimate of remaining costs to complete the environmental remediation at the Port Gamble townsite.  The clean up activities at this site have been shared with Pope & Talbot, Inc. (“P&T”) under a contribution agreement.  On August 6, 2007 P&T announced that it had entered into a forbearance agreement with its senior lenders.
 
Following this announcement management believes there is a possibility that all or some portion of P&T’s liability under the contribution agreement will not be fulfilled, as a result of which the Partnership my be required to meet all or a portion of P&T’s unsatisfied obligations.  Management does not currently have enough information to estimate the amount of this liability, but notes that P&T has a $1.2 million liability accrual on its books as reported in its June 30, 2007 Form 10-Q related to environmental liabilities at Port Gamble.
 
Subsequent to the period covered by this report, on October 28, 2007 P&T filed a petition under Canadian bankruptcy laws seeking protection from creditors in connection with restructuring its business. P&T has announced that it intends to continue limited operations during its insolvency proceedings but has given no assurance when or if it will exit bankruptcy or whether it will be able to satisfy its unsecured obligations.
 
6.
 
Supplemental disclosure of cash flow information: For the nine months ended September 30, 2007 and 2006, interest paid net of amounts capitalized amounted to $1.1 million and $1.5 million, respectively.  Income taxes paid for the nine months ended September 30, 2007 and 2006 amounted to $353,000 and $234,000, respectively.
 
7.
Revenue, operating income, and EBITDDA, which management uses as a measure of segment profit or loss, for the quarters and nine-month periods ended September 30, 2007 and 2006, by segment, including amounts relating to ORM Timber Fund I, LP, which is part of the Fee Timber segment, are as set forth below.
 
 
8

 
   
Fee Timber
   
Timberland
                   
Three Months Ended
 
Pope Resources
         
Total
   
Management &
   
Real
             
September 30 (Thousands)
 
Timber
   
Timberfund
   
Fee Timber
   
Consulting
   
Estate
   
Other
   
Consolidated
 
2007
                                         
Revenue internal
  $
8,697
    $
1,180
    $
9,877
    $
612
    $
1,979
    $
-
    $
12,468
 
Eliminations
    (41 )    
-
      (41 )     (246 )     (10 )    
-
      (297 )
Revenue external
   
8,656
     
1,180
     
9,836
     
366
     
1,969
     
-
     
12,171
 
                                                         
Cost of sales
    (3,522 )     (1,106 )     (4,628 )    
-
      (543 )    
-
      (5,171 )
                                                         
Operating expenses internal
    (1,231 )     (347 )     (1,578 )     (667 )     (867 )     (957 )     (4,069 )
Eliminations
   
27
     
232
     
259
     
57
      (19 )    
-
     
297
 
Operating expenses external
    (1,204 )     (115 )     (1,319 )     (610 )     (886 )     (957 )     (3,772 )
                                                         
Income (loss) from operations internal
   
3,944
      (273 )    
3,671
      (55 )    
569
      (957 )    
3,228
 
Eliminations
    (14 )    
232
     
218
      (189 )     (29 )    
-
     
-
 
Income (loss) from operations external
  $
3,930
    $ (41 )   $
3,889
    $ (244 )   $
540
    $ (957 )   $
3,228
 
                                                         
EBITDDA reconciliation:
                                                       
Minority interest
   
-
     
218
     
218
     
-
     
-
     
-
     
218
 
Depletion
   
908
     
522
     
1,430
     
-
     
-
     
-
     
1,430
 
Depreciation and amortization
   
61
     
26
     
87
     
21
     
49
     
48
     
205
 
EBITDDA
  $
4,899
    $
725
    $
5,624
    $ (223 )   $
589
    $ (909 )   $
5,081
 
                                                         
2006
                                                       
Revenue internal
  $
8,749
    $
-
    $
8,749
    $
581
    $
9,341
    $
-
    $
18,671
 
Eliminations
    (635 )    
-
      (635 )     (3 )     (9 )    
-
      (647 )
Revenue external
   
8,114
     
-
     
8,114
     
578
     
9,332
     
-
     
18,024
 
                                                         
Cost of sales
    (3,416 )    
-
      (3,416 )    
-
      (2,782 )    
-
      (6,198 )
                                                         
Operating expenses internal
    (1,139 )    
-
      (1,139 )     (546 )     (1,524 )     (861 )     (4,070 )
Eliminations
   
4
     
-
     
4
     
1
     
642
     
-
     
647
 
Operating expenses external
    (1,135 )    
-
      (1,135 )     (545 )     (882 )     (861 )     (3,423 )
                                                         
Income (loss) from operations internal
   
4,194
     
-
     
4,194
     
35
     
5,035
      (861 )    
8,403
 
Eliminations
    (631 )    
-
      (631 )     (2 )    
633
     
-
     
-
 
Income (loss) from operations external
  $
3,563
    $
-
    $
3,563
    $
33
    $
5,668
    $ (861 )   $
8,403
 
                                                         
EBITDDA reconciliation:
                                                       
Minority interest
   
-
     
-
     
-
     
7
     
-
     
-
     
7
 
Depletion
   
1,058
     
-
     
1,058
     
-
     
220
     
-
     
1,278
 
Depreciation and amortization
   
65
     
-
     
65
     
18
     
25
     
67
     
175
 
EBITDDA
  $
4,686
    $
-
    $
4,686
    $
58
    $
5,913
    $ (794 )   $
9,863
 
 
 
9

 
 
   
Fee Timber
   
Timberland
                   
Nine Months Ended
 
Pope Resources
         
Total
   
Management &
   
Real
             
September 30 (Thousands)
 
Timber
   
Timberfund
   
Fee Timber
   
Consulting
   
Estate
   
Other
   
Consolidated
 
2007
                                         
Revenue internal
  $
28,039
    $
2,726
    $
30,765
    $
1,763
    $
2,598
    $
-
    $
35,126
 
Eliminations
    (123 )    
-
      (123 )     (689 )     (30 )    
-
      (842 )
Revenue external
   
27,916
     
2,726
     
30,642
     
1,074
     
2,568
     
-
     
34,284
 
                                                         
Cost of sales
    (11,556 )     (2,150 )     (13,706 )    
-
      (596 )    
-
      (14,302 )
                                                         
Operating expenses internal
    (3,206 )     (872 )     (4,078 )     (1,757 )     (2,433 )     (3,688 )     (11,956 )
Eliminations
   
50
     
675
     
725
     
139
      (22 )    
-
     
842
 
Operating expenses external
    (3,156 )     (197 )     (3,353 )     (1,618 )     (2,455 )     (3,688 )     (11,114 )
                                                         
Income (loss) from operations internal
   
13,277
      (296 )    
12,981
     
6
      (431 )     (3,688 )    
8,868
 
Eliminations
    (73 )    
675
     
602
      (550 )     (52 )    
-
     
-
 
Income (loss) from operations external
  $
13,204
    $
379
    $
13,583
    $ (544 )   $ (483 )   $ (3,688 )   $
8,868
 
                                                         
EBITDDA reconciliation:
                                                       
Minority interest
   
-
     
237
     
237
     
-
     
-
     
-
     
237
 
Depletion
   
3,223
     
956
     
4,179
     
-
     
-
     
-
     
4,179
 
Depreciation and amortization
   
193
     
61
     
254
     
62
     
136
     
152
     
604
 
EBITDDA
  $
16,620
    $
1,633
    $
18,253
    $ (482 )   $ (347 )   $ (3,536 )   $
13,888
 
                                                         
                                                         
2006
                                                       
Revenue internal
  $
32,924
    $
-
    $
32,924
    $
3,168
    $
14,311
    $
-
    $
50,403
 
Eliminations
    (637 )    
-
      (637 )     (22 )     (27 )    
-
      (686 )
Revenue external
   
32,287
     
-
     
32,287
     
3,146
     
14,284
     
-
     
49,717
 
                                                         
Cost of sales
    (15,194 )    
-
      (15,194 )    
-
      (5,843 )    
-
      (21,037 )
                                                         
Operating expenses internal
    (3,304 )    
-
      (3,304 )     (1,803 )     (3,169 )     (2,767 )     (11,043 )
Eliminations
   
20
     
-
     
20
     
23
     
643
     
-
     
686
 
Operating expenses external
    (3,284 )    
-
      (3,284 )     (1,780 )     (2,526 )     (2,767 )     (10,357 )
                                                         
Income (loss) from operations internal
   
14,426
     
-
     
14,426
     
1,365
     
5,299
      (2,767 )    
18,323
 
Eliminations
    (617 )    
-
      (617 )    
1
     
616
     
-
     
-
 
Income (loss) from operations external
  $
13,809
    $
-
    $
13,809
    $
1,366
    $
5,915
    $ (2,767 )   $
18,323
 
                                                         
EBITDDA reconciliation:
                                                       
Minority interest
   
-
     
-
     
-
      (112 )    
-
     
-
      (112 )
Depletion
   
5,750
     
-
     
5,750
     
-
     
220
     
-
     
5,970
 
Depreciation and amortization
   
198
     
-
     
198
     
54
     
102
     
180
     
534
 
EBITDDA
  $
19,757
    $
-
    $
19,757
    $
1,308
    $
6,237
    $ (2,587 )   $
24,715
 
 
 
10

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect our management's estimates based on our current goals, in light of currently known circumstances and management's expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of federal and state securities laws. Because these statements describe our goals, objectives and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Item 1A: Risk Factors ” below and other factors discussed elsewhere in this report or in our annual report on Form 10-K for the fiscal year ended December 31, 2006. The forward-looking statements in this report reflect our estimates as of the date of the report, and we cannot undertake to update these statements as our business operations and environment change.  References in this report to first-person pronouns such as “we,” “our,” and “us” refer to the Partnership or, when used to express intentions or expectations, to the Partnership’s management and managing general partner.

This discussion should be read in conjunction with the financial statements and related notes included with this report.
 
EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), was organized in late 1985 as a result of a spin-off by Pope & Talbot, Inc. (“P&T”).  We are engaged in three primary businesses. The first, and by far most significant, segment in terms of owned assets and operations is the Fee Timber segment.  Operations in this segment consist of growing timber to be harvested as logs for sale to domestic and to a lesser extent export manufacturers.  The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits, entitlements and, in some cases, installing infrastructure for raw land development, and then realizing that land’s value through the sale of larger parcels to buyers who may take the land further up the value chain to home buyers, residential developers, or to developers, operators and lessors of commercial property. Since these land projects ordinarily span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed until that project is sold, which results in operating income to the extent the sale proceeds exceed our basis in the project.  Our third business is providing timberland-related services to third parties and raising investment capital from third parties for private equity timber funds , including a fund we established and manage, ORM Timber Fund I, LP (the “Fund”).

In late 2006, the Fund purchased 24,000 acres of timberland in two transactions using 95% of the Fund’s committed capital, or $58.5 million, of the $61.8 million committed overall.  As a result of these acquisitions, the Timberland Management & Consulting segment generates fees associated with management of the Fund.  The Fund is consolidated into our financial statements with the 80% third-party Fund interest reported as minority interest.  The fees associated with management of the Fund are eliminated in consolidation.

Management’s major opportunity and challenge is to profitably grow our revenue base. For our Fee Timber and Timberland Management & Consulting segments, the revenue base is typically thought of in terms of acres owned or under management. Our Real Estate opportunities and challenges center on identifying properties in our portfolio of owned assets with potential development value.  Once identified, we attempt to maximize that value through securing entitlements and, in some cases installing infrastructure, prior to selling the property.
 
11

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impact our net income for each of the quarter and nine-month periods ended September 30, 2007 and , 2006.  In addition to the table’s detailed numeric analysis, the explanatory text that follows the table describes many of these changes by business segment:
 
QUARTER TO QUARTER COMPARISONS
 
(Amounts in $000's except per unit data)
 
             
   
Q3 2007 vs. Q3 2006
   
Q3 2007 vs. Q2 2007
 
             
   
Total
   
Total
 
             
Net income:
           
3rd Quarter 2007
  $
3,551
    $
3,551
 
2nd Quarter 2007
     
4,815
 
3rd Quarter 2006
   
8,279
         
Variance
  $ (4,728 )   $ (1,264 )
                 
Detail of earnings variance:
         
Fee Timber
               
Log price realizations (A)
  $ (183 )   $ (228 )
Log volumes (B)
   
1,920
      (4,618 )
Depletion
    (152 )    
608
 
Production costs
    (1,059 )    
1,040
 
Other Fee Timber
    (201 )     (220 )
Timberland Management & Consulting
         
Management fee changes
   
69
     
147
 
Disposition fee changes
   
-
     
-
 
Other Timberland Mgmnt & Consulting
    (346 )     (222 )
Real Estate
               
Environmental remediation liability
   
114
     
-
 
Land sales
    (5,050 )    
1,218
 
Other Real Estate
    (192 )     (216 )
General & administrative costs
    (96 )    
749
 
Interest net
   
225
     
110
 
Minority interest
   
211
     
363
 
Income taxes
   
12
     
5
 
Total change in earnings
  $ (4,728 )   $ (1,264 )
                 
                 
(A) Price variance calculated by extending the change in average realized price by current period volume.
 
(B) Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.  
 
Fee Timber
 
Fee Timber revenue is earned primarily from the harvest and sale of logs from the Partnership’s nearly 114,000 acres of fee timberland located in western Washington.  We also recognize Fee Timber revenue from sales of timber harvested from the 24,000 acres of timberland owned by the Fund.  Other revenue includes lease revenue generated from cell tower sites and sand and gravel pits located on our tree farms. Revenue from the sales of timberland tracts will also appear periodically in results for this segment. Our Fee Timber revenue is driven primarily by the volume of timber harvested, which we ordinarily express in terms of millions of board feet, or “MMBF”, and by the average prices realized on log sales, which we express in dollars per thousand board feet, or “MBF”.
 
12

 
The Fund harvested 2.3 MMBF and 4.9 MMBF during the three and nine month periods ended September 30, 2007, respectively, with an average price realized of $510/MBF and $558/MBF.  We plan to harvest a total of 5.5 MMBF from the Fund’s timberlands in 2007.  The Fund is consolidated into our financial statements and as a result the Fund’s harvest is included in the Fee Timber discussion.
 
When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year.  Both of these comparisons are made to help the reader gain an understanding of the trends in market price and harvest volumes that affect Fee Timber results of operations.  Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2007, June 30, 2007, and September 30, 2006 are as follows:
                  
($ Million)
Quarter Ended:
 
Log Sale Revenue
   
Mineral, Cell Tower
& Other Revenue
   
Total Fee Timber
Revenue
   
Operating Income
   
Harvest volume (MMBF)
 
September 30, 2007
  $
9.3
    $
0.5
    $
9.8
    $
3.9
     
15.2
 
June 30, 2007
   
14.1
     
0.5
     
14.6
     
7.3
     
22.6
 
September 30, 2006
   
7.6
     
0.5
     
8.1
     
3.6
     
12.1
 
 
The decrease in revenue and operating income for the current quarter relative to the preceding quarter of 2007 is attributable to a 7.4 MMBF decrease in harvest volume combined with a $15/MBF decrease in average price realized.  This decline in harvest volume is principally due to the acceleration of logging from the Columbia tree farm into the first two quarters of this year. Fee Timber revenue in the current quarter is $1.7 million higher than the comparable period in 2006 due to a 3.1 MMBF increase in harvest volume netted against a $12/MBF decrease in average price realized.  Harvest volume has increased in the current quarter compared to 2006’s third quarter due to inclusion of a higher proportion of the Hood Canal tree farm’s annual harvest in 2007 results and 2.3 MMBF of Fund volume not available for harvest in 2006.
 
Revenue and operating income for the Fee Timber segment for the nine-month periods ended September 30, 2007 and 2006 were as follows:
                 
($ Million)
Nine months Ended:
 
Log Sale Revenue
   
Mineral, Cell Tower
& Other Revenue
   
Total Fee Timber
Revenue
   
Operating Income
   
Harvest volume (MMBF)
 
September 30, 2007
  $
29.2
    $
1.4
    $
30.6
    $
13.6
     
47.9
 
September 30, 2006
   
31.0
     
1.3
     
32.3
     
13.8
     
50.8
 
 
The decrease in revenue and operating income in 2007 relative to 2006 is due primarily to a 2.9 MMBF decrease in volume harvested. Through the first nine months of 2007, we have harvested approximately 87% of our expected annual volume. Harvest volume during the first nine months of 2007 also includes 4.9 MMBF of Fund volume. Through September 30, 2006, we had harvested over 90% of our full-year harvest.
 
Log Volume
 
The Partnership harvested the following log volumes by species from its timberlands for the quarters ended September 30, 2007, June 30, 2007, and September 30, 2006 and the nine-month periods ended September 30, 2007 and 2006:
 
13

 
Log volumes (MBF):
 
Quarter Ended
 
Sawlogs
 
30-Sep-07
   
% Total
   
30-Jun-07
   
% Total
   
30-Sep-06
   
% Total
 
 
Douglas-fir
   
7,602
      50 %    
15,991
      71 %    
8,626
      71 %
 
Whitewood
   
2,272
      15 %    
2,922
      13 %    
483
      4 %
 
Cedar
   
931
      6 %    
575
      2 %    
188
      2 %
 
Hardwood
   
1,297
      8 %    
878
      4 %    
1,464
      12 %
Pulp
                                                 
 
All Species
   
3,127
      21 %    
2,241
      10 %    
1,386
      11 %
Total
     
15,229
      100 %    
22,607
      100 %    
12,147
      100 %
 
Log volumes (MBF):
 
Nine Months Ended
 
Sawlogs
 
30-Sep-07
   
% Total
   
30-Sep-06
   
% Total
 
 
Douglas-fir
   
30,708
      64 %    
36,908
      73 %
 
Whitewood
   
5,985
      13 %    
3,628
      7 %
 
Cedar
   
1,566
      3 %    
774
      2 %
 
Hardwood
   
2,304
      5 %    
3,170
      6 %
Pulp
                                 
 
All Species
   
7,312
      15 %    
6,350
      12 %
Total
     
47,875
      100 %    
50,830